RGC RESOURCES, INC. Forward-Looking Statements
This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, Resources may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, operational impacts and similar matters. These statements are based on management's current expectations and information available at the time of such statements and are believed to be reasonable and are made in good faith. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to those set forth in the following discussion and within Item 1A "Risk Factors" in the Company's 2021 Annual Report on Form 10-K and this Form 10-Q. All of these factors are difficult to predict and many are beyond the Company's control. Accordingly, while the Company believes its forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in the Company's documents or news releases, the words, "anticipate," "believe," "intend," "plan," "estimate," "expect," "objective," "projection," "forecast," "budget," "assume," "indicate" or similar words or future or conditional verbs such as "will," "would," "should," "can," "could" or "may" are intended to identify forward-looking statements. Forward-looking statements reflect the Company's current expectations only as of the date they are made. The Company assumes no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations. The three-month and six-month earnings presented herein should not be considered as reflective of the Company's consolidated financial results for the fiscal year endingSeptember 30, 2022 . The total revenues and margins realized during the first six months reflect higher billings due to the weather sensitive nature of the natural gas business. COVID-19 As discussed under Item 1A "Risk Factors" in the Company's 2021 Annual Report on Form 10-K, COVID-19 and the resulting pandemic continues to have a lingering impact on local, state, national and global economies. Supply chain disruptions, labor shortages and inflation, compounded by other world events, have continued as the primary examples of matters impacting economic conditions. Significant portions of the population have been vaccinated, which has contributed to a return to mostly normal operating conditions. Most restrictions implemented as a result of the pandemic have been eased, includingVirginia's state of emergency, allowing for increased business, recreational and travel activities. Natural gas consumption by the Company's commercial customers has returned to pre-pandemic levels. However, the easing of restrictions and the evolution of variant strains of COVID-19 may lead to a rise in infections nationally and throughout the Company's service territory. Management continues to monitor current conditions to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees.
The extent to which the COVID-19 pandemic will continue to impact the Company depends on future developments, which are highly uncertain and cannot be reasonably predicted, including the increase or reduction in governmental restrictions to businesses and individuals, the potential resurgence of the virus, including variants, as well as efficacy of the vaccines.
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--------------------------------------------------------------------------------Overview Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,000 residential, commercial and industrial customers inRoanoke, Virginia and surrounding localities through itsRoanoke Gas subsidiary. As a wholly-owned subsidiary of Resources, Midstream is a more than 1% investor in MVP and a less than 1% investor in Southgate. Due primarily to decisions in January andFebruary 2022 by the Fourth Circuit vacating and remanding certain permits necessary for the completion of MVP construction and commercial operation, and the greater uncertainty that now exists given the Court's actions, as well as the consequent actions by project partners to impair their respective investments and revocation of the previously noted summer 2022 in-service target date, Midstream determined that its investment in the LLC experienced an other-than-temporary decline in value. Accordingly, management recorded a$39.8 million write-down of the value of its investments in the second quarter of fiscal 2022. As ofMarch 31, 2022 , the total investment in the LLC was$27 million . More information regarding the investment in the LLC is provided under theEquity Investment inMountain Valley Pipeline section below. The utility operations ofRoanoke Gas are regulated by the SCC, which oversees the terms, conditions, and rates charged to customers for natural gas service, safety standards, extension of service and depreciation. Nearly all of the Company's revenues, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas toRoanoke Gas customers based on rates authorized by the SCC. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather. The Company is also subject to federal regulation from theDepartment of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines.FERC regulates the prices for the transportation and delivery of natural gas to the Company's distribution system and underground storage services. In addition,Roanoke Gas is subject to other regulations which are not necessarily industry specific. As the Company's business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company's rates in recovering its costs and providing a reasonable return for its shareholders. In order to mitigate the effect of weather variations and other factors not provided for in the Company's base rates,Roanoke Gas has certain approved rate mechanisms in place that help provide stability in earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment. These mechanisms include the SAVE Rider, WNA, ICC and PGA. The Company's non-gas base rates provide for the recovery of non-gas related expenses and a reasonable return to shareholders. These rates are determined based on the filing of a formal non-gas rate application with the SCC. Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates currently in place. The investment in replacing and upgrading existing infrastructure is generally not recoverable until a formal rate application is filed to include the additional investment, and new non-gas base rates are approved. The SAVE Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until a formal rate application is filed to incorporate these investments in non-gas base rates. The SAVE Plan and Rider were last reset effectiveJanuary 2019 , when the recovery of all prior SAVE Plan investment was incorporated into the current non-gas rates. Accordingly, SAVE Plan revenues increased by approximately$193,000 and$416,000 for the three and six month periods endedMarch 31, 2022 compared to the same periods last year, reflecting the Company's cumulative investment in qualified SAVE Plan infrastructure. The WNA model reduces the volatility in earnings due to the variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when weather is colder than normal. The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal and correspondingly requires the Company to refund the excess margin earned for weather that is colder than normal. 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 endedMarch 31, 2022 , the Company accrued approximately$556,000 and$1,800,000 in additional revenues under the WNA model for weather that was 7% and 13% warmer than normal, respectively, compared to approximately$249,000 and$1,196,000 in additional revenue for weather that was 3% and 9% warmer than normal during the corresponding periods last year. The current WNA year ended onMarch 31, 2022 and the 12 month cumulative WNA balance will be collected from customers beginning inMay 2022 . 25 --------------------------------------------------------------------------------
The Company also has an approved rate structure in place that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure,Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company's weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company's authorized return on equity, to the average cost of natural gas inventory during the period. Total ICC revenues increased by approximately$33,000 and$84,000 , respectively, for the three month and six month periods endedMarch 31, 2022 , compared to the corresponding periods last year, as rising natural gas commodity prices in 2021 resulted in a higher average cost of natural gas in storage. As natural gas commodity prices have experienced a significant increase during March andApril 2022 , the cost of natural gas in storage is expected to be higher atSeptember 30, 2022 . The cost of natural gas is a pass-through cost and is independent of the non-gas rates of the Company. Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs based on a quarterly filing, or more frequent if necessary, with the SCC. Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount. As actual costs will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as amounts are reflected in customer billings. Prior toJanuary 2021 , the Company has recognized significant non-cash income from equity in earnings of MVP through recording of AFUDC. Due to various legal and regulatory challenges, construction on the pipeline has been halted as has the recognition of AFUDC. If or when the permits are reinstated, construction on MVP could resume and AFUDC would again be recognized until such time as MVP is placed in service. Once in service, cash earnings will be derived from fees charged by the LLC to transport natural gas on the pipeline. Results of Operations
The analysis on the results of operations is based on the consolidated operations of the Company, which is primarily associated with the utility segment. Additional segment analysis is provided when Midstream's investment in affiliates represents a significant component of the comparison.
The Company's operating revenues are affected by the cost of natural gas, as reflected in the consolidated income statement under the line item cost of gas - utility. The cost of natural gas, 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.
Three Months Ended
Net income decreased by$29,261,907 for the three months endedMarch 31, 2022 , compared to the same period last year, primarily due to the impairment of the Company's investment in the LLC. 26 --------------------------------------------------------------------------------
The tables below reflect operating revenues, volume activity and heating
degree-days.
Three Months Ended March 31, Increase/
2022 2021 (Decrease) Percentage
Operating Revenues
Gas Utility $ 29,499,219 $ 28,221,274 $ 1,277,945 5 %
Non Utility 30,464 32,388 (1,924 ) (6 )%
Total Operating Revenues $ 29,529,683 $ 28,253,662 $ 1,276,021 5 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 3,221,562 3,212,413 9,149 0 %
Transportation and Interruptible 1,020,460 806,981 213,479 26 %
Total Delivered Volumes 4,242,022 4,019,394 222,628 6 %
HDD 1,918 1,997 (79 ) (4 )%
Total operating revenues for the three months ended March 31, 2022 , compared to
the same period last year, increased by 5% due to a combination of an increase
in SAVE revenues, WNA revenues and higher transportation volume deliveries.
