RGCO 10-Q
Rgc Resources Inc (RGCO)
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 | ||||||
| C | | |
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 April 30, 2023 |
| Common Stock, $5 Par Value | |
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Page No. |
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| PART I. FINANCIAL INFORMATION |
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| Item 1. |
Financial Statements |
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME | |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | 5 |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | 6 | |
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7 | |
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II. OTHER INFORMATION |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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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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| 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 MVP and 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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| RNG | Renewable natural gas | |||
| 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 is a contemplated interstate pipeline that was approved by the FERC to extend 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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| 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
| March 31, 2023 | September 30, | |||||||
| Unaudited | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (less allowance for credit losses of $, and $, respectively) | ||||||||
| Materials and supplies | ||||||||
| Gas in storage | ||||||||
| Prepaid income taxes | ||||||||
| Regulatory assets | ||||||||
| Interest rate swaps | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| UTILITY PROPERTY: | ||||||||
| In service | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| In service, net | ||||||||
| Construction work in progress | ||||||||
| Utility property, net | ||||||||
| OTHER NON-CURRENT ASSETS: | ||||||||
| Regulatory assets | ||||||||
| Investment in unconsolidated affiliates | ||||||||
| Benefit plan assets | ||||||||
| Deferred income taxes | ||||||||
| Interest rate swaps | ||||||||
| Other | ||||||||
| Total other non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2023 | September 30, | |||||||
| Unaudited | 2022 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Dividends payable | ||||||||
| Accounts payable | ||||||||
| Capital contributions payable | ||||||||
| Customer credit balances | ||||||||
| Income taxes payable | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Regulatory liabilities | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM DEBT: | ||||||||
| Notes payable | ||||||||
| Less unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Long-term debt, net | ||||||||
| DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES: | ||||||||
| Asset retirement obligations | ||||||||
| Regulatory cost of retirement obligations | ||||||||
| Benefit plan liabilities | ||||||||
| Deferred income taxes | ||||||||
| Regulatory liabilities | ||||||||
| Total deferred credits and other non-current 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 income | ||||||||
| 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 March 31, |
Six Months Ended March 31, |
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| 2023 |
2022 |
2023 |
2022 |
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| OPERATING REVENUES: |
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| Gas utility |
$ | $ | $ | $ | ||||||||||||
| Non utility |
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| 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 (loss) of unconsolidated affiliate |
( |
) | ||||||||||||||
| Impairment of unconsolidated affiliates |
( |
) | ( |
) | ||||||||||||
| Other income, net |
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| Interest expense |
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| INCOME (LOSS) BEFORE INCOME TAXES |
( |
) | ( |
) | ||||||||||||
| INCOME TAX EXPENSE (BENEFIT) |
( |
) | ( |
) | ||||||||||||
| NET INCOME (LOSS) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| BASIC EARNINGS (LOSS) PER COMMON SHARE |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| DILUTED EARNINGS (LOSS) 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 March 31, |
Six Months Ended March 31, |
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| 2023 |
2022 |
2023 |
2022 |
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| NET INCOME (LOSS) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Other comprehensive income (loss), net of tax: |
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| Interest rate swaps |
( |
) | ( |
) | ||||||||||||
| Defined benefit plans |
( |
) | ( |
) | ||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |
( |
) | ( |
) | ||||||||||||
| COMPREHENSIVE INCOME (LOSS) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
| Six Months Ended March 31, 2023 | ||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Six Months Ended March 31, 2022 | ||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of common stock ( shares) | ||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
See notes to condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
| Six Months Ended March 31, |
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| 2023 |
2022 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income (loss) |
$ | $ | ( |
) | ||||
| 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 property, net |
( |
) | ( |
) | ||||
| Stock option grants |
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| Equity in earnings of unconsolidated affiliate |
( |
) | ( |
) | ||||
| Impairment of unconsolidated affiliates |
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| Allowance for funds used during construction |
( |
) | ||||||
| Changes in assets and liabilities which provided (used) cash, exclusive of changes and noncash transactions shown separately |
( |
) | ||||||
| Net cash provided by operating activities |
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| 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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| Repayments 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 (used in) financing activities |
( |
) | ||||||
| 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 March 31, 2023, cash flows for the six months ended March 31, 2023 and 2022, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three and six months ended March 31, 2023 and 2022. The results of operations for the three and six months ended March 31, 2023 are not indicative of the results to be expected for the fiscal year ending September 30, 2023 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 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, 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, 2022. The September 30, 2022 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, 2022.
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 and ASU 2022-06, 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, 2024. The Intercontinental Exchange 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 2023. 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. | Stock Issue |
In March 2022, the Company issued
During fiscal 2023,
| 3. | Revenue |
The Company assesses new contracts and identifies related performance obligations for promises to transfer distinct goods or services to the customer. Revenue is recognized when performance obligations have been satisfied. In the case of Roanoke Gas, the Company contracts with its customers for the sale and/or delivery of natural gas.
The following tables summarize revenue by customer, product and income statement classification:
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | |||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
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 the cost of natural gas sold to customers (commodity) and the cost of transporting natural gas through the Company’s distribution system to customers (delivery). 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 with payments due 20 days from the rendering of the bill. 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. Customers are invoiced monthly based on services provided for these activities. The Company utilizes the practical expedient allowing revenue to be recognized based on invoiced amounts. The transaction price is based on a contractually predetermined rate schedule; therefore, the transaction price represents total value to the customer and no variable price consideration exists.
Alternative Revenue Program revenues
ARPs, which fall outside the scope of ASC 606, are SCC approved mechanisms that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets. The Company's ARPs include its WNA, which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average; 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; and the RNG over/under collection mechanism, which adjusts revenues similar to the SAVE Plan, but is calculated based on the timing and costs associated with owning, operating and maintaining the RNG facility. These amounts are ultimately collected from, or returned to, customers through future rate changes as approved by the SCC.
Customer accounts receivable and liabilities
Accounts receivable, as reflected in the condensed consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below:
| Current Assets | Current Liabilities | |||||||||||||||
| Trade accounts receivable(1) | Unbilled revenue(1) | Customer credit balances | Customer deposits | |||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Balance at March 31, 2023 | ||||||||||||||||
| Increase (decrease) | $ | $ | $ | ( | ) | $ | ||||||||||
(1) Included in accounts receivable in the condensed consolidated balance sheet. Amounts shown net of reserve for credit losses.
The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts.
RGC RESOURCES, INC. AND SUBSIDIARIES
| 4. | Income Taxes |
The effective tax rates for the three and six month periods ended March 31, 2023 reflected in the table below are less than the corresponding periods in fiscal 2022 and the combined federal and state statutory rate of
Excluding the effect of the Midstream impairment, the effective tax rate for the three and six month periods ended March 31, 2022 would have been
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Effective tax rate | % | % | % | % | ||||||||||||
| Effective tax rate - LLC impairment | % | % | ||||||||||||||
| Effective tax rate excluding LLC impairment | % | % | % | % | ||||||||||||
The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia, and thus subject to examinations by federal and state tax authorities. The IRS is currently examining the Company's 2018 and 2019 federal tax returns. The Company does not have any indication at this time of the outcome. The Company believes its income tax assets and liabilities are fairly stated as of March 31, 2023 and 2022; however, these assets and liabilities could be adjusted as a result of this examination. With the amendment of the federal returns for fiscal 2018 and 2019, these years will remain open for IRS examination for two more years. Aside from these exceptions, the federal returns and the state returns for Virginia for the tax years ended prior to September 30, are no longer subject to examination. The state returns for West Virginia prior to September 30, are no longer subject to examination.
| 5. | Rates and Regulatory Matters |
The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension and depreciation.
