UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form | 10-Q |
(Mark One) |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Quarterly Period Ended March 31, 20212022
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Transition Period From | to |
Commission File Number 000-26591
RGC Resources, Inc. | ||
(Exact name of Registrant as Specified in its Charter) |
Virginia | 54-1909697 |
(State or Other Jurisdiction of | (I.R.S. Employer |
519 Kimball Ave., N.E., Roanoke, VA | 24016 |
(Address of Principal Executive Offices) | (Zip Code) |
(540) 777-4427
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Common Stock, $5 Par Value | RGCO | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated-filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at April 30 |
Common Stock, $5 Par Value |
|
GLOSSARY OF TERMS
AFUDC | Allowance for Funds Used During Construction | |||
AOCI/AOCL | Accumulated Other Comprehensive Income (Loss) | |||
ARO | Asset Retirement Obligation | |||
ARP | Alternative Revenue Program, regulatory or rate recovery mechanisms approved by the SCC that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets | |||
ARPA | American Rescue Plan Act of 2021 | |||
ASC | Accounting Standards Codification | |||
ASU | Accounting Standards Update as issued by the FASB | |||
ATM | At-the-market program whereby a Company can incrementally offer common stock through a broker at prevailing market prices and on an as-needed basis | |||
CARES/CARES Act | The Coronavirus Aid, Relief, and Economic Security Act | |||
Company | RGC Resources, Inc. or Roanoke Gas Company | |||
COVID-19 or Coronavirus |
| |||
CPCN | Certificate of Public Convenience and Necessity | |||
Diversified Energy | Diversified Energy Company, a wholly-owned subsidiary of Resources | |||
DRIP | Dividend Reinvestment and Stock Purchase Plan of RGC Resources, Inc. | |||
DTH | Decatherm (a measure of energy used primarily to measure natural gas) | |||
EPS | Earnings Per Share | |||
ERISA | Employee Retirement Income Security Act of 1974 | |||
ESAC | Eligible Safety Activity Costs, a Virginia natural gas utility’s operation and maintenance expenditures that are related to the development, implementation, or execution of the utility’s integrity management plan or programs and measures implemented to comply with regulations issued by the SCC or a federal regulatory body with jurisdiction over pipeline safety | |||
FASB | Financial Accounting Standards Board | |||
FDIC | Federal Deposit Insurance Corporation | |||
FERC | Federal Energy Regulatory Commission | |||
Fourth Circuit | U.S. Fourth Circuit Court of Appeals | |||
GAAP |
| |||
HDD | Heating degree day, a measurement designed to quantify the demand for energy. It is the number of degrees that a day’s average temperature falls below 65 degrees Fahrenheit | |||
ICC | Inventory carrying cost revenue, an SCC approved rate structure that mitigates the impact of financing costs on natural gas inventory | |||
IRS | Internal Revenue Service | |||
KEYSOP | RGC Resources, Inc. Key Employee Stock Option Plan | |||
LDI | Liability Driven Investment approach, a strategy which reduces the volatility in the pension plan's funded status and expense by matching the duration of the fixed income investments with the duration of the corresponding pension liabilities | |||
LIBOR | London Inter-Bank Offered Rate | |||
LLC | Mountain Valley Pipeline, L.L.C., a joint venture established to design, construct and operate | |||
LNG | Liquefied natural gas, the cryogenic liquid form of natural gas. Roanoke Gas operates and maintains a plant capable of producing and storing up to 200,000 dth of liquefied natural gas |
MGP | Manufactured gas plant | |||
Midstream | RGC Midstream, L.L.C., a wholly-owned subsidiary of Resources created to invest in pipeline projects including MVP and Southgate | |||
MVP | Mountain Valley Pipeline, a FERC-regulated natural gas pipeline project intended to connect the Equitran's gathering and transmission system in northern West Virginia to the Transco interstate pipeline in south central Virginia with a planned interconnect to Roanoke Gas’ natural gas distribution system | |||
NQDC Plan | RGC Resources, Inc. Non-qualified Deferred Compensation Plan | |||
Normal Weather | The average number of heating degree days over the most recent 30-year period | |||
PBGC | Pension Benefit Guaranty Corporation | |||
Pension Plan | Defined benefit plan that provides pension benefits to employees hired prior to January 1, 2017 who meet certain years of service criteria | |||
PGA | Purchased Gas Adjustment, a regulatory mechanism, which adjusts natural gas customer rates to reflect changes in the forecasted cost of gas and actual gas costs | |||
Postretirement Plan | Defined benefit plan that provides postretirement medical and life insurance benefits to eligible employees hired prior to January 1, 2000 who meet years of service and other criteria | |||
R&D credit | Research and development federal tax credit defined under Internal Revenue Code section 41 and the related regulations | |||
Resources | RGC Resources, Inc., parent company of Roanoke Gas, Midstream and Diversified Energy | |||
RGCO | Trading symbol for RGC Resources, Inc. on the NASDAQ Global Stock Market | |||
Roanoke Gas | Roanoke Gas Company, a wholly-owned subsidiary of Resources | |||
RSPD | RGC Resources, Inc. Restricted Stock Plan for Outside Directors | |||
RSPO | RGC Resources, Inc. Restricted Stock Plan for Officers | |||
SAVE | Steps to Advance Virginia's Energy, a regulatory mechanism per Chapter 26 of Title 56 of the Code of Virginia that allows natural gas utilities to recover the investment, including related depreciation and expenses and provide return on rate base, in eligible infrastructure replacement projects without the filing of a formal base rate application | |||
SAVE Plan | Steps to Advance Virginia's Energy Plan, the Company's proposed and approved operational replacement plan and related spending under the SAVE regulatory | |||
SAVE Rider | Steps to Advance Virginia's Energy Plan Rider, the rate component of the SAVE Plan as approved by the SCC that is billed monthly to the Company’s customers to recover the costs associated with eligible infrastructure projects including the related depreciation and expenses and return on rate base of the investment | |||
SCC | Virginia State Corporation Commission, the regulatory body with oversight responsibilities of the utility operations of Roanoke Gas | |||
SEC | U.S. Securities and Exchange Commission | |||
SOFR | Secured Overnight Financing Rate | |||
Southgate | Mountain Valley Pipeline, LLC’s Southgate project, which extends from the MVP in south central Virginia to central North Carolina, of which Midstream holds less than a 1% investment | |||
S&P 500 Index | Standard & Poor’s 500 Stock Index | |||
TCJA | Tax Cuts and Jobs Act of 2017 | |||
WNA | Weather Normalization Adjustment, an ARP mechanism which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average | |||
Some of the terms above may not be included in this filing |
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2021 | September 30, | March 31, 2022 | September 30, | |||||||||||||
Unaudited | 2020 | Unaudited | 2021 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 726,549 | $ | 291,066 | $ | 9,431,990 | $ | 1,518,317 | ||||||||
Accounts receivable (less allowance for uncollectibles of $849,719, and $703,140, respectively) | 9,828,956 | 3,404,044 | ||||||||||||||
Accounts receivable (less allowance for credit losses of $712,100, and $242,010, respectively) | 10,997,174 | 4,949,900 | ||||||||||||||
Materials and supplies | 1,101,514 | 1,027,191 | 1,043,133 | 1,031,666 | ||||||||||||
Gas in storage | 1,283,767 | 5,708,761 | 2,063,974 | 7,867,470 | ||||||||||||
Prepaid income taxes | 0 | 647,623 | 2,118,634 | 3,104,950 | ||||||||||||
Regulatory assets | 1,723,472 | 2,503,314 | 1,997,076 | 5,656,453 | ||||||||||||
Interest rate swap | 312,511 | 0 | ||||||||||||||
Other | 1,898,954 | 854,562 | 4,556,142 | 1,015,099 | ||||||||||||
Total current assets | 16,563,212 | 14,436,561 | 32,520,634 | 25,143,855 | ||||||||||||
UTILITY PROPERTY: | ||||||||||||||||
In service | 264,489,731 | 258,342,372 | 280,362,362 | 272,382,539 | ||||||||||||
Accumulated depreciation and amortization | (74,224,836 | ) | (71,386,537 | ) | (78,862,695 | ) | (76,038,433 | ) | ||||||||
In service, net | 190,264,895 | 186,955,835 | 201,499,667 | 196,344,106 | ||||||||||||
Construction work in progress | 13,433,545 | 11,489,258 | 17,209,963 | 15,305,578 | ||||||||||||
Utility plant, net | 203,698,440 | 198,445,093 | 218,709,630 | 211,649,684 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Regulatory assets | 10,974,638 | 10,970,094 | 6,706,015 | 6,769,759 | ||||||||||||
Investment in unconsolidated affiliates | 60,544,494 | 57,542,805 | 27,321,251 | 64,867,319 | ||||||||||||
Benefit plan assets | 1,344,713 | 1,259,639 | ||||||||||||||
Deferred income taxes | 337,757 | 0 | ||||||||||||||
Interest rate swap | 1,046,987 | 0 | ||||||||||||||
Other | 383,254 | 284,954 | 371,498 | 418,937 | ||||||||||||
Total other assets | 71,902,386 | 68,797,853 | 37,128,221 | 73,315,654 | ||||||||||||
TOTAL ASSETS | $ | 292,164,038 | $ | 281,679,507 | $ | 288,358,485 | $ | 310,109,193 |
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2021 | September 30, | March 31, 2022 | September 30, | |||||||||||||
Unaudited | 2020 | Unaudited | 2021 | |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Current maturities of long-term debt | $ | 7,000,000 | $ | 0 | $ | 19,705,200 | $ | 7,000,000 | ||||||||
Dividends payable | 1,522,322 | 1,428,268 | 1,908,139 | 1,549,841 | ||||||||||||
Accounts payable | 4,555,690 | 4,442,182 | 5,809,165 | 7,729,707 | ||||||||||||
Capital contributions payable | 1,441,232 | 2,512,437 | 773,090 | 2,140,637 | ||||||||||||
Customer credit balances | 851,968 | 1,587,061 | 682,959 | 1,539,680 | ||||||||||||
Income taxes payable | 505,121 | 0 | 88,080 | 0 | ||||||||||||
Customer deposits | 1,605,684 | 1,611,476 | 1,583,542 | 1,571,342 | ||||||||||||
Accrued expenses | 2,714,264 | 3,565,210 | 2,831,418 | 3,819,977 | ||||||||||||
Interest rate swaps | 356,412 | 533,795 | 0 | 332,389 | ||||||||||||
Regulatory liabilities | 222,373 | 890,313 | 3,195,059 | 329,959 | ||||||||||||
Total current liabilities | 20,775,066 | 16,570,742 | 36,576,652 | 26,013,532 | ||||||||||||
LONG-TERM DEBT: | ||||||||||||||||
Notes payable | 111,755,200 | 114,975,200 | 105,125,000 | 116,110,200 | ||||||||||||
Line-of-credit | 9,281,929 | 9,143,606 | 0 | 17,628,897 | ||||||||||||
Less unamortized debt issuance costs | (266,700 | ) | (299,175 | ) | (283,922 | ) | (267,670 | ) | ||||||||
Long-term debt, net | 120,770,429 | 123,819,631 | 104,841,078 | 133,471,427 | ||||||||||||
DEFERRED CREDITS AND OTHER LIABILITIES: | ||||||||||||||||
Interest rate swaps | 974,310 | 1,689,761 | 0 | 863,694 | ||||||||||||
Asset retirement obligations | 7,396,895 | 7,180,982 | 7,876,084 | 7,628,958 | ||||||||||||
Regulatory cost of retirement obligations | 13,122,705 | 12,678,043 | 14,126,243 | 13,640,567 | ||||||||||||
Benefit plan liabilities | 6,016,865 | 6,149,527 | 885,806 | 949,851 | ||||||||||||
Deferred income taxes | 14,971,506 | 13,973,762 | 5,883,375 | 14,948,213 | ||||||||||||
Regulatory liabilities | 10,561,654 | 10,729,082 | 12,706,518 | 12,891,242 | ||||||||||||
Total deferred credits and other liabilities | 53,043,935 | 52,401,157 | 41,478,026 | 50,922,525 | ||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Common stock, $5 par; authorized 20,000,000 shares; issued and outstanding 8,226,650 and 8,160,058 shares, respectively | 41,133,250 | 40,800,290 | ||||||||||||||
Common stock, $5 par; authorized 20,000,000 shares; issued and outstanding 9,789,895 and 8,375,092 shares, respectively | 48,949,475 | 41,875,460 | ||||||||||||||
Preferred stock, no par, authorized 5,000,000 shares; no shares issued and outstanding | 0 | 0 | 0 | 0 | ||||||||||||
Capital in excess of par value | 17,058,609 | 15,847,121 | 40,978,942 | 19,705,387 | ||||||||||||
Retained earnings | 42,137,946 | 35,688,510 | 15,194,355 | 39,656,296 | ||||||||||||
Accumulated other comprehensive loss | (2,755,197 | ) | (3,447,944 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | 339,957 | (1,535,434 | ) | |||||||||||||
Total stockholders’ equity | 97,574,608 | 88,887,977 | 105,462,729 | 99,701,709 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 292,164,038 | $ | 281,679,507 | $ | 288,358,485 | $ | 310,109,193 |
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
OPERATING REVENUES: | ||||||||||||||||||||||||||||||||
Gas utility | $ | 28,221,274 | $ | 22,275,719 | $ | 47,704,774 | $ | 41,901,325 | $ | 29,499,219 | $ | 28,221,274 | $ | 52,730,874 | $ | 47,704,774 | ||||||||||||||||
Non utility | 32,388 | 162,012 | 65,905 | 321,859 | 30,464 | 32,388 | 61,889 | 65,905 | ||||||||||||||||||||||||
Total operating revenues | 28,253,662 | 22,437,731 | 47,770,679 | 42,223,184 | 29,529,683 | 28,253,662 | 52,792,763 | 47,770,679 | ||||||||||||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||||||||||||||
Cost of gas - utility | 14,447,057 | 8,672,997 | 22,147,756 | 16,850,803 | 14,923,575 | 14,447,057 | 26,239,980 | 22,147,756 | ||||||||||||||||||||||||
Cost of sales - non utility | 4,580 | 78,880 | 9,967 | 155,336 | 4,756 | 4,580 | 8,791 | 9,967 | ||||||||||||||||||||||||
Operations and maintenance | 3,931,470 | 4,110,149 | 7,433,592 | 8,027,619 | 4,242,007 | 3,931,470 | 7,932,321 | 7,433,592 | ||||||||||||||||||||||||
General taxes | 642,825 | 587,873 | 1,216,849 | 1,131,110 | 647,253 | 642,825 | 1,250,462 | 1,216,849 | ||||||||||||||||||||||||
Depreciation and amortization | 2,128,304 | 1,988,216 | 4,281,702 | 3,976,721 | 2,268,704 | 2,128,304 | 4,539,398 | 4,281,702 | ||||||||||||||||||||||||
Total operating expenses | 21,154,236 | 15,438,115 | 35,089,866 | 30,141,589 | 22,086,295 | 21,154,236 | 39,970,952 | 35,089,866 | ||||||||||||||||||||||||
OPERATING INCOME | 7,099,426 | 6,999,616 | 12,680,813 | 12,081,595 | 7,443,388 | 7,099,426 | 12,821,811 | 12,680,813 | ||||||||||||||||||||||||
Equity in earnings (loss) of unconsolidated affiliate | (3,797 | ) | 1,188,593 | 1,352,886 | 2,282,679 | (445 | ) | (3,797 | ) | 71,682 | 1,352,886 | |||||||||||||||||||||
Impairment of unconsolidated affiliates | (39,822,213 | ) | 0 | (39,822,213 | ) | 0 | ||||||||||||||||||||||||||
Other income, net | 287,548 | 317,892 | 617,574 | 475,535 | 344,510 | 287,548 | 666,949 | 617,574 | ||||||||||||||||||||||||
Interest expense | 1,007,764 | 1,038,293 | 2,027,593 | 2,123,478 | 1,103,844 | 1,007,764 | 2,208,700 | 2,027,593 | ||||||||||||||||||||||||
INCOME BEFORE INCOME TAXES | 6,375,413 | 7,467,808 | 12,623,680 | 12,716,331 | ||||||||||||||||||||||||||||
INCOME TAX EXPENSE | 1,607,935 | 1,787,492 | 3,132,939 | 3,029,079 | ||||||||||||||||||||||||||||
NET INCOME | $ | 4,767,478 | $ | 5,680,316 | $ | 9,490,741 | $ | 9,687,252 | ||||||||||||||||||||||||
BASIC EARNINGS PER COMMON SHARE | $ | 0.58 | $ | 0.70 | $ | 1.16 | $ | 1.20 | ||||||||||||||||||||||||
DILUTED EARNINGS PER COMMON SHARE | $ | 0.58 | $ | 0.70 | $ | 1.16 | $ | 1.19 | ||||||||||||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (33,138,604 | ) | 6,375,413 | (28,470,471 | ) | 12,623,680 | ||||||||||||||||||||||||||
INCOME TAX EXPENSE (BENEFIT) | (8,644,175 | ) | 1,607,935 | (7,560,571 | ) | 3,132,939 | ||||||||||||||||||||||||||
NET INCOME (LOSS) | $ | (24,494,429 | ) | $ | 4,767,478 | $ | (20,909,900 | ) | $ | 9,490,741 | ||||||||||||||||||||||
BASIC EARNINGS (LOSS) PER COMMON SHARE | $ | (2.89 | ) | $ | 0.58 | $ | (2.48 | ) | $ | 1.16 | ||||||||||||||||||||||
DILUTED EARNINGS (LOSS) PER COMMON SHARE | $ | (2.89 | ) | $ | 0.58 | $ | (2.48 | ) | $ | 1.16 | ||||||||||||||||||||||
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.185 | $ | 0.175 | $ | 0.370 | $ | 0.350 | $ | 0.195 | $ | 0.185 | $ | 0.390 | $ | 0.370 |
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
NET INCOME | $ | 4,767,478 | $ | 5,680,316 | $ | 9,490,741 | $ | 9,687,252 | ||||||||||||||||||||||||
NET INCOME (LOSS) | $ | (24,494,429 | ) | $ | 4,767,478 | $ | (20,909,900 | ) | $ | 9,490,741 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 494,294 | (1,216,574 | ) | 663,019 | (953,521 | ) | 1,535,499 | 494,294 | 1,897,773 | 663,019 | ||||||||||||||||||||||
Defined benefit plans | 14,864 | 16,791 | 29,728 | 33,582 | (11,191 | ) | 14,864 | (22,382 | ) | 29,728 | ||||||||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 509,158 | (1,199,783 | ) | 692,747 | (919,939 | ) | ||||||||||||||||||||||||||
COMPREHENSIVE INCOME | $ | 5,276,636 | $ | 4,480,533 | $ | 10,183,488 | $ | 8,767,313 | ||||||||||||||||||||||||
OTHER COMPREHENSIVE INCOME, NET OF TAX | 1,524,308 | 509,158 | 1,875,391 | 692,747 | ||||||||||||||||||||||||||||
COMPREHENSIVE INCOME (LOSS) | $ | (22,970,121 | ) | $ | 5,276,636 | $ | (19,034,509 | ) | $ | 10,183,488 |
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
Six Months Ended March 31, 2021 | ||||||||||||||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
Balance - September 30, 2020 | $ | 40,800,290 | $ | 15,847,121 | $ | 35,688,510 | $ | (3,447,944 | ) | $ | 88,887,977 | |||||||||
Net Income | 0 | 0 | 4,723,263 | 0 | 4,723,263 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 183,589 | 183,589 | |||||||||||||||
Cash dividends declared ($0.185 per share) | 0 | 0 | (1,519,670 | ) | 0 | (1,519,670 | ) | |||||||||||||
Issuance of common stock (11,979 shares) | 59,895 | 214,487 | 0 | 0 | 274,382 | |||||||||||||||
Balance - December 31, 2020 | $ | 40,860,185 | $ | 16,061,608 | $ | 38,892,103 | $ | (3,264,355 | ) | $ | 92,549,541 | |||||||||
Net Income | 0 | 0 | 4,767,478 | 0 | 4,767,478 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 509,158 | 509,158 | |||||||||||||||
Cash dividends declared ($0.185 per share) | 0 | 0 | (1,521,635 | ) | 0 | (1,521,635 | ) | |||||||||||||
Issuance of common stock (54,613 shares) | 273,065 | 997,001 | 0 | 0 | 1,270,066 | |||||||||||||||
Balance - March 31, 2021 | $ | 41,133,250 | $ | 17,058,609 | $ | 42,137,946 | $ | (2,755,197 | ) | $ | 97,574,608 |
Six Months Ended March 31, 2022 | ||||||||||||||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
Balance - September 30, 2021 | $ | 41,875,460 | $ | 19,705,387 | $ | 39,656,296 | $ | (1,535,434 | ) | $ | 99,701,709 | |||||||||
Net Income | 0 | 0 | 3,584,529 | 0 | 3,584,529 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 351,083 | 351,083 | |||||||||||||||
Cash dividends declared ($0.195 per share) | 0 | 0 | (1,642,324 | ) | 0 | (1,642,324 | ) | |||||||||||||
Issuance of common stock (13,914 shares) | 69,570 | 230,278 | 0 | 0 | 299,848 | |||||||||||||||
Balance - December 31, 2021 | $ | 41,945,030 | $ | 19,935,665 | $ | 41,598,501 | $ | (1,184,351 | ) | $ | 102,294,845 | |||||||||
Net Loss | 0 | 0 | (24,494,429 | ) | 0 | (24,494,429 | ) | |||||||||||||
Other comprehensive income | 0 | 0 | 0 | 1,524,308 | 1,524,308 | |||||||||||||||
Cash dividends declared ($0.195 per share) | 0 | 0 | (1,909,717 | ) | 0 | (1,909,717 | ) | |||||||||||||
Issuance of common stock (1,400,889 shares) | 7,004,445 | 21,043,277 | 0 | 0 | 28,047,722 | |||||||||||||||
Balance - March 31, 2022 | $ | 48,949,475 | $ | 40,978,942 | $ | 15,194,355 | $ | 339,957 | $ | 105,462,729 |
Six Months Ended March 31, 2020 | ||||||||||||||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
Balance - September 30, 2019 | $ | 40,366,320 | $ | 14,397,072 | $ | 30,821,917 | $ | (2,488,917 | ) | $ | 83,096,392 | |||||||||
Net Income | 0 | 0 | 4,006,936 | 0 | 4,006,936 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 279,844 | 279,844 | |||||||||||||||
Cash dividends declared ($0.175 per share) | 0 | 0 | (1,419,236 | ) | 0 | (1,419,236 | ) | |||||||||||||
