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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| Form | |
| (Mark One) |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For Quarterly Period Ended
| 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
| RGC Resources, Inc. | ||
| (Exact name of Registrant as Specified in its Charter) |
| | |
| (State or Other Jurisdiction of | (I.R.S. Employer |
| | |
| (Address of Principal Executive Offices) | (Zip Code) |
(
(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 | ||||||
| | | |
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.
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).
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 | ☐ | |||||||||||
| | ☒ | 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
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 January 31 2022 |
| Common Stock, $5 Par Value | |
GLOSSARY OF TERMS
| AFUDC |
Allowance for Funds Used During Construction |
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| AOCI/AOCL |
Accumulated Other Comprehensive Income (Loss) |
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| ARO |
Asset Retirement Obligation |
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| 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 |
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| ARPA | American Rescue Plan Act of 2021 | |||
| ASC |
Accounting Standards Codification |
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| ASU |
Accounting Standards Update as issued by the FASB |
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| 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 |
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| Company |
RGC Resources, Inc. or Roanoke Gas Company |
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| COVID-19 or Coronavirus |
A pandemic disease that causes respiratory illness similar to the flu with symptoms such as coughing, fever, and in more severe cases, difficulty in breathing | |||
| CPCN |
Certificate of Public Convenience and Necessity |
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| Diversified Energy |
Diversified Energy Company, a wholly-owned subsidiary of Resources |
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| DRIP |
Dividend Reinvestment and Stock Purchase Plan of RGC Resources, Inc. |
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| DTH |
Decatherm (a measure of energy used primarily to measure natural gas) |
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| EPS |
Earnings Per Share |
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| ERISA |
Employee Retirement Income Security Act of 1974 |
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| 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 |
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| FASB |
Financial Accounting Standards Board |
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| FDIC |
Federal Deposit Insurance Corporation |
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| FERC |
Federal Energy Regulatory Commission |
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| Fourth Circuit |
U.S. Fourth Circuit Court of Appeals |
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| GAAP |
Generally Accepted Accounting Principles in the United States |
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| 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 |
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| ICC |
Inventory carrying cost revenue, an SCC approved rate structure that mitigates the impact of financing costs on natural gas inventory |
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| IRS |
Internal Revenue Service |
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| KEYSOP |
RGC Resources, Inc. Key Employee Stock Option Plan |
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| 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 |
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| LLC |
Mountain Valley Pipeline, L.L.C., a joint venture established to design, construct and operate the Mountain Valley Pipeline and MVP Southgate |
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| 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 |
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| MGP |
Manufactured gas plant |
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| Midstream |
RGC Midstream, L.L.C., a wholly-owned subsidiary of Resources created to invest in pipeline projects including MVP and Southgate |
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| 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 |
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| NQDC Plan |
RGC Resources, Inc. Non-qualified Deferred Compensation Plan |
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| Normal Weather |
The average number of heating degree days over the most recent 30-year period |
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| PBGC |
Pension Benefit Guaranty Corporation |
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| Pension Plan |
Defined benefit plan that provides pension benefits to employees hired prior to January 1, 2017 who meet certain years of service criteria |
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| 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 |
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| 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 |
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| 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 |
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| RGCO |
Trading symbol for RGC Resources, Inc. on the NASDAQ Global Stock Market |
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| Roanoke Gas |
Roanoke Gas Company, a wholly-owned subsidiary of Resources |
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| RSPD |
RGC Resources, Inc. Restricted Stock Plan for Outside Directors |
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| RSPO |
RGC Resources, Inc. Restricted Stock Plan for Officers |
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| 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 |
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| 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 mechanism |
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| 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 |
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| SCC |
Virginia State Corporation Commission, the regulatory body with oversight responsibilities of the utility operations of Roanoke Gas |
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| SEC |
U.S. Securities and Exchange Commission |
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| 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 |
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| S&P 500 Index |
Standard & Poor’s 500 Stock Index |
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| TCJA |
Tax Cuts and Jobs Act of 2017 |
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| WNA |
Weather Normalization Adjustment, an ARP mechanism which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average |
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| Some of the terms above may not be included in this filing |
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | September 30, | |||||||
| Unaudited | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (less allowance for uncollectibles of $, and $, respectively) | ||||||||
| Materials and supplies | ||||||||
| Gas in storage | ||||||||
| Prepaid income taxes | ||||||||
| Regulatory assets | ||||||||
| Interest rate swap | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| UTILITY PROPERTY: | ||||||||
| In service | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| In service, net | ||||||||
| Construction work in progress | ||||||||
| Utility plant, net | ||||||||
| OTHER ASSETS: | ||||||||
| Regulatory assets | ||||||||
| Investment in unconsolidated affiliates | ||||||||
| Benefit plan assets | ||||||||
| Interest rate swap | ||||||||
| Other | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | September 30, | |||||||
| Unaudited | 2021 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Dividends payable | ||||||||
| Accounts payable | ||||||||
| Capital contributions payable | ||||||||
| Customer credit balances | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Interest rate swaps | ||||||||
| Regulatory liabilities | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM DEBT: | ||||||||