SAVE Plan revenues increased by approximately $193,000 due to the continuing
investment in qualified SAVE infrastructure projects. Although the three
months ended March 31, 2022 had 4% fewer heating degree days than the same
period last year, the weather sensitive residential and commercial volumes were
nearly unchanged. The improvement in natural gas deliveries is reflective of
increased economic activity in the post-pandemic environment. As described
above, the WNA model provided $307,000 in additional revenues as the current
period was 7% warmer than normal compared to weather that was 3% warmer than
normal for the same period last year. Transportation and interruptible volumes,
primarily driven by business activity rather than weather, increased by 26% due
to a single multi-fuel customer that increased its utilization of natural gas
from an alternate energy source during the quarter. Excluding the
multi-fuel customer's usage from both periods, total transportation and
interruptible volumes would have been nearly unchanged.
Three Months Ended March 31,
2022 2021 Increase Percentage
Gross Utility Margin
Gas Utility Revenues $ 29,499,219 $ 28,221,274 $ 1,277,945 5 %
Cost of Gas - Utility 14,923,575 14,447,057 476,518 3 %
Gross Utility Margin $ 14,575,644 $ 13,774,217 $ 801,427 6 %
Gross utility margin increased from the same period last year as a result of the
aforementioned higher SAVE revenues, WNA and transportation volumes as well as
ICC revenues. ICC revenues increased by approximately $33,000 due to higher
natural gas inventory balances attributable to rising natural gas commodity
prices.
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The components of and the change in gas utility margin are summarized below:
Three Months Ended March 31,
2022 2021 Increase
Customer Base Charge $ 3,666,318 $ 3,652,055 $ 14,263
Carrying Cost 98,511 65,446 33,065
SAVE Plan 743,992 550,847 193,145
Volumetric 9,470,897 9,226,891 244,006
WNA 556,404 249,330 307,074
Other Revenues 39,522 29,648 9,874
Total $ 14,575,644 $ 13,774,217 $ 801,427
Operations and maintenance expenses increased by $310,537 , or 8%, over the same
period last year primarily due to higher bad debt expense, corporate insurance
premiums, professional services and compensation costs. Bad debt expense
increased by $194,000 for the quarter due to higher billings related to rising
natural gas prices and delinquent balances. Corporate insurance premiums related
to property and liability insurance increased by nearly $43,000 , or 17%, due
to insurance market conditions. Professional services increased by $44,000
primarily due to costs related to determining the fair value and impairment of
the LLC investment.
General taxes increased by $4,428 , or 1%, primarily due to higher property taxes
related to ongoing investments in infrastructure replacement, system
reinforcements and customer growth, net of greater capitalization of payroll and
property taxes.
Depreciation expense increased by
Equity in loss of unconsolidated affiliate was nearly unchanged as no growth construction activities occurred and no AFUDC was recorded. All earnings or losses during the respective quarters relate to income earned on available cash balances, net of expenses.See Equity Investment in Mountain Valley Pipeline section below for additional information. Impairment of unconsolidated affiliates includes$39,822,213 for an other-than-temporary write down of the Company's investment in the LLC. See Critical Accounting Policies and Estimates andEquity Investment in Mountain Valley Pipeline sections below for further details of the impairment. Other income, net increased by$56,962 , or 20%, primarily due to an approximately$86,000 decrease in the non-service cost components of net periodic benefit costs partially offset by a reduction in the utilization fee. The reduction in the non-service cost component is attributable to the reduction in the amortization of the actuarial losses due to the improved funding position of the defined benefit plans. The utilization fee under the revenue sharing agreement declined per the terms of the asset management agreement with Sequent Energy. Interest expense increased by$96,080 , or 10%, as the total daily average debt outstanding increased by 20% between quarters. The higher borrowing levels, derived from the ongoing investment in the LLC and financing expenditures in support ofRoanoke Gas' capital budget, were offset by a 9% reduction in the weighted-average interest rate on the Company's debt.Roanoke Gas' interest expense increased by$43,506 primarily due to a$17.2 million increase in total daily average debt outstanding for the period, net of a reduction in the average interest rate from 3.73% to 3.23% primarily driven by the issuance of the$15 million note onOctober 1, 2021 with a 2.00% swap adjusted rate. 28
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Midstream's interest expense increased by$52,574 primarily due to a$8.2 million increase in total average debt outstanding for the period and slight increase in the average interest rate from 2.28% to 2.32% associated with the an increase in the average variable interest rate of Midstream's credit facility. Income tax moved from an expense of$1,607,935 to a benefit of$8,644,175 corresponding to the recognition of the impairment of the Company's investment in the LLC. The effective tax rate was 26.1% and 25.2% for the three month periods endedMarch 31, 2022 and 2021, respectively. Excluding the effect of the impairment, the effective tax rate would have been 24.0% compared to 25.2% for the same period last year. The reduction in the adjusted effective tax rate is attributable to the amortization of the deferred R&D tax credit associated with the tax credit study.