Issuance of common stock (18,053 shares) | 90,265 | 304,934 | 0 | 0 | 395,199 | |||||||||||||||
Balance - December 31, 2019 | $ | 40,456,585 | $ | 14,702,006 | $ | 33,409,617 | $ | (2,209,073 | ) | $ | 86,359,135 | |||||||||
Net Income | 0 | 0 | 5,680,316 | 0 | 5,680,316 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (1,199,783 | ) | (1,199,783 | ) | |||||||||||||
Cash dividends declared ($0.175 per share) | 0 | 0 | (1,424,192 | ) | 0 | (1,424,192 | ) | |||||||||||||
Issuance of common stock (45,628 shares) | 228,140 | 673,731 | 0 | 0 | 901,871 | |||||||||||||||
Balance - March 31, 2020 | $ | 40,684,725 | $ | 15,375,737 | $ | 37,665,741 | $ | (3,408,856 | ) | $ | 90,317,347 |
Six Months Ended March 31, 2021 | ||||||||||||||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
Balance - September 30, 2020 | $ | 40,800,290 | $ | 15,847,121 | $ | 35,688,510 | $ | (3,447,944 | ) | $ | 88,887,977 | |||||||||
Net Income | 0 | 0 | 4,723,263 | 0 | 4,723,263 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 183,589 | 183,589 | |||||||||||||||
Cash dividends declared ($0.185 per share) | 0 | 0 | (1,519,670 | ) | 0 | (1,519,670 | ) | |||||||||||||
Issuance of common stock (11,979 shares) | 59,895 | 214,487 | 0 | 0 | 274,382 | |||||||||||||||
Balance - December 31, 2020 | $ | 40,860,185 | $ | 16,061,608 | $ | 38,892,103 | $ | (3,264,355 | ) | $ | 92,549,541 | |||||||||
Net Income | 0 | 0 | 4,767,478 | 0 | 4,767,478 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 509,158 | 509,158 | |||||||||||||||
Cash dividends declared ($0.185 per share) | 0 | 0 | (1,521,635 | ) | 0 | (1,521,635 | ) | |||||||||||||
Issuance of common stock (54,613 shares) | 273,065 | 997,001 | 0 | 0 | 1,270,066 | |||||||||||||||
Balance - March 31, 2021 | $ | 41,133,250 | $ | 17,058,609 | $ | 42,137,946 | $ | (2,755,197 | ) | $ | 97,574,608 |
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Six Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 9,490,741 | $ | 9,687,252 | ||||||||||||
Net income (loss) | $ | (20,909,900 | ) | $ | 9,490,741 | |||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 4,405,956 | 4,095,390 | 4,656,829 | 4,405,956 | ||||||||||||
Cost of retirement of utility plant, net | (265,021 | ) | (286,237 | ) | (298,580 | ) | (265,021 | ) | ||||||||
Stock option grants | 5,550 | 0 | ||||||||||||||
Equity in earnings of unconsolidated affiliate | (1,352,886 | ) | (2,282,679 | ) | (71,682 | ) | (1,352,886 | ) | ||||||||
Impairment of unconsolidated affiliates | 39,822,213 | 0 | ||||||||||||||
Allowance for funds used during construction | (55,981 | ) | (217,147 | ) | 0 | (55,981 | ) | |||||||||
Changes in assets and liabilities which used cash, exclusive of changes and noncash transactions shown separately | (2,611,407 | ) | 171,552 | (10,211,524 | ) | (2,611,407 | ) | |||||||||
Net cash provided by operating activities | 9,611,402 | 11,168,131 | 12,992,906 | 9,611,402 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Expenditures for utility property | (8,978,822 | ) | (10,435,947 | ) | (10,758,703 | ) | (8,978,822 | ) | ||||||||
Investment in unconsolidated affiliates | (2,720,008 | ) | (5,931,060 | ) | (3,572,011 | ) | (2,720,008 | ) | ||||||||
Proceeds from disposal of utility property | 7,390 | 13,666 | 51,834 | 7,390 | ||||||||||||
Net cash used in investing activities | (11,691,440 | ) | (16,353,341 | ) | (14,278,880 | ) | (11,691,440 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from issuance of unsecured notes | 3,780,000 | 17,063,000 | 26,720,000 | 3,780,000 | ||||||||||||
Retirement of notes payable | (25,000,000 | ) | 0 | |||||||||||||
Borrowings under line-of-credit | 22,535,162 | 9,784,534 | 34,423,129 | 22,535,162 | ||||||||||||
Repayments under line-of-credit | (22,396,839 | ) | (17,957,007 | ) | (52,052,026 | ) | (22,396,839 | ) | ||||||||
Debt issuance expenses | 0 | (70,750 | ) | (39,732 | ) | 0 | ||||||||||
Proceeds from issuance of stock | 1,544,448 | 1,297,070 | 28,342,019 | 1,544,448 | ||||||||||||
Cash dividends paid | (2,947,250 | ) | (2,758,757 | ) | (3,193,743 | ) | (2,947,250 | ) | ||||||||
Net cash provided by financing activities | 2,515,521 | 7,358,090 | 9,199,647 | 2,515,521 | ||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 435,483 | 2,172,880 | 7,913,673 | 435,483 | ||||||||||||
BEGINNING CASH AND CASH EQUIVALENTS | 291,066 | 1,631,348 | 1,518,317 | 291,066 | ||||||||||||
ENDING CASH AND CASH EQUIVALENTS | $ | 726,549 | $ | 3,804,228 | $ | 9,431,990 | $ | 726,549 |
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. | Basis of Presentation |
Resources is an energy services company primarily engaged in the sale and distribution of natural gas. The condensed consolidated financial statements include the accounts of Resources and its wholly-owned subsidiaries: Roanoke Gas, Diversified Energy and Midstream.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present Resources' financial position as of March 31, 20212022, cash flows for the six months ended March 31, 20212022 and 20202021, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three and six months ended March 31, 20212022 and 20202021. The results of operations for the three and six months ended March 31, 20212022 are not indicative of the results to be expected for the fiscal year ending September 30, 20212022 as quarterly earnings are affected by the highly seasonal nature of the business and weather conditions generally result in greater earnings during the winter months.
The unaudited condensed consolidated financial statements and condensed notes are presented as permitted under the rules and regulations of the SEC. Pursuant to those rules, certain information and note disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted, althoughomitted. Although the Company believes that the disclosures are adequate, to make the information not misleading. Therefore, the unaudited condensed consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes contained in the Company’s Form 10-K for the year ended September 30, 20202021. The September 30, 20202021 consolidated balance sheet was included in the Company’s audited financial statements included in Form 10-K.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements contained in the Company's Form 10-K for the year ended September 30, 20202021.
Recently Issued or Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-14,Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The new guidance is effective for the Company for the annual reporting period ending September 30, 2021. The Company adopted the new guidance effective October 1, 2020. As this ASU only modifies disclosure requirements, the new guidance does not have a material effect on the Company's financial position, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In combination with ASU 2021-01, the ASU provides temporary optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate change on financial reporting. The new guidance applies specifically to contracts and hedging relationships that reference LIBOR, or any other referenced rate that is expected to be discontinued due to reference rate reform. The new guidance is effective for the Company through December 31, 2022. Management hasThe Intercontinental Exchange (ICE) Benchmark Administration, the administrator for LIBOR and other inter-bank offered rates, announced that the LIBOR rates for one-day, one-month, six-month and one-year will cease publication in June 2023 and that no new financial contracts may use LIBOR after December 31, 2021. Currently, all of the Company's LIBOR based financial contracts are based on the one-month LIBOR rate. None of the holders of these financial contracts have indicated when a transition from LIBOR will occur. Accordingly, the Company does not yet completed its evaluation of the new guidance.anticipate adopting this guidance until later in fiscal 2022. The Company has several contracts and hedging relationships for which LIBOR currently remains in-place; therefore, the new guidance could result in a significant impact on the Company's financial position, results of operations, and cash flows when the reference rate is changed for related contracts.
Other accounting standards that have been issued by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform with current year presentation.
RGC RESOURCES, INC. AND SUBSIDIARIES
2. | Stock Issue |
In March 2022, the Company issued 1,350,000 shares of common stock in an equity offering resulting in net proceeds of nearly $27,000,000. The Company issued the common stock to strengthen its balance sheet by increasing its cash position and lowering its outstanding debt. The net proceeds were invested in Roanoke Gas to supplement the funding of its infrastructure improvement and replacement program and in Midstream to reduce its outstanding debt. An additional 64,803 shares of common stock have been issued during fiscal 2022 related to the DRIP, Restricted Stock, stock option exercises and ATM activity.
3. | Revenue |
The Company assesses new contracts and identifies related performance obligations for promises to transfer distinct goods or services to the customer. Revenue is recognized when performance obligations have been satisfied. In the case of Roanoke Gas, the Company contracts with its customers for the sale and/or delivery of natural gas.
The following tables summarize revenue by customer, product and income statement classification:
Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | |||||||||||||||||||||||||||||||||||||
Natural Gas (Billed and Unbilled): | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | $ | 17,402,552 | $ | 0 | $ | 17,402,552 | $ | 12,892,659 | $ | 0 | $ | 12,892,659 | $ | 18,104,512 | $ | 0 | $ | 18,104,512 | $ | 17,402,552 | $ | 0 | $ | 17,402,552 | ||||||||||||||||||||||||
Commercial | 9,264,611 | 0 | 9,264,611 | 6,368,939 | 0 | 6,368,939 | 9,487,312 | 0 | 9,487,312 | 9,264,611 | 0 | 9,264,611 | ||||||||||||||||||||||||||||||||||||
Industrial and Transportation | 1,252,343 | 0 | 1,252,343 | 1,243,426 | 0 | 1,243,426 | 1,352,161 | 0 | 1,352,161 | 1,252,343 | 0 | 1,252,343 | ||||||||||||||||||||||||||||||||||||
Other | 95,092 | 32,388 | 127,480 | 117,466 | 162,012 | 279,478 | 138,035 | 30,464 | 168,499 | 95,092 | 32,388 | 127,480 | ||||||||||||||||||||||||||||||||||||
Total contracts with customers | 28,014,598 | 32,388 | 28,046,986 | 20,622,490 | 162,012 | 20,784,502 | 29,082,020 | 30,464 | 29,112,484 | 28,014,598 | 32,388 | 28,046,986 | ||||||||||||||||||||||||||||||||||||
Alternative Revenue Programs | 206,676 | 0 | 206,676 | 1,653,229 | 0 | 1,653,229 | 417,199 | 0 | 417,199 | 206,676 | 0 | 206,676 | ||||||||||||||||||||||||||||||||||||
Total operating revenues | $ | 28,221,274 | $ | 32,388 | $ | 28,253,662 | $ | 22,275,719 | $ | 162,012 | $ | 22,437,731 | $ | 29,499,219 | $ | 30,464 | $ | 29,529,683 | $ | 28,221,274 | $ | 32,388 | $ | 28,253,662 |
Six Months Ended March 31, 2021 | Six Months Ended March 31, 2020 | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | |||||||||||||||||||||||||||||||||||||
Natural Gas (Billed and Unbilled): | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | $ | 28,648,746 | $ | 0 | $ | 28,648,746 | $ | 25,177,242 | $ | 0 | $ | 25,177,242 | $ | 31,317,001 | $ | 0 | $ | 31,317,001 | $ | 28,648,746 | $ | 0 | $ | 28,648,746 | ||||||||||||||||||||||||
Commercial | 15,254,631 | 0 | 15,254,631 | 12,102,779 | 0 | 12,102,779 | 16,873,030 | 0 | 16,873,030 | 15,254,631 | 0 | 15,254,631 | ||||||||||||||||||||||||||||||||||||
Industrial and Transportation | 2,476,144 | 0 | 2,476,144 | 2,570,669 | 0 | 2,570,669 | 2,665,252 | 0 | 2,665,252 | 2,476,144 | 0 | 2,476,144 | ||||||||||||||||||||||||||||||||||||
Other | 256,169 | 65,905 | 322,074 | 333,461 | 321,859 | 655,320 | 361,863 | 61,889 | 423,752 | 256,169 | 65,905 | 322,074 | ||||||||||||||||||||||||||||||||||||
Total contracts with customers | 46,635,690 | 65,905 | 46,701,595 | 40,184,151 | 321,859 | 40,506,010 | 51,217,146 | 61,889 | 51,279,035 | 46,635,690 | 65,905 | 46,701,595 | ||||||||||||||||||||||||||||||||||||
Alternative Revenue Programs | 1,069,084 | 0 | 1,069,084 | 1,717,174 | 0 | 1,717,174 | 1,513,728 | 0 | 1,513,728 | 1,069,084 | 0 | 1,069,084 | ||||||||||||||||||||||||||||||||||||
Total operating revenues | $ | 47,704,774 | $ | 65,905 | $ | 47,770,679 | $ | 41,901,325 | $ | 321,859 | $ | 42,223,184 | $ | 52,730,874 | $ | 61,889 | $ | 52,792,763 | $ | 47,704,774 | $ | 65,905 | $ | 47,770,679 |
Gas utility revenues
Substantially all of Roanoke Gas' revenues are derived from rates authorized by the SCC through its tariffs. Based on its evaluation, the Company has concluded that these tariff-based revenues fall within the scope of ASC 606. Tariff rates represent the transaction price. Performance obligations created under these tariff-based sales include commodity (the cost of natural gas sold to customers) and delivery (transporting natural gas through the Company’s distribution system to customers). The delivery of natural gas to customers results in the satisfaction of the Company’s respective performance obligations over time.
All customers are billed monthly based on consumption as measured by metered usage. Revenue is recognized as bills are issued for natural gas that has been delivered or transported. In addition, the Company utilizes the practical expedient that allows an entity to recognize the invoiced amount as revenue, if that amount corresponds to the value received by the customer. Since customers are billed tariff rates, there is no variable consideration in the transaction price.
RGC RESOURCES, INC. AND SUBSIDIARIES
Unbilled revenue is included in residential and commercial revenues in the preceding table. Natural gas consumption is estimated for the period subsequent to the last billed date and up through the last day of the month. Estimated volumes and approved tariff rates are utilized to calculate unbilled revenue. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The Company obtains metered usage for industrial customers at the end of each month, thereby eliminating any unbilled consideration for these rate classes.
Other revenues
Other revenues primarily consist of miscellaneous fees and charges, utility-related revenues not directly billed to utility customers and billings for non-utility activities. Regarding these activities, the customer is invoiced monthly based on services provided. The Company utilizes the practical expedient allowing revenue to be recognized based on invoiced amounts. The transaction price is based on a contractually predetermined rate schedule; therefore, the transaction price represents total value to the customer and no variable price consideration exists.
Alternative Revenue Program revenues
ARPs, which fall outside the scope of ASC 606, are SCC approved mechanisms that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets. The Company's ARPs include its WNA, which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average, and the SAVE Plan over/under collection mechanism, which adjusts revenues for the differences between SAVE Plan revenues billed to customers and the revenue earned, as calculated based on the timing and extent of infrastructure replacement completed during the period. These amounts are ultimately collected from, or returned to, customers through future rate changes as approved by the SCC.
RGC RESOURCES, INC. AND SUBSIDIARIES
Customer Accounts ReceivableAccountsReceivable and Liabilities
Accounts receivable, as reflected in the condensed consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below:
Current Assets | Current Liabilities | |||||||||||||||
Trade accounts receivable(1) | Unbilled revenue(1) | Customer credit balances | Customer deposits | |||||||||||||
Balance at September 30, 2020 | $ | 2,343,492 | $ | 1,041,518 | $ | 1,587,061 | $ | 1,611,476 | ||||||||
Balance at March 31, 2021 | 7,445,589 | 1,832,773 | 851,968 | 1,605,684 | ||||||||||||
Increase (decrease) | $ | 5,102,097 | $ | 791,255 | $ | (735,093 | ) | $ | (5,792 | ) |
Current Assets | Current Liabilities | |||||||||||||||
Trade accounts receivable(1) | Unbilled revenue(1) | Customer credit balances | Customer deposits | |||||||||||||
Balance at September 30, 2021 | $ | 3,722,916 | $ | 1,191,227 | $ | 1,539,680 | $ | 1,571,342 | ||||||||
Balance at March 31, 2022 | 7,872,022 | 3,057,298 | 682,959 | 1,583,542 | ||||||||||||
Increase (decrease) | $ | 4,149,106 | $ | 1,866,071 | $ | (856,721 | ) | $ | 12,200 |
(1) Included in accounts receivable in the condensed consolidated balance sheet. Amounts shown net of reserve for bad debts.credit losses.
The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts.
| Income Taxes |
A reconciliationThe effective tax rate for the three month and six month periods ended March 31, 2022 reflected in the table below are higher than the corresponding periods in fiscal 2021 and the combined federal and state statutory rate of income25.74%. The increase in the effective tax expense from applyingrate corresponds to the federal statutory ratesrecognition of a deferred tax asset associated with the impairment of the Company's investment in effect for each period to total income tax expense is presented below:the LLC.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Income before income taxes | $ | 6,375,413 | $ | 7,467,808 | $ | 12,623,680 | $ | 12,716,331 | ||||||||
Corporate federal tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||
Income tax expense computed at the federal statutory rate | $ | 1,338,837 | $ | 1,568,240 | $ | 2,650,973 | $ | 2,670,430 | ||||||||
State income taxes, net of federal tax benefit | 305,557 | 338,631 | 607,990 | 588,668 | ||||||||||||
Net amortization of excess deferred taxes on regulated operations | (38,124 | ) | (38,124 | ) | (124,332 | ) | (124,332 | ) | ||||||||
Other, net | 1,665 | (81,255 | ) | (1,692 | ) | (105,687 | ) | |||||||||
Total income tax expense | $ | 1,607,935 | $ | 1,787,492 | $ | 3,132,939 | $ | 3,029,079 | ||||||||
Effective tax rate | 25.2 | % | 23.9 | % | 24.8 | % | 23.8 | % |
RGC RESOURCES, INC. AND SUBSIDIARIES
Excluding the effect of the impairment, the effective tax rate for the three and six month periods ended March 31, 2022 would have been 24.0% and 23.7%, respectively, reflecting the impact of additional tax deductions from the amortization of R&D tax credits deferred as a regulatory liability and the exercise of stock options. The recognition of the impairment resulted in a net loss position for both periods thereby generating a higher effective tax rate as compared to the effective tax rate on the income positions from the corresponding periods in fiscal 2021.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Effective tax rate | 26.1 | % | 25.2 | % | 26.6 | % | 24.8 | % | ||||||||
Effective tax rate - LLC impairment | 25.7 | % | 0 | 25.7 | % | 0 | ||||||||||
Effective tax rate excluding LLC impairment | 24.0 | % | 25.2 | % | 23.7 | % | 24.8 | % | ||||||||
| Rates and Regulatory Matters |
On March 16, 2020, in response to COVID-19, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service to all customers until May 15, 2020, which it subsequently extended through October 5, 2020. The Virginia General Assembly then extended the moratorium for residential customers until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to remain in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner. Under the moratorium, utilities are prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees; therefore, residential customers that would normally be disconnected for non-payment will continue incurring costs for gas service until the moratorium is removed, resulting in higher potential write-offs. Roanoke Gas continues to evaluate and adjust its provision for bad debts; however, the potential magnitude from the service moratorium continues to be uncertain.