| Notes payable | ||||||||
| Line-of-credit | ||||||||
| Less unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Long-term debt, net | ||||||||
| DEFERRED CREDITS AND OTHER LIABILITIES: | ||||||||
| Interest rate swaps | ||||||||
| Asset retirement obligations | ||||||||
| Regulatory cost of retirement obligations | ||||||||
| Benefit plan liabilities | ||||||||
| Deferred income taxes | ||||||||
| Regulatory liabilities | ||||||||
| Total deferred credits and other liabilities | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Common stock, $ par; authorized shares; issued and outstanding and shares, respectively | ||||||||
| Preferred stock, par, authorized shares; shares issued and outstanding | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
| Three Months Ended December 31, |
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| 2021 |
2020 |
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| OPERATING REVENUES: |
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| Gas utility |
$ | $ | ||||||
| Non utility |
||||||||
| Total operating revenues |
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| OPERATING EXPENSES: |
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| Cost of gas - utility |
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| Cost of sales - non utility |
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| Operations and maintenance |
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| General taxes |
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| Depreciation and amortization |
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| Total operating expenses |
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| OPERATING INCOME |
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| Equity in earnings of unconsolidated affiliate |
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| Other income, net |
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| Interest expense |
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| INCOME BEFORE INCOME TAXES |
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| INCOME TAX EXPENSE |
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| NET INCOME |
$ | $ | ||||||
| BASIC EARNINGS PER COMMON SHARE |
$ | $ | ||||||
| DILUTED EARNINGS PER COMMON SHARE |
$ | $ | ||||||
| DIVIDENDS DECLARED PER COMMON SHARE |
$ | $ | ||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
| Three Months Ended December 31, |
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| 2021 |
2020 |
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| NET INCOME |
$ | $ | ||||||
| Other comprehensive income (loss), net of tax: |
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| Interest rate swaps |
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| Defined benefit plans |
( |
) | ||||||
| OTHER COMPREHENSIVE INCOME, NET OF TAX |
||||||||
| COMPREHENSIVE INCOME |
$ | $ | ||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
| Three Months Ended December 31, 2021 | ||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Three Months Ended December 31, 2020 | ||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
| Balance - September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
| Three Months Ended December 31, |
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| 2021 |
2020 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Cost of retirement of utility plant, net |
( |
) | ( |
) | ||||
| Stock option grants |
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| Equity in earnings of unconsolidated affiliate |
( |
) | ( |
) | ||||
| Allowance for funds used during construction |
( |
) | ||||||
| Changes in assets and liabilities which used cash, exclusive of changes and noncash transactions shown separately |
( |
) | ( |
) | ||||
| Net cash provided by (used in) operating activites |
( |
) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Expenditures for utility property |
( |
) | ( |
) | ||||
| Investment in unconsolidated affiliates |
( |
) | ( |
) | ||||
| Proceeds from disposal of utility property |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from issuance of unsecured notes |
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| Retirement of notes payable |
( |
) | ||||||
| Borrowings under line-of-credit |
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| Repayments under line-of-credit |
( |
) | ( |
) | ||||
| Debt issuance expenses |
( |
) | ||||||
| Proceeds from issuance of stock |
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| Cash dividends paid |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| NET INCREASE IN CASH AND CASH EQUIVALENTS |
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| BEGINNING CASH AND CASH EQUIVALENTS |
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| ENDING CASH AND CASH EQUIVALENTS |
$ | $ | ||||||
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 December 31, 2021, cash flows for the three months ended December 31, 2021 and 2020, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three months ended December 31, 2021 and 2020. The results of operations for the three months ended December 31, 2021 are not indicative of the results to be expected for the fiscal year ending September 30, 2022 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, 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, 2021. The September 30, 2021 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, 2021.
Recently Issued or Adopted Accounting Standards
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. The 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 anticipate adopting this guidance until later in fiscal 2022. 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.
RGC RESOURCES, INC. AND SUBSIDIARIES
| 2. | 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 December 31, 2021 | Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| Gas utility | Non utility | Total operating revenues | Gas utility | Non utility | Total operating revenues | |||||||||||||||||||
| Natural Gas (Billed and Unbilled): | ||||||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Industrial and Transportation | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total contracts with customers | ||||||||||||||||||||||||
| Alternative Revenue Programs | ||||||||||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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.
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.
RGC RESOURCES, INC. AND SUBSIDIARIES
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.
Customer Accounts Receivable
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, 2021 | $ | $ | $ | $ | ||||||||||||
| Balance at December 31, 2021 | ||||||||||||||||
| Increase (decrease) | $ | $ | $ | ( | ) | $ | ||||||||||
(1) Included in accounts receivable in the condensed consolidated balance sheet. Amounts shown net of reserve for bad debts.
The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts.
| 3. |
Income Taxes |
Resources' effective tax rate is lower than the combined statutory state and federal corporate tax rate due to the flowback of excess deferred income taxes and the amortization of tax credits from the regulated operations of Roanoke Gas in addition to the tax benefits from the exercise of stock options and vesting of restricted stock.
The Company's effective tax rate was
| 4. | Rates and Regulatory Matters |
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 deferred certain COVID-19 related costs during the first quarter 2022.
In October 2021, Roanoke Gas received notification that its application for ARPA funds had been approved. This notification allowed the pending receipt of these funds to be considered in the valuation of the estimated allowance for uncollectibles as of September 30, 2021. In November 2021, Roanoke Gas received over $
RGC RESOURCES, INC. AND SUBSIDIARIES
| 5. | Other Investments |
Midstream is an approximately
The LLC temporarily suspended accruing AFUDC on the project beginning January 1, 2021 and through March 31, 2021 due to a temporary reduction in growth construction activities. Beginning April 1, 2021, the LLC resumed accruing a limited amount of AFUDC associated with certain growth construction activities resuming through October 2021. AFUDC accruals were suspended in November 2021 and will resume when growth construction activities restart. The amount of AFUDC recognized during the current and prior period is included in the tables below.
