RGC Resources, Inc. (NASDAQ:RGCO) is a leading energy services company that has been providing reliable and efficient natural gas distribution services to its customers for decades. Headquartered in Roanoke, Virginia, the company's primary subsidiary, Roanoke Gas, serves a growing customer base of over 62,800 residential, commercial, and industrial clients across its service territory.

History and Background

RGC Resources has a rich history that spans more than a century. The company traces its roots back to 1887 when the Roanoke Gas Light Company was founded to provide illuminating gas for the city of Roanoke. Over the years, the company has evolved and adapted to the changing energy landscape, transitioning from illuminating gas to natural gas distribution and diversifying its operations to include investments in infrastructure projects such as the Mountain Valley Pipeline (MVP).

RGC Resources, Inc. was officially founded in 1946 and has been publicly traded on the NASDAQ Global Market since 1996 under the ticker symbol RGCO. In its early years, the company primarily focused on expanding its natural gas distribution system within its historic service territory. During the 1970s and 1980s, RGC Resources faced challenges as it navigated rising natural gas commodity prices and regulatory changes. However, the company demonstrated its resilience by successfully adapting to these market conditions and continuing to serve its growing customer base.

The 1990s marked a significant period of expansion for RGC Resources as it implemented a diversification strategy. This led to the creation of two wholly-owned subsidiaries: Midstream, which focuses on investments in pipeline projects, and Diversified Energy, an unregulated energy services company. This strategic move helped the company weather changes in the natural gas industry and provided additional revenue streams.

Financials

In the fiscal year ended September 30, 2023, RGC Resources reported total revenues of $97.44 million and net income of $11.30 million, or $1.14 per diluted share. The company's operational and financial performance has been consistently strong, with a 5-year average return on equity (ROE) of 11.2%. This solid financial footing has enabled RGC Resources to maintain a healthy balance sheet and deliver consistent shareholder returns, including 21 consecutive annual dividend increases.

For the nine months ended June 30, 2024, the company's Gas Utility segment generated operating revenues of $71.46 million, down 16% compared to the same period in the prior year, primarily due to lower natural gas commodity prices and lower SAVE revenues. However, gross utility margin, a non-GAAP financial measure, increased 8% to $40.71 million over the same period, driven by the non-gas base rate increase, Weather Normalization Adjustment (WNA), and Renewable Natural Gas (RNG) revenue.

In the most recent quarter (Q3 2024), RGC Resources reported revenue of $14.46 million, a 6% increase compared to the same quarter last year, driven by higher WNA and RNG revenues. However, net income decreased by 77% year-over-year to $156,692 due to higher operating expenses, lower equity earnings from the Mountain Valley Pipeline (MVP) project, and higher interest expense.

The company's Non-utility segment, which includes unregulated activities, generated operating revenues of $81.37 thousand for the nine months ended June 30, 2024, a 6% decrease compared to the same period in the prior year. However, the segment recorded equity in earnings of unconsolidated affiliates of $2.98 million, a significant increase compared to $523.58 thousand in the same period last year, primarily due to the recognition of AFUDC during the MVP construction phase.

Liquidity

As of June 30, 2024, RGC Resources had a debt-to-equity ratio of 1.33. The company had $2.54 million in cash and cash equivalents on its balance sheet and $25 million available under its revolving credit facility. The company's current ratio was 1.07 and quick ratio was 0.69, indicating a solid liquidity position.

Growth Drivers

One of the key drivers of RGC Resources' growth has been its strategic investments in infrastructure projects. In 2024, the company celebrated a significant milestone with the completion and initial delivery of natural gas from the Mountain Valley Pipeline (MVP), a major interstate natural gas pipeline project in which RGC's subsidiary, Midstream, holds a less than 1% investment. The MVP's in-service has strengthened the reliability and affordability of natural gas supply to RGC's customers, positioning the company for continued success.

Resilience and Adaptability

Despite the challenges posed by the COVID-19 pandemic, RGC Resources has demonstrated its resilience and ability to navigate uncertain times. The company's diversified business model, with regulated utility operations and strategic infrastructure investments, has provided a degree of stability and insulation from the broader economic turbulence.

Future Outlook

Looking ahead, RGC Resources remains focused on executing its growth strategy, which includes continued investment in its utility infrastructure, expansion of its customer base, and exploration of new opportunities in the energy sector. The company's recently approved 5-year SAVE (Steps to Advance Virginia's Energy) plan, which allows for the recovery of costs associated with eligible infrastructure replacement projects, is expected to provide a stable and predictable revenue stream.

For the full fiscal year 2024, RGC Resources' consolidated earnings guidance remains unchanged from what was shared in the first quarter. The company expects the AFUDC (Allowance for Funds Used During Construction) from the Mountain Valley Pipeline project to be slightly higher than expected so far this year, due to slight changes in the in-service date and prolonged construction. The rate case with interim rates effective July 1, 2024 is highlighted as a key driver for the second half of fiscal 2024, particularly the fourth quarter.

Sustainability Initiatives

Furthermore, RGC Resources' commitment to environmental sustainability is reflected in its investment in a renewable natural gas (RNG) facility, which began operations in 2023. This project, developed in partnership with the Western Virginia Water Authority, not only reduces greenhouse gas emissions but also generates additional revenue streams for the company.

Conclusion

In conclusion, RGC Resources, Inc. (NASDAQ:RGCO) is a well-positioned energy services company with a proven track record of financial stability, operational excellence, and strategic growth. With its diversified business model, investments in critical infrastructure, and focus on sustainability, the company is poised to continue delivering value to its shareholders and customers for years to come. Despite facing challenges such as higher operating expenses and interest costs, RGC Resources' strategic investments, particularly in the Mountain Valley Pipeline and renewable natural gas projects, position it well for future growth and stability in the evolving energy landscape.