In April 2020, the SCC issued an order allowing regulated utilities in Virginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and to apply for recovery at a future date. Formal guidance has not been provided by the SCC at this time. Roanoke Gas began deferringdeferred certain COVID-19 related costs during the firsttwo quarters of fiscal 2022.
In October 2021, and plans to seek recoveryRoanoke Gas received notification that its application for ARPA funds had been approved. This notification allowed the pending receipt of these deferrals atfunds to be considered in the appropriate time.
CARES Actvaluation of the estimated allowance for credit losses as of September 30, 2021. In November 2021, Roanoke Gas received over $850,000 in ARPA funds have been provided to assist customers with growing past due balances. Inbalances based on arrearage balances as of December 2020,August 31, 2021. Roanoke Gas received $403,000 in CARES Act funds. Based onThe Company applied the guidance provided by the SCC, the Company was able to apply $209,000 of this moneyfull amount to eligible customer accounts in December 2021.
6. | Other Investments |
Midstream is an approximately 1% equity investment owner of the LLC constructing the MVP, a 303 mile natural gas interstate pipeline from northern West Virginia to southern Virginia. Since inception, the MVP has encountered various legal and regulatory issues that continue to delay the completion of the project. While under construction, AFUDC has provided the majority of the income recognized by Midstream. AFUDC accruals were suspended in November 2021 until such time when growth construction activities are allowed to resume.
Midstream is also a less than 1% investor in Southgate, which is being accounted for under the cost method.
On January 25, 2022, the Fourth Circuit vacated and remanded on specific issues certain permits issued by the Bureau of Land Management and the U.S. Forest Service to the LLC in respect of the Jefferson National Forest. On February 3, 2022, the Fourth Circuit vacated and remanded on specific issues the Biological Opinion and Incidental Take Statement issued by the U.S. Fish and Wildlife Service for MVP. Primarily due to these unfavorable decisions by the Fourth Circuit, Midstream identified as an indicator of 2021 Customers with eligible arrearage balancesan other-than-temporary decline in value the increased uncertainty of the completion and commercial operation of MVP and Southgate. As a result, Midstream assessed the value of its investment in the LLC as of April 30, 2021February 22, 2022 will be able and March 31, 2022, to apply fordetermine if its investment's carrying value exceeded the remaining CARES Act funds.fair value.
Midstream estimated the fair value of its investment in the LLC, with the assistance of a valuation specialist, using an income based approach that primarily considered probability-weighted scenarios of discounted future cash flows based on the estimated project costs at completion and projected revenues. These scenarios reflected assumptions and judgments regarding the ultimate outcome of further matters relating to, or resulting from, the January and February 2022 Fourth Circuit rulings, as well as various other ongoing legal and regulatory matters affecting MVP and Southgate. Such assumptions and judgments also included certain additional potential delays and related cost increases that could result from unfavorable decisions on these proceedings and matters. Midstream’s analysis also took into account, among other things, probability weighted growth expectations from additional compression expansion opportunities. This analysis also considered scenarios under which ongoing or new legal and regulatory matters further delay the completion and increase the total costs of the project; all required legal and regulatory approvals and authorizations and certain compression expansion opportunities are realized; and MVP and Southgate are canceled. As a result of the assessment, Midstream recognized a pre-tax impairment loss of approximately $39.8 million in the second quarter of fiscal 2022. The fair value of the investment in the LLC was determined under a Level 3 measurement considering the significant assumptions and judgments required in estimating the fair value of the Company's investment in the LLC. Investment balances of MVP and Southgate, as of March 31, 2022, are reflected in the table below.
RGC RESOURCES, INC. AND SUBSIDIARIES
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MidstreamThere is an approximately 1% owner of the LLC constructing the MVP. The LLC has changed its approach in seeking authorization to cross all remaining streams and wetlands on the project route. It requested individual permits from the U.S. Army Corps of Engineers to cross certain streams and wetlands utilizing open cut techniques and has applied to amend the MVP project's CPCN to seek FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. The LLC is targeting a full in-service date for the MVP project in summer 2022 at a total project cost of approximately $6.2 billion, with Midstream's total cash contribution expected to approach $65 million.
The LLC suspended accruing AFUDC on the project subsequent to December 31, 2020 and until growth construction activities resume and, as a result, Midstream will not recognize AFUDC income from MVP during this suspension. During the first half of fiscal 2021, the Company recognized $1,353,000 in AFUDC income related to itsrisk that Midstream’s equity investment in the LLC.
Roanoke Gas will continueLLC may be further impaired in the future. There are ongoing, and potential future legal and regulatory matters related to suspend accruing AFUDC on itsMVP, any of which could affect the ability to complete or operate the project, as well as legal and regulatory matters related to Southgate that must be resolved. Assumptions and estimates utilized in assessing the fair value of Midstream’s investment in the LLC twomay gate stations that will interconnect with the MVP until such time as construction activities resumechange depending on the respective gate stations. Roanoke Gas recognized $55,981nature or timing of AFUDC associated with these gate stations duringresolutions to the first halflegal and regulatory matters or based on other relevant developments. Adverse changes in circumstances relevant to the likelihood of fiscal 2021.project or expansion completion could prompt Midstream, in future assessments, to apply lower probability of project or expansion completion and such changes in assumptions or estimates, including discount rates, could have a material adverse effect on the fair value of Midstream’s investment in the LLC and potentially result in an additional impairment, which could have a material adverse effect on the results of operations and financial position of Midstream and the Company as a whole.
Funding for Midstream's investments in the LLC for both the MVP and Southgate projects is being provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement, maturing in December 2022, and twothree additional notes issuedas detailed in June 2019. See Note 79. for a schedule of debt instruments.
The investments in the LLC are included in the accompanying financial statements as follows:
Balance Sheet location: | March 31, 2021 | September 30, 2020 | March 31, 2022 | September 30, 2021 | ||||||||||||
Other Assets: | ||||||||||||||||
MVP | $ | 60,156,954 | $ | 57,183,063 | $ | 27,237,888 | $ | 64,462,194 | ||||||||
Southgate | 387,540 | 359,742 | 83,363 | 405,125 | ||||||||||||
Investment in unconsolidated affiliates | $ | 60,544,494 | $ | 57,542,805 | $ | 27,321,251 | $ | 64,867,319 | ||||||||
Current Liabilities: | ||||||||||||||||
MVP | $ | 1,440,329 | $ | 2,501,883 | $ | 772,601 | $ | 2,139,696 | ||||||||
Southgate | 903 | 10,554 | 489 | 941 | ||||||||||||
Capital contributions payable | $ | 1,441,232 | $ | 2,512,437 | $ | 773,090 | $ | 2,140,637 |
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Income Statement location: | March 31, 2021 | March 31, 2020 | March 31, 2021 | March 31, 2020 | March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||||
Equity in earnings (loss) of unconsolidated affiliate | $ | (3,797 | ) | $ | 1,188,593 | $ | 1,352,886 | $ | 2,282,679 | $ | (445 | ) | $ | (3,797 | ) | $ | 71,682 | $ | 1,352,886 |
March 31, 2021 | September 30, 2020 | |||||||
Undistributed earnings, net of income taxes, of MVP in retained earnings | $ | 7,847,356 | $ | 6,842,702 |
March 31, 2022 | September 30, 2021 | |||||||
Undistributed earnings, net of income taxes, of MVP in retained earnings | $ | 8,134,259 | $ | 8,081,027 |
The change inundistributed earnings does not include the impairment of the investment in unconsolidated affiliates is provided below:the LLC.
Six Months Ended | ||||||||
March 31, 2021 | March 31, 2020 | |||||||
Cash investment | $ | 2,720,008 | $ | 5,931,060 | ||||
Change in accrued capital calls | (1,071,205 | ) | (3,298,038 | ) | ||||
Equity in earnings of unconsolidated affiliate | 1,352,886 | 2,282,679 | ||||||
Change in investment in unconsolidated affiliates | $ | 3,001,689 | $ | 4,915,701 |
RGC RESOURCES, INC. AND SUBSIDIARIES
The change in the investment in unconsolidated affiliates is provided below:
Six Months Ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Cash investment | $ | 3,572,011 | $ | 2,720,008 | ||||
Change in accrued capital calls | (1,367,548 | ) | (1,071,205 | ) | ||||
Pre-tax impairment | (39,822,213 | ) | 0 | |||||
Equity in earnings of unconsolidated affiliate | 71,682 | 1,352,886 | ||||||
Change in investment in unconsolidated affiliates | $ | (37,546,068 | ) | $ | 3,001,689 |
Summary unaudited financial statements of MVP are presented below. Southgate financial statements, which are accounted for under the cost method, are not included:
Income Statements | Income Statements | |||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | March 31, 2021 | March 31, 2020 | March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||||||||
AFUDC | $ | 0 | $ | 117,754,887 | $ | 133,757,314 | $ | 227,780,361 | $ | 0 | $ | 0 | $ | 6,883,069 | $ | 133,757,314 | ||||||||||||||||
Other income (expense), net | 5,514 | (34,575 | ) | (47,094 | ) | 699,607 | 9,245 | 5,514 | (35,818 | ) | (47,094 | ) | ||||||||||||||||||||
Net income | $ | 5,514 | $ | 117,720,312 | $ | 133,710,220 | $ | 228,479,968 | $ | 9,245 | $ | 5,514 | $ | 6,847,251 | $ | 133,710,220 |
Balance Sheets | Balance Sheets | |||||||||||||||
March 31, 2021 | September 30, 2020 | March 31, 2022 | September 30, 2021 | |||||||||||||
Assets: | ||||||||||||||||
Current assets | $ | 163,664,436 | $ | 513,713,429 | $ | 118,201,286 | $ | 208,961,113 | ||||||||
Construction work in progress | 5,935,832,366 | 5,536,248,668 | 6,514,077,686 | 6,281,991,035 | ||||||||||||
Other assets | 2,363,875 | 4,597,441 | 1,190,042 | 980,410 | ||||||||||||
Total assets | $ | 6,101,860,677 | $ | 6,054,559,538 | $ | 6,633,469,014 | $ | 6,491,932,558 | ||||||||
Liabilities and Equity: | ||||||||||||||||
Current liabilities | $ | 184,699,507 | $ | 187,581,804 | $ | 146,102,517 | $ | 200,441,027 | ||||||||
Noncurrent liabilities | 303,706 | 245,000 | 45,000 | 13,000 | ||||||||||||
Capital | 5,916,857,464 | 5,866,732,734 | 6,487,321,497 | 6,291,478,531 | ||||||||||||
Total liabilities and equity | $ | 6,101,860,677 | $ | 6,054,559,538 | $ | 6,633,469,014 | $ | 6,491,932,558 |
| Derivatives and Hedging |
The Company’s hedging and derivative policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations, including the price of natural gas and the cost of borrowed funds. This policy specifically prohibits the use of derivatives for speculative purposes.
The Company has three5 interest rate swaps associated with its variable rate debt.debt as of March 31, 2022. During fiscal 2021, Roanoke Gas entered into 2 delayed draw variable-rate term notes in the amounts of $15 million and $10 million, with corresponding swap agreements to convert the variable interest rates into fixed rates of 2.00% and 2.49%, respectively. Proceeds of $5 million associated with the $10 million delayed draw note were received on April 1, 2022; therefore, the swap associated with that note has a swap agreement that effectively convertsno financial impact during the $7,000,000 term note based on LIBOR into fixed-rate debt with a 2.30% effective interest rate.current period. Midstream has two2 swap agreements corresponding to the $14,000,000$14 million and $10,000,000$10 million variable rate term notes. The swap agreements convert these two2 notes into fixed rate instruments with effective interest rates of 3.24% and 3.14%, respectively. In addition, on November 1, 2021, Midstream entered into a promissory note in the amount of $8 million, with a corresponding swap agreement to convert the variable interest rate into a fixed rate of 2.443%. The swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of the swaps were deemed ineffective during the periods presented.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company had no outstanding derivative instruments for the purchase of natural gas.
The fair value of the current and non-current portions of the interest rate swaps are reflected in the condensed consolidated balance sheets under the caption interest rate swaps. The table in Note 810 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.
8. | Short-Term Debt |
On March 31, 2022, Roanoke Gas entered into an unsecured line-of-credit agreement replacing the line-of-credit agreement dated March 25, 2021. The agreement provides for a variable interest rate based upon Daily Simple SOFR plus 1.10% and multiple tier borrowing limits to accommodate seasonal borrowing demands. The Company's total available borrowing limits during the term of the line-of-credit agreement range from $21,000,000 to $33,000,000. The line-of-credit agreement will expire on March 31, 2023, unless extended. The Company anticipates being able to extend or replace the credit line upon expiration. As of March 31, 2022, the Company had 0 outstanding balance under its line-of-credit agreement.
In connection with the line-of-credit, the Company also entered into the Seventh Amendment to Credit Agreement as of March 31, 2022, which amends the original Credit Agreement dated March 31, 2016 and all subsequent amendments. The Amendment aligns the termination date, maximum principal amount available under the line-of-credit, amends certain financial conditions required of Resources, and retains all other terms and requirements of prior credit agreements.
9. | Long-Term Debt |
On November 1,2021 Midstream entered into an unsecured promissory note in the principal amount of $8 million with an interest rate based on 30-day LIBOR plus 115 basis points maturing January 1, 2028. Related to this note, Midstream also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.443%. The loan will convert into an installment loan with principal pay-down beginning in fiscal 2023. In addition, this note reduces the borrowing capacity defined by the Third Amendment to Credit Agreement and related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the new promissory note. All other terms of the Third Amendment to Credit Agreement remain unchanged. On March 31, 2022, Midstream applied $10 million from a cash infusion received from Resources to pay down a corresponding amount on the non-revolving credit facility which in turn reduced the total borrowing capacity from $33 million to $23 million.
On September 24, 2021, Roanoke Gas entered into a Loan Agreement ("Agreement") and an unsecured Delayed Draw Promissory Note in the principal amount of $10 million ("Promissory Note"). Under the provisions of the Agreement, Roanoke Gas received the first advance of $5 million on April 1, 2022 with the remaining $5 million to be received on or about October 1, 2022. The Promissory Note has an interest rate of 30-day LIBOR plus 100 basis points and a maturity date of October 1, 2028. The proceeds from this Promissory Note will be used to finance Roanoke Gas' infrastructure enhancement and replacement projects. Also, on September 24, 2021, Roanoke Gas entered into an interest rate swap agreement for $10 million corresponding to the term and draw provisions of the Agreement, which effectively converts the variable rate Promissory Note to a fixed instrument with an effective annual interest rate of 2.49%.
On August 20, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $15 million ("Term Note") with an interest rate of 1.20% above 30-day SOFR Average per annum maturing on August 20, 2026. In connection with the Term Note, Roanoke Gas also entered into the Sixth Amendment to its Credit Agreement ("Amendment"), which amends the original Credit Agreement with the corresponding bank dated March 31, 2016 and all subsequent amendments. The Amendment aligns the termination date and the maximum principal amount available under the Term Note and retains all other terms and requirements of prior credit agreements. The proceeds from this Term Note will be used to finance Roanoke Gas' infrastructure enhancement and replacement projects, as well as to refinance a portion of its existing debt. Also, on August 20, 2021, Roanoke Gas entered into an interest rate swap agreement for $15 million corresponding to the duration of the Term Note, which effectively converts the variable rate note to a fixed rate instrument with an effective annual interest rate of 2.00%. The Term Note funded in full on October 1, 2021.
RGC RESOURCES, INC. AND SUBSIDIARIES
|
|
On March 25, 2021, Roanoke Gas renewed its unsecured line-of-credit agreement for a two-year term expiring March 31, 2023 with a maximum borrowing limit of $40,000,000. Amounts drawn against the agreement are considered to be non-current as the balance under the line-of-credit is not subject to repayment within the next 12-month period. The agreement has a variable-interest rate based on 30 day LIBOR plus 100 basis points and an availability fee of 15 basis points and provides multi-tiered borrowing limits associated with the seasonal borrowing demands of the Company. The Company's total available borrowing limits during the term of the agreement range from $14,000,000 to $40,000,000.
Long-term debt consists of the following:
March 31, 2021 | September 30, 2020 | March 31, 2022 | September 30, 2021 | |||||||||||||||||||||||||||||
Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||||||||||||||
Roanoke Gas Company: | ||||||||||||||||||||||||||||||||
Unsecured senior notes payable, at 4.26% due on September 18, 2034 | $ | 30,500,000 | $ | 130,330 | $ | 30,500,000 | $ | 135,157 | ||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 0.90%, due November 1, 2021 | 7,000,000 | 1,945 | 7,000,000 | 3,613 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 3.58% due on October 2, 2027 | 8,000,000 | 31,304 | 8,000,000 | 33,712 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 4.41% due on March 28, 2031 | 10,000,000 | 31,326 | 10,000,000 | 32,892 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 3.60% due on December 6, 2029 | 10,000,000 | 30,824 | 10,000,000 | 32,585 | ||||||||||||||||||||||||||||
RGC Midstream, LLC: | ||||||||||||||||||||||||||||||||
Unsecured term notes payable, at 30-day LIBOR plus 1.35%, due December 29, 2022 | 29,255,200 | 20,866 | 25,475,200 | 38,728 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026 | 14,000,000 | 12,640 | 14,000,000 | 13,844 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024 | 10,000,000 | 7,465 | 10,000,000 | 8,644 | ||||||||||||||||||||||||||||
Roanoke Gas: | ||||||||||||||||||||||||||||||||
Unsecured senior notes payable, at 4.26%, due September 18, 2034 | $ | 30,500,000 | $ | 120,676 | $ | 30,500,000 | $ | 125,502 | ||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 0.90%, due November 1, 2021 | 0 | 0 | 7,000,000 | 278 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 3.58%, due October 2, 2027 | 8,000,000 | 26,488 | 8,000,000 | 28,896 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 4.41%, due March 28, 2031 | 10,000,000 | 28,193 | 10,000,000 | 29,760 | ||||||||||||||||||||||||||||
Unsecured term notes payable, at 3.60%, due December 6, 2029 | 10,000,000 | 27,301 | 10,000,000 | 29,062 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day SOFR plus 1.20%, due August 20, 2026 | 15,000,000 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Unsecured delayed draw note payable | 0 | 31,064 | 0 | 21,545 | ||||||||||||||||||||||||||||
Midstream: | ||||||||||||||||||||||||||||||||
Unsecured term notes payable, at 30-day LIBOR plus 1.35%, due December 29, 2022 | 19,330,200 | 8,942 | 33,610,200 | 14,904 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026 | 14,000,000 | 10,233 | 14,000,000 | 11,437 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024 | 10,000,000 | 5,107 | 10,000,000 | 6,286 | ||||||||||||||||||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due January 1, 2028 | 8,000,000 | 25,918 | 0 | 0 | ||||||||||||||||||||||||||||
Total notes payable, current and non-current | 118,755,200 | 266,700 | 114,975,200 | 299,175 | 124,830,200 | 283,922 | 123,110,200 | 267,670 | ||||||||||||||||||||||||
Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2023 | 0 | — | 17,628,897 | — | ||||||||||||||||||||||||||||
Total long-term debt | 124,830,200 | 283,922 | 140,739,097 | 267,670 | ||||||||||||||||||||||||||||
Less: current maturities of long-term debt | (7,000,000 | ) | — | 0 | — | (19,705,200 | ) | — | (7,000,000 | ) | — | |||||||||||||||||||||
Total notes payable | $ | 111,755,200 | $ | 266,700 | $ | 114,975,200 | $ | 299,175 | ||||||||||||||||||||||||
Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2023 | 9,281,929 | - | 9,143,606 | - | ||||||||||||||||||||||||||||
Total long-term debt | $ | 121,037,129 | $ | 266,700 | $ | 124,118,806 | $ | 299,175 | ||||||||||||||||||||||||
Total long-term debt, net current maturities | $ | 105,125,000 | $ | 283,922 | $ | 133,739,097 | $ | 267,670 |
All debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that limit consolidated long-term indebtedness to not more than 65% of total capitalization. All of the debt agreements, except for the line-of-credit, provide for priority indebtedness to not exceed 15% of consolidated total assets. The $15 million note and the line-of-credit have an interest coverage ratio requirement of 1.5 which excludes the effect of a non cash impairment on the LLC investments up to the total investment as of December 31, 2021 as revised by the Seventh Amendment to the Credit Agreement. The Company was in compliance with all debt covenants as of March 31, 2021 2022and September 30, 2020. 2021.
