RGC Resources, Inc. — Fiscal 2023 Form 10-K Summary
Reporting period: The filing is an annual report for the fiscal year ended September 30, 2023, rather than a standalone calendar 2023 fourth-quarter filing. RGC Resources primarily operates Roanoke Gas, a regulated natural gas distribution utility serving approximately 62,200 customers in and around Roanoke, Virginia. Roanoke Gas generated more than 99% of consolidated revenue. Midstream holds less than 1% interests in the Mountain Valley Pipeline (MVP) and Southgate projects; Diversified Energy is inactive.
Financial Performance and Position
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Total operating revenues | $97.4 million | $84.2 million | 16% increase |
| Gas utility revenues | $97.3 million | $84.0 million | 16% increase |
| Gross utility margin | $45.6 million | $41.5 million | 10% increase |
| Operating income | $17.7 million | $14.9 million | 19% increase |
| Net income (loss) | $11.3 million | $(31.7) million | $43.0 million improvement |
| Basic and diluted EPS | $1.14 | $(3.48) | Improved |
| Net cash from operations | $23.8 million | $15.6 million | $8.2 million increase |
| Capital expenditures | $25.3 million | $25.5 million | Approximately flat |
| Cash and cash equivalents | $1.5 million | $4.9 million | $3.4 million decrease |
| Total debt principal | $141.4 million, including line-of-credit borrowings | Not presented on the same basis in the filing summary | Weighted-average debt rate rose to 3.83% from 3.06% |
| Stockholders’ equity | $100.7 million | $93.1 million | Increase |
Gross utility margin represented approximately 46.8% of gas utility revenue in fiscal 2023, compared with approximately 49.4% in fiscal 2022. Total delivered volumes declined 1% to 10.2 million DTH, while residential and commercial volumes declined 3% because heating degree days were 3% lower and weather was approximately 16% warmer than normal. The weather normalization adjustment contributed approximately $3.0 million of revenue.
Natural gas costs represented approximately 65% of fiscal 2023 operating expenses and are generally recovered through the Purchased Gas Adjustment mechanism. Operations and maintenance expense increased 3%, depreciation increased 9%, and interest expense increased 25% to $5.6 million as interest rates rose. The company declared dividends of $0.79 per share, compared with $0.78 per share in fiscal 2022.
Material Changes Versus the Prior Comparable Period
- Net income benefited primarily from the absence of the $55.1 million pre-tax MVP impairment recorded in fiscal 2022 and from higher non-gas base rates implemented in January 2023. Excluding the after-tax effect of the prior-year impairment, management estimated that net income increased approximately $2.1 million.
- Revenue growth reflected higher natural gas prices during the first half of fiscal 2023, the non-gas base rate increase, higher inventory carrying cost revenue, weather normalization revenue, and the new renewable natural gas (RNG) rider.
- Gross utility margin increased $4.0 million. Customer base charge revenue rose $1.2 million, volumetric margin rose $3.0 million, WNA revenue rose $1.0 million, and inventory carrying cost revenue rose $0.3 million. These gains were partly offset by a $2.2 million reduction in SAVE Plan revenue.
- The RNG facility began operating in March 2023 and contributed approximately $0.7 million of revenue and approximately $3.9 million of fiscal 2023 capital expenditures.
- Operating cash flow improved primarily because lower gas prices reduced the cash tied up in gas storage. Investing cash outflows remained high, while financing cash flow was only $0.2 million compared with $18.4 million in fiscal 2022, when the company completed a $27 million equity offering.
- Consolidated capitalization improved to 44.4% equity and 55.6% long-term debt at September 30, 2023, compared with 40.4% equity and 59.6% long-term debt a year earlier.
Guidance, Outlook, Risks and Unusual Items
- MVP: Following federal legislation and Supreme Court action in 2023, construction resumed. The project operator targeted completion in the first quarter of calendar 2024. The company expects cash distributions to begin three to six months after commercial operations begin. Further delays, cost overruns, legal or regulatory setbacks, higher interest rates, or operational problems could cause additional impairment of the company’s $17.1 million MVP investment or affect dividends and debt covenant compliance.
- Midstream liquidity: Midstream has $11 million of debt maturing during the succeeding 12 months and approximately $2.7 million of projected interest expense. Management expects to refinance or extend these obligations, but completion of MVP is an important assumption.
- Utility capital program: Capital expenditures are expected to be at least $20 million annually over the next several years. The approved five-year SAVE Plan contemplates approximately $49.5 million of eligible investment through September 2028, including an estimated $8.5 million in fiscal 2024.
- Rates and customer refunds: A settlement with Virginia SCC staff provides for $7.45 million of incremental annual non-gas revenue. New rates began October 1, 2023, subject to final SCC approval, and the company recorded a provision to refund excess interim billings, including interest. The new SAVE Rider is expected to provide approximately $0.4 million in fiscal 2024.
- Debt and liquidity: Roanoke Gas had $4.4 million outstanding on its $25 million revolving note at September 30, 2023, with $13 million of availability at that date and $25 million available beginning December 1, 2023. The company reported compliance with all debt covenants. Variable-rate debt remains exposed to higher interest costs despite interest-rate swaps.
- Operational and regulatory risks: All gas supply reaches the system through two primary interstate pipelines. Pipeline failure, severe weather, cyber incidents, safety events, labor constraints, inflation, environmental or climate regulation, and delays in rate relief or infrastructure approvals could adversely affect results.
- Tax matters: The IRS is examining the company’s 2018 and 2019 federal tax returns; the filing does not provide a clear estimate of any potential adjustment.
- Unusual items: The company recognized a $311,000 pre-tax gain from the transfer of a housing-authority distribution facility in the fourth quarter of fiscal 2023. Two remaining apartment-complex transfers depend on future funding, whose timing is unknown. No pending legal proceedings were reported.
Most Important Facts for Investors to Verify
- Whether MVP achieved commercial operation on the targeted schedule and whether Midstream refinanced or repaid its 2024 debt maturities.
- The final SCC order and actual customer refunds related to the $7.45 million rate settlement.
- Fiscal 2024 operating cash flow, capital spending, SAVE recovery, RNG performance, and the effect of lower inventory carrying cost revenue.
- The company’s available borrowing capacity, debt covenant compliance, refinancing costs, and exposure to variable interest rates.
- Any new impairment indicators for MVP or Southgate and the sustainability of the investment’s future earnings and cash distributions.
- The outcome of the IRS examinations and the treatment of outstanding R&D and RNG tax credits.
- Whether customer growth, weather normalization, natural gas prices, and competition from electricity and renewable energy affect future utility margins.