Six Months Ended
Net income decreased by
The tables below reflect operating revenues, volume activity and heating
degree-days.
Six Months Ended March 31, Increase/
2022 2021 (Decrease) Percentage
Operating Revenues
Gas Utility $ 52,730,874 $ 47,704,774 $ 5,026,100 11 %
Non Utility 61,889 65,905 (4,016 ) (6 )%
Total Operating Revenues $ 52,792,763 $ 47,770,679 $ 5,022,084 11 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 5,132,292 5,262,636 (130,344 ) (2 )%
Transportation and Interruptible 1,797,901 1,623,637 174,264 11 %
Total Delivered Volumes 6,930,193 6,886,273 43,920 1 %
HDD 3,079 3,245 (166 ) (5 )%
Total operating revenues for the six months ended March 31, 2022 , compared to
the same period last year, increased by 11% due to a combination of higher
natural gas commodity prices and pipeline and storage fees and an increase in
SAVE and WNA revenues. During the first quarter of fiscal 2022, the Company
experienced both rising natural gas prices over the comparable period last year,
with the average commodity price declining slightly during the second fiscal
quarter and rate increases implemented in the second quarter of fiscal 2021 from
the interstate pipelines and underground natural gas storage operators who
deliver and store natural gas. These higher costs are passed on to customers
through the PGA. SAVE Plan revenues increased by approximately $416,000 due to
the continuing investment in qualified SAVE infrastructure projects. The six
months ended March 31, 2022 had 5% fewer heating degree days than the same
period last year, which resulted in a corresponding 2% reduction in the weather
sensitive residential and commercial volumes. If adjusted for the WNA effect
of the shortfall in heating degree days, the residential and commercial volumes
would have been nearly 2% higher than the WNA adjusted volumes in the prior
year, reflecting improved economic activity in a post-pandemic environment.
Six Months Ended March 31,
2022 2021 Increase Percentage
Gross Utility Margin
Gas Utility Revenues $ 52,730,874 $ 47,704,774 $ 5,026,100 11 %
Cost of Gas - Utility 26,239,980 22,147,756 4,092,224 18 %
Gross Utility Margin $ 26,490,894 $ 25,557,018 $ 933,876 4 %
Gross utility margin increased from the same period last year as a result of the
higher SAVE revenues and WNA in addition to the increase in ICC revenues as
reflected in the table below. ICC revenues increased by approximately
29
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The components of and the change in gas utility margin are summarized below:
Six Months Ended March 31, Increase/
2022 2021 (Decrease)
Customer Base Charge $ 7,302,995 $ 7,274,520 $ 28,475
Carrying Cost 275,842 192,202 83,640
SAVE Plan 1,471,365 1,055,545 415,820
Volumetric 15,554,251 15,774,483 (220,232 )
WNA 1,800,421 1,196,301 604,120
Other Revenues 86,020 63,967 22,053
Total $ 26,490,894 $ 25,557,018 $ 933,876
Operations and maintenance expenses increased by $498,729 , or 7%, over the same
period last year primarily due to higher bad debt expense, corporate insurance
premiums and professional services. Bad debt expense increased by $267,000 due
to higher billings related to rising natural gas prices and
delinquencies. Corporate insurance premiums increased by $91,000 due
to insurance market conditions. Professional services increased by $60,000
primarily related to costs related to evaluating the Company's investment in the
LLC and assessing the level of impairment. Natural gas distribution system
maintenance and cyber security enhancements accounted for much of the remaining
increase.