RGC RESOURCES, INC. AND SUBSIDIARIES
| Other Comprehensive Income (Loss) |
A summary of other comprehensive income and loss is provided below:
Tax | Tax | |||||||||||||||||||||||
Before-Tax | (Expense) | Net-of-Tax | Before-Tax | (Expense) | Net-of-Tax | |||||||||||||||||||
Amount | or Benefit | Amount | Amount | or Benefit | Amount | |||||||||||||||||||
Three Months Ended March 31, 2022 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized gains | $ | 1,903,875 | $ | (490,057 | ) | $ | 1,413,818 | |||||||||||||||||
Transfer of realized losses to interest expense | 163,860 | (42,179 | ) | 121,681 | ||||||||||||||||||||
Net interest rate swaps | 2,067,735 | (532,236 | ) | 1,535,499 | ||||||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial gains | (15,070 | ) | 3,879 | (11,191 | ) | |||||||||||||||||||
Other comprehensive income | $ | 2,052,665 | $ | (528,357 | ) | $ | 1,524,308 | |||||||||||||||||
Three Months Ended March 31, 2021 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized gains | $ | 529,356 | $ | (136,257 | ) | $ | 393,099 | $ | 529,356 | $ | (136,257 | ) | $ | 393,099 | ||||||||||
Transfer of realized losses to interest expense | 136,270 | (35,075 | ) | 101,195 | 136,270 | (35,075 | ) | 101,195 | ||||||||||||||||
Net interest rate swaps | 665,626 | (171,332 | ) | 494,294 | 665,626 | (171,332 | ) | 494,294 | ||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial losses | 20,017 | (5,153 | ) | 14,864 | 20,017 | (5,153 | ) | 14,864 | ||||||||||||||||
Other comprehensive income | $ | 685,643 | $ | (176,485 | ) | $ | 509,158 | $ | 685,643 | $ | (176,485 | ) | $ | 509,158 | ||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized losses | $ | (1,654,962 | ) | $ | 425,987 | $ | (1,228,975 | ) | ||||||||||||||||
Transfer of realized losses to interest expense | 16,698 | (4,297 | ) | 12,401 | ||||||||||||||||||||
Net interest rate swaps | (1,638,264 | ) | 421,690 | (1,216,574 | ) | |||||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial losses | 22,610 | (5,819 | ) | 16,791 | ||||||||||||||||||||
Other comprehensive loss | $ | (1,615,654 | ) | $ | 415,871 | $ | (1,199,783 | ) |
RGC RESOURCES, INC. AND SUBSIDIARIES
Tax | Tax | |||||||||||||||||||||||
Before-Tax | (Expense) | Net-of-Tax | Before-Tax | (Expense) | Net-of-Tax | |||||||||||||||||||
Amount | or Benefit | Amount | Amount | or Benefit | Amount | |||||||||||||||||||
Six Months Ended March 31, 2022 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized gains | $ | 2,219,858 | $ | (571,390 | ) | $ | 1,648,468 | |||||||||||||||||
Transfer of realized losses to interest expense | 335,723 | (86,418 | ) | 249,305 | ||||||||||||||||||||
Net interest rate swaps | 2,555,581 | (657,808 | ) | 1,897,773 | ||||||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial gains | (30,140 | ) | 7,758 | (22,382 | ) | |||||||||||||||||||
Other comprehensive income | $ | 2,525,441 | $ | (650,050 | ) | $ | 1,875,391 | |||||||||||||||||
Six Months Ended March 31, 2021 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized gains | $ | 619,126 | $ | (159,364 | ) | $ | 459,762 | $ | 619,126 | $ | (159,364 | ) | $ | 459,762 | ||||||||||
Transfer of realized losses to interest expense | 273,708 | (70,451 | ) | 203,257 | 273,708 | (70,451 | ) | 203,257 | ||||||||||||||||
Net interest rate swaps | 892,834 | (229,815 | ) | 663,019 | 892,834 | (229,815 | ) | 663,019 | ||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial losses | 40,034 | (10,306 | ) | 29,728 | 40,034 | (10,306 | ) | 29,728 | ||||||||||||||||
Other comprehensive income | $ | 932,868 | $ | (240,121 | ) | $ | 692,747 | $ | 932,868 | $ | (240,121 | ) | $ | 692,747 | ||||||||||
Six Months Ended March 31, 2020 | ||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||
Unrealized losses | $ | (1,304,269 | ) | $ | 335,718 | $ | (968,551 | ) | ||||||||||||||||
Transfer of realized losses to interest expense | 20,238 | (5,208 | ) | 15,030 | ||||||||||||||||||||
Net interest rate swaps | (1,284,031 | ) | 330,510 | (953,521 | ) | |||||||||||||||||||
Defined benefit plans: | ||||||||||||||||||||||||
Amortization of actuarial losses | 45,220 | (11,638 | ) | 33,582 | ||||||||||||||||||||
Other comprehensive loss | $ | (1,238,811 | ) | $ | 318,872 | $ | (919,939 | ) |
The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company. TheActuarial gains and losses attributable to the regulated operations are included as a regulatory asset. See Note 16 for a schedule of regulatory assets. The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net.
RGC RESOURCES, INC. AND SUBSIDIARIES
Reconciliation of Accumulated Other Comprehensive Income (Loss)
Accumulated | ||||||||||||
Other | ||||||||||||
Interest Rate | Defined Benefit | Comprehensive | ||||||||||
Swaps | Plans | Income (Loss) | ||||||||||
Balance at September 30, 2020 | $ | (1,651,213 | ) | $ | (1,796,731 | ) | $ | (3,447,944 | ) | |||
Other comprehensive income | 663,019 | 29,728 | 692,747 | |||||||||
Balance at March 31, 2021 | $ | (988,194 | ) | $ | (1,767,003 | ) | $ | (2,755,197 | ) |
Accumulated | ||||||||||||
Other | ||||||||||||
Interest Rate | Defined Benefit | Comprehensive | ||||||||||
Swaps | Plans | Income (Loss) | ||||||||||
Balance at September 30, 2021 | $ | (888,210 | ) | $ | (647,224 | ) | $ | (1,535,434 | ) | |||
Other comprehensive income (loss) | 1,897,773 | (22,382 | ) | 1,875,391 | ||||||||
Balance at March 31, 2022 | $ | 1,009,563 | $ | (669,606 | ) | $ | 339,957 |
| Commitments and Contingencies |
The outbreak of COVID-19 and the related pandemic continues to impact local, state, national and global economies. Supply chain disruptions, labor shortages and inflation have supplanted quarantines and government restrictions as the primary examples of matters impacting economic conditions. Significant progress was made in distributing and administering vaccines to the public, which has allowed a significant effect on businessesreturn to mostly normal operating conditions. Restrictions implemented as a result of the pandemic have eased, allowing for increased business, recreational and individuals throughouttravel activities. Natural gas consumption by the nation and the world. TheCompany’s commercial customers has returned to pre-pandemic levels. However, future surges in COVID-19 pandemic has forced all levels of government, as well as businesses and individuals, to take actions to limit the spread of the disease. The result has been a significant disruption to normal activities as many businesses have either shut down or are operating on a limited basis resulting in higher unemployment and government imposed social distancing mandates over the past year. With the increased distribution and acceptance of vaccines, some restrictions imposed to limit the spread and transmission of the virus have been reduced allowing for some return to normalcy. However, the existence of variant strains of the virus and reduced focus on safety measures may lead to a resurgence in infections and could result in additional restrictions. The extent to which COVID-19 will affect the Company over future periods will depend on ongoing developments, which are highly uncertain and cannot be reasonably predicted, including the durationreinstatement of some or all of the outbreak,restrictions previously in place. Management continues to monitor current conditions to ensure the continued easingcontinuation of restrictionssafe and reliable service to businessescustomers and individuals,to maintain the potential for a resurgencesafety of the virus, including variants, and the effectiveness and timeliness of vaccines, among other factors.Company's employees.
| Earnings Per Share |
Basic earnings per common share for the three and six months ended March 31, 20212022 and 20202021 were calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share were calculated by dividing net income by the weighted average common shares outstanding during the period plus potential dilutive common shares.
A reconciliation of basic and diluted earnings per share is presented below:
Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Net income | $ | 4,767,478 | $ | 5,680,316 | $ | 9,490,741 | $ | 9,687,252 | ||||||||||||||||||||||||
Net income (loss) | $ | (24,494,429 | ) | $ | 4,767,478 | $ | (20,909,900 | ) | $ | 9,490,741 | ||||||||||||||||||||||
Weighted average common shares | 8,217,822 | 8,122,157 | 8,192,533 | 8,101,887 | 8,486,518 | 8,217,822 | 8,434,689 | 8,192,533 | ||||||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
Options to purchase common stock | 12,828 | 22,806 | 13,621 | 27,331 | 0 | 12,828 | 0 | 13,621 | ||||||||||||||||||||||||
Diluted average common shares | 8,230,650 | 8,144,963 | 8,206,154 | 8,129,218 | 8,486,518 | 8,230,650 | 8,434,689 | 8,206,154 | ||||||||||||||||||||||||
Earnings per share of common stock: | ||||||||||||||||||||||||||||||||
Earnings (loss) per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.58 | $ | 0.70 | $ | 1.16 | $ | 1.20 | $ | (2.89 | ) | $ | 0.58 | $ | (2.48 | ) | $ | 1.16 | ||||||||||||||
Diluted | $ | 0.58 | $ | 0.70 | $ | 1.16 | $ | 1.19 | $ | (2.89 | ) | $ | 0.58 | $ | (2.48 | ) | $ | 1.16 |
RGC RESOURCES, INC. AND SUBSIDIARIES
| Employee Benefit Plans |
The Company has both a pension plan and a postretirement plan. The pension plan covers the Company’s employees hired before January 1, 2017 and provides retirement income based on years of service and employee compensation. The postretirement plan provides certain health care and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense is detailed as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Components of net periodic pension cost: | ||||||||||||||||||||||||||||||||
Service cost | $ | 183,570 | $ | 172,902 | $ | 367,140 | $ | 345,804 | $ | 162,072 | $ | 183,570 | $ | 324,144 | $ | 367,140 | ||||||||||||||||
Interest cost | 243,785 | 265,557 | 487,570 | 531,114 | 253,279 | 243,785 | 506,558 | 487,570 | ||||||||||||||||||||||||
Expected return on plan assets | (503,936 | ) | (459,156 | ) | (1,007,872 | ) | (918,312 | ) | (457,888 | ) | (503,936 | ) | (915,776 | ) | (1,007,872 | ) | ||||||||||||||||
Recognized loss | 125,535 | 113,936 | 251,070 | 227,872 | 36,600 | 125,535 | 73,200 | 251,070 | ||||||||||||||||||||||||
Net periodic pension cost | $ | 48,954 | $ | 93,239 | $ | 97,908 | $ | 186,478 | ||||||||||||||||||||||||
Net periodic pension cost (benefit) | $ | (5,937 | ) | $ | 48,954 | $ | (11,874 | ) | $ | 97,908 |
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Components of postretirement benefit cost: | ||||||||||||||||||||||||||||||||
Service cost | $ | 35,172 | $ | 41,970 | $ | 70,344 | $ | 83,940 | $ | 24,450 | $ | 35,172 | $ | 48,900 | $ | 70,344 | ||||||||||||||||
Interest cost | 107,623 | 132,869 | 215,246 | 265,738 | 110,930 | 107,623 | 221,860 | 215,246 | ||||||||||||||||||||||||
Expected return on plan assets | (149,122 | ) | (137,599 | ) | (298,244 | ) | (275,198 | ) | (166,541 | ) | (149,122 | ) | (333,082 | ) | (298,244 | ) | ||||||||||||||||
Recognized loss | 38,664 | 59,343 | 77,328 | 118,686 | 0 | 38,664 | 0 | 77,328 | ||||||||||||||||||||||||
Net postretirement benefit cost | $ | 32,337 | $ | 96,583 | $ | 64,674 | $ | 193,166 | ||||||||||||||||||||||||
Net postretirement benefit cost (benefit) | $ | (31,161 | ) | $ | 32,337 | $ | (62,322 | ) | $ | 64,674 |
The components of net periodic benefit cost, other than the service cost component, are included in other income, net in the condensed consolidated statements of income. Service cost is included in operations and maintenance expense in the condensed consolidated statements of income.
The table below reflects the Company's actual contributions made fiscal year-to-date and the expected remaining contributions to be made during the balance of the current fiscal year.
Fiscal Year-to-Date Contributions | Remaining Fiscal Year Contributions | |||||||
Pension plan | $ | 0 | $ | 500,000 | ||||
Postretirement plan | 0 | 400,000 | ||||||
Total | $ | 0 | $ | 900,000 |
| Fair Value Measurements |
FASB ASC No. 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
RGC RESOURCES, INC. AND SUBSIDIARIES
Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date.
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy:
Fair Value Measurements - March 31, 2021 | Fair Value Measurements - March 31, 2022 | |||||||||||||||||||||||||||||||
Quoted | Significant | Quoted | Significant | |||||||||||||||||||||||||||||
Prices | Other | Significant | Prices | Other | Significant | |||||||||||||||||||||||||||
in Active | Observable | Unobservable | in Active | Observable | Unobservable | |||||||||||||||||||||||||||
Fair | Markets | Inputs | Inputs | Fair | Markets | Inputs | Inputs | |||||||||||||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 1,359,498 | $ | 0 | $ | 1,359,498 | $ | 0 | ||||||||||||||||||||||||
Total | $ | 1,359,498 | $ | 0 | $ | 1,359,498 | $ | 0 | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Natural gas purchases | $ | 124,948 | $ | 0 | $ | 124,948 | $ | 0 | $ | 1,355,281 | $ | 0 | $ | 1,355,281 | $ | 0 | ||||||||||||||||
Interest rate swaps | 1,330,722 | 0 | 1,330,722 | 0 | ||||||||||||||||||||||||||||
Total | $ | 1,455,670 | $ | 0 | $ | 1,455,670 | $ | 0 | $ | 1,355,281 | $ | 0 | $ | 1,355,281 | $ | 0 |
Fair Value Measurements - September 30, 2020 | ||||||||||||||||
Quoted | Significant | |||||||||||||||
Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Fair | Markets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities: | ||||||||||||||||
Natural gas purchases | $ | 470,755 | $ | 0 | $ | 470,755 | $ | 0 | ||||||||
Interest rate swaps | 2,223,556 | 0 | 2,223,556 | 0 | ||||||||||||
Total | $ | 2,694,311 | $ | 0 | $ | 2,694,311 | $ | 0 |
Fair Value Measurements - September 30, 2021 | ||||||||||||||||
Quoted | Significant | |||||||||||||||
Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Fair | Markets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities: | ||||||||||||||||
Natural gas purchases | $ | 2,728,935 | $ | 0 | $ | 2,728,935 | $ | 0 | ||||||||
Interest rate swaps | 1,196,083 | 0 | 1,196,083 | 0 | ||||||||||||
Total | $ | 3,925,018 | $ | 0 | $ | 3,925,018 | $ | 0 |
The fair value of the interest rate swaps are determined by using the counterparty's proprietary models and certain assumptions regarding past, present and future market conditions.
Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on weighted average first of the month index prices corresponding to the month of the scheduled payment. At March 31, 20212022 and September 30, 20202021, the Company had recorded in accounts payable the estimated fair value of the liability valued at the corresponding first of month index prices for which the liability is expected to be settled.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company’s nonfinancial assets and liabilities measured at fair value on a nonrecurring basis consist of its AROs. The AROs are measured at fair value at initial recognition based on expected future cash flows required to settle the obligation.
The carrying value of cash and cash equivalents, accounts receivable, borrowings under line-of-credit, accounts payable (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments. In addition, the carrying amount of the variable rate line-of-credit is a reasonable approximation of its fair value.
RGC RESOURCES, INC. AND SUBSIDIARIES
The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements:
Fair Value Measurements - March 31, 2021 | Fair Value Measurements - March 31, 2022 | ||||||||||||||||||||||||||
Quoted | Significant | Quoted | Significant | ||||||||||||||||||||||||
Prices | Other | Significant | Prices | Other | Significant | ||||||||||||||||||||||
in Active | Observable | Unobservable | in Active | Observable | Unobservable | ||||||||||||||||||||||
Carrying | Markets | Inputs | Inputs | Carrying | Markets | Inputs | Inputs | ||||||||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Current maturities of long-term debt | $ | 7,000,000 | 0 | 0 | $ | 7,000,000 | $ | 19,705,200 | $ | 0 | $ | 0 | $ | 19,765,421 | |||||||||||||
Notes payable | 111,755,200 | $ | 0 | $ | 0 | 118,949,157 | 105,125,000 | 0 | 0 | 107,952,588 | |||||||||||||||||
Total | $ | 118,755,200 | $ | 0 | $ | 0 | $ | 125,949,157 | $ | 124,830,200 | $ | 0 | $ | 0 | $ | 127,718,009 |
Fair Value Measurements - September 30, 2020 | Fair Value Measurements - September 30, 2021 | |||||||||||||||||||||||||||||||
Quoted | Significant | Quoted | Significant | |||||||||||||||||||||||||||||
Prices | Other | Significant | Prices | Other | Significant | |||||||||||||||||||||||||||
in Active | Observable | Unobservable | in Active | Observable | Unobservable | |||||||||||||||||||||||||||
Carrying | Markets | Inputs | Inputs | Carrying | Markets | Inputs | Inputs | |||||||||||||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Current maturities of long-term debt | $ | 7,000,000 | $ | 0 | $ | 0 | $ | 7,000,000 | ||||||||||||||||||||||||
Notes payable | $ | 114,975,200 | $ | 0 | $ | 0 | $ | 124,740,970 | 116,110,200 | 0 | 0 | 124,691,896 | ||||||||||||||||||||
Total | $ | 114,975,200 | $ | 0 | $ | 0 | $ | 124,740,970 | $ | 123,110,200 | $ | 0 | $ | 0 | $ | 131,691,896 |
The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt based on the underlying Treasury rate or other Treasury instruments with a corresponding maturity period and estimated credit spread extrapolated based on market conditions since the issuance of the debt.
FASB ASC 825, Financial Instruments, requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. As of March 31, 20212022 and September 30, 20202021, no0 single customer accounted for more than 5% of the total accounts receivable balance. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants.
| Segment Information |
Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and assess performance. The Company uses operating income and equity in earnings to assess segment performance.
Intersegment transactions are recorded at cost.
RGC RESOURCES, INC. AND SUBSIDIARIES
The reportable segments disclosed herein are defined as follows:
Gas Utility - The natural gas segment of the Company generates revenue from its tariff rates and other regulatory mechanisms through which it provides the sale and distribution of natural gas to its residential, commercial and industrial customers.
Investment in Affiliates - The investment in affiliates segment reflects the income generated through the activities of the Company's investment in the MVP and Southgate projects.LLC.
Parent and Other - The category parent and other includes the unregulated activities of the Company as well as certain corporate eliminations.
