RGC Resources, Inc. — Form 10-Q Summary
Business context and reporting period
RGC Resources is primarily a regulated natural-gas distribution company serving approximately 62,600 residential, commercial and industrial customers in and around Roanoke, Virginia through Roanoke Gas. Its Midstream subsidiary owns approximately 1% of Mountain Valley Pipeline (MVP) and less than 1% of Southgate.
This report covers the three and nine months ended June 30, 2023, representing fiscal third quarter and year-to-date results. The business is highly seasonal, with stronger earnings generally occurring during winter heating months.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $13.7 million, down 21% | $85.0 million, up 21% |
| Operating income | $1.8 million, up 10% | $16.9 million, up 17% |
| Net income | $0.7 million, up $0.1 million | $10.3 million versus a $20.3 million loss |
| Diluted EPS | $0.07 versus $0.06 | $1.04 versus $(2.29) |
| Operating cash flow | Not separately provided | $23.6 million versus $19.8 million |
| Capital expenditures | Not separately provided | $19.4 million versus $17.4 million |
- Gross utility margin, a non-GAAP measure defined as gas utility revenue less utility gas cost, increased 8% to $8.6 million in the quarter and 10% to $37.8 million year to date.
- Quarterly revenue declined primarily because average natural-gas prices fell to approximately $3.00 per dekatherm from $7.40. The lower gas cost was largely passed through to customers, while non-gas rate increases, weather normalization and the new RNG rider supported margin.
- Year-to-date revenue benefited from higher gas prices during the first six months, new non-gas base rates, higher inventory carrying-cost revenue and RNG revenue.
- Cash and cash equivalents were $5.2 million at June 30, 2023, compared with $4.9 million at September 30, 2022.
- Total debt principal was $137.6 million, including $11.1 million classified as current. Long-term debt, net of current maturities and issuance costs, was $126.3 million.
- The $25 million Roanoke Gas revolving note was undrawn at June 30, 2023. The company reported compliance with all debt covenants and a capitalization mix of approximately 42% equity and 58% debt.
- Dividends declared were $0.1975 per share in the quarter and $0.5925 per share year to date.
Material changes versus the prior comparable period
- Quarterly net income increased by $94,289, primarily due to new non-gas base rates and MVP-related AFUDC earnings.
- Year-to-date net income improved by $30.6 million, principally because the prior-year period included a $39.8 million pre-tax impairment of the MVP investment. Excluding the after-tax effect of that impairment, management stated that year-to-date net income increased approximately $1.0 million.
- Gross utility margin increased despite a 3% decline in year-to-date delivered volumes and heating degree days. Quarterly delivered volumes declined 3%, and heating degree days declined 6%.
- SAVE Plan revenue decreased by approximately $1.2 million year to date because prior SAVE investments were incorporated into the new non-gas base rates effective January 1, 2023.
- The RNG facility became operational in March 2023 and contributed approximately $0.4 million of year-to-date revenue and $0.4 million of margin-related revenue.
- Interest expense increased 29% in the quarter and 27% year to date due primarily to higher rates on variable-rate debt, partially offset year to date by lower average debt.
- Utility property, net, increased to $243.1 million from $229.9 million at September 30, 2022, reflecting continued infrastructure investment.
Guidance, outlook, commentary and risks
- Management expects fiscal 2023 capital expenditures of approximately $21 million to $23 million.
- Management expects the SAVE Plan and Rider to resume in fiscal 2024. The proposed five-year plan contemplates approximately $8.5 million of eligible investment in fiscal 2024 and $49.5 million through September 30, 2028. SCC staff recommended approval with an initial revenue requirement of approximately $366,000 beginning October 1, 2023; final resolution was expected in the fourth quarter of fiscal 2023.
- The SCC rate case placed new non-gas rates into effect beginning January 1, 2023 on an interim, subject-to-refund basis. The filing seeks an annual increase of $8.55 million. The final award may be higher or lower than the recorded estimated refund provision, and resolution was expected in late calendar 2023 or early 2024.
- The company filed to update its RNG Rider effective October 1, 2023; resolution was expected in the fourth quarter of fiscal 2023.
- After the Supreme Court vacated Fourth Circuit stays on July 27, 2023, MVP construction resumed. Management cited a target for completing the remaining four to five months of construction by year-end 2023, but completion timing and cost remain uncertain.
- MVP continues to face litigation, permitting, construction, weather, environmental, protest and vandalism risks. Adverse developments could delay completion, increase costs, dilute Midstream’s ownership interest or cause additional impairment of the investment. No additional impairment was recorded as of June 30, 2023.
- Midstream’s credit facility was extended on July 28, 2023 to December 31, 2024, but the company expects $11.1 million of debt maturities and approximately $2.4 million of interest expense during the succeeding 12 months. Management is pursuing extensions or refinancing of remaining current maturities.
- Higher interest rates are expected to continue increasing expense on variable-rate debt. Most LIBOR-based instruments had transitioned to SOFR-related rates by June 30, 2023; the remaining variable-rate note was expected to transition in the fourth quarter of fiscal 2023.
- The IRS is examining the company’s 2018 and 2019 federal tax returns. The filing does not provide a clear estimate of any potential exposure.
Important facts for investors to verify
- Final SCC outcomes for the interim rate case, including the amount of any customer refund and the timing of final rates.
- Approval and effective revenue requirement for the proposed SAVE Plan and the updated RNG Rider.
- MVP construction progress, final cost, in-service timing, remaining legal challenges and any effect on Midstream’s ownership percentage or impairment risk.
- Refinancing or extension of Midstream’s $11.1 million of current debt maturities and the impact of variable interest rates.
- Actual fiscal 2023 capital expenditures compared with the $21 million to $23 million expectation and the company’s ability to fund infrastructure investment while maintaining dividends.
- Winter weather, natural-gas prices, customer volumes and collections, which can materially affect seasonal revenue, margin and liquidity.