RGC Resources, Inc. Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 63,200 customers in and around Roanoke, Virginia through Roanoke Gas. The filing covers the three and six months ended March 31, 2023, representing fiscal second-quarter and year-to-date results. The business is highly seasonal, with stronger earnings generally occurring during winter months.
Key Financial Metrics
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 |
|---|---|---|---|---|
| Total operating revenues | $38.0 million | $29.5 million | $71.3 million | $52.8 million |
| Operating income | $9.6 million | $7.4 million | $15.1 million | $12.8 million |
| Net income (loss) | $6.3 million | $(24.5) million | $9.6 million | $(20.9) million |
| Diluted EPS | $0.64 | $(2.89) | $0.97 | $(2.48) |
| Gross utility margin | $16.7 million | $14.6 million | $29.2 million | $26.5 million |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $17.0 million | $13.0 million |
- Second-quarter revenue increased 29%, while year-to-date revenue increased 35%, primarily from higher natural gas commodity prices, new non-gas base rates and higher inventory carrying cost revenue.
- Gross utility margin increased 15% in the quarter and 10% year to date. Gross utility margin was approximately 44.0% of gas utility revenue in the quarter, compared with approximately 49.4% in the prior-year quarter; the lower percentage reflects the pass-through nature of higher gas costs.
- Operating margin was approximately 25.2% in the quarter, compared with 25.2% in the prior-year quarter. Year-to-date operating margin was approximately 21.2%, compared with 24.3% in the prior-year period.
- Interest expense increased 26% in the quarter and 25% year to date because of higher rates on variable-rate debt, despite lower average debt balances.
- Cash and cash equivalents were $6.6 million at March 31, 2023, compared with $4.9 million at September 30, 2022. Operating cash flow funded most investing requirements, but financing cash flow was negative $0.9 million.
- Capital expenditures for utility property were $12.9 million year to date, compared with $10.8 million in the prior-year period. Fiscal 2023 capital expenditures are expected to be approximately $21 million to $23 million.
- Total debt principal was $138.1 million at March 31, 2023, including $25.1 million classified as current. Stockholders’ equity was $100.3 million, and management reported a capitalization mix of approximately 42% equity and 58% debt.
- The Company was in compliance with all debt covenants at March 31, 2023. The $25 million revolving note had no outstanding balance at that date.
Material Changes Versus the Prior Comparable Period
- Net income improved by $30.8 million in the quarter and $30.5 million year to date, primarily because the prior-year periods included a $39.8 million pre-tax impairment of the Mountain Valley Pipeline investment. Excluding the after-tax impairment effect, management stated that net income increased approximately $1.3 million in the quarter and $0.9 million year to date.
- Gas utility revenue increased despite lower demand. Second-quarter delivered volumes declined 19% and heating degree days declined 22%; year-to-date delivered volumes declined 2% and heating degree days declined 2%.
- Weather normalization revenue was approximately $2.8 million in the quarter and $2.6 million year to date, compared with $0.6 million and $1.8 million, respectively, in the prior-year periods. The accumulated $2.8 million current WNA balance was scheduled to be collected from customers beginning in May 2023.
- New interim non-gas rates became effective January 1, 2023 and are designed to generate approximately $8.55 million of additional annual revenue. The rates include recovery previously provided through the SAVE Rider and remain subject to refund pending the Virginia State Corporation Commission’s final decision.
- The SAVE Plan and Rider were suspended for the remainder of fiscal 2023 after prior SAVE investments were incorporated into base rates. Management expects the mechanism to resume in fiscal 2024.
- The renewable natural gas facility became operational in March 2023, and customer billing under the approved RNG rate adjustment began March 1, 2023.
Guidance, Outlook, Risks and Unusual Items
- Management does not provide conventional earnings guidance in the filing and cautions that first-half results are not indicative of full-year performance because of seasonality and weather sensitivity.
- The Company filed a proposed five-year SAVE Plan on March 31, 2023, seeking recovery of approximately $8.5 million of eligible fiscal 2024 investment and approximately $49.5 million over the five-year period ending September 30, 2028.
- The interim rate increase is subject to a regulatory audit and final order expected in late 2023 or early 2024. The eventual rate award and required customer refund could be greater or less than the amount accrued.
- Mountain Valley Pipeline construction remained subject to legal and regulatory delays. The Company’s investment had a carrying value of approximately $15.0 million for MVP and $88,000 for Southgate at March 31, 2023. Management recorded no additional impairment as of March 31, 2023, but identified a continuing risk of future impairment, dilution or adverse results from further delays, permit denials, cost increases, litigation or higher discount rates.
- Midstream’s $23 million credit facility matures in December 2023. Total debt service over the succeeding 12 months includes $25.1 million of principal maturities and approximately $2.4 million of interest based on current rates. Management is seeking an extension or refinancing of the $23 million facility and believes Midstream can meet its cash requirements.
- Variable-rate debt exposes the Company to higher interest expense. Several borrowings and related hedges reference LIBOR or SOFR; the Company expects to transition remaining LIBOR-based contracts later in fiscal 2023, and the ultimate effect is not clear from the filing.
- The IRS is examining the Company’s 2018 and 2019 federal tax returns. Management cannot currently determine the outcome and states that tax assets and liabilities could be adjusted.
- The Company depends on two primary interstate pipelines for natural gas supply. Failure of either pipeline could materially affect service reliability and results of operations.
- There were no material legal proceedings reported, no material changes to previously disclosed risk factors, and no material control deficiencies identified.
Important Facts for Investors to Verify
- Track the Virginia SCC rate case, the final allowed revenue increase and any customer refund relative to the accrued provision.
- Verify the status, remaining permits, construction timing, financing and completion cost of MVP, including the effect of the May 4, 2023 agreement on Midstream’s future capital contributions and ownership percentage.
- Monitor refinancing or extension of Midstream’s $23 million December 2023 maturity and the Company’s ability to manage the $25.1 million of current debt maturities.
- Assess whether the proposed SAVE Plan and Rider will be approved and whether projected infrastructure spending of $8.5 million in fiscal 2024 and $49.5 million over five years is achieved.
- Compare weather-normalized demand, WNA collections and the effect of declining natural gas prices on inventory carrying cost revenue and cash flow.
- Review remaining LIBOR-linked debt and derivative contracts for transition terms and potential interest-rate effects.