Information related to the segments of the Company are provided below:
Three Months Ended March 31, 2022 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 29,499,219 | $ | 0 | $ | 30,464 | $ | 29,529,683 | ||||||||
Depreciation | 2,268,704 | 0 | 0 | 2,268,704 | ||||||||||||
Operating income (loss) | 7,528,839 | (108,987 | ) | 23,536 | 7,443,388 | |||||||||||
Equity in earnings (loss) | 0 | (445 | ) | 0 | (445 | ) | ||||||||||
Impairment of investments in affiliates | 0 | (39,822,213 | ) | 0 | (39,822,213 | ) | ||||||||||
Interest expense | 751,038 | 352,806 | 0 | 1,103,844 | ||||||||||||
Income (loss) before income taxes | 7,117,202 | (40,279,495 | ) | 23,689 | (33,138,604 | ) |
Three Months Ended March 31, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 28,221,274 | $ | 0 | $ | 32,388 | $ | 28,253,662 | ||||||||
Depreciation | 2,128,304 | 0 | 0 | 2,128,304 | ||||||||||||
Operating income (loss) | 7,175,532 | (102,295 | ) | 26,189 | 7,099,426 | |||||||||||
Equity in earnings (loss) | 0 | (3,797 | ) | 0 | (3,797 | ) | ||||||||||
Interest expense | 707,532 | 300,232 | 0 | 1,007,764 | ||||||||||||
Income (loss) before income taxes | 6,750,004 | (400,880 | ) | 26,289 | 6,375,413 |
RGC RESOURCES, INC. AND SUBSIDIARIES
Six Months Ended March 31, 2022 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 52,730,874 | $ | 0 | $ | 61,889 | $ | 52,792,763 | ||||||||
Depreciation | 4,539,398 | 0 | 0 | 4,539,398 | ||||||||||||
Operating income (loss) | 12,933,155 | (160,547 | ) | 49,203 | 12,821,811 | |||||||||||
Equity in earnings | 0 | 71,682 | 0 | 71,682 | ||||||||||||
Impairment of investments in affiliates | 0 | (39,822,213 | ) | 0 | (39,822,213 | ) | ||||||||||
Interest expense | 1,515,901 | 692,799 | 0 | 2,208,700 | ||||||||||||
Income (loss) before income taxes | 12,076,384 | (40,596,376 | ) | 49,521 | (28,470,471 | ) |
Six Months Ended March 31, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 47,704,774 | $ | 0 | $ | 65,905 | $ | 47,770,679 | ||||||||
Depreciation | 4,281,702 | 0 | 0 | 4,281,702 | ||||||||||||
Operating income (loss) | 12,788,574 | (153,142 | ) | 45,381 | 12,680,813 | |||||||||||
Equity in earnings | 0 | 1,352,886 | 0 | 1,352,886 | ||||||||||||
Interest expense | 1,411,862 | 615,731 | 0 | 2,027,593 | ||||||||||||
Income before income taxes | 11,986,004 | 592,045 | 45,631 | 12,623,680 |
March 31, 2022 | ||||||||||||||||
Gas Utility | Investment in Affiliates(1) | Parent and Other | Consolidated Total | |||||||||||||
Total assets | $ | 240,934,602 | $ | 27,465,020 | $ | 19,958,863 | $ | 288,358,485 |
(1) Decrease in total assets resulted from the MVP and Southgate impairment. See Note 6 for additional information.
September 30, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Total assets | $ | 231,737,427 | $ | 65,686,376 | $ | 12,685,390 | $ | 310,109,193 |
RGC RESOURCES, INC. AND SUBSIDIARIES
Information related to the segments of the Company are provided below:
Three Months Ended March 31, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 28,221,274 | $ | 0 | $ | 32,388 | $ | 28,253,662 | ||||||||
Depreciation | 2,128,304 | 0 | 0 | 2,128,304 | ||||||||||||
Operating income (loss) | 7,175,532 | (102,295 | ) | 26,189 | 7,099,426 | |||||||||||
Equity in earnings (loss) | 0 | (3,797 | ) | 0 | (3,797 | ) | ||||||||||
Interest expense | 707,532 | 300,232 | 0 | 1,007,764 | ||||||||||||
Income (loss) before income taxes | 6,750,004 | (400,880 | ) | 26,289 | 6,375,413 |
Three Months Ended March 31, 2020 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 22,275,719 | $ | 0 | $ | 162,012 | $ | 22,437,731 | ||||||||
Depreciation | 1,988,216 | 0 | 0 | 1,988,216 | ||||||||||||
Operating income (loss) | 6,988,528 | (69,526 | ) | 80,614 | 6,999,616 | |||||||||||
Equity in earnings | 0 | 1,188,593 | 0 | 1,188,593 | ||||||||||||
Interest expense | 661,997 | 376,296 | 0 | 1,038,293 | ||||||||||||
Income before income taxes | 6,642,411 | 744,698 | 80,699 | 7,467,808 |
Six Months Ended March 31, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 47,704,774 | $ | 0 | $ | 65,905 | $ | 47,770,679 | ||||||||
Depreciation | 4,281,702 | 0 | 0 | 4,281,702 | ||||||||||||
Operating income (loss) | 12,788,574 | (153,142 | ) | 45,381 | 12,680,813 | |||||||||||
Equity in earnings | 0 | 1,352,886 | 0 | 1,352,886 | ||||||||||||
Interest expense | 1,411,862 | 615,731 | 0 | 2,027,593 | ||||||||||||
Income before income taxes | 11,986,004 | 592,045 | 45,631 | 12,623,680 |
Six Months Ended March 31, 2020 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Operating revenues | $ | 41,901,325 | $ | 0 | $ | 321,859 | $ | 42,223,184 | ||||||||
Depreciation | 3,976,721 | 0 | 0 | 3,976,721 | ||||||||||||
Operating income (loss) | 12,030,013 | (108,117 | ) | 159,699 | 12,081,595 | |||||||||||
Equity in earnings | 0 | 2,282,679 | 0 | 2,282,679 | ||||||||||||
Interest expense | 1,380,850 | 742,628 | 0 | 2,123,478 | ||||||||||||
Income before income taxes | 11,121,293 | 1,435,052 | 159,986 | 12,716,331 |
March 31, 2021 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Total assets | $ | 218,924,307 | $ | 60,987,637 | $ | 12,252,094 | $ | 292,164,038 |
September 30, 2020 | ||||||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
Total assets | $ | 211,994,364 | $ | 57,660,105 | $ | 12,025,038 | $ | 281,679,507 |
| Regulatory Assets and Liabilities |
The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No. 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would ordinarily be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the condensed consolidated balance sheet (regulatory assets) and amortized into expense over periods when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of FASB ASC No. 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include the effects in the condensed consolidated statements of income and comprehensive income in the period which FASB ASC No. 980 no longer applied.
Regulatory assets included in the Company’s accompanying balance sheets are as follows:
March 31, 2022 | September 30, 2021 | |||||||
Assets: | ||||||||
Current Assets: | ||||||||
Regulatory assets: | ||||||||
WNA revenues | $ | 1,808,525 | $ | 8,104 | ||||
Under-recovery of gas costs | 0 | 5,048,164 | ||||||
Under-recovery of SAVE Plan revenues | 0 | 305,502 | ||||||
Accrued pension and postretirement medical | 103,340 | 206,679 | ||||||
Other deferred expenses | 85,211 | 88,004 | ||||||
Total current | 1,997,076 | 5,656,453 | ||||||
Utility Property: | ||||||||
In service: | ||||||||
Other | 11,945 | 11,945 | ||||||
Construction work in progress: | ||||||||
AFUDC | 386,189 | 386,189 | ||||||
Other Assets: | ||||||||
Regulatory assets: | ||||||||
Premium on early retirement of debt | 1,427,340 | 1,484,433 | ||||||
Accrued pension and postretirement medical | 5,154,713 | 5,154,713 | ||||||
Other deferred expenses | 123,962 | 130,613 | ||||||
Total non-current | 6,706,015 | 6,769,759 | ||||||
Total regulatory assets | $ | 9,101,225 | $ | 12,824,346 |
RGC RESOURCES, INC. AND SUBSIDIARIES
Regulatory assets included in the Company’s accompanying balance sheets are as follows:
March 31, 2021 | September 30, 2020 | |||||||
Assets: | ||||||||
Current Assets: | ||||||||
Regulatory assets: | ||||||||
WNA | $ | 583,539 | $ | 0 | ||||
Under-recovery of gas costs | 747,232 | 1,733,718 | ||||||
Under-recovery of SAVE Plan revenues | 20,021 | 108,550 | ||||||
Accrued pension and postretirement medical | 288,365 | 576,731 | ||||||
Other deferred expenses | 84,315 | 84,315 | ||||||
Total current | 1,723,472 | 2,503,314 | ||||||
Utility Property: | ||||||||
In service: | ||||||||
Other | 11,945 | 11,945 | ||||||
Construction work in progress: | ||||||||
AFUDC | 386,189 | 330,208 | ||||||
Other Assets: | ||||||||
Regulatory assets: | ||||||||
Premium on early retirement of debt | 1,541,527 | 1,598,620 | ||||||
Accrued pension and postretirement medical | 9,156,546 | 9,156,546 | ||||||
Other deferred expenses | 276,565 | 214,928 | ||||||
Total non-current | 10,974,638 | 10,970,094 | ||||||
Total regulatory assets | $ | 13,096,244 | $ | 13,815,561 |
Regulatory liabilities included in the Company’s accompanying balance sheets are as follows:
March 31, 2021 | September 30, 2020 | March 31, 2022 | September 30, 2021 | |||||||||||||
Liabilities and Stockholders' Equity: | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Regulatory liabilities: | ||||||||||||||||
WNA | 0 | 601,784 | ||||||||||||||
Excess deferred income taxes | 205,353 | 205,353 | ||||||||||||||
Other deferred liabilities | 17,020 | 83,176 | ||||||||||||||
Over-recovery of gas costs | $ | 98,776 | $ | 0 | ||||||||||||
Over-recovery of SAVE Plan revenues | 102,879 | 0 | ||||||||||||||
Deferred income taxes | 332,361 | 329,959 | ||||||||||||||
Supplier refunds | 2,661,043 | 0 | ||||||||||||||
Total current | 222,373 | 890,313 | 3,195,059 | 329,959 | ||||||||||||
Deferred Credits and Other Liabilities: | ||||||||||||||||
Asset retirement obligations | 7,396,895 | 7,180,982 | 7,876,084 | 7,628,958 | ||||||||||||
Regulatory cost of retirement obligations | 13,122,705 | 12,678,043 | 14,126,243 | 13,640,567 | ||||||||||||
Regulatory Liabilities: | ||||||||||||||||
Excess deferred income taxes | 10,561,654 | 10,729,082 | ||||||||||||||
Deferred income taxes | 12,706,518 | 12,891,242 | ||||||||||||||
Total non-current | 31,081,254 | 30,588,107 | 34,708,845 | 34,160,767 | ||||||||||||
Total regulatory liabilities | $ | 31,303,627 | $ | 31,478,420 | $ | 37,903,904 | $ | 34,490,726 |
As of March 31, 20212022 and September 30, 20202021, the Company had regulatory assets in the amount of $13,084,299$9,089,280 and $13,803,616,$12,812,401, respectively, on which the Company did not earn a return during the recovery period.
RGC RESOURCES, INC. AND SUBSIDIARIES
| Subsequent Events |
On April 1, 2022, Roanoke Gas received a $5 million advance associated with its $10 million unsecured delayed draw note payable. The remaining $5 million is expected to be drawn on or about October 1, 2022. See Note 9 for additional information.
The Company has evaluated subsequent events through the date the financial statements were issued. There were no items not otherwise disclosed which would have materially impacted the Company'sCompany’s condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, Resources may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, operational impacts and similar matters. These statements are based on management’s current expectations and information available at the time of such statements and are believed to be reasonable and are made in good faith. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to those set forth in the following discussion and within Item 1A “Risk Factors” in the Company’s 20202021 Annual Report on Form 10-K.10-K and this Form 10-Q. All of these factors are difficult to predict and many are beyond the Company’s control. Accordingly, while the Company believes its forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in the Company’s documents or news releases, the words, “anticipate,” “believe,” “intend,” “plan,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs such as “will,” “would,” “should,” “can,” “could” or “may” are intended to identify forward-looking statements.
Forward-looking statements reflect the Company’s current expectations only as of the date they are made. The Company assumes no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations.
The three-month and six-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2021.2022. The total revenues and margins realized during the first six months reflect higher billings due to the weather sensitive nature of the natural gas business.
COVID-19
As was discussed under Item 1A "Risk Factors" in the Company's 2020Company’s 2021 Annual Report on Form 10-K, COVID-19 and the resulting pandemic continuecontinues to have a lingering impact theon local, state, national and global economies. The actions takenSupply chain disruptions, labor shortages and inflation, compounded by other world events, have continued as the primary examples of matters impacting economic conditions. Significant portions of the population have been vaccinated, which has contributed to limita return to mostly normal operating conditions. Most restrictions implemented as a result of the spreadpandemic have been eased, including Virginia’s state of emergency, allowing for increased business, recreational and overcometravel activities. Natural gas consumption by the virus have disrupted normal activitiesCompany’s commercial customers has returned to pre-pandemic levels. However, the easing of restrictions and the evolution of variant strains of COVID-19 may lead to a rise in infections nationally and throughout the Company'sCompany’s service territory. Management continues to monitor current conditions to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees.
Significant progress has been made in distributing and administering vaccines
The extent to which the public, which is a critical step on the returnCOVID-19 pandemic will continue to some form of normalcy. Certain restrictions implemented as a result of the pandemic have been eased allowing for increased business, recreational and travel activities. However, the easing of restrictions and the existence of variant strains of COVID-19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place.
impact the Company
Althoughhas experienced some decline in natural gas consumption by commercial customers impacted by COVID-19, other customers have increased gas consumption for use in their business processes. When adjusted for variability in weather through the WNA, total commercial and industrial volumes declined by 3% for the quarter and 2% for the six month period, compared to the corresponding periods in the prior year. The decline from the prior year was due to a single industrial customer that switched its primary fuel source from natural gas to an alternate fuel in response to pricing differences. The Company’s volume of gas delivered to residential customers, as adjusted for weather variability through the WNA, reflected nominal increases year over year.
The Company expects the service moratorium, as discussed below under "Regulatory," to continue at least into the summer of 2021. As a result, management continues to closely monitor and evaluate its provision for bad debts. With the moratorium in place, delinquent account balances are continuing to build among customers that have been affected by COVID-19 and other economic events. In February 2021, the Company was able to apply more than $200,000 of CARES Act funds to the delinquent balances of those customers impacted by COVID-19. Total bad debt expense incurred by the Company remains unpredictable as several factors including the duration of the moratorium, the speed and extent in which the economy recovers, the utilization of the remaining CARES Act funding, the extent that restrictions on business remain in place, a potential resurgence in the pandemic or other issues remain uncertain or unknown. Any improvements or setbacks among any of the factors listed above could result in a significantly higher or lower level of bad debts as provided for in the consolidated financial statements.
depends on future developments, which are highly uncertain and cannot be reasonably predicted, including the
The ultimate impact to the Company will dependfactors listed above. The longer the pandemic continues, the greaterincrease or reduction in governmental restrictions to businesses and individuals, the potential negative financial effect onresurgence of the Company and its customers.
virus, including variants, as well as efficacy of the vaccines.
RGC RESOURCES, INC. AND SUBSIDIARIES
Overview
Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,000 residential, commercial and industrial customers in Roanoke, Virginia and surrounding localities through its Roanoke Gas subsidiary.
In addition, As a wholly-owned subsidiary of Resources, Midstream is a more than 1% investor in MVP and a less than 1% investor in Southgate.
Due primarily to decisions in January and February 2022 by the Fourth Circuit vacating and remanding certain permits necessary for the completion of MVP throughconstruction and commercial operation, and the greater uncertainty that now exists given the Court’s actions, as well as the consequent actions by project partners to impair their respective investments and revocation of the previously noted summer 2022 in-service target date, Midstream determined that its Midstream subsidiary and provides certain unregulated services throughinvestment in the LLC experienced an other-than-temporary decline in value. Accordingly, management recorded a $39.8 million write-down of the value of its Roanoke Gas subsidiary. Currently,investments in the unregulatedsecond quarter of fiscal 2022. As of March 31, 2022, the total investment in the LLC was $27 million. More information regarding the investment in the LLC is provided under the Equity Investment in Mountain Valley Pipeline section below.
The utility operations of Roanoke Gas represent less than 1% of total revenues of Resources on an annual basis.
The Company’s utility operations are regulated by the SCC, which oversees the terms, conditions, and rates to be charged to customers for natural gas service, safety standards, extension of service and depreciation. Nearly all of the Company’s revenues, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates authorized by the SCC. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather.
The Company is also subject to federal regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines. FERC regulates the prices for the transportation and delivery of natural gas to the Company’s distribution system and underground storage. The Companystorage services. In addition, Roanoke Gas is also subject to other regulations which are not necessarily industry specific.
Nearly all of the Company’s annual revenues, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas to Roanoke Gas customers. The SCC authorizes the rates and fees the Company charges its customers for these services. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather.
On October 10, 2018, Roanoke Gas filed a general rate application requesting an annual increase in customer non-gas base rates. Roanoke Gas implemented the non-gas rates contained in its rate application (or the "interim rates") for natural gas service rendered to customers on or after January 1, 2019. On January 24, 2020, the SCC issued its final order on the general rate application, granting Roanoke Gas an annualized increase in non-gas base rates of $7.25 million. In March 2020, the Company refunded $3.8 million to its customers, representing the excess revenues collected plus interest for the difference between the final approved rates and the interim rates billed since January 1, 2019.
As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders. In order to mitigate the effect of weather variations and other factors not provided for in weather and the cost of natural gas, the CompanyCompany's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability in earnings, adjust for volatility in the price of natural gas and provide a return on increasedqualified infrastructure investment. These mechanisms include the SAVE Rider, WNA, ICC and PGA.
The Company’s non-gas base rates provide for the recovery of non-gas related expenses and a reasonable return to shareholders. These rates are determined based on the filing of a formal non-gas rate application with the SCC utilizing historical and proforma information, including investment in natural gas facilities.SCC. Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates currently in place. The investment in replacing and upgrading existing infrastructure is generally not recoverable until a formal rate application is filed to include the additional investment, and new non-gas base rates are approved. The SAVE Plan and Rider provides the Company with the ability to recovera mechanism through which it recovers costs related to these SAVE qualified infrastructure investments on a prospective basis. The SAVE Plan provides a mechanism through which the Company may recover the related depreciation and expenses and provides a return on rate base of the additional capital investments related to improving the Company's infrastructurebasis, until such time a formal rate application is filed to incorporate these investments in the Company's non-gas base rates. The SAVE Plan and Rider were last reset effective January 2019, in connection withwhen the implementationrecovery of newall prior SAVE Plan investment was incorporated into the current non-gas rates. Accordingly, SAVE Plan revenues increased by $261,000approximately $193,000 and $585,000$416,000 for the three and six month periods ended March 31, 2021, respectively,2022 compared to the same periods last year. The increases in SAVE revenues reflectsyear, reflecting the continuedCompany's cumulative investment in qualified SAVE Plan infrastructure.
The WNA model reduces the volatility in earnings volatility relateddue to weatherthe variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when weather is colder than normal. The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal and correspondingly requires the Company to refund the excess margin earned for weather that is colder than normal. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day.day and thereby estimates the revenue adjustment based on weather variance from normal. Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. For the three and six months ended March 31, 2021,2022, the Company accrued approximately $249,000$556,000 and $1,196,000$1,800,000 in additional revenues under the WNA model for weather that was 7% and 13% warmer than normal, respectively, compared to approximately $249,000 and $1,196,000 in additional revenue for weather that was 3% and 9% warmer than normal respectively. Forduring the corresponding periods last year, the Company accrued $1,651,000 and $1,817,000 in additional revenues for weather that was approximately 20% and 13% warmer than normal, respectively.year. The current WNA year ended on March 31, 2021. The2022 and the 12 month cumulative WNA balance will be collected from customers during thebeginning in May 2021 billing cycle.2022.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company also has an approved rate structure in place that mitigates the impact of financing costs associated withof its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue forby applying the financing costs, or “carrying costs,” of its inventory. This ICC factor, applied to the cost of inventory is based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity.
During times of rising gas costs and rising inventory levels, Roanoke Gas recognizes ICC revenuesequity, to offset higher financing costs associated with higher inventory balances. Conversely, during times of decreasing gas costs and lower inventory balances, the Company recognizes less ICC revenue as financing costs are lower. In addition, ICC revenues are impacted by the changes in the weighted-averageaverage cost of capital.natural gas inventory during the period. Total ICC revenues increased by approximately $33,000 and $84,000, respectively, for the three month and six month periods ended March 31, 2021 declined by $20,000 and $49,000, respectively, from2022, compared to the samecorresponding periods last year, primarily due to loweras rising natural gas commodity prices in 2021 resulted in a higher average pricecost of natural gas in storage. As natural gas commodity prices have experienced a significant increase during March and April 2022, the cost of natural gas in storage balances and a reduction in the ICC factor used in calculating these revenues.is expected to be higher at September 30, 2022.
The cost of natural gas is a pass-through cost and is independent of the non-gas rates of the Company. Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. The cost of natural gas is a pass-through cost and is independent of the non-gas base rates of the Company. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs incurred by its regulated operations. Onbased on a quarterly basis,filing, or more frequentlyfrequent if necessary, the Company files a PGA rate adjustment request with the SCC to adjust the gas cost component of its rates up or down depending on projected price and activity.SCC. Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount. As actual costs will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as those amounts are reflected in customer billings.
