RGC RESOURCES INC annual report, FY2020

RGC Resources, Inc. — Fiscal 2020 Form 10-K Summary

Reporting period: Fiscal year ended September 30, 2020, with comparative fiscal 2019 results. The filing was dated December 3, 2020. RGC Resources primarily operates Roanoke Gas, a regulated natural-gas distribution utility serving approximately 62,000 customers in and around Roanoke, Virginia. Midstream owns an investment in Mountain Valley Pipeline, LLC (MVP); Diversified Energy has no active operations.

Financial Performance and Position

Metric	2020	2019	Change
Operating revenues	$63.1 million	$68.0 million	Down 7%
Gross utility margin	$38.5 million	$34.9 million	Up 10%
Operating income	$12.5 million	$11.6 million	Up 8%
Equity in affiliate earnings	$4.8 million	$3.0 million	Up $1.8 million
Net income	$10.6 million	$8.7 million	Up 21%
Basic and diluted EPS	$1.30	$1.08	Up 20%
Operating cash flow	$12.8 million	$14.7 million	Down $1.9 million
Capital expenditures	$22.9 million	$21.9 million	Up $1.0 million
Cash and cash equivalents	$0.3 million	$1.6 million	Down $1.3 million
Long-term debt, net	$123.8 million	$103.4 million	Up $20.4 million

Gross utility margin increased despite lower revenue because natural-gas costs declined 26% and are generally passed through to customers under the Purchased Gas Adjustment mechanism. The resulting gross utility margin represented approximately 61% of utility revenues in 2020, compared with approximately 52% in 2019.

Total delivered gas volumes increased 5% to 10.4 million DTH. Residential and commercial volumes declined 7%, while transportation and interruptible volumes increased 32%, primarily because of one industrial customer that temporarily shifted its primary fuel source to natural gas. Heating degree days declined 4%, and weather was approximately 8% warmer than normal.

Net income benefited from the full-year effect of higher non-gas base rates, higher transportation volumes, increased MVP-related AFUDC earnings, and higher weather-normalization revenue. These benefits were partly offset by increased operations and maintenance expense, bad-debt expense, depreciation, taxes, and interest expense.

Cash Flow, Liquidity, Debt, and Capital

Operating cash flow was $12.8 million, compared with $14.7 million in 2019. The decline primarily reflected the $3.8 million customer rate refund, a $3.0 million adverse movement in gas-cost recovery, and changes in regulatory assets and liabilities.
Investing cash outflows were $30.7 million, including $22.9 million of utility capital expenditures and $7.9 million invested in MVP and Southgate.
Financing cash inflows were $16.6 million. The company issued $10.0 million of fixed-rate notes for Roanoke Gas capital needs, increased Midstream borrowing capacity to $41.0 million, issued stock through employee and dividend-reinvestment programs, and paid $5.6 million of dividends.
At September 30, 2020, consolidated capitalization was 41.7% equity and 58.3% long-term debt, compared with 44.5% equity and 55.5% debt in 2019.
Roanoke Gas had a $28.0 million unsecured revolving facility expiring March 31, 2022, with $19.0 million of availability at September 30, 2020. Midstream’s $41.0 million credit facility matures December 29, 2022.
The company was in compliance with its debt covenants at year-end, including the requirement that long-term debt not exceed 65% of long-term capitalization.
Declared dividends increased to $0.70 per share from $0.66 per share.

Material Changes Versus Fiscal 2019

The Virginia State Corporation Commission finalized Roanoke Gas’s rate case in January 2020, approving a $7.25 million annualized non-gas rate increase and a 9.44% authorized return on equity. The company refunded $3.8 million of excess interim-rate collections in March 2020.
The company recorded a $317,000 write-down of ESAC regulatory assets and accelerated recovery of an additional $525,000 based on the fiscal 2020 earnings test.
COVID-19 reduced commercial consumption, increased bad-debt expense by approximately $336,000, and led to a continuing residential disconnection moratorium. The allowance for doubtful accounts increased to $703,000 from $111,000.
MVP-related equity earnings increased to $4.8 million from $3.0 million, primarily from higher AFUDC. The investment balance rose to $57.2 million for MVP and $57.5 million including Southgate.
Total debt increased mainly because of MVP funding and the $10.0 million Roanoke Gas note issuance.
The SAVE Rider was reset after prior investments were incorporated into base rates. Fiscal 2020 SAVE revenue declined to $1.3 million from $1.6 million; however, the approved fiscal 2021 rider is expected to collect approximately $2.3 million annually.

Guidance, Outlook, Risks, and Unusual Items

Management expects commercial gas consumption to remain lower during fiscal 2021 because of the continuing pandemic, while residential volumes have remained relatively stable.
Management expects utility capital expenditures to remain near current levels as the SAVE infrastructure-renewal program continues through approximately 2024. Fiscal 2021 MVP cash investment is expected to be approximately $17 million.
MVP was approximately 92% complete, but its targeted full in-service date was extended to the second half of calendar 2021. Estimated total project cost increased to $5.8 billion to $6.0 billion, excluding AFUDC. The project remains subject to permitting, litigation, regulatory approvals, construction delays, and possible additional financing.
Management expects total MVP cash investment of approximately $60 million to $62 million and cautions that current AFUDC earnings will decline when the project is placed in service and earnings shift to pipeline capacity charges.
Southgate, in which Midstream owns less than 1%, has a targeted 2022 in-service date but faces permitting and regulatory uncertainty, including a denied North Carolina water-quality certification that was appealed.
The company relies on two primary interstate pipelines for all gas delivered to its system. Pipeline failures, extreme weather, supply interruptions, operational incidents, cyberattacks, and capacity constraints could affect service and earnings.
Natural-gas commodity risk is substantially mitigated through the PGA mechanism, but higher prices could increase customer delinquencies and competition from alternative energy sources.
The company has approximately $6.1 million of combined pension and postretirement plan underfunding. Management expects fiscal 2021 contributions of approximately $500,000 to the pension plan and $400,000 to the postretirement plan.
Roanoke Gas had approximately $11 million of remaining regulatory liability associated with excess deferred income taxes, generally refundable to customers over approximately 28 years.
The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and no material impairment identified in the long-lived asset review.

Most Important Facts for Investors to Verify

Whether MVP receives the required permits and approvals and reaches service in the second half of calendar 2021 without further material cost increases.
Whether MVP-related capital calls and Southgate funding can be met without materially increasing leverage or diluting shareholders.
The duration and financial effect of COVID-19, including commercial demand, customer delinquencies, bad-debt expense, and recovery of pandemic-related costs through regulation.
Whether the higher fiscal 2021 SAVE Rider and the existing rate mechanisms sufficiently support utility infrastructure spending and authorized returns.
Debt covenant compliance, refinancing requirements beginning in fiscal 2022, interest-rate exposure, and available revolving-credit capacity.
The sustainability of earnings growth given the expected decline in MVP AFUDC after the project enters service.
The company’s reliance on two interstate pipelines, local economic conditions, weather variability, environmental regulation, cybersecurity, and the ability to retain specialized employees.