General taxes increased by
Depreciation expense increased by
Equity in earnings of unconsolidated affiliate decreased by
Impairment of unconsolidated affiliates includes the
Other income, net increased by$49,375 , or 8%, primarily due to an approximately$173,000 decrease in the non-service cost components of net periodic benefit costs partially offset by the absence of the equity portion of AFUDC on the two gate stations that will interconnect MVP withRoanoke Gas' distribution system and reduction in the utilization fee.Roanoke Gas ceased the recognition of AFUDC on these stations effectiveJanuary 2021 until such time construction activities resume. The utilization fee under the revenue sharing agreement declined per the terms of the asset management agreement with Sequent Energy. Interest expense increased by$181,107 , or 9%, as the total daily average debt outstanding increased by 18% between periods. The higher borrowing levels, derived from the ongoing investment in the LLC and financing expenditures in support ofRoanoke Gas' capital budget, were offset by an 8% reduction in the weighted-average interest rate on the Company's debt.Roanoke Gas' interest expense increased by$104,039 primarily due to a$16 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 3.63% to 3.23% associated with the issuance of the$15 million note onOctober 1, 2021 with a 2.00% swap adjusted rate.
Midstream's interest expense increased by
Income tax expense decreased by$10,693,510 to a net tax benefit of$7,560,571 , corresponding to the recognition of the impairment of the Company's investment in the LLC. The effective tax rate was 26.6% and 24.8% for the six month periods endedMarch 31, 2022 and 2021, respectively. Excluding the effect of the impairment, the effective tax rate would have been 23.7% compared to 24.8% for the same period last year. The reduction in the adjusted effective tax rate is attributable to the amortization of the deferred R&D tax credit associated with the tax credit study conducted in fiscal 2021. 30 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The consolidated financial statements of Resources are prepared in accordance with GAAP. The amounts of assets, liabilities, revenues and expenses reported in the Company's consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and management judgments. Actual results may differ significantly from these estimates and assumptions. Under the provisions of ASC 323 - Investments -Equity Method and Joint Ventures , the Company is required to evaluate its investment in the LLC to determine if the fair value of the investments are below the carrying amount and if this decline in fair value is considered other-than-temporary. If the results of the evaluation indicate that the decline in fair value is other-than-temporary, then the recognition of an impairment is required. The following events or circumstances would indicate the potential of an other-than-temporary decline in the fair value of the investment in the LLC:
• a prolonged period of time that the fair value is below the investor's carrying value;
• the current expected financial performance is significantly worse than anticipated when the investor originally invested in the investee;
• adverse regulatory action is expected to substantially reduce the investee's product demand or profitability;
• the investee has lost significant customers or suppliers with no immediate prospects for replacement;
• the investee's discounted or undiscounted cash flows are below the investor's carrying amount; and
• the investee's industry is declining and significantly lags the performance of the economy as a whole.
The determination of fair value of the Company's investment in the LLC is a significant estimate. Management has conducted quarterly evaluations of its investment in the LLC, with the assistance of a valuation specialist, to determine the fair value utilizing an income approach and probability scenarios of discounted cash flows. In conducting these evaluations, management made a variety of assumptions that it believes to be reasonable. Variations in many of these assumptions could have a significant impact on the calculation of the fair value and the resulting level of impairment recorded. Furthermore, these assumptions are based on the facts and circumstances at the date of the evaluations and are subject to change. See theEquity Investment in Mountain Valley Pipeline section for additional information regarding the LLC valuation and impairment.
There have been no other significant changes to the critical accounting policies
as reflected in the Company's Annual Report on Form 10-K for the year ended
Asset ManagementRoanoke 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 paysRoanoke Gas a monthly utilization fee. In accordance with an SCC order issued in 2018, a portion of the utilization fee is retained by the Company with the balance passed through to customers through reduced gas costs. The current asset manager ends onMarch 31, 2023 .
