RGC Resources, Inc. — Fiscal 2022 Second Quarter Form 10-Q
Business context and reporting period
RGC Resources is primarily a regulated natural-gas distribution company serving approximately 63,000 customers in and around Roanoke, Virginia through Roanoke Gas. Midstream owns an approximately 1% interest in Mountain Valley Pipeline (MVP) and a less-than-1% interest in Southgate. The filing covers the three and six months ended March 31, 2022, with fiscal-year comparisons to March 31, 2021. Results are highly seasonal and generally stronger during the winter heating months.
Financial performance and key metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total operating revenues | $29.5 million, up 5% | $52.8 million, up 11% |
| Gas utility revenues | $29.5 million, up 5% | $52.7 million, up 11% |
| Gross utility margin | $14.6 million, up 6% | $26.5 million, up 4% |
| Operating income | $7.4 million, up 5% | $12.8 million, up 1% |
| Net income (loss) | $(24.5) million, versus $4.8 million | $(20.9) million, versus $9.5 million |
| Diluted EPS | $(2.89), versus $0.58 | $(2.48), versus $1.16 |
| Operating cash flow | Not separately provided for the quarter | $13.0 million, versus $9.6 million |
Gross utility margin was approximately 49.4% of gas utility revenue in the quarter and 50.2% for the six-month period. The reported net loss was driven primarily by a $39.8 million pre-tax impairment of the MVP/Southgate investment. Excluding the impairment, management reported effective tax rates of 24.0% for the quarter and 23.7% for the six-month period.
Six-month investing cash outflows were $14.3 million, including $10.8 million of utility capital expenditures and $3.6 million of investments in unconsolidated affiliates. Financing activities provided $9.2 million, including approximately $27 million of net proceeds from a March 2022 equity offering. Cash increased from $1.5 million at September 30, 2021 to $9.4 million at March 31, 2022.
At March 31, 2022, total debt principal was $124.8 million, including $19.7 million of current maturities. The company had no outstanding balance on its $21 million to $33 million seasonal line of credit. Long-term capitalization was 46% equity and 54% debt, and management stated that all debt covenants were satisfied.
Material changes versus the prior comparable period
- Revenue increased primarily from higher natural-gas commodity prices passed through under the purchased gas adjustment, higher SAVE and weather-normalization revenues, and increased transportation volumes.
- Six-month residential and commercial delivered volumes declined 2% while transportation and interruptible volumes increased 11%; quarterly transportation volumes rose 26%, substantially due to one multi-fuel customer.
- Weather was 7% warmer than normal in the quarter and 13% warmer than normal for the six-month period. The weather-normalization mechanism produced approximately $556,000 and $1.8 million of additional revenue, respectively.
- Operations and maintenance expense increased 8% for the quarter and 7% for the six-month period, reflecting higher bad-debt expense, insurance, professional services, maintenance and cybersecurity costs.
- Interest expense increased 10% for the quarter and 9% for the six-month period because of higher average debt balances, partly offset by lower average borrowing rates.
- Equity earnings from unconsolidated affiliates declined materially because MVP construction activity was limited and AFUDC accruals were suspended in November 2021.
- The March equity offering increased shares outstanding by 1.35 million and was used to strengthen the balance sheet, fund Roanoke Gas infrastructure investment and reduce Midstream debt.
Outlook, commentary, risks and unusual items
- On May 3, 2022, the MVP operator announced a target full in-service date in the second half of 2023 and estimated total project cost of approximately $6.6 billion, excluding AFUDC. The target depends on obtaining and maintaining multiple federal and state approvals and resolving ongoing litigation.
- Fourth Circuit decisions vacating and remanding certain MVP permits and biological approvals caused the company to recognize the $39.8 million impairment. Management stated that additional impairment, potentially including a full write-off of the remaining investment, remains possible.
- Midstream’s $19.3 million credit facility balance was scheduled to mature on December 29, 2022. As of the filing date, discussions regarding an extension were ongoing and no extension had been finalized.
- Roanoke Gas’s replacement seasonal line of credit expires March 31, 2023, unless extended. Management expects to extend or replace it.
- Fiscal 2022 utility capital expenditures were expected to increase by approximately $5 million from the prior year because of a one-time gas-supply infrastructure project.
- The company expects to file an application during the third quarter to update the SAVE Plan and Rider for the period beginning October 2022. The current SAVE Rider is designed to collect approximately $3.45 million annually.
- Supply-chain disruption, labor shortages, inflation, natural-gas price volatility, weather, customer collections, cyber risks and potential renewed COVID-19 impacts remain relevant operating risks.
- The company received $858,556 of ARPA funds in November 2021 and applied the full amount to eligible customer accounts in December 2021. Supplier refunds of approximately $2.7 million were expected to be passed through to customers beginning in July 2022.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether MVP obtains the required permits and approvals, meets the revised second-half 2023 target, and avoids further cost increases or impairment.
- Whether Midstream’s December 2022 debt maturity is extended or refinanced before becoming a liquidity constraint.
- The sustainability of regulated utility margins after weather-normalization, SAVE revenues and pass-through gas-cost effects.
- Actual fiscal 2022 capital expenditures and the associated need for debt or equity financing.
- Customer arrearages, bad-debt expense and collections as gas prices and customer bills remain elevated.
- The effect of LIBOR replacement, SOFR-based borrowing costs and interest-rate swaps on future interest expense and liquidity.