RGC Resources, Inc. — Form 10-Q Summary
Business context and reporting period
RGC Resources is primarily a regulated natural-gas sale and distribution company serving approximately 62,700 customers in and around Roanoke, Virginia through Roanoke Gas. It also invests in the Mountain Valley Pipeline (MVP) and Southgate projects through Midstream. This report covers the three and nine months ended June 30, 2021, within the fiscal year ending September 30, 2021. Results are highly seasonal and generally stronger during winter months.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Nine months ended June 30, 2021 | Nine months ended June 30, 2020 |
|---|---|---|---|---|
| Total operating revenues | $14.0 million | $11.1 million | $61.8 million | $53.3 million |
| Operating income | $1.5 million | $1.3 million | $14.2 million | $13.4 million |
| Net income | $0.6 million | $1.2 million | $10.1 million | $10.9 million |
| Diluted EPS | $0.07 | $0.15 | $1.23 | $1.34 |
| Gross utility margin | $7.7 million | $7.2 million | $33.3 million | $32.2 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $14.4 million | $12.8 million |
- Third-quarter revenue increased 27%, while nine-month revenue increased 16%. Higher natural-gas prices, pipeline and storage fees, SAVE revenues, and residential and commercial demand were the primary drivers.
- Gross utility margin increased 8% in the quarter and 3% year to date. The margin represented approximately 55% of gas utility revenue in the quarter and 54% year to date, based on the filing’s non-GAAP gross utility margin measure.
- Third-quarter net income declined 49%, and nine-month net income declined 7%, primarily because MVP-related equity earnings fell as AFUDC activity declined.
- Capital expenditures for utility property were $15.0 million year to date, compared with $17.0 million in the prior-year period. Cash investment in MVP was $4.2 million, down 37%.
- Cash and cash equivalents were $1.3 million at June 30, 2021, versus $0.3 million at September 30, 2020. Total assets were $296.9 million, and stockholders’ equity was $98.8 million.
- Total debt principal was approximately $130.4 million, consisting of $120.9 million of notes payable and $9.5 million outstanding under the line of credit. The company reported compliance with all debt covenants.
- The company declared dividends of $0.185 per common share during the quarter and $0.555 per share for the nine-month period.
Material changes versus the prior comparable period
- Gas utility revenue rose 29% in the quarter and 17% year to date. Natural-gas commodity prices increased approximately 64% per DTH in the quarter and 30% year to date; these costs are generally passed through to customers through the PGA mechanism.
- Residential and commercial volumes increased 2% in the quarter and 6% year to date, while transportation and interruptible volumes fell 36% and 20%, respectively. The decline was attributed principally to a large multi-fuel customer switching to an alternative fuel.
- SAVE Plan revenue increased $329,000 in the quarter and $914,000 year to date due to infrastructure investment.
- Operations and maintenance expense increased 3% in the quarter but decreased 4% year to date. Year-to-date expense benefited from the absence of prior-year ESAC asset write-down and amortization and from CARES Act assistance applied to customer arrears.
- Equity earnings from unconsolidated affiliates decreased $1.1 million in the quarter and $2.0 million year to date as MVP AFUDC activity was substantially lower.
- Operating cash flow increased $1.6 million year to date, partly because the prior-year $3.8 million customer rate refund did not recur.
- Shares outstanding increased during the period through stock issuance, including the company’s ATM program. Approximately 111,000 ATM shares had been issued by June 30, 2021, generating more than $2.5 million in net proceeds.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected fiscal 2021 capital expenditures to remain consistent with the prior year and intended to use the ATM program during the fourth fiscal quarter as market conditions allowed.
- The MVP joint venture continued to target a full in-service date in summer 2022 and total project cost of approximately $6.2 billion, excluding AFUDC. RGC’s expected total cash contribution was approaching $65 million.
- MVP remained approximately 92% complete, but construction was constrained by legal and regulatory challenges involving stream and wetland crossings, federal and state permits, and FERC authorizations. Delays could increase project costs and RGC’s required contributions.
- MVP AFUDC accruals were suspended from January through March 2021 and resumed in April at a substantially lower level. Future earnings from MVP will depend on construction activity before in-service and transportation fees after completion.
- Midstream had approximately $41 million of borrowing capacity under its credit facility maturing in December 2022; the filing reports differing utilized amounts in separate sections, approximately $29.3 million and $31.4 million. Management stated that additional financing would be required because of MVP delays.
- The residential service-disconnection moratorium was scheduled to expire August 30, 2021, although a Virginia legislative special session could extend it. Continued customer service during delinquency creates uncertainty regarding bad-debt expense and write-offs.
- Roanoke Gas received approximately $403,000 of CARES Act funds and applied the funds to eligible customer arrears. The company also deferred certain COVID-19 costs for potential future regulatory recovery, but the timing and amount of recovery remain uncertain.
- Roanoke Gas filed a SAVE Rider application targeting approximately $3.45 million of annual revenue for October 2021 through September 2022, approximately $1.1 million above existing rates. A final SCC order was expected by September 30, 2021.
- Management concluded that the MVP investment was not impaired as of June 30, 2021, but stated that significant delays or permit denials could trigger a future impairment evaluation.
- The company uses LIBOR-based debt and interest-rate swaps. LIBOR transition effects could materially affect financial position, results, or cash flows when applicable contracts are amended.
Important facts for investors to verify
- Whether the MVP receives all required permits and authorizations and achieves the summer 2022 in-service target without further cost escalation.
- The amount and timing of additional financing required for MVP and the treatment of the company’s conflicting reported credit-facility utilization amounts.
- Whether the residential disconnection moratorium was extended and the resulting bad-debt reserve, customer arrears, and write-offs.
- The SCC’s final decision on the proposed SAVE Rider and the recoverability of deferred COVID-19 costs.
- The sustainability of earnings excluding MVP AFUDC, particularly after MVP construction ends and before transportation-fee revenue begins.
- The company’s liquidity, debt maturities, LIBOR transition exposure, and compliance with debt covenants.
- Future impairment indicators for the MVP investment and the company’s approximately $62.5 million investment balance at June 30, 2021.