On December 2, 2022, Roanoke Gas filed an application with the SCC seeking an $
On December 21, 2022, the SCC issued its Order for Notice and Hearing which authorized the Company to put the proposed rates into effect on January 1, 2023, on an interim basis. The SCC also established a procedural schedule and set the matter for hearing. The Company expects final resolution of the rate case to occur in late calendar 2023 or early 2024.
The Company has recorded a provision for refund, including interest, associated with customer billings under the new non-gas rates. As the SCC audit is still in progress, the Company based its estimate for refund in part based on the history of final awards in previous rate filings, as well as other factors. The amount of the accrued refund is an estimate, and the final order could result in a rate award that is either more or less than the amount currently reflected in the financial statements. Management will refine its estimates as more information becomes available.
The Company filed an application with the SCC for a new -year SAVE Plan and Rider on March 31, 2023 for recovery of costs associated with SAVE eligible investments, beginning October 1, 2023. The application seeks recovery of costs associated with an estimated $
RGC RESOURCES, INC. AND SUBSIDIARIES
On May 16, 2022, Roanoke Gas announced a cooperative agreement under which Roanoke Gas and the Western Virginia Water Authority will produce commercial quality RNG from biogas produced at the regional water pollution control plant. In August 2022, Roanoke Gas filed an application with the SCC seeking approval of a rate adjustment clause under which the Company will recover the costs associated with constructing, owning, operating and maintaining the renewable natural gas facility. The application was filed under Chapter 30 of Title 56 of the Code of Virginia. Chapter 30 allows the Company to accrue AFUDC on the RNG project. In connection with the RNG project, Roanoke Gas began accruing AFUDC in fiscal 2022 associated with construction of the facility. As of March 31, 2023, the Company has recognized approximately $
On June 2, 2022, Roanoke Gas filed an application with the SCC to acquire certain natural gas delivery assets from a local housing authority. Under this application, the Company requested the approval to acquire such facilities at
On July 19, 2022, the SCC approved the application and on August 4, 2022, the housing authority transferred the assets from
| 6. | Other Investments |
As of the date of the filing of this Quarterly Report on Form 10-Q, Midstream is an approximately
Roanoke Gas will continue to suspend accruing AFUDC on its
Midstream is a less than
On May 4, 2023, Midstream agreed with the LLC’s managing partner and primary interest owner to make Midstream’s future capital contributions to the LLC up to the point of project in-service or cancellation, as a result of which Midstream's ownership interest percentage in the LLC as it relates to the MVP project will be proportionately adjusted.
In the second quarter of fiscal 2022, Midstream incurred an other-than-temporary decline in the fair value of its equity investment in the LLC, primarily due to unfavorable decisions by the Fourth Circuit that vacated and remanded key authorizations, which required a pre-tax impairment charge of approximately $
RGC RESOURCES, INC. AND SUBSIDIARIES
Midstream estimated the fair value of its investment in the LLC, with the assistance of a valuation specialist, using an income-based approach that primarily considered probability-weighted scenarios of discounted future cash flows based on the estimated project costs at completion and projected revenues. These scenarios reflected assumptions and judgments regarding the ultimate outcome of further matters relating to, or resulting from the Fourth Circuit rulings, as well as various other ongoing legal and regulatory matters affecting MVP and Southgate. Such assumptions and judgments also included certain additional potential delays and related cost increases that could result from unfavorable decisions on these proceedings and matters. Midstream’s analysis considered probability weighted growth expectations from additional compression expansion opportunities, how ongoing or new legal and regulatory matters may further delay the completion and increase the total costs of the project and the potential of MVP and Southgate cancellation.
Midstream reassesses the value of its investment in the LLC on at least a quarterly basis. With the assistance of a valuation specialist, Midstream conducted the quarterly evaluation of its investment in the LLC as of March 31, 2023 and determined that its investment was fairly stated and no further impairment was required. The fair value of the investment in the LLC was determined under a Level 3 measurement considering the significant assumptions and judgments required in estimating the fair value of the Company's investment in the LLC.
There is risk that Midstream’s equity investment in the LLC may be impaired further in the future. There are continuing, and potential future, legal and regulatory matters related to MVP and Southgate, any of which could affect the ability to complete or operate the project, as well as potential macroeconomic factors, changes in interest rates, cost increases, other unanticipated events and legal and regulatory matters that must be resolved. While macroeconomic factors in and of themselves may not be a direct indicator of impairment, should an impairment indicator be identified in the future, macroeconomic factors such as changes in interest rates could ultimately impact the size and scope of any potential impairment. Assumptions and estimates utilized in assessing the fair value of Midstream’s investment in the LLC may change depending on the nature or timing of resolutions to the legal and regulatory matters or based on other relevant developments. Adverse changes in circumstances relevant to the likelihood of project or expansion completion could prompt Midstream, in future assessments, to apply lower probability of project or expansion completion. Such changes in assumptions or estimates, including discount rates, could have a material adverse effect on the fair value of Midstream’s investment in the LLC and potentially result in additional impairment, which could have a material adverse effect on the results of operations and financial position of Midstream and the Company as a whole.
Funding for Midstream's investments in the LLC for both MVP and Southgate has been provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement maturing in December 2023, and three additional notes as detailed in Note 9, as well as by equity contributions from Resources.
The Company will participate in the earnings generated from the transportation of natural gas through both pipelines proportionate to its level of investment once the pipelines are placed in service.
Investment balances of MVP and Southgate, as of March 31, 2023, are reflected in the table below:
| Balance Sheet location: | March 31, 2023 | September 30, 2022 | ||||||
| Other Assets: | ||||||||
| MVP | $ | $ | ||||||
| Southgate | ||||||||
| Investment in unconsolidated affiliates | $ | $ | ||||||
| Current Liabilities: | ||||||||
| MVP | $ | $ | ||||||
| Southgate | ||||||||
| Capital contributions payable | $ | $ | ||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| Income Statement location: | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | ||||||||||||
| Equity in earnings (loss) of unconsolidated affiliate | $ | $ | ( | ) | $ | $ | ||||||||||
| March 31, 2023 | September 30, 2022 | |||||||
| Undistributed earnings, net of income taxes, of MVP in retained earnings, excluding impairment | $ | $ | ||||||
The undistributed earnings does not include the impairment of the investment in the LLC.