Roanoke Gas will continue to suspend accruing AFUDC on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations. Roanoke Gas recognized $
Midstream is also a less than
Funding for Midstream's investments in the LLC for both the MVP and Southgate projects is being provided through variable rate unsecured promissory notes, under a non-revolving credit agreement, maturing in December 2022, and three additional notes as detailed in Note 7.
The investments in the LLC are included in the accompanying financial statements as follows:
| Balance Sheet location: | December 31, 2021 | September 30, 2021 | ||||||
| Other Assets: | ||||||||
| MVP | $ | $ | ||||||
| Southgate | ||||||||
| Investment in unconsolidated affiliates | $ | $ | ||||||
| Current Liabilities: | ||||||||
| MVP | $ | $ | ||||||
| Southgate | ||||||||
| Capital contributions payable | $ | $ | ||||||
| Three Months Ended | ||||||||
| Income Statement location: | December 31, 2021 | December 31, 2020 | ||||||
| Equity in earnings of unconsolidated affiliate | $ | $ | ||||||
| December 31, 2021 | September 30, 2021 | |||||||
| Undistributed earnings, net of income taxes, of MVP in retained earnings | $ | $ | ||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
The change in the investment in unconsolidated affiliates is provided below:
| Three Months Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Cash investment | $ | $ | ||||||
| Change in accrued capital calls | ( | ) | ( | ) | ||||
| Equity in earnings of unconsolidated affiliate | ||||||||
| Change in investment in unconsolidated affiliates | $ | $ | ||||||
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 | ||||||||
| Three Months Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| AFUDC | $ | $ | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| Net income | $ | $ | ||||||
| Balance Sheets | ||||||||
| December 31, 2021 | September 30, 2021 | |||||||
| Assets: | ||||||||
| Current assets | $ | $ | ||||||
| Construction work in progress | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity: | ||||||||
| Current liabilities | $ | $ | ||||||
| Noncurrent liabilities | ||||||||
| Capital | ||||||||
| Total liabilities and equity | $ | $ | ||||||
| 6. | 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
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 8 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.
| 7. | Long-Term Debt |
On November 1, 2021 Midstream entered into an unsecured promissory note in the principal amount of $
On September 24, 2021, Roanoke Gas entered into a Loan Agreement ("Agreement") and an unsecured Delayed Draw Promissory Note in the principal amount of $
On August 20, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $
RGC RESOURCES, INC. AND SUBSIDIARIES
Long-term debt consists of the following:
| December 31, 2021 | September 30, 2021 | |||||||||||||||
| Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||
| Roanoke Gas: | ||||||||||||||||
| Unsecured senior notes payable, at %, due September 18, 2034 | $ | $ | $ | $ | ||||||||||||
| Unsecured term note payable, at 30-day LIBOR plus %, due November 1, 2021 | ||||||||||||||||
| Unsecured term notes payable, at %, due October 2, 2027 | ||||||||||||||||
| Unsecured term notes payable, at %, due March 28, 2031 | ||||||||||||||||
| Unsecured term notes payable, at %, due December 6, 2029 | ||||||||||||||||
| Unsecured term note payable, at 30-day SOFR plus %, due August 20, 2026 | — | |||||||||||||||
| Unsecured delayed draw note payable | ||||||||||||||||
| Midstream: | ||||||||||||||||
| Unsecured term notes payable, at 30-day LIBOR plus %, due December 29, 2022 | ||||||||||||||||
| Unsecured term note payable, at 30-day LIBOR plus %, due June 12, 2026 | ||||||||||||||||
| Unsecured term note payable, at 30-day LIBOR plus %, due June 1, 2024 | ||||||||||||||||
| Unsecured term note payable, at 30-day LIBOR plus %, due January 1, 2028 | — | |||||||||||||||
| Total notes payable, current and non-current | ||||||||||||||||
| Line-of-credit, at 30-day LIBOR plus %, due March 31, 2023 | — | — | ||||||||||||||
| Total long-term debt | ||||||||||||||||
| Less: current maturities of long-term debt | ( | ) | — | ( | ) | — | ||||||||||
| Total long-term debt, net current maturities | $ | $ | $ | $ | ||||||||||||
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
RGC RESOURCES, INC. AND SUBSIDIARIES
| 8. | Other Comprehensive Income (Loss) |
A summary of other comprehensive income and loss is provided below:
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| Amount | or Benefit | Amount | ||||||||||
| Three Months Ended December 31, 2021 | ||||||||||||
| Interest rate swaps: | ||||||||||||
| Unrealized gains | $ | $ | ( | ) | $ | |||||||
| Transfer of realized losses to interest expense | ( | ) | ||||||||||
| Net interest rate swaps | ( | ) | ||||||||||
| Defined benefit plans: | ||||||||||||
| Amortization of actuarial gains | ( | ) | ( | ) | ||||||||
| Other comprehensive income | $ | $ | ( | ) | $ | |||||||
| Three Months Ended December 31, 2020 | ||||||||||||
| Interest rate swaps: | ||||||||||||
| Unrealized gains | $ | $ | ( | ) | $ | |||||||
| Transfer of realized losses to interest expense | ( | ) | ||||||||||
| Net interest rate swaps | ( | ) | ||||||||||
| Defined benefit plans: | ||||||||||||
| Amortization of actuarial losses | ( | ) | ||||||||||
| Other comprehensive income | $ | $ | ( | ) | $ | |||||||
The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company. Actuarial gains and losses attributable to the regulated operations are included as a regulatory asset. See Note 14 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.