In FebruaryPrior to January 2021, the central and eastern sections of the country experienced a polar vortex causing severe cold weather that had a significant short-term impact on energy prices. As the Company receives a majority of its natural gas supply from these regions, the average spot commodity price of gas delivered in February 2021 increased by nearly 200% compared to the prior month. When combined with capacity fee increases implemented by two of the pipelines transporting gas for delivery into Roanoke Gas' distribution system, the higher costs necessitated the Company to file for relief by requesting an increase in its PGA rate effective March 2021. Although, the commodity price of gas returned to normal levels in March 2021, the SCC administratively approved the higher PGA factor through April 2021, allowing the Company to recover the higher gas costs incurred.
The Company has recognized significant non-cash income from equity in earnings of MVP inthrough recording of AFUDC. Due to various legal and regulatory challenges, construction on the past, as AFUDCpipeline has been recorded duringhalted as has the construction activities. Effective January 1, 2021, the LLC made a determination to temporarily suspend recognition of AFUDC due to delays inAFUDC. If or when the permits are reinstated, construction related to the LLC’s change in its approach to seeking authorization to cross all remaining streamson MVP could resume and wetlands on the project route. Assuming the necessary approvals are received for the crossings and construction resumes, AFUDC would again be recognized until such time as MVP is placed in service. Once in service, cash earnings will be derived from fees charged by the project is readyLLC to be placed into service. Accordingly,transport natural gas on the Company did not recognize any AFUDC during the second quarter of fiscal 2021.
Effective January 1, 2021, Roanoke Gas suspended AFUDC on its two gate stations that will connect to MVP until such time as construction activities resume. pipeline.
Results of Operations
The analysis on the results of operations is based on the consolidated operations of the Company, which is primarily associated with the utility segment. Additional segment analysis is provided in areas wherewhen Midstream's investment in affiliates represents a significant component of the comparison.
ManagementThe Company's operating revenues are affected by the cost of natural gas, as reflected in the consolidated income statement under the line item cost of gas - utility. The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost. Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as the difference between condensed consolidated income statement line items gas utility revenues andless cost of gas, - utility, is a more useful and relevant measure to analyze financial performance. The term gross utility margin is not intended to represent or replace operating income, the most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies. The following results of operations analyses will reference gross utility margin.
Three Months Ended March 31, 2021:2022:
Net income decreased by $912,838, or 16%,$29,261,907 for the three months ended March 31, 2021,2022, compared to the same period last year, primarily due to the cessationimpairment of AFUDC earnings on the Company's investment in MVP.the LLC.
RGC RESOURCES, INC. AND SUBSIDIARIES
The tables below reflect operating revenues, volume activity and heating degree-days.
Three Months Ended March 31, | Three Months Ended March 31, | Increase/ | ||||||||||||||||||||||||||||||
2021 | 2020 | Increase / (Decrease) | Percentage | 2022 | 2021 | (Decrease) | Percentage | |||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||
Gas utility | $ | 28,221,274 | $ | 22,275,719 | $ | 5,945,555 | 27 | % | ||||||||||||||||||||||||
Non utility | 32,388 | 162,012 | (129,624 | ) | (80 | )% | ||||||||||||||||||||||||||
Gas Utility | $ | 29,499,219 | $ | 28,221,274 | $ | 1,277,945 | 5 | % | ||||||||||||||||||||||||
Non Utility | 30,464 | 32,388 | (1,924 | ) | (6 | )% | ||||||||||||||||||||||||||
Total Operating Revenues | $ | 28,253,662 | $ | 22,437,731 | $ | 5,815,931 | 26 | % | $ | 29,529,683 | $ | 28,253,662 | $ | 1,276,021 | 5 | % | ||||||||||||||||
Delivered Volumes | ||||||||||||||||||||||||||||||||
Regulated Natural Gas (DTH) | ||||||||||||||||||||||||||||||||
Residential and Commercial | 3,212,413 | 2,675,117 | $ | 537,296 | 20 | % | 3,221,562 | 3,212,413 | 9,149 | 0 | % | |||||||||||||||||||||
Transportation and Interruptible | 806,981 | 917,159 | (110,178 | ) | (12 | )% | 1,020,460 | 806,981 | 213,479 | 26 | % | |||||||||||||||||||||
Total Delivered Volumes | 4,019,394 | 3,592,276 | $ | 427,118 | 12 | % | 4,242,022 | 4,019,394 | 222,628 | 6 | % | |||||||||||||||||||||
HDD (Unofficial) | 1,997 | 1,661 | 336 | 20 | % | |||||||||||||||||||||||||||
HDD | 1,918 | 1,997 | (79 | ) | (4 | )% |
Total operating revenues for the three months ended March 31, 2021,2022, compared to the same period last year, increased by 26%5% due to a combination of significantly higher natural gas prices and pipeline and storage fees, higher natural gas deliveries and an increase in SAVE revenues, partially offset by a reduction in WNA revenues a decrease inand higher transportation and interruptible volumes and a decrease in non-utility revenues. A polar vortex in mid-February 2021 in the central and eastern portions of the country resulted in a temporary spike in the spot prices for natural gas. In addition, two of the pipeline suppliers implemented rate increases on the transportation fees for delivering natural gas into Roanoke's distribution system. As a result of both events, the commodity price of natural gasvolume deliveries. SAVE Plan revenues increased by 47% per dth and total pipeline and storage fees increased by 43% forapproximately $193,000 due to the quarter. These higher costs are passed on to customers throughcontinuing investment in qualified SAVE infrastructure projects. Although the PGA mechanism. The quarterthree months ended March 31, 20212022 had 20% more4% fewer heating degree days than the same period last year, which accounted for the 20% increase in the weather sensitive residential and commercial volumes.volumes were nearly unchanged. The revenue impactimprovement in natural gas deliveries is reflective of increased volumes from colder weather was mitigated by a $1,401,228 reductioneconomic activity in the post-pandemic environment. As described above, the WNA model provided $307,000 in additional revenues as the current period was 7% warmer than normal compared to priorweather that was 3% warmer than normal for the same period last year. SAVE Plan revenues increased by $260,848 due to the ongoing investment in qualified SAVE infrastructure projects. The transportationTransportation and interruptible volumes, primarily driven by business activity rather than weather, declinedincreased by 12% related mostly26% due to a single multi-fuel customer that switchedincreased its primary fuel fromutilization of natural gas tofrom an alternate energy source in response toduring the rising natural gas commodity prices. Non-utility revenues decreased due toquarter. Excluding the completion of a significant long-term contract in fiscal 2020.multi-fuel customer's usage from both periods, total transportation and interruptible volumes would have been nearly unchanged.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2021 | 2020 | Increase | Percentage | 2022 | 2021 | Increase | Percentage | |||||||||||||||||||||||||
Gross Utility Margin | ||||||||||||||||||||||||||||||||
Gas Utility Revenue | $ | 28,221,274 | $ | 22,275,719 | $ | 5,945,555 | 27 | % | ||||||||||||||||||||||||
Gas Utility Revenues | $ | 29,499,219 | $ | 28,221,274 | $ | 1,277,945 | 5 | % | ||||||||||||||||||||||||
Cost of Gas - Utility | 14,447,057 | 8,672,997 | 5,774,060 | 67 | % | 14,923,575 | 14,447,057 | 476,518 | 3 | % | ||||||||||||||||||||||
Gross Utility Margin | $ | 13,774,217 | $ | 13,602,722 | $ | 171,495 | 1 | % | $ | 14,575,644 | $ | 13,774,217 | $ | 801,427 | 6 | % |
Gross utility margin increased from the same period last year primarily as a result of the aforementioned higher SAVE revenues, WNA and customer growth, partially offset by a reduction in transportation and interruptible deliveries. WNA-adjusted volumes associated with residential and commercial customersas well as ICC revenues. ICC revenues increased by more than 3% as comparedapproximately $33,000 due to a 20% increase for the actual volumes. The transportation and interruptible volumes declined by 12% related mostly to a single multi-fuel customer that switched its primary fuel fromhigher natural gas inventory balances attributable to an alternate source. The higher customer base charge revenue reflects a combination of nominal customer growth and the continuing service to delinquent customers as a result of the moratorium for disconnectingrising natural gas service on past due accounts.commodity prices.
The components of and the change in gas utility margin are summarized below:
Three Months Ended March 31, | ||||||||||||
2021 | 2020 | Increase / (Decrease) | ||||||||||
Customer Base Charge | $ | 3,652,055 | $ | 3,610,679 | $ | 41,376 | ||||||
Carrying Cost | 65,446 | 85,134 | (19,688 | ) | ||||||||
SAVE Plan | 550,847 | 289,999 | 260,848 | |||||||||
Volumetric | 9,226,891 | 7,934,022 | 1,292,869 | |||||||||
WNA | 249,330 | 1,650,558 | (1,401,228 | ) | ||||||||
Other Gas Revenues | 29,648 | 32,330 | (2,682 | ) | ||||||||
Total | $ | 13,774,217 | $ | 13,602,722 | $ | 171,495 |
RGC RESOURCES, INC. AND SUBSIDIARIES
The components of and the change in gas utility margin are summarized below:
Three Months Ended March 31, | ||||||||||||
2022 | 2021 | Increase | ||||||||||
Customer Base Charge | $ | 3,666,318 | $ | 3,652,055 | $ | 14,263 | ||||||
Carrying Cost | 98,511 | 65,446 | 33,065 | |||||||||
SAVE Plan | 743,992 | 550,847 | 193,145 | |||||||||
Volumetric | 9,470,897 | 9,226,891 | 244,006 | |||||||||
WNA | 556,404 | 249,330 | 307,074 | |||||||||
Other Revenues | 39,522 | 29,648 | 9,874 | |||||||||
Total | $ | 14,575,644 | $ | 13,774,217 | $ | 801,427 |
Operations and maintenance expenses decreasedincreased by $178,679 from$310,537, or 8%, over the same period last year primarily due to lower compensation costs andhigher bad debt expense, corporate insurance premiums, professional services and compensation costs. Bad debt expense increased by $194,000 for the quarter due to higher billings related to rising natural gas prices and delinquent balances. Corporate insurance premiums related to property and liability insurance increased by nearly $43,000, or 17%, due to insurance market conditions. Professional services increased by $44,000 primarily due to costs related to determining the fair value and impairment of the LLC investment.
General taxes increased by $4,428, or 1%, primarily due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth, net of greater capitalization of payroll and property taxes.
Depreciation expense increased by $140,400, or nearly 7%, on a comparable increase in utility plant balances.
Equity in loss of unconsolidated affiliate was nearly unchanged as no growth construction activities occurred and no AFUDC was recorded. All earnings or losses during the respective quarters relate to income earned on available cash balances, net of expenses. See Equity Investment in Mountain Valley Pipeline section below for additional information.
Impairment of unconsolidated affiliates includes $39,822,213 for an other-than-temporary write down of the Company's investment in the LLC. See Critical Accounting Policies and Estimates and Equity Investment in Mountain Valley Pipeline sections below for further details of the impairment.
Other income, net increased by $56,962, or 20%, primarily due to an approximately $86,000 decrease in the non-service cost components of net periodic benefit costs partially offset by reduced capitalized overheads. Compensation expense declined by $220,000 related to lower benefit costs and the absence of accelerated vesting of officer restricted stock that resulted from a planned retirementreduction in the prior year. Badutilization fee. The reduction in the non-service cost component is attributable to the reduction in the amortization of the actuarial losses due to the improved funding position of the defined benefit plans. The utilization fee under the revenue sharing agreement declined per the terms of the asset management agreement with Sequent Energy.
Interest expense increased by $96,080, or 10%, as the total daily average debt outstanding increased by 20% between quarters. The higher borrowing levels, derived from the ongoing investment in the LLC and financing expenditures in support of Roanoke Gas' capital budget, were offset by a 9% reduction in the weighted-average interest rate on the Company's debt.
Roanoke Gas' interest expense declinedincreased by $155,000$43,506 primarily due to a $17.2 million increase in total daily average debt outstanding for the quarterperiod, net of a reduction in the average interest rate from 3.73% to 3.23% primarily driven by the issuance of the $15 million note on October 1, 2021 with a 2.00% swap adjusted rate.
RGC RESOURCES, INC. AND SUBSIDIARIES
Midstream's interest expense increased by $52,574 primarily due to a $8.2 million increase in total average debt outstanding for the period and slight increase in the average interest rate from 2.28% to 2.32% associated with the an increase in the average variable interest rate of Midstream's credit facility.
Income tax moved from an expense of $1,607,935 to a benefit of $8,644,175 corresponding to the recognition of the impairment of the Company's investment in the LLC. The effective tax rate was 26.1% and 25.2% for the three month periods ended March 31, 2022 and 2021, respectively. Excluding the effect of the impairment, the effective tax rate would have been 24.0% compared to 25.2% for the same period last year. The reduction in the adjusted effective tax rate is attributable to the amortization of the deferred R&D tax credit associated with the tax credit study.
Six Months Ended March 31, 2022:
Net income decreased by $30,400,641 from $9,490,741 to a net loss of $20,909,900 for the six months ended March 31, 2022, compared to the same period last year, due to the applicationimpairment of morethe Company's investment in the LLC.
The tables below reflect operating revenues, volume activity and heating degree-days.
Six Months Ended March 31, | Increase/ | |||||||||||||||
2022 | 2021 | (Decrease) | Percentage | |||||||||||||
Operating Revenues | ||||||||||||||||
Gas Utility | $ | 52,730,874 | $ | 47,704,774 | $ | 5,026,100 | 11 | % | ||||||||
Non Utility | 61,889 | 65,905 | (4,016 | ) | (6 | )% | ||||||||||
Total Operating Revenues | $ | 52,792,763 | $ | 47,770,679 | $ | 5,022,084 | 11 | % | ||||||||
Delivered Volumes | ||||||||||||||||
Regulated Natural Gas (DTH) | ||||||||||||||||
Residential and Commercial | 5,132,292 | 5,262,636 | (130,344 | ) | (2 | )% | ||||||||||
Transportation and Interruptible | 1,797,901 | 1,623,637 | 174,264 | 11 | % | |||||||||||
Total Delivered Volumes | 6,930,193 | 6,886,273 | 43,920 | 1 | % | |||||||||||
HDD | 3,079 | 3,245 | (166 | ) | (5 | )% |
Total operating revenues for the six months ended March 31, 2022, compared to the same period last year, increased by 11% due to a combination of higher natural gas commodity prices and pipeline and storage fees and an increase in SAVE and WNA revenues. During the first quarter of fiscal 2022, the Company experienced both rising natural gas prices over the comparable period last year, with the average commodity price declining slightly during the second fiscal quarter and rate increases implemented in the second quarter of fiscal 2021 from the interstate pipelines and underground natural gas storage operators who deliver and store natural gas. These higher costs are passed on to customers through the PGA. SAVE Plan revenues increased by approximately $416,000 due to the continuing investment in qualified SAVE infrastructure projects. The six months ended March 31, 2022 had 5% fewer heating degree days than $200,000the same period last year, which resulted in CARES Act funds. Asa corresponding 2% reduction in the weather sensitive residential and commercial volumes. If adjusted for the WNA effect of the shortfall in heating degree days, the residential and commercial volumes would have been nearly 2% higher than the WNA adjusted volumes in the prior year, reflecting improved economic activity in a post-pandemic environment.
Six Months Ended March 31, | ||||||||||||||||
2022 | 2021 | Increase | Percentage | |||||||||||||
Gross Utility Margin | ||||||||||||||||
Gas Utility Revenues | $ | 52,730,874 | $ | 47,704,774 | $ | 5,026,100 | 11 | % | ||||||||
Cost of Gas - Utility | 26,239,980 | 22,147,756 | 4,092,224 | 18 | % | |||||||||||
Gross Utility Margin | $ | 26,490,894 | $ | 25,557,018 | $ | 933,876 | 4 | % |
Gross utility margin increased from the same period last year as a result of the applied funds,higher SAVE revenues and WNA in addition to the growth in past due balances was temporarily slowed resulting in a smaller increase in ICC revenues as reflected in the table below. ICC revenues increased by approximately $84,000 due to higher natural gas inventory balances attributable to rising natural gas commodity prices.
RGC RESOURCES, INC. AND SUBSIDIARIES
The components of and the change in gas utility margin are summarized below:
Six Months Ended March 31, | Increase/ | |||||||||||
2022 | 2021 | (Decrease) | ||||||||||
Customer Base Charge | $ | 7,302,995 | $ | 7,274,520 | $ | 28,475 | ||||||
Carrying Cost | 275,842 | 192,202 | 83,640 | |||||||||
SAVE Plan | 1,471,365 | 1,055,545 | 415,820 | |||||||||
Volumetric | 15,554,251 | 15,774,483 | (220,232 | ) | ||||||||
WNA | 1,800,421 | 1,196,301 | 604,120 | |||||||||
Other Revenues | 86,020 | 63,967 | 22,053 | |||||||||
Total | $ | 26,490,894 | $ | 25,557,018 | $ | 933,876 |
Operations and maintenance expenses increased by $498,729, or 7%, over the same period last year primarily due to higher bad debt reserves. Total capitalized overheads declinedexpense, corporate insurance premiums and professional services. Bad debt expense increased by $193,000 on a $1.6 million reduction in capital expenditures$267,000 due to higher billings related to weatherrising natural gas prices and project timing.delinquencies. Corporate insurance premiums increased by $91,000 due to insurance market conditions. Professional services increased by $60,000 primarily related to costs related to evaluating the Company's investment in the LLC and assessing the level of impairment. Natural gas distribution system maintenance and cyber security enhancements accounted for much of the remaining increase.
General taxes increased by $54,952,$33,613, or 9%3%, primarily due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.
Depreciation expense increased by $140,088,$257,696, or 7%6%, on a comparable increase in utility plant balances.
Equity in earnings of unconsolidated affiliate decreased by $1,192,390,$1,281,204, as the LLC ceased recognition of AFUDC on the MVP effective January 2021 until such time as substantiveno growth construction activities resume.occurred. See Equity Investment in Mountain Valley Pipeline section below for more details.additional information.
Impairment of unconsolidated affiliates includes the $39,822,213 other-than-temporary write down of the Company's investment in the LLC as discussed further in the Equity Investment in Mountain Valley Pipeline section below.
Other income, net declinedincreased by $30,344$49,375, or 8%, primarily due to the absence of the equity portion of AFUDC offset by a $112,000an approximately $173,000 decrease in the non-service cost components of net periodic benefit costs. Incosts partially offset by the final orderabsence of the equity portion of AFUDC on the Company's non-gas rate application, the SCC allowed Roanoke Gas to defer financing costs related to the two natural gas transfergate stations that will interconnect MVP with Roanoke Gas' distribution system with the MVP. Beginningand reduction in the second quarter of fiscal 2020, the Company used the industry standard practice of AFUDC to defer these costs for potential recovery in future rate proceedings. As noted above, the LLC stopped recognizing AFUDC related to MVP.utilization fee. Roanoke Gas also suspendedceased the recognition of AFUDC on these two gate stations effective January 2021 until such time as construction activities resume to interconnectresume. The utilization fee under the MVPrevenue sharing agreement declined per the terms of the asset management agreement with the Company's distribution system. Under the requirements of ASC 715, the components of net periodic benefit costs other than service cost are to be classified outside of income from operations. The reduction in these costs is attributable to reduced interest cost related to a lower discount rate applied to the benefit plans' liabilities and higher projected earnings on plan assets attributable to asset growth.Sequent Energy.
Interest expense decreasedincreased by $30,529,$181,107, or 3%9%, despiteas the total daily average debt outstanding increasingincreased by 15%18% between quarters.periods. The higher borrowing levels, derived from the ongoing investment in MVPthe LLC and financing expenditures in support of Roanoke Gas' capital budget, were offset by a 15%an 8% reduction in the weighted averageweighted-average interest rate on the Company's debt. Interest expense was also impacted by the absence of a credit for the debt portion of AFUDC related to Roanoke's two gate stations due to the cessation of the accrual, partially offset by the prior year interest on the rate refund.
Roanoke Gas' interest expense increased by $45,535$104,039 primarily due to a $10.5$16 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 3.86%3.63% to 3.51%3.23% associated with the higher borrowings underissuance of the variable rate line-of-credit.$15 million note on October 1, 2021 with a 2.00% swap adjusted rate.
Midstream's interest expense decreasedincreased by $76,064. The decline$77,068 primarily due to a $7.7 million increase in total average debt outstanding for the average variable interest rateperiod net of Midstream's credit facility resulteda slight decrease in the average interest rate on total Midstream debt decreasing from 3.09%2.34% to 2.25%, more than offsetting the effect of the $6,472,000 increase in total average debt outstanding.2.30%.