Recent construction activity has been limited based on legal and regulatory challenges. Although certain permits and authorizations were received in the first quarter of fiscal 2022, there remain pending challenges and authorization requests impacting current progress including actions by the Fourth Circuit in January andFebruary 2022 . Following a comprehensive review of all outstanding stream and wetland crossings across the approximately 300-mile MVP route, onFebruary 19, 2021 , the LLC submitted (i) a joint application package to each of the Huntington,Pittsburgh and Norfolk Districts of theU.S. Army Corps of Engineers (Army Corps ) that requests an individual permit from theArmy Corps to cross certain streams and wetlands utilizing open cut techniques (the Army Corps Individual Permit) and (ii) an application to amend the MVP's CPCN that soughtFERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. OnApril 8, 2022 , theFERC authorized the amended CPCN. 31
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Related to seeking the Army Corps Individual Permit, onMarch 4, 2021 , the LLC submitted applications to each of theWest Virginia Department of Environmental Protection (WVDEP) and theVirginia Department of Environmental Quality (VADEQ) seeking Section 401 water quality certification approvals or waivers (such approvals or waivers, the State 401 Approvals). The State 401 Approvals were both issued inDecember 2021 . OnJanuary 25, 2022 , the LLC's authorizations related to theJefferson National Forest (JNF) received from theBureau of Land Management and theU.S. Forest Service were vacated and remanded on specific issues by the Fourth Circuit. OnFebruary 3, 2022 , the Fourth Circuit vacated and remanded on specific issues the Biological Opinion and Incidental Take Statement issued by theUnited States Department of the Interior's Fish and Wildlife Service for MVP. OnMay 3, 2022 , the operator for MVP announced that after evaluating legal options and consulting with the relevant federal agencies, the LLC plans to pursue new authorizations relating to the JNF and new Biological Opinion and Incidental Take Statement; and as a result, the operator is targeting a full in-service date for MVP during the second half of 2023 at a target total project cost of approximately$6.6 billion (excluding AFUDC). In addition to timely receiving, and subsequently maintaining, new authorizations in respect of the JNF and the Biological Opinion and Incidental Take Statement, the LLC must, in order to complete MVP, among other things, timely receive the Army Corps Individual Permit (as well as timely receive, as necessary, certain other state-level approvals), as well as any necessary extensions fromFERC to complete MVP. The LLC also must (i) continue to have available the orders previously issued by theFERC , which are subject to ongoing litigation, modifying its prior stop work orders and extending the LLC's prescribed time to complete MVP; and (ii) timely receive authorization from theFERC to complete construction work in the portion of the project route currently remaining subject to theFERC's previous stop work order and in the JNF. In each case, any such foregoing or other authorizations must remain in effect notwithstanding any pending or future challenge thereto. Failure to achieve any one of the above items could lead to additional delays and higher project costs. Resources' earnings from MVP are primarily attributable to AFUDC income generated by the LLC. The LLC temporarily suspended the accrual of AFUDC on the project fromJanuary 1, 2021 (due to a temporary reduction in growth construction activities) throughMarch 31, 2021 . Limited growth construction activities resumed inApril 2021 , and the LLC began accruing AFUDC associated with those activities. InNovember 2021 , the LLC suspended the accrual of AFUDC for the winter curtailment period until such time as growth construction activities may resume. Additionally,Roanoke Gas continues the suspension of AFUDC accruals on its two gate stations that will interconnect with MVP until such time as construction activities resume on the respective gate stations. InApril 2018 , the LLC announced the Southgate project and submitted Southgate's certificate application to theFERC inNovember 2018 . The Final Environmental Impact Statement for the project was issued onFebruary 14, 2020 . InJune 2020 , theFERC issued the CPCN for Southgate; however, theFERC , while authorizing the project, directed theOffice of Energy Projects not to issue a notice to proceed with construction until necessary federal permits are received for MVP and the Director of theOffice of Energy Projects lifts the stop work order and authorizes the LLC to continue constructing MVP. OnAugust 11, 2020 , theNorth Carolina Department of Environmental Quality (NCDEQ) denied Southgate's application for a Clean Water Act Section 401 Individual Water Quality Certification and Jordan Lake Riparian Buffer Authorization due to uncertainty surrounding MVP's completion. OnMarch 11, 2021 , the Fourth