Reconciliation of Accumulated Other Comprehensive Income (Loss)
| Accumulated | ||||||||||||
| Other | ||||||||||||
| Interest Rate | Defined Benefit | Comprehensive | ||||||||||
| Swaps | Plans | Income (Loss) | ||||||||||
| Balance at September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive income (loss) | ( | ) | ||||||||||
| Balance at December 31, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
RGC RESOURCES, INC. AND SUBSIDIARIES
| 9. |
Commitments and Contingencies |
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 return to mostly normal operating conditions. Restrictions implemented as a result of the pandemic have eased, allowing for increased business, recreational and travel activities. Natural gas consumption by the Company’s commercial customers has largely returned to pre-pandemic levels. However, recent surges in COVID-19 infections could result in the reinstatement of some or all of the restrictions previously in place. 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.
| 10. | Earnings Per Share |
Basic earnings per common share for the three months ended December 31, 2021 and 2020 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 December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Weighted average common shares | ||||||||
| Effect of dilutive securities: | ||||||||
| Options to purchase common stock | ||||||||
| Diluted average common shares | ||||||||
| Earnings per share of common stock: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
| 11. | 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 | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Components of net periodic pension cost: | ||||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ) | ( | ) | ||||
| Recognized loss | ||||||||
| Net periodic pension cost | $ | ( | ) | $ | ||||
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Components of postretirement benefit cost: | ||||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ) | ( | ) | ||||
| Recognized loss | ||||||||
| Net postretirement benefit cost | $ | ( | ) | $ | ||||
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 | $ | $ | ||||||
| Postretirement plan | ||||||||
| Total | $ | $ | ||||||
| 12. | 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 - December 31, 2021 | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices | Other | Significant | ||||||||||||||
| in Active | Observable | Unobservable | ||||||||||||||
| Fair | Markets | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Interest rate swap | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Natural gas purchases | $ | $ | $ | $ | ||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 December 31, 2021 and September 30, 2021, 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.
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 - December 31, 2021 | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices | Other | Significant | ||||||||||||||
| in Active | Observable | Unobservable | ||||||||||||||
| Carrying | Markets | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||||
| Notes payable | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements - September 30, 2021 | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices | Other | Significant | ||||||||||||||
| in Active | Observable | Unobservable | ||||||||||||||
| Carrying | Markets | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||||
| Notes payable | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 December 31, 2021 and September 30, 2021,
| 13. | 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.
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 December 31, 2021 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||
| Depreciation | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Equity in earnings | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Three Months Ended December 31, 2020 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||
| Depreciation | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Equity in earnings | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| September 30, 2021 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
| 14. | 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:
| December 31, 2021 | September 30, 2021 | |||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Regulatory assets: | ||||||||
| Accrued WNA revenues | $ | $ | ||||||
| Under-recovery of gas costs | ||||||||
| Under-recovery of SAVE Plan revenues | ||||||||
| Accrued pension and postretirement medical | ||||||||
| Other deferred expenses | ||||||||
| Total current | ||||||||
| Utility Property: | ||||||||
| In service: | ||||||||
| Other | ||||||||
| Construction work in progress: | ||||||||
| AFUDC | ||||||||
| Other Assets: | ||||||||
| Regulatory assets: | ||||||||
| Premium on early retirement of debt | ||||||||
| Accrued pension and postretirement medical | ||||||||
| Other deferred expenses | ||||||||
| Total non-current | ||||||||
| Total regulatory assets | $ | $ | ||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
Regulatory liabilities included in the Company’s accompanying balance sheets are as follows:
| December 31, 2021 | September 30, 2021 | |||||||
| Liabilities and Stockholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Regulatory liabilities: | ||||||||
| Deferred income taxes | $ | $ | ||||||
| Other deferred liabilities | ||||||||
| Total current | ||||||||
| Deferred Credits and Other Liabilities: | ||||||||
| Asset retirement obligations | ||||||||
| Regulatory cost of retirement obligations | ||||||||
| Regulatory Liabilities: | ||||||||
| Deferred income taxes | ||||||||
| Total non-current | ||||||||
| Total regulatory liabilities | $ | $ | ||||||
As of December 31, 2021 and September 30, 2021, the Company had regulatory assets in the amount of $
| 15. |
Subsequent Events |
On January 25, 2022, the Fourth Circuit vacated 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 the Biological Opinion and Incidental Take Statement issued by the U.S. Fish and Wildlife Service for the MVP project. The full impact of these decisions is not yet known and the LLC is continuing to evaluate these developments, including effects to the project timing and costs. Further, management will continue monitoring the status of the project for circumstances that may lead to future impairment of the Company’s investment in the LLC, including but not limited to significant construction delays or further denials of necessary permits and approvals. The amount and timing of any such impairment would depend on the specific circumstances.
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’s condensed 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 2021 Annual Report on Form 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 earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2022. The total revenues and margins realized during the first three months reflect higher billings due to the weather sensitive nature of the natural gas business.