Income tax expense decreased by $179,557$10,693,510 to a net tax benefit of $7,560,571, corresponding to a reductionthe recognition of the impairment of the Company's investment in taxable income.the LLC. The effective tax rate was 25.2%26.6% and 23.9%24.8% for the threesix month periods ended March 31, 2022 and 2021, and 2020, respectively. TheExcluding the effect of the impairment, the effective tax rate would have been 23.7% compared to 24.8% for the prior year was lower due to excess deductions relatedsame period last year. The reduction in the adjusted effective tax rate is attributable to the vestingamortization of restricted stock and the exercise of stock options.deferred R&D tax credit associated with the tax credit study conducted in fiscal 2021.
RGC RESOURCES, INC. AND SUBSIDIARIES
Six Months Ended March 31, 2021:
Net income decreased by $196,511, or 2%, for the six months ended March 31, 2021, compared to the same period last year. Reductions in the earnings of MVP related to AFUDC, net of higher natural gas margins and lower operation and maintenance expenses, were the contributing factors to the earnings decline.
The tables below reflect operating revenues, volume activity and heating degree-days.
Six Months Ended March 31, | ||||||||||||||||
2021 | 2020 | Increase / (Decrease) | Percentage | |||||||||||||
Operating Revenues | ||||||||||||||||
Gas utility | $ | 47,704,774 | $ | 41,901,325 | $ | 5,803,449 | 14 | % | ||||||||
Non utility | 65,905 | 321,859 | (255,954 | ) | (80 | )% | ||||||||||
Total Operating Revenues | $ | 47,770,679 | $ | 42,223,184 | $ | 5,547,495 | 13 | % | ||||||||
Delivered Volumes | ||||||||||||||||
Regulated Natural Gas (DTH) | ||||||||||||||||
Residential and Commercial | 5,262,636 | 4,924,373 | $ | 338,263 | 7 | % | ||||||||||
Transportation and Interruptible | 1,623,637 | 1,786,741 | (163,104 | ) | (9 | )% | ||||||||||
Total Delivered Volumes | 6,886,273 | 6,711,114 | $ | 175,159 | 3 | % | ||||||||||
HDD (Unofficial) | 3,245 | 3,101 | 144 | 5 | % |
Total operating revenues for the six months ended March 31, 2021, compared to the same period last year, increased by 13% due to higher natural gas prices and pipeline and storage fees, higher delivered volumes and an increase in SAVE revenues, partially offset by a reduction in WNA revenues, a decrease in transportation and interruptible volumes and a decrease in non-utility revenues. Total delivered volumes increased by 175,159 dth while the weather sensitive residential and commercial volumes increased by 7% due to a 5% increase in heating degree days. After adjusting for WNA, the weather sensitive volumes reflected an increase of 3% as the cooler weather reduced the level of WNA revenues by $620,854. SAVE Plan revenues increased by $584,933 due to the ongoing investment in qualified SAVE infrastructure projects. Transportation and interruptible volumes, which are excluded from the WNA calculations, decreased by 9%, primarily due to the single multi-fuel customer that switched its primary fuel from natural gas to an alternate source as referenced above. Non-utility revenues decreased due to the completion of a significant long-term contract in fiscal 2020, which accounted for more than 75% of total non-utility revenues.
Six Months Ended March 31, | ||||||||||||||||
2021 | 2020 | Increase | Percentage | |||||||||||||
Gross Utility Margin | ||||||||||||||||
Gas Utility Revenue | $ | 47,704,774 | $ | 41,901,325 | $ | 5,803,449 | 14 | % | ||||||||
Cost of Gas - Utility | 22,147,756 | 16,850,803 | 5,296,953 | 31 | % | |||||||||||
Gross Utility Margin | $ | 25,557,018 | $ | 25,050,522 | $ | 506,496 | 2 | % |
Gross utility margin increased from the same period last year primarily as a result of the increased SAVE revenues attributable to the continuing investment in qualified SAVE Plan infrastructure projects. Total WNA-adjusted volumes declined slightly with reductions in interruptible and transportation volumes more than offsetting the higher normalized residential and commercial volumes. The higher customer base charge revenues, associated with customer growth, offset reductions in ICC and other revenues.
The components of and the change in gas utility margin are summarized below:
Six Months Ended March 31, | ||||||||||||
2021 | 2020 | Increase / (Decrease) | ||||||||||
Customer Base Charge | $ | 7,274,520 | $ | 7,191,428 | $ | 83,092 | ||||||
Carrying Cost | 192,202 | 241,041 | (48,839 | ) | ||||||||
SAVE Plan | 1,055,545 | 470,612 | 584,933 | |||||||||
Volumetric | 15,774,483 | 15,237,865 | 536,618 | |||||||||
WNA | 1,196,301 | 1,817,155 | (620,854 | ) | ||||||||
Other Gas Revenues | 63,967 | 92,421 | (28,454 | ) | ||||||||
Total | $ | 25,557,018 | $ | 25,050,522 | $ | 506,496 |
RGC RESOURCES, INC. AND SUBSIDIARIES
Operations and maintenance expenses decreased by $594,027 from the same period last year primarily due to the write-down and amortization of ESAC regulatory assets during the prior year, lower compensation costs and bad debt expense, partially offset by lower capitalized overheads. In January 2020, the SCC issued their final order on Roanoke Gas' non-gas base rate application. Included in the order approving the rate award on the non-gas base rate application was a requirement to write-down $317,000 in ESAC assets that were not subject to recovery. In addition, the first six months of fiscal 2020 included $153,000 of ESAC asset amortization. No ESAC amortization is included the current year as the Company accelerated recovery of the remaining balance in September 2020. As discussed previously, compensation expense declined by $300,000 primarily due to the vesting of restricted stock in the prior fiscal year. Bad debt expense declined by $185,000 due to the application of more than $200,000 in CARES Act funds to eligible customers with past due balances. Total capitalized overheads declined by $253,000 on reduced capital expenditures related to a combination of weather and project timing.
��
General taxes increased by $85,739, or 8%, due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.
Depreciation expense increased by $304,981, or 8%, on a comparable increase in utility plant balances.
Equity in earnings of unconsolidated affiliate decreased by $929,793, or 41%, due to the cessation of AFUDC recognition by the LLC on the MVP effective January 2021.
Other income, net increased by $142,039 primarily due to a $225,000 decrease in the non-service cost components of net periodic benefit costs partially offset by $121,000 reduction in the equity portion of AFUDC on the two gate stations that will interconnect the MVP with Roanoke's distribution system. The Company temporarily stopped recognizing AFUDC on these gate stations effective January 2021 until the resumption of construction activities closer to the completion of the MVP project.
Interest expense decreased by $95,885, or 5%, despite total average debt outstanding increasing by 17% associated with funding Roanoke Gas' capital projects and Midstream's continuing investment in MVP. As a result of the declining interest rates on the Company's variable rate debt, the weighted-average interest rate fell by 16%. Interest expense was also reduced by the absence of rate refund interest in the current year and reduced AFUDC related to the delayed completion of the MVP project.
Roanoke Gas' interest expense increased by $31,012 primarily due to the capitalization of $40,000 less in AFUDC during the current year. Higher interest expense related to a more than $11 million increase in average outstanding debt balances offset the absence of interest on the rate refund from the prior year.
Midstream's interest expense decreased by $126,897. The average interest rate of Midstream's debt declined from 3.13% to 2.27% due to significant reductions in the interest rate on its variable rate debt, which more than offset the $7,120,000 increase in total average debt outstanding during the period.
Income tax expense increased by $103,860 on a less than 1% decline in pre-tax income. The effective tax rate was 24.8% and 23.8% for the six-month periods ended March 31, 2021 and 2020, respectively. A combination of vesting of restricted stock and the exercise of stock options provided additional tax benefits that resulted in a net lower effective tax rate during the prior year.
Critical Accounting Policies and Estimates
The consolidated financial statements of Resources are prepared in accordance with GAAP. The amounts of assets, liabilities, revenues and expenses reported in the Company’s consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and management judgments. Actual results may differ significantly from these estimates and assumptions.
Under the provisions of ASC 323 - Investments - Equity Method and Joint Ventures, the Company is required to evaluate its investment in the LLC to determine if the fair value of the investments are below the carrying amount and if this decline in fair value is considered other-than-temporary. If the results of the evaluation indicate that the decline in fair value is other-than-temporary, then the recognition of an impairment is required. The following events or circumstances would indicate the potential of an other-than-temporary decline in the fair value of the investment in the LLC:
• a prolonged period of time that the fair value is below the investor’s carrying value;
• the current expected financial performance is significantly worse than anticipated when the investor originally invested in the investee;
• adverse regulatory action is expected to substantially reduce the investee’s product demand or profitability;
• the investee has lost significant customers or suppliers with no immediate prospects for replacement;
• the investee’s discounted or undiscounted cash flows are below the investor’s carrying amount; and
• the investee’s industry is declining and significantly lags the performance of the economy as a whole.
The determination of fair value of the Company's investment in the LLC is a significant estimate. Management has conducted quarterly evaluations of its investment in the LLC, with the assistance of a valuation specialist, to determine the fair value utilizing an income approach and probability scenarios of discounted cash flows. In conducting these evaluations, management made a variety of assumptions that it believes to be reasonable. Variations in many of these assumptions could have a significant impact on the calculation of the fair value and the resulting level of impairment recorded. Furthermore, these assumptions are based on the facts and circumstances at the date of the evaluations and are subject to change. See the Equity Investment in Mountain Valley Pipeline section for additional information regarding the LLC valuation and impairment.
There have been no other significant changes to the critical accounting policies as reflected in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020.2021.
Asset Management
Roanoke Gas uses a third-party asset manager to oversee its pipeline transportation, storage rights and gas supply inventories and deliveries. In return for being able to utilize the excess capacities of the transportation and storage rights, the asset manager pays Roanoke Gas a monthly utilization fee. In accordance with an SCC order issued in 2018, a portion of the utilization fee is retained by the Company with the balance passed through to customers through reduced gas costs. The current asset manager contract has been renewed throughends on March 31, 2022.
RGC RESOURCES, INC. AND SUBSIDIARIES2023.
Equity Investment in Mountain Valley Pipeline
While the total MVP project work is approximately 92% complete, recentRecent construction activity has been limited basedbased on legal and regulatory challenges. Although certain permits and authorizations were received in the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021,2022, there remain pending challenges and authorization requests impacting current progress.progress including actions by the Fourth Circuit in January and February 2022.
Following a comprehensive review of all outstanding stream and wetland crossings across the approximately 300-mile MVP project route, on February 19, 2021, the LLC submitted (i) a joint application package to each of the Huntington, Pittsburgh and Norfolk Districts of the U.S. Army Corps of Engineers (Army Corps) that requests an individual permit from the Army Corps to cross certain streams and wetlands utilizing open cut techniques (the Army Corps Individual Permit) and (ii) an application to amend the MVP project’sMVP's CPCN that seekssought FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. On April 8, 2022, the FERC authorized the amended CPCN.
RGC RESOURCES, INC. AND SUBSIDIARIES
Related to seeking the Army Corps Individual Permit, on March 4, 2021, the LLC submitted applications to each of the West Virginia Department of Environmental Protection (WVDEP) and the Virginia Department of Environmental Quality (VADEQ) seeking Section 401 water quality certification approvals or waivers. While the LLC anticipated that the applications would be acted upon within approximately six months and the agencies are continuing to process the applications, both the VADEQ and WVDEP submitted requests to the Army Corps for additional time to address the applications. Based on ongoing discussions, involving the Army Corps and the VADEQ and WVDEP regarding the requested extensions, the LLC expects that the Army Corps will grant the VADEQ and WVDEP additional review time and, in light of the agencies’ rationales for seeking extensions, is supportive of that action. Taking into account that discussions are ongoing, the likelihood of a longer review period than originally anticipated and, as a result, the potential for certain time of year restrictions (unless waivedwaivers (such approvals or alternative crossing authority is obtained) and seasonal challenges to affect construction, as well as seasonal carrying costs, the LLC is targeting a full in-service date for the MVP project in summer 2022 at a total project cost of approximately $6.2 billion (excluding AFUDC).
In order to complete the MVP project in accordance with the targeted full in-service date and cost, the LLC must, among other things, timely receive the Army Corps Individual Permit (as well as timely receivewaivers, the State 401 Approvals). The State 401 Approvals and, as necessary, certain other state-level approvals) and timely receive authorization fromwere both issued in December 2021. On January 25, 2022, the FERC to amend the CPCN to utilize alternative trenchless construction methods for certain stream and wetland crossings. The LLC also must (i) maintain and, as applicable, timely receive requiredLLC’s authorizations including authorization to proceed with construction, related to the Jefferson National Forest (JNF) received from the Bureau of Land Management and the U.S. Forest Service were vacated and the FERC; (ii) continue to have available the orders previously issuedremanded on specific issues by the FERC modifying its prior stop work ordersFourth Circuit. On February 3, 2022, the Fourth Circuit vacated and extending the LLC’s prescribed time to complete the MVP project; and (iv) continue to be authorized to work underremanded on specific issues the Biological Opinion and Incidental Take Statement issued by the United States Department of the Interior’s Fish and Wildlife Service for MVP. On May 3, 2022, the operator for MVP project.announced that after evaluating legal options and consulting with the relevant federal agencies, the LLC plans to pursue new authorizations relating to the JNF and new Biological Opinion and Incidental Take Statement; and as a result, the operator is targeting a full in-service date for MVP during the second half of 2023 at a target total project cost of approximately $6.6 billion (excluding AFUDC).
In addition to timely receiving, and subsequently maintaining, new authorizations in respect of the JNF and the Biological Opinion and Incidental Take Statement, the LLC must, in order to complete MVP, among other things, timely receive the Army Corps Individual Permit (as well as timely receive, as necessary, certain other state-level approvals), as well as any necessary extensions from FERC to complete MVP. The LLC also must (i) continue to have available the orders previously issued by the FERC, which are subject to ongoing litigation, modifying its prior stop work orders and extending the LLC’s prescribed time to complete MVP; and (ii) timely receive authorization from the FERC to complete construction work in the portion of the project route currently remaining subject to the FERC's previous stop work order and in the JNF. In each case, any such foregoing or other authorizations must remain in effect notwithstanding any pending or future challenge thereto. Failure to achieve any one of the above items could lead to additional delays and higher project costs.
Resources' current earnings from the MVP investment are primarily attributable to AFUDC income generated by the LLC. As a result of the above-described approach to seeking authorization to cross all remaining streams and wetlands on the project route, limited construction activities on the project are expected during the process to obtain the requisite approvals. Accordingly, theThe LLC temporarily suspended the accrual of AFUDC on the project subsequentfrom January 1, 2021 (due to December 31, 2020 and untila temporary reduction in growth construction resumesactivities) through March 31, 2021. Limited growth construction activities resumed in April 2021, and the LLC began accruing AFUDC associated with those activities. In November 2021, the LLC suspended the accrual of AFUDC for the winter curtailment period until such time as a result, Resources will not recognize AFUDC income from MVP during this suspension.growth construction activities may resume. Additionally, Roanoke Gas will continue to suspend accruingcontinues the suspension of AFUDC accruals on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations.
Management has conducted an assessment of its MVP investment in accordance with the provisions of ASC 323, Investments - Equity Method and Joint Ventures. As a result of its evaluation, management has concluded that the investment is not currently impaired as of March 31, 2021. Furthermore, the LLC has conducted its own evaluation of the project and also concluded that no impairment exists as of March 31, 2021. Management will continue monitoring the status of the project for circumstances that may lead to future impairment, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any future impairment would be dependent on the specific circumstances at the time of evaluation.
In April 2018, the LLC announced the MVP Southgate project and submitted Southgate's certificate application to the FERC in November 2018. The Final Environmental Impact Statement for the project was issued on February 14, 2020. In June 2020, the FERC issued the CPCN for the MVP Southgate; however, the FERC, while authorizing the project, directed the Office of Energy Projects not to issue a notice to proceed with construction until necessary federal permits are received for the MVP project and the Director of the Office of Energy Projects lifts the stop work order and authorizes the LLC to continue constructing the MVP. On August 11, 2020, the North Carolina Department of Environmental Quality (NCDEQ) denied Southgate's application for a Clean Water Act Section 401 Individual Water Quality Certification and Jordan Lake Riparian Buffer Authorization due to timing of the MVP project'suncertainty surrounding MVP's completion. On March 11, 2021, the Fourth Circuit, Court of Appeals, pursuant to an appeal filed by the LLC, vacated the NCDEQ's denial and remanded the matter to the NCDEQ for additional review. On April 29, 2021, the NCDEQ reissued its denial of Southgate's application. Based onOn December 3, 2021, the updated targeted full in-service dateVirginia State Air Pollution Control Board denied the permit for Southgate's Lambert compressor station, which decision the LLC initially appealed before withdrawing its request to review the denial.
Given the continually evolving regulatory and legal environment, for greenfield pipeline construction projects, as well as factors specific to MVP and expectations regarding Southgate, including the December 2021 compressor station state air permit approval timing,denial, the LLC continues to evaluate Southgate including engaging in discussions with Dominion Energy North Carolina regarding options with respect to Southgate, including potentially refining the project's design and timing in lieu of pursuing the project as originally contemplated. Dominion Energy North Carolina's obligations under the precedent agreement in support of the original project are subject to certain conditions, including that the LLC complete construction of the project facilities by June 1, 2022, which deadline is targeting commencing construction onsubject to extension by virtue of previously declared events of force majeure. The project operator has announced that it is unable to predict the MVP Southgateresults of the discussions between the LLC and Dominion Energy North Carolina, including any potential modifications to the project, or ultimate undertaking or completion of the project.
Management conducted an assessment of its investment in the LLC in accordance with the provisions of ASC 323, Investments - Equity Method and Joint Ventures. This assessment included a third-party valuation. As a result of its evaluation, management has concluded that the investment in the LLC sustained an other-than-temporary decline in fair value as of February 22, 2022 and placingrecorded a pre-tax impairment loss of approximately $39.8 million in its second quarter operating results as discussed in Note 6 to the MVP Southgate in-service during the spring of 2023.
Midstream has borrowing capacity of $41 million underconsolidated financial statements. Management re-evaluated its current credit facility, which matures in December 2022. Asinvestment as of March 31, 2021, $29.3 million had been utilized. This credit facility2022 and concluded that its investment was fairly stated. Management will provide additional financing capacitycontinue monitoring the status of MVP and Southgate for MVP funding; however, duecircumstances that may lead to ongoing delays, additional financing will be required. Management is working with the Company's lending institutions to secure the necessary funding. If the legal and regulatory challenges,future impairments, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any further impairment would be dependent on the specific circumstances, including changes to probabilities of completion, and changes in the assumed future challenges, are not resolved in a timely manner and/or restrictions are imposed that impact future construction,cash flows, at the costtime of the MVP and Midstream's capital contributions may increase above current projections.evaluation.
RGC RESOURCES, INC. AND SUBSIDIARIES
Regulatory
On January 24, 2020, the SCC issued its final general rate case order awarding Roanoke Gas an annualized non-gas rate increase of $7.25 million and providing for a 9.44% return on equity. The final order directed the Company to write-off a portion of ESAC assets that were excluded from recovery under the rate award. As a result, in the second quarter of fiscal 2020 Roanoke Gas expensed an additional $317,000 of ESAC assets above the normal amortization amount. Rates authorized by the SCC's final order required the Company to issue customers $3.8 million in rate refunds, which was completed in March 2020.
The final order also excluded from current rates a return on the investment of two interconnect stations with the MVP, but noted Roanoke Gas could defer the related financing costs of those investments for possible future recovery. As a result, the Company began recognizing AFUDC during the second quarter of fiscal 2020 to capitalize both the equity and debt financing costs incurred during the construction phases. During the first quarter ofIn November 2021, Roanoke Gas recognized a totalreceived $858,556 in ARPA funds to assist customers with growing past due balances based on arrearage balances as of $55,981August 31, 2021. The Company was able to apply the full amount of these funds to customer accounts in AFUDC, $41,978 and $14,003 of equity and debt carrying costs, respectively. Beginning January 2021, the LLC temporarily ceased recording AFUDC as MVP construction was temporarily inactive while awaiting resolution of regulatory and permitting issues. Similarly, Roanoke Gas temporarily ceased recording AFUDC on its related MVP interconnect construction projects until such time as construction activities resume.
On March 16, 2020, in response to COVID-19, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service to all customers until May 15, 2020. The Commission extended the moratorium on disconnections through October 5, 2020. Subsequently, the Virginia General Assembly extended the moratorium for residential customers until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to remain in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner. Under the moratorium, utilities are prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees; therefore, residential customers that would normally be disconnected for non-payment will continue incurring costs for gas service until the moratorium is removed, resulting in higher potential bad debt write-offs. Roanoke Gas continues to evaluate and adjust its provision for bad debts; however, the potential magnitude of the combined impact from the economy and the moratorium on bad debts continues to be uncertain.December 2021.
