RGC Resources, Inc. Form 10-Q Summary
Business context and reporting period
RGC Resources, Inc. is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas, serving approximately 63,200 customers in and around Roanoke, Virginia. The company also holds less-than-1% investments in the Mountain Valley Pipeline (MVP) and Southgate projects through Midstream.
The filing covers the three months ended December 31, 2023, the first quarter of fiscal 2024, compared with the three months ended December 31, 2022. Results are highly seasonal, with winter weather generally producing higher earnings; management cautions that first-quarter results are not indicative of full-year performance.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Change |
|---|---|---|---|
| Total operating revenues | $24.4 million | $33.3 million | Down 27% |
| Gas utility revenues | $24.4 million | $33.3 million | Down 27% |
| Gross utility margin | $14.3 million | $12.4 million | Up 15% |
| Operating income | $6.7 million | $5.5 million | Up 20% |
| Income before taxes | $6.6 million | $4.3 million | Up 55% |
| Net income | $5.0 million | $3.3 million | Up $1.8 million |
| Basic and diluted EPS | $0.50 | $0.33 | Up $0.17 |
| Net cash used in operating activities | $(0.6) million | $(2.4) million | Improved by $1.9 million |
| Capital expenditures | $5.3 million | $7.5 million | Down $2.2 million |
Gross utility margin, a non-GAAP measure defined as utility revenues less utility gas costs, increased despite lower revenue because natural gas commodity prices declined 58% and the related pass-through gas costs declined 51%. Margin also benefited from new non-gas base rates, weather normalization revenue and the RNG rider.
The effective income tax rate was 24.0%, compared with 23.4% in the prior-year quarter. Dividends declared increased to $0.20 per share from $0.1975 per share.
At December 31, 2023, cash and cash equivalents were $2.9 million, compared with $1.5 million at September 30, 2023. Total assets were $314.7 million and stockholders’ equity was $103.5 million.
Material changes versus the prior comparable period
- Delivered natural gas volumes declined 9% to 3.0 million DTH. Residential and commercial volumes declined 14%, while transportation and interruptible volumes increased 6%.
- Heating degree days declined 19% year over year, and weather was 16% warmer than normal. The weather normalization adjustment generated approximately $1.2 million of additional revenue, compared with an approximately $0.2 million refund in the prior-year quarter.
- New non-gas base rates increased the customer base charge by approximately $442,000 and contributed to higher volumetric margin. The approved rate increase provides an incremental annual revenue requirement of $7.45 million.
- SAVE Plan revenue declined approximately $1.0 million because SAVE recovery was incorporated into the new base rates. New SAVE Rider rates became effective October 1, 2023 and are expected to generate approximately $366,000 during fiscal 2024.
- The RNG facility contributed approximately $300,000 of revenue during the quarter.
- Equity earnings from unconsolidated affiliates increased to $1.5 million from nominal prior-year earnings, primarily due to resumed MVP construction and related AFUDC.
- Operations and maintenance expense increased 11%, depreciation and amortization increased 11%, and interest expense increased 20%. The weighted-average interest rate on total debt increased to 4.28% from 3.78%.
- Capital expenditures decreased primarily because the RNG project was completed and placed in service in March 2023.
Liquidity, debt, outlook, risks and unusual items
The company had $13.3 million outstanding under Roanoke Gas’s revolving credit facility at December 31, 2023. The facility matures March 31, 2024 and has borrowing limits ranging from $4 million to $25 million. Midstream had $33.85 million of long-term debt maturities due within the next 12 months, including a note due in June 2024 and $23 million due December 31, 2024.
The filing states that these obligations exceed liquidity available under currently executed agreements and anticipated operating cash flows without additional third-party action. Accordingly, substantial doubt exists about the company’s ability to continue as a going concern. Management plans to refinance the obligations and reports positive discussions with banks, but refinancing is not within the company’s complete control and is not assured. The company was in compliance with all debt covenants at December 31, 2023.
Management expects fiscal 2024 capital expenditures of approximately $20 million. Management believes Roanoke Gas has sufficient financing resources for the next year, including renewal of its line of credit and use of private shelf facilities, and may reduce capital spending if necessary. The company also maintains access to equity financing through its ATM program and other offerings.
RGC Resources filed a general rate application with the Virginia State Corporation Commission on February 2, 2024. The company expects to complete customer refunds related to excess interim-rate collections during the February 2024 billing cycle.
MVP construction resumed after favorable legislative and judicial developments in 2023. The investment’s first-quarter earnings were primarily AFUDC; AFUDC will cease on completed segments as MVP approaches service, after which the company expects earnings from pipeline transportation contracts. Management believes MVP will be completed relatively soon, but delays, legal or regulatory developments, cost increases, interest rates and impairment risk remain material uncertainties. Management expects cash distributions from the LLC to begin three to six months after commercial operations commence.
Other risks include weather and commodity-price volatility, higher interest costs on variable-rate debt, dependence on two primary pipeline supply sources, regulatory decisions, refinancing availability, and the outcome of IRS examinations of the company’s 2018 and 2019 federal tax returns. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Disclosure controls and procedures were assessed as effective as of December 31, 2023.
Important facts for investors to verify
- Whether Roanoke Gas’s revolving credit facility was renewed or replaced by its March 31, 2024 maturity date.
- Whether Midstream refinanced or extended the $33.85 million of debt maturing within the next 12 months.
- Resolution of the company’s disclosed substantial doubt regarding going-concern status.
- Results and timing of the general rate case filed with the Virginia State Corporation Commission.
- Completion of customer refunds related to interim-rate collections.
- Actual MVP completion date, transition from AFUDC earnings to operating earnings, and timing of cash distributions.
- Actual fiscal 2024 capital spending relative to the approximately $20 million expectation.
- Impact of warmer or colder weather, natural gas prices and interest rates on margins, working capital and debt-service requirements.