COVID-19
As discussed under Item 1A "Risk Factors" in the Company’s 2021 Annual Report on Form 10-K, COVID-19 and the resulting pandemic continues to impact the local, state, national and global economies. Supply chain disruptions, labor shortages and inflation have continued as the primary examples of matters impacting economic conditions. Significant progress was made in distributing and administering vaccines to the public through December 31, 2021, which has allowed a return to mostly normal operating conditions. Most restrictions implemented as a result of the pandemic have been eased, including Virginia’s state of emergency, allowing for increased business, recreational and travel activities. Natural gas consumption by the Company’s commercial customers has largely returned to pre-pandemic levels. However, the easing of restrictions and the existence of variant strains of COVID-19 have led to a rise in infections nationally and throughout the Company’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.
See the Regulatory section below for information regarding the service disconnection moratorium, CARES Act and ARPA funds.
The full extent to which the COVID-19 pandemic will impact the Company depends on future developments, which are highly uncertain and cannot be reasonably predicted, including the increase or reduction in governmental restrictions to businesses and individuals, the potential resurgence of the 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. Roanoke Gas also provides certain unregulated services. As a wholly-owned subsidiary of Resources, Midstream is a more than 1% investor in the MVP and a less than 1% investor in Southgate. More information regarding the investment in MVP is provided under the Equity Investment in Mountain Valley Pipeline section below.
The utility operations of Roanoke Gas are regulated by the SCC, which oversees the terms, conditions, and rates 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 services. In addition, Roanoke Gas is subject to other regulations which are not necessarily industry specific.
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 the Company'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 qualified 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. 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 Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until a formal rate application is filed to incorporate these investments in non-gas base rates. The SAVE Plan and Rider were reset effective January 2019, when the recovery of all prior SAVE Plan investment was incorporated into the current non-gas rates. Accordingly, SAVE Plan revenues increased by approximately $223,000 during the three month period ended December 31, 2021 compared to the same period last year. The increases in SAVE revenues reflect the Company's cumultative investment in qualified SAVE Plan infrastructure since the SAVE Plan and Rider were last updated.
The WNA model reduces the volatility in earnings due to the 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. 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 months ended December 31, 2021, the Company accrued approximately $1,244,000 in additional revenues under the WNA model for weather that was nearly 22% warmer than normal, compared to approximately $947,000 in additional revenue for weather that was 16% warmer than normal during the same period last year.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company also has an approved rate structure in place that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, 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, to the average cost of natural gas inventory during the period. Total ICC revenues increased by approximately $51,000 for the three month period ended December 31, 2021, compared to the corresponding period last year, as rising natural gas commodity prices during the summer storage refill period resulted in a higher average cost of natural gas in storage.
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. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs based on a quarterly filing, or more frequent if necessary, with the 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 amounts are reflected in customer billings.
The Company has recognized significant non-cash income from equity in earnings of MVP in the past through recording AFUDC. Effective January 1, 2021, the LLC suspended accruing AFUDC on the project due to a reduction in growth construction activities as it changed its approach in seeking authorization to cross all remaining streams and wetlands on the project route and due to various legal and regulatory challenges and requirements. Beginning in April 2021, the LLC resumed accruing a limited amount of AFUDC associated with certain growth construction activities through October 2021. AFUDC accruals were suspended in November 2021 for the winter season and will resume when growth construction activities restart. AFUDC accruals should continue during such growth construction activities upon their resumption until such time as MVP is placed in service. Once in-service, future earnings will be derived from fees to transport natural gas on the pipeline.
Subsequent to December 31, 2021, the Fourth Circuit took action to vacate certain permits required to complete the MVP, thereby creating potential uncertainty as to the timing of completion and the ultimate cost of the project. For more information, see Equity Investment in Mountain Valley Pipeline section below.
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 when Midstream's investment in affiliates represents a significant component of the comparison.
The 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 is passed through to customers at cost, 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. Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as utility revenues less cost of gas, 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 December 31, 2021:
Net income decreased by $1,138,734, or 24%, for the three months ended December 31, 2021, compared to the same period last year, primarily due to lower AFUDC earnings on the MVP investment.
RGC RESOURCES, INC. AND SUBSIDIARIES
The tables below reflect operating revenues, volume activity and heating degree-days.
| Three Months Ended December 31, |
||||||||||||||||
| 2021 |
2020 |
Increase / (Decrease) |
Percentage |
|||||||||||||
| Operating Revenues |
||||||||||||||||
| Gas Utility |
$ | 23,231,655 | $ | 19,483,500 | $ | 3,748,155 | 19 | % | ||||||||
| Non Utility |
31,425 | 33,517 | (2,092 | ) | (6 | )% | ||||||||||
| Total Operating Revenues |
$ | 23,263,080 | $ | 19,517,017 | $ | 3,746,063 | 19 | % | ||||||||
| Delivered Volumes |
||||||||||||||||
| Regulated Natural Gas (DTH) |
||||||||||||||||
| Residential and Commercial |
1,910,730 | 2,050,223 | $ | (139,493 | ) | (7 | )% | |||||||||
| Transportation and Interruptible |
777,441 | 816,656 | (39,215 | ) | (5 | )% | ||||||||||
| Total Delivered Volumes |
2,688,171 | 2,866,879 | $ | (178,708 | ) | (6 | )% | |||||||||
| HDD |
1,161 | 1,248 | (87 | ) | (7 | )% | ||||||||||
Total operating revenues for the three months ended December 31, 2021, compared to the same period last year, increased by 19% due to a combination of significantly higher natural gas commodity prices and pipeline and storage fees and an increase in SAVE revenues, partially offset by a decline in total delivered volumes. The Company experienced both rising natural gas prices over the last year and rate increases from the interstate pipelines and underground natural gas storage operators who deliver and store natural gas. The commodity price of natural gas increased by 54% per DTH, while the demand component (pipeline and storage fees) increased by 65% per DTH on lower natural gas deliveries. These higher costs are passed on to customers through the PGA mechanism. SAVE Plan revenues increased by approximately $223,000 due to the continuing investment in qualified SAVE infrastructure projects. The three months ended December 31, 2021 had 87, or 7%, fewer heating degree days than the same period last year, which resulted in a corresponding 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 the same as the WNA adjusted volumes in the prior year. Transportation and interruptible volumes, primarily driven by business activity rather than weather, declined by 5% due to a single multi-fuel customer that switched its primary fuel from natural gas to an alternate source in November 2020.
