RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 63,000 customers in and around Roanoke, Virginia through Roanoke Gas Company. It also holds minority investments in the Mountain Valley Pipeline (MVP) and Southgate projects through Midstream. This filing covers the three months ended December 31, 2021, the Company’s fiscal first quarter of 2022, with comparative results for the three months ended December 31, 2020.
Financial Performance and Key Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total operating revenues | $23.3 million | $19.5 million | +19% |
| Gas utility revenues | $23.2 million | $19.5 million | +19% |
| Gross utility margin | $11.9 million | $11.8 million | +1% |
| Operating income | $5.4 million | $5.6 million | -4% |
| Net income | $3.6 million | $4.7 million | -24% |
| Diluted EPS | $0.43 | $0.58 | -26% |
| Operating margin | 23.1% | 28.6% | Down |
| Net margin | 15.4% | 24.2% | Down |
- Revenue growth primarily reflected higher natural gas commodity prices, increased pipeline and storage fees passed through under the Purchased Gas Adjustment mechanism, and higher SAVE Plan revenues. Delivered gas volumes declined 6%, and heating degree days declined 7%.
- Gross utility margin increased only modestly because the higher revenue was substantially offset by a 47% increase in utility gas costs. Weather normalization revenue was approximately $1.2 million, compared with approximately $0.9 million in the prior-year quarter, as weather was approximately 22% warmer than normal.
- Operating expenses increased to $17.9 million from $13.9 million. Operations and maintenance expense rose 5%, general taxes rose 5%, and depreciation and amortization rose more than 5%.
- Equity earnings from unconsolidated affiliates fell to $72,000 from $1.4 million because MVP AFUDC accruals were limited and then suspended in November 2021.
- Cash flow from operations was negative $3.5 million, compared with positive $153,000 in the prior-year quarter, primarily because of higher accounts receivable, lower accounts payable, and increased WNA-related receivables.
- Capital expenditures were $5.7 million, compared with $5.3 million, and cash investment in MVP was $2.1 million, compared with $2.5 million.
- Financing activities provided $11.6 million, including new debt proceeds, partially offset by debt repayments and dividends. Ending cash was $1.8 million, compared with $0.7 million at December 31, 2020.
- Total assets were $323.2 million at December 31, 2021, compared with $310.1 million at September 30, 2021. Stockholders’ equity was $102.3 million, compared with $99.7 million.
Debt, Liquidity, and Capital Resources
- Total debt principal was $153.6 million at December 31, 2021, including $134.0 million of notes payable and $19.6 million drawn on the line of credit. Current maturities totaled $28.5 million, primarily related to Midstream debt due December 29, 2022.
- Midstream’s borrowing capacity declined from $41 million to $33 million after its November 2021 $8 million promissory note. Of that capacity, $28.5 million was utilized at quarter-end.
- The Company reported 40% equity and 60% debt capitalization and compliance with all debt covenants. The principal debt covenant limits consolidated long-term indebtedness to 65% of total capitalization.
- Roanoke Gas has delayed-draw financing of $10 million scheduled in two $5 million installments on approximately April 1, 2022 and October 1, 2022. Management stated that available financing, the line of credit, private shelf facilities, potential ATM equity issuance, and adjustable capital spending should provide sufficient liquidity over the next year.
- The quarterly dividend increased to $0.195 per share from $0.185 per share. No shares were issued under the ATM program during the quarter.
Material Changes, Outlook, and Risks
- Management expects fiscal 2022 capital expenditures to increase by approximately $5 million over the prior year because of a one-time gas supply infrastructure project.
- The approved SAVE Rider is expected to collect approximately $3.45 million in annual revenue for October 2021 through September 2022, approximately $1.1 million above the prior fiscal year.
- The Company emphasizes that quarterly results are highly seasonal and that first-quarter earnings are not indicative of full-year results. Winter weather, gas prices, storage levels, customer collections, and regulatory mechanisms materially affect revenue, margins, and cash flow.
- COVID-19-related supply-chain disruptions, labor shortages, inflation, customer arrearages, and potential changes in operating restrictions remain risks. Roanoke Gas received approximately $858,556 of ARPA funds in November 2021 and applied the full amount to eligible customer accounts in December.
- The MVP remains the most significant unusual and contingent item. The Fourth Circuit vacated certain Jefferson National Forest permits on January 25, 2022 and vacated the project’s Biological Opinion and Incidental Take Statement on February 3, 2022. The effects on project timing and costs were not yet known.
- Additional MVP permits and authorizations remain necessary. Further delays, cost overruns, unsuccessful appeals, or permit denials could reduce future earnings, require an impairment of the Company’s $66.5 million MVP investment, increase funding needs, and adversely affect dividends or debt covenant compliance. Management concluded that no MVP impairment existed as of December 31, 2021.
- LIBOR-based contracts remain outstanding. The Company expects to address reference-rate reform later in fiscal 2022; the filing states that the transition could materially affect financial position, results, or cash flows.
Important Facts for Investors to Verify
- Verify MVP permit, construction schedule, final project cost, additional capital requirements, and any impairment indicators following the Fourth Circuit decisions.
- Monitor the December 2022 maturity and refinancing requirements for Midstream’s $28.5 million debt and the availability of its reduced $33 million credit facility.
- Assess operating cash flow and customer receivable collections as gas prices, weather normalization adjustments, and customer arrearages change.
- Confirm the fiscal 2022 capital-spending outlook, including the anticipated $5 million increase and its financing implications.
- Track the impact of higher gas costs, inflation, labor and supply-chain constraints, and insurance and bad-debt expenses on utility margins.
- Review future regulatory decisions affecting the SAVE Rider, PGA, WNA, COVID-19 cost recovery, and ARPA-related customer assistance.
- Evaluate the replacement of LIBOR in debt and swap agreements and any resulting changes in borrowing costs or hedge accounting.