Circuit, pursuant to an appeal filed by the LLC, vacated the NCDEQ's denial and remanded the matter to the NCDEQ for additional review. OnApril 29, 2021 , the NCDEQ reissued its denial of Southgate's application. OnDecember 3, 2021 , theVirginia State Air Pollution Control Board denied the permit for Southgate's Lambert compressor station, which decision the LLC initially appealed before withdrawing its request to review the denial. Given the continually evolving regulatory and legal environment, for greenfield pipeline construction projects, as well as factors specific to MVP and Southgate, including theDecember 2021 compressor station state air permit denial, the LLC continues to evaluate Southgate including engaging in discussions with Dominion Energy North Carolina regarding options with respect to Southgate, including potentially refining the project's design and timing in lieu of pursuing the project as originally contemplated. Dominion Energy North Carolina's obligations under the precedent agreement in support of the original project are subject to certain conditions, including that the LLC complete construction of the project facilities byJune 1, 2022 , which deadline is subject to extension by virtue of previously declared events of force majeure. The project operator has announced that it is unable to predict the results of the discussions between the LLC and Dominion Energy North Carolina, including any potential modifications to the project, or ultimate undertaking or completion of the project. Management conducted an assessment of its investment in the LLC in accordance with the provisions of ASC 323, Investments -Equity Method and Joint Ventures . This assessment included a third-party valuation. As a result of its evaluation, management has concluded that the investment in the LLC sustained an other-than-temporary decline in fair value as ofFebruary 22, 2022 and recorded a pre-tax impairment loss of approximately$39.8 million in its second quarter operating results as discussed in Note 6 to the consolidated financial statements. Management re-evaluated its investment as ofMarch 31, 2022 and concluded that its investment was fairly stated. Management will continue monitoring the status of MVP and Southgate for circumstances that may lead to future impairments, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any further impairment would be dependent on the specific circumstances, including changes to probabilities of completion, and changes in the assumed future cash flows, at the time of evaluation. 32
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Regulatory
In
InApril 2020 , the SCC issued an order allowing regulated utilities inVirginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and to apply for recovery at a future date.Roanoke Gas deferred certain COVID-19 related costs during the first two quarters of fiscal 2022.Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Rider. InMay 2021 , the Company filed its most recent SAVE application with the SCC to update the SAVE Plan and Rider for the periodOctober 2021 throughSeptember 2022 . The updated SAVE Rider is designed to collect approximately$3.45 million in annual revenues, an increase of approximately$1.1 million from the SAVE Rider in effect during fiscal 2021. The Company received a final order onAugust 25, 2021 , in which the SCC approved the Company's requested revenue requirement. The Company anticipates filing an application during the third quarter with the SCC to update the SAVE Plan and Rider for the periodOctober 2022 throughSeptember 2023 to implement new SAVE Plan rates.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the 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 receivable and the payment of dividends. To meet these needs, the Company relies on its operating cash flows, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.
Cash and cash equivalents increased by
Six Months Ended March 31,
Cash Flow Summary 2022 2021
Net cash provided by operating activities
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. Several
factors, including weather, energy prices, natural gas storage levels and
customer collections, contribute to working capital levels and related cash
flows. Generally, operating cash flows are positive during the second and third
fiscal quarters as a combination of earnings, declining storage gas levels and
collections on customer accounts all contribute to higher cash levels. During
the first and fourth fiscal quarters, operating cash flows generally decrease
due to increases in natural gas storage levels and rising customer receivable
balances.
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Cash flows from operating activities for the six months endedMarch 31, 2022 increased by$3,381,504 compared to the same period last year. The increase was primarily driven by storage gas withdrawals and receipt of supplier refunds from the pipelines.
The table below summarizes the significant operating cash flow components:
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