| Three Months Ended December 31, |
||||||||||||||||
| 2021 |
2020 |
Increase |
Percentage |
|||||||||||||
| Gross Utility Margin |
||||||||||||||||
| Gas Utility Revenues |
$ | 23,231,655 | $ | 19,483,500 | $ | 3,748,155 | 19 | % | ||||||||
| Cost of Gas - Utility |
11,316,405 | 7,700,699 | 3,615,706 | 47 | % | |||||||||||
| Gross Utility Margin |
$ | 11,915,250 | $ | 11,782,801 | $ | 132,449 | 1 | % | ||||||||
Gross utility margin increased from the same period last year as a result of the aforementioned higher SAVE revenues and higher ICC revenues, partially offset by the reduction in transportation and interruptible deliveries. ICC revenues increased by approximately $51,000 due to higher natural gas inventory balances attributable to rising natural gas commodity prices. As noted above, the lower margin transportation and interruptible volumes declined by 5% from the same period last year. Excluding the multi-fuel customer's usage from both periods, total transportation and interruptible volumes would have increased by 5%.
RGC RESOURCES, INC. AND SUBSIDIARIES
The components of and the change in gas utility margin are summarized below:
| Three Months Ended December 31, |
||||||||||||
| 2021 |
2020 |
Increase / (Decrease) |
||||||||||
| Customer Base Charge |
$ | 3,636,677 | $ | 3,622,465 | $ | 14,212 | ||||||
| Carrying Cost |
177,331 | 126,756 | 50,575 | |||||||||
| SAVE Plan |
727,373 | 504,698 | 222,675 | |||||||||
| Volumetric |
6,083,354 | 6,547,592 | (464,238 | ) | ||||||||
| WNA |
1,244,017 | 946,971 | 297,046 | |||||||||
| Other Revenues |
46,498 | 34,319 | 12,179 | |||||||||
| Total |
$ | 11,915,250 | $ | 11,782,801 | $ | 132,449 | ||||||
Operations and maintenance expenses increased by $188,192, or 5%, over the same period last year primarily due to higher bad debt expense and corporate insurance premiums. Bad debt expense increased for the quarter due to higher billings related to rising natural gas prices, while during the same period last year CARES Act funds offset bad debt expense. Corporate insurance premiums related to property and liability insurance increased by nearly $50,000, or 19%, due to insurance market conditions.
General taxes increased by $29,185, or 5%, primarily due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.
Depreciation expense increased by $117,296, or more than 5%, on a comparable increase in utility plant balances.
Equity in earnings of unconsolidated affiliate decreased by $1,284,556, as limited growth construction activities temporarily ceased at the end of October 2021. The same period last year included AFUDC recorded on the entire project throughout the quarter. The amount of AFUDC recognized in future periods will be dependent on the level and timing of construction activities required to complete the MVP. See Equity Investment in Mountain Valley Pipeline section below for additional information.
Other income, net decreased by $7,587, or 2%, primarily due to an approximately $86,000 decrease in the non-service cost components of net periodic benefit costs partially offset by the absence of the equity portion of AFUDC and reduction in the utilization 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. In the final order on the Company's 2019 non-gas rate application, the SCC allowed Roanoke Gas to defer financing costs related to the two natural gas transfer stations that will interconnect Roanoke Gas' distribution system with the MVP. Roanoke Gas temporarily ceased the recognition of AFUDC on these stations effective January 2021 until such time construction activites resume. The utilization fee under the revenue sharing agreement declined per the terms of the asset management agreement with Sequent Energy.
Interest expense increased by $85,027, or 8%, as the total average debt outstanding increased by 17% between quarters. The higher borrowing levels, derived from the ongoing investment in MVP and financing expenditures in support of Roanoke Gas' capital budget, were offset by an 8% reduction in the weighted-average interest rate on the Company's debt. Interest expense was also impacted by the absence of the debt portion of AFUDC related to Roanoke Gas' two gate stations during the current quarter.
Roanoke Gas' interest expense increased by $60,533 primarily due to a $14.8 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 3.53% to 3.23% associated with the issuance of the $15 million note on October 1, 2021 with a 2.0% swap adjusted rate.
RGC RESOURCES, INC. AND SUBSIDIARIES
Midstream's interest expense increased by $24,494 primarily due to a $7.2 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 2.40% to 2.27% associated with the decline in the average variable interest rate of Midstream's credit facility.