RGC RESOURCES, INC. AND SUBSIDIARIES
The change in the investment in unconsolidated affiliates is provided below:
| Six Months Ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Cash investment | $ | $ | ||||||
| Change in accrued capital calls | ( | ) | ( | ) | ||||
| Pre-tax impairment | ( | ) | ||||||
| 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 | Six Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| AFUDC | $ | $ | $ | $ | ||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Balance Sheets | ||||||||
| March 31, 2023 | September 30, 2022 | |||||||
| Assets: | ||||||||
| Current assets | $ | $ | ||||||
| Construction work in progress | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity: | ||||||||
| Current liabilities | $ | $ | ||||||
| Capital | ||||||||
| Total liabilities and equity | $ | $ | ||||||
| 7. | 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
On April 3, 2023, Roanoke Gas amended and restated its $
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 10 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.
| 8. | Short-Term Debt |
On March 31, 2022, Roanoke Gas entered into an unsecured line-of-credit agreement replacing the line-of-credit agreement dated March 25, 2021. The agreement provided for a variable interest rate based upon Daily Simple SOFR plus
On March 24, 2023, Roanoke Gas entered into an unsecured Revolving Note in the principal amount of $
| 9. | Long-Term Debt |
On March 24, 2023, Roanoke Gas amended and restated the $
On November 1, 2021, Midstream entered into an unsecured promissory note in the principal amount of $
On March 31, 2022, Midstream applied $
RGC RESOURCES, INC. AND SUBSIDIARIES
Long-term debt consists of the following:
| March 31, 2023 | September 30, 2022 | |||||||||||||||
| Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||
| Roanoke Gas: | ||||||||||||||||
| Unsecured senior notes payable, at %, due September 18, 2034 | $ | $ | $ | $ | ||||||||||||
| 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 term note payable, at Term SOFR plus %, due October 1, 2028 | 28,674 | |||||||||||||||
| Midstream: | ||||||||||||||||
| Unsecured term notes payable, at TERM SOFR plus %, due December 31, 2023 | ||||||||||||||||
| 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 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
| 10. | 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 March 31, 2023 | ||||||||||||
| Interest rate swaps: | ||||||||||||
| Unrealized losses | $ | ( | ) | $ | $ | ( | ) | |||||
| Transfer of realized gains to interest expense | ( | ) | ( | ) | ||||||||
| Net interest rate swaps | ( | ) | ( | ) | ||||||||
| Defined benefit plans: | ||||||||||||
| Amortization of actuarial losses | ( | ) | ||||||||||
| Other comprehensive loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Three Months Ended March 31, 2022 | ||||||||||||
| 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 | $ | $ | ( | ) | $ | |||||||
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| Amount | or Benefit | Amount | ||||||||||
| Six Months Ended March 31, 2023 | ||||||||||||
| Interest rate swaps: | ||||||||||||
| Unrealized losses | $ | ( | ) | $ | $ | ( | ) | |||||
| Transfer of realized gains to interest expense | ( | ) | ( | ) | ||||||||
| Net interest rate swaps | ( | ) | ( | ) | ||||||||
| Defined benefit plans: | ||||||||||||
| Amortization of actuarial losses | ( | ) | ||||||||||
| Other comprehensive loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Six Months Ended March 31, 2022 | ||||||||||||
| 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 | $ | $ | ( | ) | $ | |||||||
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 16 for a schedule of regulatory assets. The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net.
RGC RESOURCES, INC. AND SUBSIDIARIES
Reconciliation of Accumulated Other Comprehensive Income (Loss)
| Accumulated | ||||||||||||
| Other | ||||||||||||
| Interest Rate | Defined Benefit | Comprehensive | ||||||||||
| Swaps | Plans | Income (Loss) | ||||||||||
| Balance at September 30, 2022 | $ | $ | ( | ) | $ | |||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | |||||||
| 11. | Commitments and Contingencies |
Roanoke Gas currently holds the only franchises and CPCNs to distribute natural gas in its service area. The current franchise agreements expire December 31, 2035. The Company's CPCNs are exclusive and generally are intended for perpetual duration.
Due to the nature of the natural gas distribution business, the Company has entered into agreements with both suppliers and pipelines for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The Company utilizes an asset manager to assist in optimizing the use of its transportation, storage rights and gas supply in order to provide a secure and reliable source of natural gas to its customers. The Company also has storage and pipeline capacity contracts to store and deliver natural gas to the Company’s distribution system. Roanoke Gas is currently served directly by
| 12. | Earnings Per Share |
Basic earnings per common share for the three and six months ended March 31, 2023 and 2022 were calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share were calculated by dividing net income by the weighted average common shares outstanding during the period plus potential dilutive common shares.
A reconciliation of basic and diluted earnings per share is presented below:
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Options to purchase common stock | ||||||||||||||||
| Diluted average common shares | ||||||||||||||||
| Earnings (loss) per share of common stock: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
| 13. | 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 a retirement benefit based on years of service and employee compensation. The postretirement plan, covering employees hired before January 1, 2000, provides certain health care and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense is detailed as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Components of net periodic pension cost (benefit): | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recognized loss | ||||||||||||||||
| Net periodic pension cost (benefit) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Components of postretirement benefit cost (benefit): | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net postretirement benefit cost (benefit) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The components of net periodic benefit cost, excluding 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.
For the three and six month periods ended March 31, 2023,
| 14. | Fair Value Measurements |
ASC 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
RGC RESOURCES, INC. AND SUBSIDIARIES
Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date.
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy:
| Fair Value Measurements - March 31, 2023 | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices | Other | Significant | ||||||||||||||
| in Active | Observable | Unobservable | ||||||||||||||
| Fair | Markets | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Natural gas purchases | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements - September 30, 2022 | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices | Other | Significant | ||||||||||||||
| in Active | Observable | Unobservable | ||||||||||||||
| Fair | Markets | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Natural gas purchases | $ | $ | $ | $ | ||||||||||||
| 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.
See Note 6 for discussion on the fair value assumptions of the Company's investment in the LLC.
Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on weighted average first of the month index prices corresponding to the month of the scheduled payment. At March 31, 2023 and September 30, 2022, 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 - March 31, 2023 | ||||||||||||||||
| 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, 2022 | ||||||||||||||||
| 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.
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.
| 15. | 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 activities of the Company's investment in the LLC.
Parent and Other - The category parent and other includes the unregulated activities of the Company as well as certain corporate eliminations.
Information related to the Company's segments are provided below:
| Three Months Ended March 31, 2023 | ||||||||||||||||
| 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 March 31, 2022 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||
| Depreciation | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Equity in earnings (loss) | ( | ) | ( | ) | ||||||||||||
| Impairment of investments in affiliates | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
| Six Months Ended March 31, 2023 | ||||||||||||||||
| 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 | ( | ) | ||||||||||||||
| Six Months Ended March 31, 2022 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||
| Depreciation | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Equity in earnings | ||||||||||||||||
| Impairment of investments in affiliates | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| March 31, 2023 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| September 30, 2022 | ||||||||||||||||
| Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
RGC RESOURCES, INC. AND SUBSIDIARIES
| 16. | Regulatory Assets and Liabilities |
The Company’s regulated operations follow the accounting and reporting requirements of ASC 980, Regulated Operations. A regulated company may defer 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 customer rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in customer rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of ASC 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 ASC 980 no longer applied.
