RGC Resources, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022, compared with the three months ended December 31, 2021. RGC Resources primarily distributes regulated natural gas through Roanoke Gas to approximately 62,900 customers in Virginia, with additional investments in the Mountain Valley Pipeline (MVP) and Southgate projects. Results are highly seasonal and are generally stronger during winter months.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total operating revenues | $33.3 million | $23.3 million | Up 43% |
| Gross utility margin | $12.4 million | $11.9 million | Up 4% |
| Operating income | $5.5 million | $5.4 million | Up 3% |
| Income before taxes | $4.3 million | $4.7 million | Down 9% |
| Net income | $3.3 million | $3.6 million | Down 9% |
| Diluted EPS | $0.33 | $0.43 | Down $0.10 |
| Net cash used in operating activities | $(2.4) million | $(3.5) million | Improved $1.1 million |
| Capital expenditures | $7.5 million | $5.7 million | Up $1.8 million |
Margins: Operating margin was approximately 16.7%, compared with 23.1% in the prior-year quarter. Gross utility margin declined to approximately 37.4% of utility revenue from 51.3%, primarily because gas costs rose faster than revenues. Gas costs are generally passed through to customers through the Purchased Gas Adjustment mechanism.
Balance sheet and liquidity: Cash and cash equivalents were $3.2 million at December 31, 2022, down from $4.9 million at September 30, 2022. Total assets were $308.0 million. Total debt, including current maturities and the line of credit, was approximately $147.6 million, consisting of $138.3 million of long-term debt principal and $9.4 million outstanding under the line of credit. The company was in compliance with all debt covenants. The line of credit had borrowing capacity ranging from $21 million to $33 million and was scheduled to expire March 31, 2023; management expected to extend or replace it.
Shareholder returns: The quarterly dividend declared was $0.1975 per share, compared with $0.1950 in the prior-year period. The company issued 31,245 common shares during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased $10.0 million, driven by natural gas prices averaging more than $7.00 per dekatherm versus $3.80, higher deliveries, and increased SAVE and inventory carrying-cost revenues.
- Delivered volumes increased 23% and heating degree days increased 31%. Residential and commercial deliveries increased 27%, although weather-normalized volumes increased only approximately 1%.
- Gross utility margin increased $0.5 million, or 4%. SAVE revenue increased approximately $0.3 million and inventory carrying-cost revenue increased approximately $0.2 million, while the weather normalization adjustment reduced revenue by approximately $1.4 million versus the prior year.
- Operations and maintenance expense increased 6%, primarily due to inflation-related compensation and contracted services, higher bad-debt expense, and higher insurance premiums.
- Interest expense increased 24% to $1.4 million. The weighted-average interest rate increased to 3.78% from 2.93%, despite a 3% decline in average debt outstanding.
- Equity earnings from the MVP investment declined to $1,232 from $72,127 because construction activity remained limited.
- Operating cash flow remained negative because higher gas prices and colder weather increased accounts receivable and working-capital needs. Financing activities provided $9.1 million, including increased line-of-credit borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2023 capital expenditures to be approximately $20 million.
- Roanoke Gas filed for an $8.55 million base-rate increase, including $4.05 million previously recovered through the SAVE Rider. Interim rates became effective January 1, 2023, subject to refund, audit, hearing and a final SCC order expected in late 2023 or early 2024.
- The company expected to file for a new SAVE Plan and Rider in the third quarter of fiscal 2023 for recovery of eligible investments beginning October 1, 2023.
- The Virginia State Corporation Commission approved the renewable natural gas project on January 23, 2023. The company expected to begin billing under the related rate adjustment clause by early March 2023 and to cease capitalizing AFUDC upon commissioning.
- MVP construction remained delayed by legal and regulatory challenges. The project had received an extension to October 13, 2026, while the operator continued pursuing required permits. The previously targeted in-service date in the second half of calendar 2023 and estimated project cost of approximately $6.6 billion remained subject to significant uncertainty.
- Management estimated that Midstream would require $15 million to $18 million of additional capital over the next 12 to 24 months for MVP-related requirements. Debt and equity funding alternatives were under evaluation.
- The company recorded no additional MVP impairment in the quarter after recognizing approximately $55.1 million of pre-tax impairment charges during fiscal 2022. Further impairment remains possible if project delays, permitting outcomes, costs, interest rates or completion probabilities worsen.
- Natural gas prices, weather, customer collections, regulatory decisions, rising interest rates and variable-rate debt may materially affect results and liquidity. The filing states that quarterly results are not indicative of full-year performance.
- The IRS was examining the company’s 2018 and 2019 federal tax returns. The filing did not provide a clear estimate of any potential liability.
Investor Verification Items
- Track the final outcome and timing of the $8.55 million Virginia base-rate case, including any refunds or changes to interim rates.
- Verify renewal or replacement of the $21 million-to-$33 million line of credit before its March 31, 2023 expiration.
- Monitor MVP permitting, construction progress, funding needs, projected completion date and potential additional impairment.
- Assess the effect of natural gas prices and weather-normalization mechanisms on customer bills, margins and working capital.
- Review the company’s exposure to rising interest rates, LIBOR-to-SOFR contract transitions and upcoming debt maturities, including the $23 million Midstream maturity scheduled for December 31, 2023.
- Confirm actual fiscal 2023 capital spending and financing requirements against management’s approximately $20 million capital-expenditure expectation.