Income tax expense decreased by $441,400, corresponding to a 25% reduction in taxable income. The effective tax rate was 23.2% and 24.4% for the three month periods ended December 31, 2021 and 2020, respectively. The reduction in the effective tax rate is attributable to the amortization of the deferred R&D tax credit associated with the tax credit study and amended tax filings conducted in fiscal 2021.
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.
There have been no 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, 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 extended through March 31, 2023.
Equity Investment in Mountain Valley Pipeline
Recent construction activity has been limited based on legal and regulatory challenges. Although certain permits and authorizations were received in the first quarter of fiscal 2022, there remain pending challenges and authorization requests impacting current progress.
RGC RESOURCES, INC. AND SUBSIDIARIES
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’s CPCN that seeks FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods.
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 (such approvals or waivers, the State 401 Approvals). The State 401 Approvals were both issued in December 2021. In early June 2021, the FERC issued a notice of schedule for the LLC's CPCN amendment application. FERC issued its environmental assessment August 13, 2021. As discussed in Note 15 to the consolidated financial statements, in January 2022, the LLC’s authorizations related to the Jefferson National Forest (JNF) received from the Bureau of Land Management and the U.S. Forest Service were vacated by the Fourth Circuit. On February 3, 2022, the Fourth Circuit vacated the Biological Opinion and Incidental Take Statement issued by the United States Department of the Interior’s Fish and Wildlife Service for the MVP project. The full impact of these decisions is not yet known and the LLC is continuing to evaluate these developments.
In addition to addressing the authorizations in respect of the JNF, as well as the Biological Opinion and Incidental Take Statement, and any regulatory requirements as a result thereof, the LLC must, in order to complete the MVP project, among other things, timely receive (i) the Army Corps Individual Permit (as well as timely receive, as necessary, certain other state-level approvals) and (ii) authorization from the FERC to amend the CPCN to utilize alternative trenchless construction methods for certain stream and wetland crossings. The LLC also must (i) continue to have available the orders previously issued by the FERC modifying its prior stop work orders and extending the LLC’s prescribed time to complete the MVP project; 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 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 attributable to AFUDC income generated by the LLC. The LLC temporarily suspended the accrual of AFUDC on the project from January 1, 2021 (due to a temporary reduction in growth construction activities) through March 31, 2021. Limited growth construction activities resumed in April 2021, and the LLC began accruing AFUDC associated with those activities. The LLC suspended the accrual of AFUDC for the winter curtailment period, which began in November 2021, and will continue until such time as growth construction activities resume. Additionally, Roanoke Gas continues 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 conducted an assessment of its MVP investment 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 is not currently impaired as of December 31, 2021. Furthermore, the LLC has conducted its own evaluation of the project under ASC 360, Plant, Property and Equipment and concluded that no impairment exists as of December 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's completion. On March 11, 2021, the Fourth Circuit, 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. On December 3, 2021, the Virginia State Air Pollution Control Board denied the permit for the MVP Southgate project’s Lambert compressor station, which decision the LLC has appealed (and such appeal is pending). The LLC is continuing to evaluate these matters, as well as factors specific to the MVP project discussed in Note 15 to the consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
Regulatory
During much of fiscal 2021, Roanoke Gas operated under a service disconnection moratorium under which the Company was prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees; therefore, residential customers that ordinarily would have been disconnected for non-payment continued incurring charges for gas service. As a result, the Company’s arrearage balances reached historically high levels.
In December 2020, Roanoke Gas received $403,000 in CARES Act funds to assist customers with growing past due balances. The Company was able to apply the full amount to eligible customer accounts during the second and third fiscal quarters. In November 2021, Roanoke Gas received $858,556 in ARPA funds to assist customers with growing past due balances based on arrearage balances as of August 31, 2021. The Company was able to apply the full amount of these funds to customer accounts in 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 deferred certain COVID-19 related costs during the first quarter of fiscal 2022.
Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Rider. In May 2021, the Company filed its most recent SAVE application with the SCC to update the SAVE Plan and Rider for the period October 2021 through September 2022. The updated SAVE Rider is designed to collect approximately $3.45 million in annual revenues, an increase of approximately $1.1 million from the SAVE Rider in effect during fiscal 2021. The Company received a final order on August 25, 2021, in which the SCC approved the Company’s requested revenue requirement.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the related weather sensitivity, the Company’s primary capital needs are the funding of its capital projects, investment in the MVP, 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, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.
Cash and cash equivalents increased by $233,557 and $445,599 for the three-month periods ended December 31, 2021 and 2020, respectively. The following table summarizes the sources and uses of cash:
| Three Months Ended December 31, |
||||||||
| Cash Flow Summary |
2021 |
2020 |
||||||
| Net cash provided by (used in) operating activites |
$ | (3,544,766 | ) | $ | 152,910 | |||
| Net cash used in investing activities |
(7,832,913 | ) | (7,853,311 | ) | ||||
| Net cash provided by financing activities |
11,611,236 | 8,146,000 | ||||||
| Increase in cash and cash equivalents |
$ | 233,557 | $ | 445,599 | ||||
Cash Flows Provided by (Used in) 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. 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 three months ended December 31, 2021 decreased by $3,697,676 compared to the same period last year. The decrease was primarily driven by changes in accounts payable and accounts receivable.