Regulatory assets included in the Company’s accompanying balance sheets are as follows:
| March 31, 2023 | September 30, 2022 | |||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Regulatory assets: | ||||||||
| Accrued WNA revenues | $ | $ | ||||||
| Under-recovery of gas costs | ||||||||
| Under-recovery of RNG revenues | ||||||||
| Accrued pension and postretirement medical | ||||||||
| Other deferred expenses | ||||||||
| Total current | ||||||||
| Utility Property: | ||||||||
| In service: | ||||||||
| Other | ||||||||
| Construction work in progress: | ||||||||
| AFUDC | ||||||||
| Other Non-Current 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:
| March 31, 2023 | September 30, 2022 | |||||||
| Liabilities and Stockholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Regulatory liabilities: | ||||||||
| Over-recovery of gas costs | $ | $ | ||||||
| Over-recovery of SAVE Plan revenues | ||||||||
| Rate refund | ||||||||
| Deferred income taxes | ||||||||
| Supplier refunds | ||||||||
| Other deferred liabilities | ||||||||
| Total current | ||||||||
| Deferred Credits and Other Non-Current Liabilities: | ||||||||
| Asset retirement obligations | ||||||||
| Regulatory cost of retirement obligations | ||||||||
| Regulatory liabilities: | ||||||||
| Deferred income taxes | ||||||||
| Other | ||||||||
| Total non-current | ||||||||
| Total regulatory liabilities | $ | $ | ||||||
As of March 31, 2023 and September 30, 2022, the Company had regulatory assets in the amount of $
| 17. | Subsequent Events |
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 consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, Resources may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, operational impacts and similar matters. These statements are based on management’s current expectations and information available at the time of such statements and are believed to be reasonable and are made in good faith. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to those set forth in the following discussion and within Item 1A “Risk Factors” in the Company’s 2022 Annual Report on Form 10-K. 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.
RGC RESOURCES, INC. AND SUBSIDIARIES
The three-month and six-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2023. The total revenues and margins realized during the first six months reflect higher billings due to the weather sensitive nature of the natural gas business.
Overview
Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,200 residential, commercial and industrial customers in Roanoke, Virginia and surrounding localities through its Roanoke Gas subsidiary. Midstream, a wholly-owned subsidiary of Resources, is an approximate 1% investor in MVP and a less than 1% investor in Southgate.
Despite certain progress made in response to prior rulings and actions by the Fourth Circuit, including the denial of challenges to the permit for Virginia water crossings, construction activities to complete the MVP project continue to be on hold in part due to the Fourth Circuit's recent action to vacate the West Virginia water crossing permit on certain issues. The LLC is actively pursuing the resolution of the issues raised by the Fourth Circuit. See the Equity Investment in Mountain Valley Pipeline section for more information.
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 are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates and fees 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 on investment based on normal weather. These rates are determined based on various rate applications filed 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 in place at that time. The investment in replacing and upgrading existing infrastructure, as well as recovering increases in non-gas expenses due to inflationary pressures, regulatory requirements or operational needs, are generally not recoverable until a formal rate application is filed to include the additional investment and higher costs, and new non-gas base rates are approved.
Beginning January 1, 2023, Roanoke Gas implemented new, non-gas base rates designed to provide $8.55 million in additional revenues in response to higher operating costs and to recover its investment in non-SAVE related projects since the last non-gas base rate increase. Revenues from the SAVE Plan and Rider were incorporated into the new non-gas base rates. These additional revenues are subject to refund pending audit and hearing with a final order by the SCC, expected in the latter part of 2023 or early 2024. See the Regulatory section for additional information.
The Company is also subject to regulation from the United States 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, RNG and PGA.
The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until a rate application is filed incorporating these investments in non-gas base rates. The SAVE Plan and Rider was reset effective January 1, 2023 when the recovery of all prior SAVE Plan investment was incorporated into the current non-gas rates. Accordingly, SAVE Plan revenues decreased by approximately $422,000 for the six-month period ended March 31, 2023 compared to the same period last year, reflecting the movement of the SAVE Plan revenues into the new non-gas base rates effective January 1, 2023. Management expects to restart the SAVE Plan and Rider in fiscal 2024 in order to incorporate new qualified SAVE infrastructure investment incurred but not reflected in the new non-gas base rates.
RGC RESOURCES, INC. AND SUBSIDIARIES
The WNA mechanism 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 warmer than normal weather and correspondingly requires the Company to refund the excess margin earned for colder than normal weather. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal. Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. For the three and six months ended March 31, 2023, the Company accrued approximately $2,800,000 and $2,612,000 in additional revenues under the WNA model for weather that was 28% and 15% warmer than normal, respectively, compared to approximately $556,000 and $1,800,000 in additional revenues for weather that was 7% and 13% warmer than normal for the corresponding period last year. The current WNA year ended on March 31, 2023 and the $2.8 million WNA balance will be collected from customers beginning in May 2023.
The Company also has an approved rate structure that mitigates the impact of the 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 $118,000 and $312,000, respectively, for the three and six month periods ended March 31, 2023, compared to the corresponding periods last year, as much higher natural gas commodity prices more than doubled the average price of gas in storage. Natural gas commodity futures prices have declined significantly, which should reduce the level of increases in ICC revenues for the remainder of the current fiscal year as lower priced natural gas is delivered into storage during the summer fill season.
In March 2023, Roanoke Gas began the operation of the RNG facility to produce commercial quality RNG for delivery into its distribution system through a cooperative agreement with the Western Virginia Water Authority. With SCC approval, Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and the related operating costs. The RNG recovery mechanism is similar to the SAVE Rider where an RNG Rider is added to customer bills to recover these costs. The customer benefits from this program through the monetization of environmental credits generated through the production of RNG, which are returned to customers through the RNG Rider. See the Regulatory section for more information.
The cost of natural gas is a pass-through cost and is independent of the Company's non-gas rates. 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 through a quarterly filing, or more frequent if necessary, with the SCC. Once SCC approval is received, the Company adjusts the gas cost component of its rates. 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.
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 cost of gas - utility. The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost. Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as 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.
RGC RESOURCES, INC. AND SUBSIDIARIES
Three Months Ended March 31, 2023:
Net income increased by $30,836,315 for the three months ended March 31, 2023, compared to the same period last year, primarily due to the impairment of the Company's investment in the LLC recorded during the second quarter of fiscal 2022. Excluding the after tax effect of the impairment, net income would have increased by approximately $1,264,000 over the same period last year.
The tables below reflect operating revenues, volume activity and heating degree-days.
