RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 62,400 customers in and around Roanoke, Virginia through Roanoke Gas. The company also holds minority investments in the Mountain Valley Pipeline (MVP) and Southgate projects through Midstream.
This filing covers the fiscal quarter and nine months ended June 30, 2022. The business is highly seasonal, with generally stronger earnings during the winter heating season; therefore, quarterly and year-to-date results are not indicative of the full fiscal year.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 |
|---|---|---|---|---|
| Total operating revenue | $17.3 million | $14.0 million | $70.1 million | $61.8 million |
| Operating income | $1.6 million | $1.5 million | $14.5 million | $14.2 million |
| Net income (loss) | $0.6 million | $0.6 million | $(20.3) million | $10.1 million |
| Basic and diluted EPS | $0.06 | $0.07 | $(2.29) | $1.23 |
| Operating cash flow | Not separately provided | Not separately provided | $19.8 million | $14.4 million |
| Capital expenditures and affiliate investments | Not separately provided | Not separately provided | $21.8 million | $19.1 million |
Gas utility revenue increased 23% in the quarter and 13% year to date. Utility gross margin, a non-GAAP measure defined as gas utility revenue less cost of gas, was $8.0 million in the quarter and $34.5 million year to date, up 4% in both comparisons. Approximate gross utility margin was 46.5% for the quarter versus 55.1% in the prior year and 49.3% year to date versus 53.9%, reflecting the pass-through of substantially higher gas costs.
Cash and cash equivalents were $13.8 million at June 30, 2022, compared with $1.5 million at September 30, 2021. Total assets were $298.7 million, and stockholders’ equity was $105.6 million. Notes payable totaled $131.4 million before unamortized issuance costs, while the company had no outstanding balance under its $21 million to $33 million seasonal line of credit at quarter-end.
Dividends declared were $0.195 per share for the quarter and $0.585 per share for the nine-month period, compared with $0.185 and $0.555, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher natural gas commodity prices, increased PGA billings, higher SAVE and WNA revenue, and greater transportation volumes. Average natural gas prices were nearly $7.00 per dekatherm in the quarter versus $2.80 in the prior-year quarter.
- Residential and commercial volumes declined 7% in the quarter and 3% year to date because of warmer weather. The company reported 288 heating degree days in the quarter, down 18% year over year.
- Transportation and interruptible volumes increased 33% in the quarter and 18% year to date, largely because of increased usage by one multi-fuel customer.
- Operating and maintenance expense increased 2% in the quarter and 5% year to date, reflecting higher bad debt, insurance, professional and contracted service costs, repairs, cybersecurity spending and customer-call-center costs.
- Interest expense increased 10% in the quarter and 9% year to date as average debt and variable interest rates rose.
- Year-to-date results include a $39.8 million pre-tax impairment of the MVP and Southgate investment following adverse Fourth Circuit rulings and increased uncertainty regarding project completion. Excluding the impairment, the company reported an adjusted effective tax rate of 23.6% versus 24.8% in the prior-year period.
- In March 2022, the company issued 1.35 million shares for nearly $27 million of net proceeds. Proceeds were used to support Roanoke Gas infrastructure investment and reduce Midstream debt.
- Utility property, net, increased to $224.1 million from $211.6 million at September 30, 2021, reflecting continued infrastructure investment.
Guidance, Outlook, Risks and Unusual Items
- The company expects the updated SAVE Rider, if approved by the Virginia State Corporation Commission, to produce approximately $4.1 million of annual revenue for October 2022 through September 2023, approximately $650,000 above the current rider. A final order was anticipated in September 2022.
- Fiscal 2022 capital expenditures were expected to increase by approximately $5 million from the prior year, primarily because of investment in a renewable natural gas project. The filing does not provide a clear total capital expenditure forecast.
- Management expects Midstream to require approximately $15 million to $17 million of additional capital over the next 12 to 24 months to meet MVP commitments. Potential funding sources include additional borrowing capacity and an equity infusion from RGC Resources.
- MVP construction has been delayed by legal and regulatory challenges. The project operator targeted in-service during the second half of 2023 at an estimated total project cost of approximately $6.6 billion, excluding AFUDC, while the company noted that required permits, authorizations and litigation outcomes remain uncertain.
- The company’s MVP investment was valued at approximately $28.2 million at June 30, 2022. Management determined that no additional impairment was required at quarter-end but stated that further impairment remains possible if project delays, cost increases, permit denials, interest-rate changes or other adverse developments reduce expected cash flows.
- Roanoke Gas’s line of credit expires March 31, 2023 unless extended or replaced. Management expects to extend or replace it and believes available financing is sufficient for the next year.
- Variable-rate debt exposes the company to higher interest expense as rates rise. Interest-rate swaps hedge portions of this exposure, but not all rate risk.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, compliance with debt covenants, and effective disclosure controls as of June 30, 2022.
- On August 4, 2022, Roanoke Gas acquired certain apartment-complex gas-delivery assets and expects to record an approximately $200,000 pre-tax gain in the fiscal fourth quarter.
Investor Verification Checklist
- Verify the final SCC decision and revenue impact of the updated SAVE Rider.
- Track MVP and Southgate permits, litigation, construction timing, total project cost and any additional impairment indicators.
- Assess how the company will fund the anticipated $15 million to $17 million of Midstream capital requirements.
- Monitor the March 2023 line-of-credit expiration, renewal or replacement terms, and compliance with debt covenants.
- Evaluate the effect of natural gas prices, customer collections, bad debt, weather normalization and pass-through mechanisms on future margins and liquidity.
- Confirm the timing and final economics of the renewable natural gas project and related regulatory approval.