The table below summarizes the significant operating cash flow components:
| Three Months Ended December 31, |
||||||||||||
| Cash Flow From Operating Activities: |
2021 |
2020 |
Increase / (Decrease) |
|||||||||
| Net income |
$ | 3,584,529 | $ | 4,723,263 | $ | (1,138,734 | ) | |||||
| Non-cash adjustments: |
||||||||||||
| Depreciation |
2,329,409 | 2,215,525 | 113,884 | |||||||||
| Equity in earnings |
(72,127 | ) | (1,356,683 | ) | 1,284,556 | |||||||
| AFUDC |
— | (55,980 | ) | 55,980 | ||||||||
| Changes in working capital and regulatory assets and liabilities: |
||||||||||||
| Accounts receivable |
(7,105,030 | ) | (6,513,338 | ) | (591,692 | ) | ||||||
| Accounts payable |
(1,320,430 | ) | 1,320,516 | (2,640,946 | ) | |||||||
| WNA |
(1,244,017 | ) | (935,992 | ) | (308,025 | ) | ||||||
| Deferred taxes |
265,238 | 702,747 | (437,509 | ) | ||||||||
| Other |
17,662 | 52,852 | (35,190 | ) | ||||||||
| Net cash provided by (used in) operating activites |
$ | (3,544,766 | ) | $ | 152,910 | $ | (3,697,676 | ) | ||||
Higher natural gas commodity prices, combined with the service disconnection moratorium that was in place during much of fiscal 2021, continue to drive accounts receivable balances higher year over year resulting in a $0.6 million decrease in operating cash flow. Related changes in accounts payable balances caused operating cash flow to decrease by $2.6 million compared to fiscal 2021. Accounts payable balances are typically higher in December than September because, as the cooler weather increases customer usage, the Company purchases higher gas volumes to meet customer demand. In fiscal 2022, a much warmer-than-normal December drove a decline in purchased gas volumes resulting in a lower accounts payable balance as compared to September 2021. Warmer weather increased WNA receivable balances during the period resulting in a $0.3 million decline in cash flows.
Cash Flows Used in Investing Activities:
Investing activities primarily consist of expenditures related to investment in Roanoke Gas' utility plant, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet the demands of customer growth, as well as Midstream's continued investment in the MVP. 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. Roanoke Gas' total capital expenditures for the three-months ended December 31, 2021 were approximately $5.7 million compared to $5.3 million during the same period last year. Capital expenditures for fiscal 2022 are expected to increase approximately $5 million over the prior year due to a one-time gas supply infrastructure project.
Midstream's total cash investment in the MVP decreased 15% to $2.1 million for the three months ended December 31, 2021, as compared to the same period in the prior year, as a result of reduced pipeline construction activity.
RGC RESOURCES, INC. AND SUBSIDIARIES
Cash Flows Provided by Financing Activities:
Financing activities generally consist of borrowings and repayments under credit agreements, issuance of stock and the payment of dividends. Net cash flows provided by financing activities were $11.6 million, for the three months ended December 31, 2021, compared to $8.1 million for the same period last year. The increase in financing cash flows is primarily attributable to increased borrowings, related to the fiscal 2022 net placement of $8 million in unsecured notes ($15 million issuance less a $7 million matured note) to provide financing for Roanoke Gas' capital budget and the funding requirements in Midstream's MVP investment.
On September 24, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $10 million with an interest rate based on 30-day LIBOR plus 100 basis points maturing on October 1, 2028. 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 2.49%. The term note will fund in two installments of $5 million each on April 1, 2022 and October 1, 2022, respectively.
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 December 1, 2027. 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.
Management regularly evaluates the Company’s liquidity through a review of its available financing resources including the impact of COVID-19 on its cash flows. Management believes it has positioned the Company with access to 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 supplemental equity funding as market conditions allow. Furthermore, the Company can draw funds under one of its two private shelf facility credit agreements or adjust Roanoke Gas’ capital spending to reduce funding requirements if necessary.
The Company did not issue any shares through its ATM program during the first fiscal quarter ended December 31, 2021. Management plans to utilize the ATM program going forward as market conditions allow.
Midstream has borrowing capacity of $33 million under its current credit facility, which matures in December 2022. As of December 31, 2021, $28.5 million had been utilized. This credit facility will provide additional financing capacity for MVP funding; however, due to ongoing delays, additional financing will be required. For further discussion regarding Midstream's borrowing capacity, see the "Equity Investment in Mountain Valley Pipeline" section above.
As of December 31, 2021, Resources' long-term capitalization ratio was 40% equity and 60% 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 December 31, 2021, 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 December 31, 2021.
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 December 31, 2021, 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
The Company has updated the following risk factor as previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2021.
Investment in Mountain Valley Pipeline, LLC.
On January 25, 2022, the Fourth Circuit vacated 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 the Biological Opinion and Incidental Take Statement issued by the U.S. Fish and Wildlife Service for the MVP project. The full impact of these decisions is not yet known, including effects to the project timing and costs. Future circumstances, including but not limited to significant construction delays or further denials of necessary permits and approvals, could lead to future 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 the 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, including that the LLC is currently waiting on resolution of the remaining permits needed for the streams and wetlands crossings and FERC has not yet granted a revised authorization to complete construction work in an eight mile section off the pipeline route.
Ongoing obstacles as discussed above have in the past caused, and may 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.
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.
RGC RESOURCES, INC. AND SUBSIDIARIES
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.
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. |
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| Date: February 7, 2022 |
By: |
/s/ Lawrence T. Oliver |
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| Lawrence T. Oliver |
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| Vice President, Interim Chief Financial Officer, Corporate Secretary and Treasurer |
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| (Principal Financial Officer) |