| Three Months Ended March 31, | Increase/ | |||||||||||||||
| 2023 |
2022 |
(Decrease) |
Percentage |
|||||||||||||
| Operating Revenues |
||||||||||||||||
| Gas Utility |
$ | 38,000,977 | $ | 29,499,219 | $ | 8,501,758 | 29 | % | ||||||||
| Non Utility |
28,680 | 30,464 | (1,784 | ) | (6 | )% | ||||||||||
| Total Operating Revenues |
$ | 38,029,657 | $ | 29,529,683 | $ | 8,499,974 | 29 | % | ||||||||
| Delivered Volumes |
||||||||||||||||
| Regulated Natural Gas (DTH) |
||||||||||||||||
| Residential and Commercial |
2,560,500 | 3,221,562 | (661,062 | ) | (21 | )% | ||||||||||
| Transportation and Interruptible |
888,307 | 1,020,460 | (132,153 | ) | (13 | )% | ||||||||||
| Total Delivered Volumes |
3,448,807 | 4,242,022 | (793,215 | ) | (19 | )% | ||||||||||
| HDD |
1,487 | 1,918 | (431 | ) | (22 | )% | ||||||||||
Total operating revenues for the three months ended March 31, 2023, compared to the same period last year, increased by 29% due to higher natural gas commodity prices, the implementation of a non-gas rate increase and higher ICC revenues, offset by a reduction in delivered volumes. Natural gas commodity prices averaged nearly $7.00 per dekatherm during the quarter compared to $3.60 per dekatherm for the corresponding quarter in the prior year. However, during the quarter, the high commodity prices began to retreat and the Company adjusted the PGA component of its rates accordingly. As discussed above, Roanoke Gas placed new non-gas rates into effect for natural gas service rendered on or after January 1, 2023, subject to refund. These new non-gas rates will generate approximately $8.55 million in additional annual revenues and includes revenues previously recorded through the SAVE Plan and Rider. Approximately 75% of the non-gas rate increase was allocated to the volumetric component; and as such, a larger portion of the rate increase was recognized during the quarter due to the volume of gas consumption. SAVE Plan revenues declined as the SAVE Rider was reset due to the incorporation of these revenues into the new non-gas base rates. Management expects the SAVE Plan and Rider to resume in fiscal 2024. Additionally, ICC revenues increased due to higher commodity prices of gas in storage. As total heating degree days decreased by 22% from the same period last year, the weather sensitive residential and commercial deliveries declined by 21%. After accounting for the application of the WNA model for the effect of weather variation from normal, the WNA adjusted residential and commercial volumes would have only decreased by approximately 3% compared to the WNA adjusted volumes for the same period last year. Transportation and interruptible volumes declined by 13% as the single, multi-fuel customer that had been utilizing natural gas as its primary fuel source reduced its consumption during the quarter.
| Three Months Ended March 31, |
||||||||||||||||
| 2023 |
2022 |
Increase |
Percentage |
|||||||||||||
| Gross Utility Margin |
||||||||||||||||
| Gas Utility Revenues |
$ | 38,000,977 | $ | 29,499,219 | $ | 8,501,758 | 29 | % | ||||||||
| Cost of Gas - Utility |
21,285,057 | 14,923,575 | 6,361,482 | 43 | % | |||||||||||
| Gross Utility Margin |
$ | 16,715,920 | $ | 14,575,644 | $ | 2,140,276 | 15 | % | ||||||||
Gross utility margin increased from the same period last year primarily as a result of the aforementioned implementation of new non-gas base rates. Although total residential and commercial natural gas deliveries decreased substantially from last year due to warmer weather, the WNA adjusted volumes reflected only a small decrease as the WNA mechanism normalized the impact of weather on the delivered volumes for both periods. In addition, less than half of the revenues collected through the fixed charge SAVE Rider were incorporated into the customer base charge increase with the remainder included in the volumetric rate component. As a result of this proposed rate design, more of the SAVE Plan related revenues incorporated into the new non-gas base rates will be recognized as part of volumetric sales during the heating season and less will recognized during the summer months.
RGC RESOURCES, INC. AND SUBSIDIARIES
The components of and the change in gas utility margin are summarized below:
| Three Months Ended March 31, | Increase/ | |||||||||||
| 2023 |
2022 |
(Decrease) |
||||||||||
| Customer Base Charge |
$ | 4,060,891 | $ | 3,666,318 | $ | 394,573 | ||||||
| ICC |
216,037 | 98,511 | 117,526 | |||||||||
| SAVE Plan |
— | 743,992 | (743,992 | ) | ||||||||
| Volumetric |
9,509,996 | 9,470,897 | 39,099 | |||||||||
| WNA |
2,799,101 | 556,404 | 2,242,697 | |||||||||
| RNG |
83,009 | — | 83,009 | |||||||||
| Other Revenues |
46,886 | 39,522 | 7,364 | |||||||||
| Total |
$ | 16,715,920 | $ | 14,575,644 | $ | 2,140,276 | ||||||
Operations and maintenance expenses decreased by $151,279, or 4%, from the same period last year primarily due to greater capitalization of overheads and lower bad debt expense, net of higher compensation costs and contracted services. Total capitalized overheads increased by approximately $134,000 due to higher direct construction expenditures related to Roanoke Gas capital projects. Bad debt expense decreased by approximately $169,000 as the prior year reflected higher delinquent balances after emerging from legislative imposed COVID restrictions. Compensation costs and contracted services increased by approximately $194,000 due to the inflationary impact on salary and contractor costs.
General taxes decreased by $9,024, or 1%, primarily due to lower property taxes associated with reductions in the assessed values of property reported by the SCC more than offsetting an increase in gross utility property.
Depreciation expense increased by $150,837, or 7%, on a comparable increase in utility property balances.
Impairment of unconsolidated affiliates includes $39,822,213 for an other-than-temporary write down of the Company's investment in the LLC as a result of the Company's valuation assessment during the prior fiscal year. See Equity Investment in Mountain Valley Pipeline for more information regarding the Company's investment in the LLC and its ongoing valuation assessments.
Other income, net decreased by $222,686, or 65%, primarily due to an increase of approximately $376,000 in the non-service cost components of net periodic benefit costs arising from the effect of much higher interest rates on the actuarial expense calculation. Roanoke Gas also recognized approximately $75,000 in AFUDC related to the RNG project during the current period.
Interest expense increased by $292,018, or 26%, as the weighted-average interest rate on total debt increased from 2.98% during the second quarter of fiscal 2022 to 3.94% during the second quarter of fiscal 2023, while total daily average debt outstanding declined by nearly 5%. The increase in the weighted-average interest rate was primarily associated with Roanoke Gas' variable rate line-of-credit and Midstream's credit facility.
Roanoke Gas' interest expense increased by $59,308 primarily due to the increase in the interest rate on the variable rate line-of-credit and the issuance of the delayed draw note in 2022.
Midstream's interest expense increased by $232,710 due to rising interest rates on its credit facility. Total average outstanding debt during the quarter declined by $6.2 million due to the equity infusions from Resources and installment payments on amortizing debt, net of the funding of MVP and Southgate.
Income tax expense increased by $10,622,540 due to the prior year impairment of the Company's investment in the LLC. The effective tax rate was 23.8% and 26.1% for the three month periods ended March 31, 2023 and 2022, respectively. Excluding the impairment and the associated tax, the effective tax rate would have been 24.0% for the second quarter of fiscal 2022. The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and R&D tax credits.