In April 2020, the SCC issued an order allowing regulated utilities in Virginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and to apply for recovery at a future date. Roanoke Gas continues to deferdeferred certain COVID-19 related costs during the first two quarters of fiscal 2021 and plans to seek recovery of these deferrals at the appropriate time. In December 2020, Roanoke Gas received $403,000 in CARES Act funds to assist customers with past due balances. Based on guidance provided by the SCC, the Company was able to apply $209,000 to eligible customer accounts in the second quarter. Customers with eligible arrearages as of April 30, 2021, will be able to apply for the remaining funds.2022.
Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Plan.Rider. In May 2020,2021, the Company filed its most recent SAVE application with the SCC to further amend itsupdate the SAVE Plan and for approval of a SAVE Rider for the period October 20202021 through September 2021. In its application, Roanoke Gas requested to continue to recover the costs of the replacement of pre-1973 plastic pipe. In addition, the Company requested to include the replacement of certain regulator stations and pre-1971 coated steel pipe as qualifying SAVE projects. In September 2020, the SCC issued its order approving the2022. The updated SAVE Plan and Rider effective with the October 2020 billing cycle. The new SAVE Rider is designed to collect approximately $2.3$3.45 million in annual revenues, an increase of approximately $1.1 million from the approximate $1.2 millionSAVE Rider in annual revenues fromeffect during fiscal 2021. The Company received a final order on August 25, 2021, in which the priorSCC approved the Company’s requested revenue requirement. The Company anticipates filing an application during the third quarter with the SCC to update the SAVE Plan and Rider for the period October 2022 through September 2023 to implement new SAVE Plan rates.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the relatedimpact of weather sensitivity,variability, the Company’s primary capital needs are the funding of its utility plant capital projects, investment in the MVP,LLC, the seasonal funding of its natural gas inventories and accounts receivable and the payment of dividends. To meet these needs, the Company relies on its operating cash flows, available financingcredit availability under short-term and long-term creditdebt agreements and proceeds from the sale of its equity program.common stock.
Cash and cash equivalents increased by $7,913,673 and $435,483 for the six-month periodperiods ended March 31, 2022 and 2021, compared to a $2,172,880 increase for the same period last year.respectively. The following table summarizes the sources and uses of cash:
Six Months Ended March 31, | ||||||||
Cash Flow Summary | 2021 | 2020 | ||||||
Net cash provided by operating activities | $ | 9,611,402 | $ | 11,168,131 | ||||
Net cash used in investing activities | (11,691,440 | ) | (16,353,341 | ) | ||||
Net cash provided by financing activities | 2,515,521 | 7,358,090 | ||||||
Increase in cash and cash equivalents | $ | 435,483 | $ | 2,172,880 |
RGC RESOURCES, INC. AND SUBSIDIARIES
Six Months Ended March 31, | ||||||||
Cash Flow Summary | 2022 | 2021 | ||||||
Net cash provided by operating activities | $ | 12,992,906 | $ | 9,611,402 | ||||
Net cash used in investing activities | (14,278,880 | ) | (11,691,440 | ) | ||||
Net cash provided by financing activities | 9,199,647 | 2,515,521 | ||||||
Increase in cash and cash equivalents | $ | 7,913,673 | $ | 435,483 |
Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year. Factors,Several factors, including weather, energy prices, natural gas storage levels and customer collections, contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to increases in natural gas storage levels and rising customer receivable balances.
RGC RESOURCES, INC. AND SUBSIDIARIES
Cash flows from operating activities for the six months ended March 31, 2021 decreased2022 increased by $1,556,729 from$3,381,504 compared to the same period last year. The decrease in cash flow provided by operationsincrease was primarily driven by changes in accounts receivablestorage gas withdrawals and regulatory assets and liabilities, netreceipt of supplier refunds from the prior year rate refund.pipelines.
The table below summarizes the significant operating cash flow components:
Six Months Ended March 31, | Six Months Ended March 31, | Increase/ | ||||||||||||||||||||||
Cash Flow From Operating Activities: | 2021 | 2020 | Increase / (Decrease) | 2022 | 2021 | (Decrease) | ||||||||||||||||||
Net income | $ | 9,490,741 | $ | 9,687,252 | $ | (196,511 | ) | $ | (20,909,900 | ) | $ | 9,490,741 | $ | (30,400,641 | ) | |||||||||
Non-cash adjustments: | ||||||||||||||||||||||||
Depreciation | 4,405,956 | 4,095,390 | 310,566 | 4,656,829 | 4,405,956 | 250,873 | ||||||||||||||||||
Equity in earnings | (1,352,886 | ) | (2,282,679 | ) | 929,793 | (71,682 | ) | (1,352,886 | ) | 1,281,204 | ||||||||||||||
AFUDC | (55,981 | ) | (217,147 | ) | 161,166 | — | (55,981 | ) | 55,981 | |||||||||||||||
ESAC assets | — | 469,911 | (469,911 | ) | ||||||||||||||||||||
Impairment of unconsolidated affiliates | 39,822,213 | — | 39,822,213 | |||||||||||||||||||||
Changes in working capital and regulatory assets and liabilities: | ||||||||||||||||||||||||
Accounts receivable | (6,571,491 | ) | (1,968,073 | ) | (4,603,418 | ) | (6,517,364 | ) | (6,571,491 | ) | 54,127 | |||||||||||||
Gas in storage | 4,424,994 | 4,638,418 | (213,424 | ) | 5,803,496 | 4,424,994 | 1,378,502 | |||||||||||||||||
WNA | (1,185,323 | ) | (1,817,155 | ) | 631,832 | (1,800,421 | ) | (1,185,323 | ) | (615,098 | ) | |||||||||||||
Customer credit balances | (735,093 | ) | 481,425 | (1,216,518 | ) | |||||||||||||||||||
Change in over (under) collection of gas costs | 986,486 | 2,055,884 | (1,069,398 | ) | ||||||||||||||||||||
Rate refund | — | (3,826,695 | ) | 3,826,695 | ||||||||||||||||||||
Supplier refunds | 2,660,147 | (66,156 | ) | 2,726,303 | ||||||||||||||||||||
Deferred taxes | 757,623 | 330,548 | 427,075 | (10,052,645 | ) | 757,623 | (10,810,268 | ) | ||||||||||||||||
Other | (553,624 | ) | (478,948 | ) | (74,676 | ) | (597,767 | ) | (236,075 | ) | (361,692 | ) | ||||||||||||
Net cash provided by operating activities | $ | 9,611,402 | $ | 11,168,131 | $ | (1,556,729 | ) | $ | 12,992,906 | $ | 9,611,402 | $ | 3,381,504 |
AsDue to rising natural gas commodity prices increased during the colder winterfiscal 2021 summer storage fill period, the average price of natural gas when storage withdrawals began was 42% higher than during the prior fiscal year. As a result, the value of the natural gas draw downs was more than $1.3 million greater resulting in an increase in operating cash. Furthermore, significant supplier refunds, resulting from rate case settlements, were received from the interstate pipelines that supply the Company with natural gas as a result of settlement of rate cases. These refunds will be passed through to Roanoke Gas' customers over the next twelve months, the Company’s gas cost recovery moved from an over-collected position at March 31, 2020 to an under-collected positionstarting in 2021, drivingJuly 2022. The Company experienced a $1.1 millionsignificant decrease in operating cash flow. In addition, increased natural gas commodity prices resulted in higher Roanoke Gas billing rates as compared to the prior year. These higher billing rates, in combination with higher customer arrearagesnet deferred tax liabilities related to the moratorium$10.2 million deferred tax asset recognized as noteda result of the impairment of the investment in the "Regulatory" section above, resultedLLC. When netted against the non-cash impairment charge, the combined amounts offset the decline in a $4.6 million decrease in operating cash flow. Fiscal 2020 also had non-cash expense for the write-down and amortization of ESAC regulatory assets. These significant decreases were partially offset by a $3.8 million increase in operating cash flow related to the rate refund applied to customer accounts in the prior year.net income year-over-year.
Cash Flows Used in by Investing Activities:
Investing activities are generally composedprimarily consist of expenditures related to investment in the Company'sRoanoke Gas' utility plant, projects, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG peak shaving plant and gas distribution system facilities expanding theand expansion of its natural gas system to meet the demands of customer growth, as well as theMidstream's continued investment in the MVP.LLC. The Company is continuing its focus on SAVE infrastructure replacement projects, including the replacement of pre-1973 first generation plastic pipe and extending the natural gas distribution system to unserved developments within its existing service territory. TotalRoanoke Gas' total capital expenditures for the six monthssix-months ended March 31, 20212022 were $9.0approximately $10.8 million compared to $10.4$9.0 million during the same period last year. Capital expenditures for fiscal 20212022 are expected to remain consistent withincrease approximately $5 million over the prior year.
Investing cash flows also include the Company's continued funding ofyear due to a one-time gas supply infrastructure project. Midstream will continue its participationinvestments in the MVP, with a total cash investment of $2.7 millionLLC for the six months ended March 31, 2021, or less than halfpurposes of maintaining the amountsystem currently in place until such time as construction activities resume and the pipeline is placed in service. The investment for the balance of the current fiscal year is expected to be below the corresponding investment during the same period last year, as a result of reduced pipeline construction activity.year.
RGC RESOURCES, INC. AND SUBSIDIARIES
Cash Flows Provided by Financing Activities:
Financing activities generally consist of long-term notes payable and line-of-credit borrowings and repayments under credit agreements, issuance of stock and the payment of dividends. Net cash flows provided by financing activities were $2.5$9.2 million, for the six months ended March 31, 2021,2022, compared to $7.4$2.5 million for the same period last year. The decreaseincrease in financing cash flows is primarily attributable to reduced borrowings, relatedResources' $27 million equity offering in March 2022 of which $12 million was invested in Roanoke Gas and $10 million in Midstream. In part due to lower capital contribution requirementsthese cash injections and due to fund Midstream's investment in the MVP and the December 2019 placement of unsecured notes providing financing for Roanoke Gas' capital budget.issuance of a $15 million note and Midstream's $8 million note, Roanoke Gas was able to pay down its line-of-credit balance and maturing $7 million note and Midstream applied $18 million against its credit facility during the current fiscal year.
On March 25,September 24, 2021, Roanoke Gas renewed itsentered into an unsecured line-of-credit agreement, which was scheduled to expire March 31, 2022. The new agreement is for a two-year term expiring March 31, 2023Delayed Draw Term Note in the principal amount of $10 million with a maximum borrowing limit of $40,000,000. Amounts drawn against the agreement are considered to be non-current as the balance under the line-of-credit is not subject to repayment within the next 12-month period. The agreement has a variablean interest rate based on 30-day LIBOR plus 100 basis points andmaturing on October 1, 2028. Related to this note, the Company also entered into an availability feeinterest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 152.49%. Roanoke Gas received the first installment of $5 million on April 1, 2022 with the remaining $5 million to be received on or about October 1, 2022.
On August 20, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $15 million with an interest rate of 1.20% above the 30-day SOFR Average per annum maturing on August 20, 2026. Related to this note, the Company also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.00%. The term note funded on October 1, 2021.
On November 1, 2021 Midstream entered into an unsecured promissory note in the principal amount of $8 million with an interest rate based on 30-day LIBOR plus 115 basis points maturing January 1, 2028. Related to this note, Midstream also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.443%. The loan will convert into an installment loan with principal pay-down beginning in fiscal 2023. In addition, this note reduces the borrowing capacity defined by the Third Amendment to Credit Agreement and related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the new promissory note. All other terms of the Third Amendment to Credit Agreement remain unchanged.
On March 31, 2022, Roanoke Gas entered into an unsecured line-of-credit agreement replacing the line-of-credit agreement dated March 25, 2021. The agreement provides multi-tieredfor a variable interest rate based upon Daily Simple SOFR plus 1.10% and multiple tier borrowing limits associated with theto accommodate seasonal borrowing demands of the Company.demands. The Company's total available borrowing limits during the term of the line-of-credit agreement range from $14,000,000$21 million to $40,000,000.$33 million. Unlike the prior two year line-of-credit agreement, the current line-of-credit agreement is for one year and will expire on March 31, 2023, unless extended. The Company anticipates being able to extend or replace the credit line upon expiration. As of March 31, 2022, the Company had no outstanding balance under its line-of-credit agreement.
In connection with the line-of-credit, the Company also entered into the Seventh Amendment to Credit Agreement as of March 31, 2022, which amends the original Credit Agreement dated March 31, 2016 and all subsequent amendments. The Amendment aligns the termination date, maximum principal amount available under the line-of-credit, amends certain financial conditions required of Resources, and retains all other terms and requirements of prior credit agreements. This Amendment modifies the interest coverage ratio calculation to exclude the effect of non-cash impairments on the investment in the LLC up to the total investment balance as of December 31, 2021.
RGC RESOURCES, INC. AND SUBSIDIARIES
In March 2022, the Company issued 1,350,000 shares of common stock in an equity offering resulting in net proceeds of nearly $27 million. The Company issued the common stock to strengthen its balance sheet by increasing the equity component of its total capitalization ratio. The net proceeds were invested in Roanoke Gas to supplement the funding of its infrastructure improvement and replacement program and in Midstream to reduce its outstanding debt. An additional 64,803 shares of common stock have been issued during fiscal 2022 related to the DRIP, Restricted Stock, stock option exercises and ATM activity.
On March 31, 2022, Midstream applied $10 million from a cash infusion received from Resources related to the $27 million equity issue to pay down a corresponding amount on the non-revolving credit facility, which in turn further reduced the total borrowing capacity to $23 million with an outstanding balance of $19.3 million as of March 31, 2022. Currently, Midstream's credit facility matures on December 29, 2022. Management is in discussions with the lenders regarding the extension of the due date related to these notes. As of the date of this filing, no extension has been finalized.
Management regularly evaluates the Company’s liquidity through a review of its available financing resources. Management continually monitors the impact of COVID-19resources on its operating cash flows; however, managementflows. Management believes it has positioned the Company with access to withstand any negative repercussions with sufficient financing resources to meet its cash requirements over the next year. The line-of-credit agreement will continue to provide the needed working capital and the ATM program will allow for potential supplemental equity funding as market conditions allow. Furthermore, the Company can draw funds under one of itsRoanoke Gas' two private shelf facility credit agreements or adjust Roanoke Gas’ capital spending to reduce funding requirements if necessary.
Midstream has borrowing capacity of $41 million under its current credit facility, which matures in December 2022. As of March 31, 2021, $29.3 million had been utilized. This credit facility will provide additional financing capacity for MVP funding; however, due to ongoing delays, additional financing may be required. For further discussion regarding Midstream's borrowing capacity, see the "Equity Investment in Mountain Valley Pipeline" section above.
In combination, all of these factors should allow the Company to continue to operate effectively and meet its obligations as they occur.
As of March 31, 2021,2022, Resources' long-term capitalization ratio was 43%46% equity and 57%54% debt.
RGC RESOURCES, INC. AND SUBSIDIARIES
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
RGC RESOURCES, INC. AND SUBSIDIARIES
ITEM 4 – CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are identified, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.
Through March 31, 2021,2022, the Company has evaluated, under the supervision and with the participation of management, including the chief executive officer and the interim chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021.2022.
Management routinely reviews the Company’s internal control over financial reporting and makes changes, as necessary, to enhance the effectiveness of the internal controls. There were no control changes during the fiscal quarter ended March 31, 2021,2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
RGC RESOURCES, INC. AND SUBSIDIARIES
Part II – Other Information
ITEM 1 – LEGAL PROCEEDINGS
No material proceedings.
ITEM 1A – RISK FACTORS
There have been no material changes fromThe Company has updated the following risk factorsfactor as previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2020.2021 and subsequent revision on the Form 10-Q for the quarter ended December 31, 2021.
Investment in Mountain Valley Pipeline, LLC.
On January 25, 2022, the Fourth Circuit vacated and remanded on specific issues certain permits issued by the Bureau of Land Management and the U.S. Forest Service to the LLC in respect to the Jefferson National Forest. On February 3, 2022, the Fourth Circuit vacated and remanded on specific issues the Biological Opinion and Incidental Take Statement issued by the U.S. Fish and Wildlife Service for MVP. Due to the greater uncertainty of the ultimate completion and commercial operation of MVP, the in-service target of summer 2022 was withdrawn. Additionally, the Company, after assessing the fair value of its investment in the project, using probability-weighted scenarios of ultimate completion and commercial operation, including discounted future cash flows, concluded that an other-than-temporary decline in fair value existed as of February 22, 2022. The resulting impairment loss was recorded in the Company’s second quarter 2022 financial statements. Future circumstances, including but not limited to significant construction delays, further denials of necessary permits and approvals, changes in the probability of ultimate completion, changes in future cash flow assumptions or changes in the discount rate could lead to further and possibly full impairment of the Company's investment in the LLC.
The success of the Company's investment in the LLC is predicated on several key factors including but not limited to the ability of all investors to meet their capital calls when due, timely state and federal approvals and resolving legal challenges to same and completing the construction of the pipeline. Any significant delay, cost over-run or the failure to receive the requisite approvals on a timely basis, or at all, could have a significant effect on the Company's earnings and financial position.
Although the LLC initially received the necessary federal and state permits to construct the pipeline, progress on MVP has been hindered by several legal and regulatory obstacles as the Fourth Circuit, FERC and other governmental agencies have vacated certain agency actions and issued stays, stop orders or delayed authorizations affecting portions or all of the project pending resolution of issues or concerns raised as the project has progressed. In addition to needing to address the matters referenced above regarding the Jefferson National Forest and Biological Opinion and Incidental Take Statement, other regulatory and legal matters continue to affect the project.
RGC RESOURCES, INC. AND SUBSIDIARIES
Ongoing obstacles as discussed above have in the past caused, and may (or possible future obstacles) in the future cause, delays in construction and have resulted, and may further result, in significantly higher projected costs and an extended targeted in-service date for the pipeline. These cost overruns may not be approved for recovery or be recovered through other regulatory mechanisms, and the LLC could be obligated to make delay or termination payments or be responsible for other contractual damages. The LLC could also experience the loss of tax incentives, or delayed or diminished returns, and could be required to write-off all or a portion of its investment in the project. New or extended regulatory, legislative or judicial actions or challenges could lead to additional delays and even higher costs, which could affect future returns for the LLC and materially impact Resources consolidated financial position and results of operations, including Resources ability to pay shareholder dividends at the current level or remain in compliance with credit agreement covenants. There is no guarantee that the LLC will ultimately (or timely) receive all necessary authorizations or that such authorizations will be maintained in effect following challenge, or even after MVP is placed in service.
In addition, there are numerous risks facing the LLC, which can adversely affect the Company's earnings and financial performance through its investment. The LLC's ability to retain contract crews to complete construction of the pipeline, the inability to obtain or renew ancillary licenses, rights-of-way, permits or other approvals and opposition from pipeline opponents and environmental groups could all influence the successful completion of the pipeline. Should the LLC be unable to adequately address these issues, the LLC’s business, financial condition, results of operations and prospects could be adversely affected, which could materially impact the financial condition and results of operations of the Company. Any failure to negotiate successful project development agreements for new facilities with third parties could have similar results.
Once in operation, the LLC’s gas infrastructure facilities are subject to many operational risks. Operational risks could result in, among other things, lost revenues due to prolonged outages, increased expenses due to monetary penalties or fines for compliance failures, liability to third parties for property and personal injury damage, a failure to perform under applicable sales agreements and associated loss of revenues from terminated agreements or liability for liquidated damages under continuing agreements. The consequences of these risks could have a material adverse effect on the LLC’s business, financial condition, results of operations and prospects. Uncertainties and risks inherent in operating and maintaining the LLC's facilities include, but are not limited to, risks associated with facility start-up operations, such as whether the facility will achieve projected operating performance on schedule and otherwise as planned. The LLC’s business, financial condition, results of operations and prospects can be materially adversely affected by weather conditions, including, but not limited to, the impact of severe weather. Threats of terrorism and catastrophic events resulting from terrorism, cyber-attacks, or individuals and/or groups attempting to disrupt the LLC’s business, or the businesses of third parties, may materially adversely affect the LLC’s business, financial condition, results of operations and prospects.
RGC RESOURCES, INC. AND SUBSIDIARIES
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
RGC RESOURCES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RGC Resources, Inc. | ||||||||
Date: May | By: | /s/ | ||||||
| ||||||||
Vice President, | ||||||||
(Principal Financial Officer) |