RGC Resources' History and Growth
RGC Resources Inc. (RGCO) is a diversified energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,400 residential, commercial, and industrial customers in Roanoke, Virginia and surrounding localities. The company's operations are regulated by the Virginia State Corporation Commission (SCC), which oversees the terms, conditions, and rates charged to customers for natural gas service, safety standards, service extension, and depreciation.
RGC Resources, formerly known as Roanoke Gas Company, was founded in 1912 and has been providing natural gas services to the Roanoke region for over a century. The company underwent a name change to RGC Resources in 1997 to better reflect its diversification into other energy-related activities, including its investment in the Mountain Valley Pipeline (MVP) project through its wholly-owned subsidiary, RGC Midstream, LLC.
Over the years, RGC Resources has steadily grown its customer base, which now stands at approximately 63,400 across its service territory. The company has consistently invested in its natural gas distribution infrastructure, replacing aging pipelines and expanding its network to serve new residential and commercial developments. In the fiscal year 2024, RGC Resources connected 631 new services and renewed 412 existing services, indicating the continued growth of its customer base.
The company's utility operations are also subject to regulation from the United States Department of Transportation regarding the construction, operation, maintenance, safety, and integrity of its transmission and distribution pipelines. Additionally, the Federal Energy Regulatory Commission regulates the prices for the transportation and delivery of natural gas to the company's distribution system and underground storage services.
In the early 2000s, RGC Resources faced challenges related to rising natural gas prices and the need to invest in its aging infrastructure. The company responded by implementing approved rate mechanisms, such as the Steps to Advance Virginia's Energy (SAVE) plan, the Weather Normalization Adjustment (WNA), and the Inventory Carrying Cost (ICC) program, to help provide stability in earnings, adjust for volatility in the price of natural gas, and earn a return on qualified infrastructure investments.
Financials and Key Ratios
As of the company's latest 10-K filing for the fiscal year ended September 30, 2024, RGC Resources reported total revenues of $84.64 million and net income of $11.76 million, or $1.16 per diluted share. The company's operating cash flow for the same period was $17.43 million, while its free cash flow was a negative $4.66 million, reflecting the capital-intensive nature of its business.
For the first quarter of fiscal year 2025 (ended December 31, 2024), RGC Resources reported revenue of $27.29 million, a 12% increase year-over-year, and net income of $5.27 million, or $0.51 per share, compared to $5 million, or $0.50 per share, in the same quarter of the prior year. The increase in revenue and net income was primarily due to the implementation of a non-gas base rate increase, along with higher delivered volumes, gas costs, and SAVE revenues, slightly offset by a decrease in Weather Normalization Adjustment (WNA) revenue.
RGC Resources' financial position remains solid, with a current ratio of 0.56 and a debt-to-equity ratio of 1.23 as of December 31, 2024. The company's liquidity is supported by $2.1 million in cash and cash equivalents, as well as a $25 million revolving credit facility, of which $19.04 million was outstanding at the end of the first quarter of fiscal 2025.
Regulatory Environment and Initiatives
RGC Resources operates in a highly regulated industry, with the SCC overseeing the company's rates, safety standards, and infrastructure investments. The company has several regulatory mechanisms in place to mitigate the impact of weather variability and natural gas price fluctuations on its earnings, including the Weather Normalization Adjustment (WNA), the Infrastructure Replacement Rider (SAVE Plan), and the Renewable Natural Gas (RNG) Rider.
In February 2024, RGC Resources filed a general rate case with the SCC, seeking an annual non-gas base rate increase of $4.33 million and an increase in its authorized return on equity from 9.44% to 10.35%. On October 16, 2024, the company reached a settlement with the SCC staff, agreeing to an annual incremental revenue requirement increase of $4.08 million based on a return on equity of 9.90%.
Mountain Valley Pipeline and Midstream Investments
RGC Resources, through its wholly-owned subsidiary RGC Midstream, holds a less than 1% equity interest in the Mountain Valley Pipeline (MVP) project, a FERC-regulated natural gas pipeline that connects the Appalachian Basin to the Southeast region. After a lengthy construction and regulatory approval process, the MVP project entered commercial operation in June 2024, providing a significant energy transportation resource for RGC Resources' service territory.
The company's midstream investments, including the MVP and the Southgate pipeline project, have been a source of volatility in its earnings, as the majority of the income recognized from these investments during the construction phase was attributable to Allowance for Funds Used During Construction (AFUDC). With the MVP now operational, RGC Resources' share of earnings from the project will be more aligned with its operational performance, which could result in some fluctuations in the company's overall profitability.