RGC RESOURCES, INC. AND SUBSIDIARIES
| Six Months Ended March 31, |
Increase/ |
|||||||||||||||
| 2023 |
2022 |
(Decrease) |
Percentage |
|||||||||||||
| Operating Revenues |
||||||||||||||||
| Gas Utility |
$ | 71,253,744 | $ | 52,730,874 | $ | 18,522,870 | 35 | % | ||||||||
| Non Utility |
58,248 | 61,889 | (3,641 | ) | (6 | )% | ||||||||||
| Total Operating Revenues |
$ | 71,311,992 | $ | 52,792,763 | $ | 18,519,229 | 35 | % | ||||||||
| Delivered Volumes |
||||||||||||||||
| Regulated Natural Gas (DTH) |
||||||||||||||||
| Residential and Commercial |
4,993,739 | 5,132,292 | (138,553 | ) | (3 | )% | ||||||||||
| Transportation and Interruptible |
1,763,608 | 1,797,901 | (34,293 | ) | (2 | )% | ||||||||||
| Total Delivered Volumes |
6,757,347 | 6,930,193 | (172,846 | ) | (2 | )% | ||||||||||
| HDD |
3,010 | 3,079 | (69 | ) | (2 | )% | ||||||||||
| Six Months Ended March 31, |
||||||||||||||||
| 2023 |
2022 |
Increase |
Percentage |
|||||||||||||
| Gross Utility Margin |
||||||||||||||||
| Gas Utility Revenues |
$ | 71,253,744 | $ | 52,730,874 | $ | 18,522,870 | 35 | % | ||||||||
| Cost of Gas - Utility |
42,089,210 | 26,239,980 | 15,849,230 | 60 | % | |||||||||||
| Gross Utility Margin |
$ | 29,164,534 | $ | 26,490,894 | $ | 2,673,640 | 10 | % | ||||||||
| Six Months Ended March 31, |
Increase/ |
|||||||||||
| 2023 |
2022 |
(Decrease) |
||||||||||
| Customer Base Charge |
$ | 7,651,448 | $ | 7,302,995 | $ | 348,453 | ||||||
| ICC |
587,576 | 275,842 | 311,734 | |||||||||
| SAVE Plan |
1,049,310 | 1,471,365 | (422,055 | ) | ||||||||
| Volumetric |
17,083,394 | 15,554,251 | 1,529,143 | |||||||||
| WNA |
2,612,454 | 1,800,421 | 812,033 | |||||||||
| RNG |
83,009 | — | 83,009 | |||||||||
| Other Revenues |
97,343 | 86,020 | 11,323 | |||||||||
| Total |
$ | 29,164,534 | $ | 26,490,894 | $ | 2,673,640 | ||||||
Impairment of unconsolidated affiliates includes $39,822,213 for an other-than-temporary write down of the Company's investment in the LLC as a result of the Company's valuation assessment during the prior fiscal year. See Equity Investment in Mountain Valley Pipeline for more information regarding the Company's investment in the LLC.
RGC RESOURCES, INC. AND SUBSIDIARIES
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, 2022.
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 management agreement ends March 31, 2025.
Equity Investment in Mountain Valley Pipeline
In October 2017, FERC issued the CPCN for the MVP project. In the first quarter of calendar 2018, the LLC received limited notice from FERC to proceed with certain construction activities and commenced construction.
Recent construction activity has been limited based on legal and regulatory challenges. Although certain permits and authorizations were received, the MVP project has been subject to repeated, significant delays and cost increases resulting from legal challenges and regulatory setbacks, particularly in respect to litigation in the Fourth Circuit, including, on January 25, 2022, the Fourth Circuit’s vacatur and remanding on specific issues of the LLC's then authorizations related to the Jefferson National Forest (JNF) received from the Bureau of Land Management and the U.S. Forest Service (USFS) and on February 3, 2022, the Fourth Circuit’s vacatur and remanding on specific issues of the then Biological Opinion and Incidental Take Statement issued by the United States Department of the Interior's Fish and Wildlife Service (FWS) for the MVP project.
Given ongoing litigation and regulatory matters, the LLC filed a request on June 24, 2022 with the FERC for an extension of time to complete the project for an additional four years (relative to a prior obtained extension) through October 13, 2026. The request was granted on August 23, 2022.
Notwithstanding prior setbacks and ongoing risks, including the risk posed by pending and future legal challenges in the Fourth Circuit, the LLC continues to engage in pursuing the authorizations necessary under applicable law from the relevant agencies to complete the MVP project, including the new authorizations relating to the JNF and an Individual Permit from the Huntington, Pittsburgh and Norfolk Districts of the U.S. Army Corps of Engineers to effect approximately 300 water crossings utilizing open cut techniques. In April 2022, the MVP obtained the FERC’s authorization to amend the Certificate to utilize alternative trenchless construction methods to effect approximately 120 water crossings. On February 28, 2023, the FWS issued the new Biological Opinion and Incidental Take Statement for the MVP project. On October 25, 2022 and January 24, 2023, oral arguments were held in the Fourth Circuit relating to the Section 401 water quality certification approvals received in December 2021 from the West Virginia Department of Environmental Protection and the Virginia Department of Environmental Quality, respectively (such approvals, the WVDEP State 401 Approval and the VADEQ State 401 Approval), each in connection with the MVP project. The oral arguments were conducted by the same panel of Fourth Circuit judges as have appeared, and overruled permitting agencies, in numerous prior matters relating to the MVP. Although on March 29, 2023, the Fourth Circuit panel denied project opponents’ challenge to the VADEQ State 401 Approval, on April 3, 2023, the panel, consistent with its posture during the oral argument, vacated the WVDEP State 401 Approval based on the panel’s view that certain aspects of the WVDEP State 401 Approval did not reflect sufficient explanation by the WVDEP and that certain additional requirements should have been incorporated into the WVDEP State 401 Approval. Relating to the JNF, on April 13, 2023, the USFS issued the final Supplemental Environmental Impact Statement regarding the MVP project. On April 27, 2023, project opponents sought a stay in the Fourth Circuit of the new Biological Opinion and Incidental Take Statement for the MVP project, and as of the date of the filing of this Quarterly Report on Form 10-Q, that proceeding is ongoing.
RGC RESOURCES, INC. AND SUBSIDIARIES
In addition to those requested authorizations that remain outstanding described in the paragraph above, including that the WVDEP must issue a new Section 401 approval, and other relevant regulatory matters, the LLC in order to complete the project needs to continue to have available the necessary orders previously issued by the FERC and receive authorization from the FERC to complete construction work in the portion of the project route currently remaining subject to the FERC’s previous stop work order and in the JNF.
The LLC’s managing partner publicly disclosed on May 2, 2023 that based on its interactions with the agencies and, in the case of the WVDEP State 401 Approval, also its view of the steps it believes necessary to address the Fourth Circuit panel’s vacatur, the LLC’s managing partner expects the agencies will issue the requisite authorizations by the early summer 2023 and believes that the agencies are producing authorizations that address points raised by the Fourth Circuit and exceed standards for the issuance of such authorizations. Given that, the LLC’s managing partner recognizes that there continue to be a number of upcoming regulatory and litigation milestones that (together with the timing thereof) will determine whether the LLC may recommence forward construction in 2023 (potentially with the goal of completing the project by end of calendar 2023) or that will prevent such construction and/or completion in 2023. However, the LLC's managing partner acknowledges the narrowed path to complete the project by the end of calendar 2023 in light of various risks (the impacts of which are not known or reasonably estimable), including ongoing and anticipated litigation in the Fourth Circuit relating to MVP project authorizations within the Fourth Circuit’s jurisdiction since the LLC's managing partner perceives continued hostility and risk posed by the Fourth Circuit panel to MVP project-related authorizations.
There also are potential, future legislative developments that may impact MVP forward construction or completion timing, as the LLC continues to urge the United States Congress to expeditiously pass, and for there to be enacted, federal energy infrastructure permitting reform legislation that specifically requires the completion of the MVP project, similar to MVP-specific aspects of legislation proposed in 2022 by each of United States Senators Joseph Manchin and Shelley Moore Capito and ideally in sufficient time for the LLC to complete construction in 2023. However, while as of the date of the filing of this Quarterly Report on Form 10-Q, the LLC believes that there remain prospects and continuing significant bipartisan support for federal energy infrastructure permitting reform legislation favorable to the MVP project, the LLC recognizes that to such date attempts to enact such legislation have failed and that differences between and within the Republican and Democratic parties continue to exist as to the scope and terms of any such reform, and such differences have impeded and could further impede the prospect of legislation being enacted, including in sufficient time for the LLC to complete construction in 2023.
