RGC RESOURCES INC quarterly report, Q2 FY2024

RGC Resources, Inc. Form 10-Q Summary

Business Context and Reporting Period

RGC Resources is primarily a regulated natural gas distribution company serving approximately 63,300 residential, commercial and industrial customers through Roanoke Gas in Virginia. It also holds less than 1% investments in the Mountain Valley Pipeline (MVP) and Southgate projects.

This filing covers the three and six months ended March 31, 2024, the company’s fiscal second quarter and first half of fiscal 2024. Results are highly seasonal, with winter weather materially affecting demand and earnings.

Financial Performance and Key Metrics

Metric	Three Months Ended March 31, 2024	Year-over-Year Change	Six Months Ended March 31, 2024	Year-over-Year Change
Total operating revenues	$32.7 million	Down 14%	$57.1 million	Down 20%
Gross utility margin	$17.3 million	Up 4%	$31.6 million	Up 8%
Operating income	$8.6 million	Down 10%	$15.3 million	Up 1%
Net income	$6.4 million	Up 2%	$11.5 million	Up 19%
Diluted EPS	$0.63	Down $0.01	$1.13	Up $0.16
Operating cash flow	Not separately provided	Not applicable	$11.2 million	Down $5.8 million

Gross utility margin was approximately 53% of gas utility revenue in the quarter and 55% for the six-month period. Operating margins were approximately 26% and 27%, respectively. The filing does not present these margins as reported measures; they are calculated from the reported figures.

• Quarterly gas utility revenue declined primarily because natural gas commodity prices were approximately 42% lower, despite a 9% increase in delivered volumes.
• Six-month gas utility revenue declined 20% as commodity prices fell approximately 50%; total delivered volumes increased 1%.
• Operations and maintenance expense increased 30% in the quarter and 21% for the six-month period, driven by personnel costs, inflation, professional services and operation of the RNG facility.
• Interest expense increased 12% in the quarter and 16% year to date as average interest rates rose to approximately 4.31% and 4.30%, respectively.
• Equity earnings from unconsolidated affiliates increased to $1.2 million in the quarter and $2.7 million year to date, primarily from MVP construction-related AFUDC.
• The effective tax rate was 23.1% for the quarter and 23.5% year to date, below the 25.74% combined statutory rate due mainly to excess deferred tax and RNG-related tax benefits.

Liquidity, Capital Resources and Debt

• Cash and cash equivalents were $2.0 million at March 31, 2024, compared with $1.5 million at September 30, 2023.
• Six-month operating cash flow was $11.2 million, compared with $17.0 million in the prior-year period. Investing cash use was $11.3 million, including $11.3 million of utility capital expenditures.
• Fiscal 2024 capital expenditures are expected to be approximately $21 million.
• Total debt was approximately $142.9 million, consisting of $136.3 million of long-term debt principal and $6.6 million drawn on the Roanoke Gas line of credit. The long-term capitalization ratio was 45% equity and 55% debt.
• The Roanoke Gas revolving note was extended to March 31, 2025; available borrowing limits currently range from $15 million to $25 million.
• Midstream amended its credit facility in March 2024, increased capacity to $25 million and extended maturity to December 31, 2025. On May 2, 2024, it added a $9 million facility maturing May 2, 2026, intended to refinance a $9 million note due June 1, 2024.
• Management stated that Roanoke Gas and Midstream have sufficient financing resources to meet expected cash requirements for the next year. The company was in compliance with all debt covenants at March 31, 2024.

Material Changes Versus the Prior Comparable Period

• Despite lower reported revenue from lower gas prices, gross utility margin and net income increased because gas costs are largely passed through to customers and because of stronger volumes, new base rates, WNA revenue and RNG revenue.
• Weather was 18% warmer than normal in the quarter and 17% warmer than normal for the six-month period. The company accrued approximately $1.7 million and $2.9 million of WNA revenue, respectively.
• The RNG Rider generated approximately $517,000 in quarterly revenue and $818,000 year to date, compared with approximately $83,000 in each prior-year comparison period.
• RGC issued 164,225 common shares for approximately $3.2 million of net proceeds during the first six months, including $1.7 million through its at-the-market program.
• Utility property, net, increased to $254.1 million from $247.6 million at September 30, 2023. Stockholders’ equity increased to $110.5 million from $100.7 million.

Guidance, Outlook, Risks and Unusual Items

• Roanoke Gas filed for a $4.33 million annual non-gas base-rate increase and an increase in its authorized return on equity from 9.44% to 10.35%. Rates are scheduled to take effect July 1, 2024, subject to refund; an SCC hearing is scheduled for November 7, 2024.
• The SCC approved a $7.45 million annual non-gas rate increase in December 2023. Customer refunds related to interim rates were paid in February 2024.
• The new SAVE Plan permits recovery of estimated fiscal 2024 eligible investment of $8.5 million and approximately $49.5 million over five years through fiscal 2028. Fiscal 2024 SAVE revenue is expected to be approximately $366,000.
• MVP filed an in-service request with FERC on April 22, 2024, with gas flow expected during the second calendar quarter. Once operational, AFUDC is expected to decline or cease on completed segments, while RGC expects earnings from transportation contracts and cash distributions three to six months after commercial operations begin.
• MVP completion, regulatory approvals, construction costs, interest rates and potential impairment of the investment remain important risks. No impairment indicators were identified through the first half of fiscal 2024.
• The business remains exposed to weather variability, natural gas prices, customer collections, pipeline reliability, inflation, higher variable-rate borrowing costs and regulatory outcomes.
• The IRS is examining the company’s 2018 and 2019 federal tax returns; the ultimate outcome is unknown.
• The company reported no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of March 31, 2024.

Investor Verification Checklist

• Verify the final outcome and timing of the $4.33 million rate request, including any refunds or changes to the requested 10.35% return.
• Confirm MVP’s FERC in-service approval, commercial gas flow, contract commencement and timing of cash distributions.
• Track the transition from MVP construction-related AFUDC earnings to recurring pipeline operating earnings.
• Reconcile planned fiscal 2024 capital expenditures of approximately $21 million with operating cash flow and additional borrowing.
• Monitor variable-rate debt exposure, refinancing execution and compliance with debt covenants.
• Assess the effect of warmer or colder weather, WNA settlements, gas prices and regulatory recovery mechanisms on future margins.
• Review the IRS examination and any potential tax adjustments.