For the first quarter of fiscal 2025, equity in earnings of unconsolidated affiliate (primarily related to the MVP investment) was $854,210, down 42% year-over-year due to the shift from AFUDC to operational earnings. RGC Resources receives approximately $800,000 per quarter in cash distributions from the MVP joint venture, which it uses to fund Midstream's interest and other expenses.
Operational Highlights and Guidance
For the fiscal year 2024, RGC Resources reported total capital expenditures of $22.09 million, primarily focused on infrastructure replacement and system expansion projects to serve new customer growth. The company has maintained its forecast for total capital spending of $21.5 million to $22 million for the fiscal year 2025, reflecting its ongoing commitment to enhancing the safety and reliability of its natural gas distribution system.
In its most recent earnings release, RGC Resources provided guidance for the fiscal year 2025, expecting earnings per share (EPS) to be in the range of $1.18 to $1.25. This guidance takes into account the impact of the new non-gas base rates that went into effect on July 1, 2024, as well as the company's continued investment in infrastructure and the ongoing transition of its midstream assets from the construction phase to the operational phase. Management stated they are still comfortable with this EPS guidance range and indicated they may refine the outlook further after the second quarter and the bulk of the winter heating season.
Business Segments
RGC Resources operates in two main business segments:
1. Gas Utility Segment: This is the primary driver of the company's business, generating the majority of its operating revenues. The segment involves the sale and distribution of natural gas to residential, commercial, and industrial customers in Roanoke, Virginia and surrounding areas. For the three months ended December 31, 2024, the gas utility segment reported operating revenues of $27.26 million, up 12% year-over-year. The gross utility margin, a non-GAAP measure calculated as utility revenues less cost of gas, was $15.56 million for the same period, up 9% year-over-year.
2. Investment in Affiliates Segment: This segment reflects RGC Resources' equity investment in the Mountain Valley Pipeline (MVP) and its cost-method investment in the proposed Southgate pipeline project. With the MVP now operational, the company recognizes its share of the MVP's operational earnings, which are favorably adjusted for amortization of a basis difference that arose from a prior impairment.
Liquidity
RGC Resources maintains a strong liquidity position to support its ongoing operations and capital investment programs. The company's primary sources of liquidity include cash flows from operations, short-term borrowings under its revolving credit facility, and long-term debt issuances. As of December 31, 2024, RGC Resources had $2.1 million in cash and cash equivalents and $5.96 million available under its $25 million unsecured revolving credit facility, providing additional financial flexibility to fund its operations and growth initiatives.
Risks and Challenges
RGC Resources, like other regulated utility companies, faces various risks and challenges, including:
1. Regulatory Risk: The company's operations are heavily dependent on the regulatory decisions made by the SCC, which could impact its ability to recover costs and earn a reasonable return on its investments.
2. Weather Variability: As a natural gas utility, RGC Resources' earnings are susceptible to fluctuations in weather patterns, which can affect customer demand and the company's ability to recover fixed costs.
3. Commodity Price Volatility: Fluctuations in natural gas prices can impact the company's purchased gas adjustment mechanism and its ability to effectively manage its gas supply and storage operations.
4. Midstream Project Execution: While the MVP is now operational, the proposed Southgate pipeline project still faces potential delays or cost overruns, which could adversely affect RGC Resources' financial performance and profitability.
5. Cybersecurity Threats: As a critical infrastructure provider, RGC Resources is exposed to the risk of cyber attacks, which could disrupt its operations and compromise customer data.
Conclusion
RGC Resources is a well-established natural gas utility company that has demonstrated its ability to navigate the regulatory environment and invest in its infrastructure to serve the growing Roanoke region. Despite the challenges posed by weather variability and commodity price fluctuations, the company has implemented various regulatory mechanisms to stabilize its earnings and provide reliable service to its customers.
The successful completion and operation of the MVP project is expected to provide a more stable stream of earnings going forward, although the transition from construction to operational phase has resulted in some short-term volatility in the company's midstream segment earnings. RGC Resources' focus on enhancing system reliability, expanding its customer base, and prudently managing its costs and capital investments positions the company well for continued growth and long-term shareholder value creation.
With a solid financial foundation, ongoing infrastructure investments, and a favorable regulatory environment, RGC Resources appears well-positioned to meet its fiscal 2025 guidance and continue its trajectory of steady growth in the regulated natural gas utility sector.