The LLC’s managing partner believes that the LLC will complete the four to five months of remaining construction activity as promptly as practicable once authorized and fully mobilized and that the total project cost would be approximately $6.6 billion (excluding AFUDC) if that completion is achieved in 2023.
Management conducted an assessment of its investment in the LLC in accordance with the provisions of ASC 323, Investments - Equity Method and Joint Ventures. This assessment included a third-party valuation. As a result of its evaluations in fiscal 2022, management concluded that the investment in the LLC sustained other-than-temporary declines in fair value as of February 22, 2022 and as of September 30, 2022 and recorded pre-tax impairment losses of approximately $39.8 million and $15.3 million in its second and fourth quarter operating results, respectively. Management re-evaluated its investment as of March 31, 2023 and concluded that its investment was fairly stated and no additional impairment was required. Management will continue monitoring the status of MVP for circumstances that may lead to future impairments, including further delays or denials of necessary permits and approvals. If necessary, the amount and timing of any further impairment would be dependent on the specific circumstances, including changes to probabilities of completion, and changes in the assumed future cash flows, and discount rate at the time of evaluation.
RGC RESOURCES, INC. AND SUBSIDIARIES
Midstream has utilized the $23 million of borrowing capacity under its non-revolving credit facility, which matures in December 2023. Effective November 1, 2021, the borrowing capacity under this credit facility was reduced to $33 million as $8 million of the outstanding balance was re-financed through a separate unsecured promissory note. Effective March 31, 2022, the borrowing capacity under the credit facility was further reduced to its current $23 million level as $10 million of the outstanding balance was paid. See Note 9 for more information.
On May 4, 2023, Midstream agreed with the LLC’s managing partner and primary interest owner to make Midstream’s future capital contributions to the LLC up to the point of project in-service or cancellation, as a result of which Midstream's ownership interest percentage in the LLC as it relates to the MVP project will be proportionately adjusted.
If the legal and regulatory challenges, including any future challenges, are not resolved in a timely manner and/or restrictions are imposed that impact future construction, the cost of the MVP may increase, and Midstream may incur further dilution accordingly. See Investment in Mountain Valley Pipeline, LLC Risk Factor under Item 1A of the Company's Form 10-K for the year ended September 30, 2022.
Regulatory
On December 2, 2022, Roanoke Gas filed an application with the SCC seeking an $8.55 million annual increase in its non-gas base rates, of which $4.05 million was being recovered through the SAVE Rider. Since the Company is seeking to recover the costs associated with its SAVE Plan through interim non-gas base rates effective January 1, 2023, the Company discontinued its SAVE Plan and Rider for the remainder of the current fiscal year.
On December 21, 2022, the SCC issued its Order for Notice and Hearing, which authorized the Company to put its proposed rates into effect, on an interim basis and subject to refund, on January 1, 2023, and set the matter for hearing. The Company expects final resolution of the rate case to occur in late calendar 2023 or early 2024.
The Company has recorded a provision for refund, including interest, associated with customer billings under the new non-gas rates. As the SCC audit is still in progress, the Company based its estimate for refund in part on the history of final awards in previous rate filings, as well as other factors. The amount of the accrued refund is an estimate, and the final order could result in a rate award that is either more or less than the amount currently reflected in the financial statements. Management will refine its estimates as more information becomes available.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company filed an application with the SCC for a new five-year SAVE Plan and Rider on March 31, 2023 for recovery of costs associated with SAVE eligible investments. The Company’s proposal encompasses SAVE eligible investments beginning October 1, 2023. The application seeks recovery of costs associated with $8.5 million in SAVE eligible investments for the initial year ending September 30, 2024 and cumulative investments of $49.5 million over the five year SAVE Plan ending September 30, 2028.
On May 16, 2022, Roanoke Gas announced a cooperative agreement under which Roanoke Gas and the Western Virginia Water Authority will produce commercial quality RNG from biogas produced at the regional water pollution control plant. In August 2022, Roanoke Gas filed an application with the SCC seeking approval of a rate adjustment clause under which the Company will recover the costs associated with constructing, owning, operating and maintaining the renewable natural gas facility. The application was filed under Chapter 30 of Title 56 of the Code of Virginia. Chapter 30 allows the Company to accrue AFUDC on the RNG project. In connection with the RNG project, Roanoke Gas began accruing AFUDC in fiscal 2022 associated with construction of the facility. As of March 31, 2023, the Company has recognized approximately $273,000 of AFUDC revenue since inception of the RNG project. The Company received a final order from the SCC on January 23, 2023 approving the Company’s application. The RNG project became operational in March 2023. The Company began billing customers the RNG rate adjustment on March 1, 2023, at which time the Company ceased recording AFUDC.
On June 2, 2022, Roanoke Gas filed an application with the SCC to acquire certain natural gas distribution assets from a local housing authority. Under this application, the Company requested the approval to acquire such facilities at five separate apartment complexes, located in the Company’s service territory, that were under housing authority management. Under the proposed plan, the housing authority would renew existing natural gas distribution facilities to include mains, services and meter installations and then transfer ownership of these facilities to Roanoke Gas. In turn, Roanoke Gas would assume responsibility for the operation and maintenance of these assets and recognize a gain related to the asset acquisition equal to the cost associated with the renewal.
On July 19, 2022, the SCC approved the application and on August 4, 2022, the housing authority transferred the assets from two apartment complexes to Roanoke Gas. Roanoke Gas recorded these assets and recognized a pre-tax gain of approximately $219,000 during the Company’s fourth quarter of fiscal 2022. The housing authority expects to complete the upgrade and subsequent asset transfer at one more apartment complex in fiscal 2023. The authority is awaiting future funding to complete the two remaining apartment complexes. The timing of funding and the completion of the asset renewals for these two complexes is unknown at this time.
In November 2021, Roanoke Gas received $859,000 in ARPA funds and applied the full amount to customer arrearages in December 2021.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the impact of weather variability, the Company’s primary capital needs are the funding of its capital projects, investment in the LLC, the seasonal funding of its natural gas inventories and accounts receivables, payment of dividends and debt service. The Company anticipates funding these items through 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 $1,727,059 for the six-month period ended March 31, 2023 compared to an increase of $7,913,673 for the six-month period ended March 31, 2022. The following table summarizes the sources and uses of cash:
| Six Months Ended March 31, |
||||||||
| Cash Flow Summary |
2023 |
2022 |
||||||
| Net cash provided by operating activities |
$ | 16,965,342 | $ | 12,992,906 | ||||
| Net cash used in investing activities |
(14,350,139 | ) | (14,278,880 | ) | ||||
| Net cash provided by (used in) financing activities |
(888,144 | ) | 9,199,647 | |||||
| Increase in cash and cash equivalents |
$ | 1,727,059 | $ | 7,913,673 | ||||
Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, all contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to increases in natural gas storage levels and rising customer receivable balances.
