RGC Resources, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 62,000 residential, commercial and industrial customers in Roanoke, Virginia, and surrounding localities through Roanoke Gas. Midstream holds an approximately 1% investment in Mountain Valley Pipeline, LLC (MVP) and a less-than-1% investment in Southgate; Diversified Energy is inactive. The filing covers the fiscal year ended September 30, 2022, with fiscal 2021 as the comparable period. The fourth quarter was included in the annual results.
- Roanoke Gas generated more than 99% of consolidated revenue.
- Fiscal 2022 delivered volumes increased 4% to 10.33 million DTH, although residential and commercial volumes declined 3% due to warmer weather.
- The company operates in a regulated, monopolistic distribution territory, with key rates and recovery mechanisms overseen by the Virginia State Corporation Commission.
Financial performance and key metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total operating revenue | $84.2 million | $75.2 million | +12% |
| Gas utility revenue | $84.0 million | $75.0 million | +12% |
| Cost of gas | $42.5 million | $35.2 million | +21% |
| Gross utility margin | $41.5 million | $39.9 million | +4% |
| Operating income | $14.9 million | $14.8 million | +1% |
| Net income (loss) | $(31.7) million | $10.1 million | $(41.8) million |
| Basic and diluted EPS | $(3.48) | $1.22 | Declined |
| Net cash from operating activities | $15.6 million | $11.6 million | +$4.0 million |
| Capital expenditures | $25.5 million | $20.0 million | +$5.5 million |
| Cash and cash equivalents | $4.9 million | $1.5 million | +$3.4 million |
Gross utility margin, a non-GAAP measure defined as utility revenue less cost of gas, improved despite higher gas costs because commodity costs are generally passed through to customers under the purchased gas adjustment mechanism. SAVE Plan revenue increased to $3.3 million from $2.5 million, WNA revenue increased to $2.0 million from $1.2 million, and inventory carrying cost revenue increased to $657,000 from $396,000.
Operating and maintenance expense increased 7%, principally due to higher bad-debt expense, insurance premiums, contracted services, cybersecurity spending and regulatory-asset amortization. Interest expense increased 11% to $4.5 million as debt levels and variable borrowing costs rose. The effective tax rate was 26.5%; the company recognized an $11.4 million tax benefit, including a $14.2 million deferred tax benefit associated with the MVP impairment.
Debt, liquidity and capital resources
- Long-term debt, net of issuance costs, was $135.7 million at September 30, 2022, compared with $133.5 million in 2021. Principal notes payable totaled $137.3 million, including $1.3 million of current maturities.
- The company had no outstanding balance on Roanoke Gas’s line of credit at year-end and had $28.0 million of available capacity. The facility expires March 31, 2023, and management expected an extension.
- Midstream had $21.9 million outstanding under a $23 million non-revolving credit facility maturing December 31, 2023.
- Management estimated Midstream would require $15 million to $17 million of additional capital over the next 12 to 24 months for MVP funding and operating and financing expenses.
- Capitalization at year-end was 40.4% equity and 59.6% long-term debt, compared with 41.5% equity and 58.5% debt in 2021.
- Financing cash flow was $18.4 million, supported by a $27 million equity offering, additional debt issuance and approximately $2.0 million from DRIP, ATM and option activity. Dividends paid were $7.0 million; dividends declared increased to $0.78 per share from $0.74.
Material changes versus the prior comparable period
- Revenue rose primarily from higher natural gas commodity prices, increased SAVE and ICC revenue, and a 20% increase in transportation and interruptible volumes. The increase was partly attributable to one multi-fuel customer that shifted from an alternative fuel.
- The company recorded a total $55.1 million pre-tax impairment of its MVP investment: $39.8 million in the second quarter and $15.3 million in the fourth quarter. The investment balance declined from $64.5 million to $13.7 million.
- Equity in earnings from unconsolidated affiliates fell to $73,000 from $1.7 million as MVP construction activity and AFUDC accruals largely ceased.
- Net income changed to a $31.7 million loss from $10.1 million of net income, primarily due to the MVP impairment and lower affiliate earnings.
- Utility property, net, increased to $229.9 million from $211.6 million. Roanoke Gas spent $25.5 million on utility property, renewed 8.3 miles of main and 605 service lines, and extended service to 544 customers.
- The company issued new Roanoke Gas debt and Midstream debt, while using equity proceeds to reduce line-of-credit and other borrowings.
- The allowance for credit losses increased to $371,000 from $242,000, reflecting higher customer bills, lingering effects of the disconnection moratorium and the expiration of federal customer assistance.
Guidance, outlook, risks and unusual items
- Management expected annual capital expenditures of approximately $20 million over the next several years, focused on the SAVE Plan, the renewable natural gas project, system improvements and customer growth.
- Roanoke Gas planned to file a non-gas base-rate application in early December 2022, with interim rates expected to become effective January 1, 2023, subject to refund. The filing is intended to address inflationary costs and additional rate base.
- The updated SAVE Rider, effective October 2022, was designed to generate approximately $4.1 million of annual revenue, about $650,000 above the prior level.
- The company expected an SCC decision in January 2023 on its renewable natural gas rate-adjustment application.
- MVP’s prior summer 2022 in-service target was withdrawn. The project received a FERC extension through October 13, 2026, while management continued to target full in-service during the second half of 2023 at an estimated total project cost of approximately $6.6 billion, excluding AFUDC. Completion depends on additional permits, litigation outcomes and potentially federal permitting reform.
- Further MVP delays, permit denials, cost increases, changes in discount rates or lower completion probabilities could cause additional or full impairment of the investment and could affect dividends, liquidity and debt-covenant compliance.
- Key operating risks include dependence on two interstate pipelines, severe weather, natural gas price volatility, inflation, labor availability, cybersecurity incidents, regulatory delays, environmental and climate-related regulation, competition from other energy sources and the ability to renew franchises and obtain rate relief.
- The company identified no material pending legal proceedings, no off-balance-sheet arrangements and no unresolved SEC staff comments. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2022.
Most important facts for investors to verify
- MVP exposure: Verify the current legal, permitting, construction-cost and completion status of MVP and any subsequent impairment or capital-call requirements.
- Liquidity and refinancing: Verify renewal or replacement of Roanoke Gas’s March 2023 credit facility and Midstream’s December 2023 facility, including covenant compliance and available borrowing capacity.
- Rate recovery: Verify the outcome and timing of the planned non-gas base-rate case, SAVE Rider collections and the renewable natural gas rate-adjustment application.
- Dividend sustainability: Assess dividend coverage in light of the fiscal 2022 net loss, MVP funding needs, capital expenditures and debt maturities.
- Operating cash flow quality: Separate recurring utility cash generation from working-capital effects, including gas-cost under-collections, supplier refunds and changes in gas inventory.
- Customer credit risk: Monitor bad-debt expense, customer arrearages and the adequacy of the $371,000 allowance for credit losses as gas prices remain elevated.
- Regulatory and commodity risk: Review the timing of recovery for higher non-gas expenses and the potential effect of natural gas prices, weather, pipeline capacity and alternative fuels on customer demand.