RGC RESOURCES, INC. AND SUBSIDIARIES
Cash flows from operating activities for the six months ended March 31, 2023 increased by $3,972,436 compared to the same period last year. The table below summarizes the significant components of operating cash flows:
| Six Months Ended March 31, | Increase/ | |||||||||||
| Cash Flow From Operating Activities: |
2023 |
2022 |
(Decrease) |
|||||||||
| Net income (loss) |
$ | 9,598,291 | $ | (20,909,900 | ) | $ | 30,508,191 | |||||
| Non-cash adjustments: |
||||||||||||
| Depreciation |
4,954,167 | 4,656,829 | 297,338 | |||||||||
| Equity in earnings |
(4,099 | ) | (71,682 | ) | 67,583 | |||||||
| AFUDC |
(198,308 | ) | — | (198,308 | ) | |||||||
| Impairment of unconsolidated affiliates |
— | 39,822,213 | (39,822,213 | ) | ||||||||
| Changes in working capital and regulatory assets and liabilities: |
||||||||||||
| Accounts receivable |
(5,155,446 | ) | (6,517,364 | ) | 1,361,918 | |||||||
| Gas in storage |
12,037,790 | 5,803,496 | 6,234,294 | |||||||||
| Accounts payable |
(1,696,080 | ) | (1,899,065 | ) | 202,985 | |||||||
| WNA |
(2,612,454 | ) | (1,800,421 | ) | (812,033 | ) | ||||||
| Supplier refunds |
(1,789,519 | ) | 2,660,147 | (4,449,666 | ) | |||||||
| Deferred taxes |
304,894 | (10,052,645 | ) | 10,357,539 | ||||||||
| Other |
1,526,106 | 1,301,298 | 224,808 | |||||||||
| Net cash provided by operating activities |
$ | 16,965,342 | $ | 12,992,906 | $ | 3,972,436 | ||||||
The average price of natural gas in storage at the beginning of fiscal 2023 was nearly twice the average price at the beginning of fiscal 2022. As natural gas balances were drawn down during the winter heating season, storage levels declined by $12 million during the current six month period compared to $5.8 million during the same period last year, even though approximately 160,000 fewer dekatherms were withdrawn. Accordingly, this difference in storage values contributed to a $6.2 million increase in operating cash. In March 2022, the Company received a $2.3 million supplier refund, resulting from a FERC rate case settlement, from one of the interstate pipelines that supply the Company with natural gas. In July 2022, the Company began refunding this balance along with other smaller refunds to customers over a 12-month period. The change from collecting supplier refunds during the prior period to refunding supplier refunds during the current period amounted to a $4.4 million reduction in operating cash. Fiscal 2022 reflected a significant decrease in deferred tax liabilities related to the $10.2 million deferred tax asset recognized as a result of the impairment of the investment in the LLC, when compared to an approximate $300,000 increase during the current period. When netted against the non-cash impairment charge, the combined amounts offset the prior year net loss, thereby making underling net income comparable between periods.
Cash Flows Used in Investing Activities:
Investing activities primarily consist of expenditures related to investment in Roanoke Gas' utility property, 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. The Company continued 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. The SAVE Plan and Rider were temporarily suspended beginning in January 2023 due to the implementation of new non-gas rates that incorporated all prior SAVE qualified infrastructure projects as well as the projected activity during the current fiscal year. Roanoke Gas expects to resume the SAVE Plan and Rider in fiscal 2024 to continue the recovery of new investments in qualified infrastructure projects. Roanoke Gas' total capital expenditures for the six month period ended March 31, 2023 were approximately $12.9 million compared to $10.8 million during the same period last year. Capital expenditures for fiscal 2023 are expected to be in the $21 - $23 million range. Midstream's investment in the LLC declined by approximately $2.1 million as no active construction activities occurred during the current fiscal year. Midstream will cease future participation in capital calls following its May funding payment based on the agreement with the LLC's managing partner to assume Midstream's future commitments. Midstream will continue to be invested in the LLC; however, its participation percentage is expected to decline with no additional investment. See Equity Investment in Mountain Valley Pipeline for additional information.
RGC RESOURCES, INC. AND SUBSIDIARIES
Cash Flows Provided by (Used in) Financing Activities:
Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends. Net cash flows used in financing activities were approximately $900,000 for the six months ended March 31, 2023, compared to $9.2 million in cash flows provided by financing activities for the same period last year. The reduction in financing cash flows is primarily attributable to Resources' $27 million equity offering in March 2022 of which $12 million was invested in Roanoke Gas and $10 million in Midstream, as well as the issuance of Roanoke Gas' $15 million note in October 2021 and Midstream's $8 million note in November 2021. These proceeds were used to pay down Roanoke Gas' line-of-credit and maturing $7 million note, and Midstream applied $18 million against its credit facility with the excess to provide funding for Roanoke's capital budget. During the current period, Resources issued a total of 102,812 shares of common stock resulting in net proceeds of $2.1 million, including 74,566 shares through the ATM program in which Resources received $1,630,000, net of fees, and Midstream borrowed $1.1 million under its credit facility.
Notes 8 and 9 provide details on the Company's line-of-credit and borrowing activity.
The current interest rate environment is expected to continue to result in higher interest expense associated with the Company's variable-rate debt or the issuance of any new debt until such time as interest rates decline.
Management regularly evaluates the Company’s liquidity through a review of its available financing resources and its cash flows. Resources’ maintains the ability to raise equity capital through its ATM program, private placement or other public offerings. Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including the line-of-credit and the two private shelf facilities. Roanoke Gas may also adjust capital spending as necessary.
Based on the agreement with the LLC's managing partner to assume future capital contributions related to the MVP, as described above in the Equity Investment in Mountain Valley Pipeline section, Midstream's future cash requirements are reduced to regular monthly operating expenses, debt service and capital contributions to Southgate. Unless refinanced, total Midstream debt service over the succeeding 12 months includes $25.1 million to retire maturing debt and approximately $2.4 million in interest expense based on current interest rates. $23 million of the maturing debt pertains to the credit facility due in December 2023, which management is seeking an extension or refinancing option until such time as the MVP is placed in service. Management believes it will be able to meet Midstream's cash requirements.
As of March 31, 2023, Resources' long-term capitalization ratio was 42% equity and 58% debt.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are identified, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.
Through March 31, 2023, the Company has evaluated, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023.
Management routinely reviews the Company’s internal control over financial reporting and makes changes, as necessary, to enhance the effectiveness of the internal controls. There were no control changes during the fiscal quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
RGC RESOURCES, INC. AND SUBSIDIARIES
No material proceedings.
There have been no material changes to the risk factors previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2022.
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.
On May 4, 2023, Midstream entered into an agreement with the LLC’s managing partner and primary interest owner to make Midstream’s future capital contributions to the LLC up to the point of project in-service or cancellation, as a result of which Midstream's ownership interest percentage in the LLC as it relates to the MVP project will be proportionately adjusted.
| * |
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
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RGC Resources, Inc. |
||||||||
| Date: May 5, 2023 |
By: |
/s/ Jason A. Field |
||||||
| Jason A. Field |
||||||||
| Vice President, Chief Financial Officer and Treasurer |
||||||||
| (Principal Financial Officer) |