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OFFON

RGC RESOURCES, INC.

(RGCO)
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RGC RESOURCES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/13/2021 | 10:59am EDT

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 2020 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.



The three-month and six-month earnings presented herein should not be considered
as reflective of the Company's consolidated financial results for the fiscal
year ending September 30, 2021. The total revenues and margins realized during
the first six months reflect higher billings due to the weather sensitive nature
of the natural gas business.



COVID-19



As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual
Report on Form 10-K, COVID-19 and the resulting pandemic continue to impact the
local, state, national and global economies. The actions taken to limit the
spread and overcome the virus have disrupted normal activities 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.


Significant progress has been made in distributing and administering vaccines to
the public, which is a critical step on the return to some form of normalcy.
Certain restrictions implemented as a result of the pandemic have been eased
allowing for increased business, recreational and travel activities. However,
the easing of restrictions and the existence of variant strains of COVID-19 may
lead to a rise in infections, which could result in the reinstatement of some of
the restrictions previously in place.


Although the Company has experienced some decline in natural gas consumption by
commercial customers impacted by COVID-19, other customers have increased gas
consumption for use in their business processes. When adjusted for variability
in weather through the WNA, total commercial and industrial volumes declined by
3% for the quarter and 2% for the six month period, compared to the
corresponding periods in the prior year.  The decline from the prior year was
due to a single industrial customer that switched its primary fuel source from
natural gas to an alternate fuel in response to pricing differences. The
Company's volume of gas delivered to residential customers, as adjusted for
weather variability through the WNA, reflected nominal increases year over year.


The Company expects the service moratorium, as discussed below under
"Regulatory," to continue at least into the summer of 2021. As a result,
management continues to closely monitor and evaluate its provision for bad
debts. With the moratorium in place, delinquent account balances are continuing
to build among customers that have been affected by COVID-19 and other economic
events. In February 2021, the Company was able to apply more than $200,000 of
CARES Act funds to the delinquent balances of those customers impacted by
COVID-19. Total bad debt expense incurred by the Company remains unpredictable
as several factors including the duration of the moratorium, the speed and
extent in which the economy recovers, the utilization of the remaining CARES Act
funding, the extent that restrictions on business remain in place, a potential
resurgence in the pandemic or other issues remain uncertain or unknown. Any
improvements or setbacks among any of the factors listed above could result in a
significantly higher or lower level of bad debts as provided for in the
consolidated financial statements.


The ultimate impact to the Company will depend on future developments, including
the factors listed above. The longer the pandemic continues, the greater the
potential negative financial effect on the Company and its customers.







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RGC RESOURCES, INC. AND SUBSIDIARIES





Overview



Resources is an energy services company primarily engaged in the regulated sale
and distribution of natural gas to approximately 63,000 residential, commercial
and industrial customers in Roanoke, Virginia and surrounding localities through
its Roanoke Gas subsidiary.


In addition, Resources is a more than 1% investor in the MVP through its Midstream subsidiary and provides certain unregulated services through its Roanoke Gas subsidiary. Currently, the unregulated operations of Roanoke Gas represent less than 1% of total revenues of Resources on an annual basis.




The Company's utility operations are regulated by the SCC, which oversees the
terms, conditions, and rates to be charged to customers for natural gas service,
safety standards, extension of service and depreciation. The Company is also
subject to federal regulation from the Department of Transportation in regard to
the construction, operation, maintenance, safety and integrity of its
transmission and distribution pipelines. FERC regulates the prices for the
transportation and delivery of natural gas to the Company's distribution system
and underground storage. The Company is also subject to other regulations which
are not necessarily industry specific.



Nearly all of the Company's annual revenues, excluding equity in earnings of
MVP, are derived from the sale and delivery of natural gas to Roanoke Gas
customers. The SCC authorizes the rates and fees the Company charges its
customers for these services. These rates are designed to provide the Company
with the opportunity to recover its gas and non-gas expenses and to earn a
reasonable rate of return for shareholders based on normal weather.



On October 10, 2018, Roanoke Gas filed a general rate application requesting an
annual increase in customer non-gas base rates. Roanoke Gas implemented the
non-gas rates contained in its rate application (or the "interim rates") for
natural gas service rendered to customers on or after January 1, 2019. On
January 24, 2020, the SCC issued its final order on the general rate
application, granting Roanoke Gas an annualized increase in non-gas base rates
of $7.25 million. In March 2020, the Company refunded $3.8 million to its
customers, representing the excess revenues collected plus interest for the
difference between the final approved rates and the interim rates billed since
January 1, 2019.



As the Company's business is seasonal in nature, volatility in winter weather
and the commodity price of natural gas can impact the effectiveness of the
Company's rates in recovering its costs and providing a reasonable return for
its shareholders. In order to mitigate the effect of variations in weather and
the cost of natural gas, the Company 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 increased infrastructure
investment. These mechanisms include SAVE, WNA, ICC and PGA.



The Company's non-gas base rates provide for the recovery of non-gas related
expenses and a reasonable return to shareholders. These rates are determined
based on the filing of a formal non-gas rate application with the SCC utilizing
historical and proforma information, including investment in natural gas
facilities. Generally, investments related to extending service to new customers
are recovered through the non-gas base rates currently in place. The investment
in replacing and upgrading existing infrastructure is generally not recoverable
until a formal rate application is filed to include the additional investment,
and new non-gas base rates are approved. The SAVE Plan and Rider provides the
Company with the ability to recover costs related to these SAVE qualified
infrastructure investments on a prospective basis. The SAVE Plan provides a
mechanism through which the Company may recover the related depreciation and
expenses and provides a return on rate base of the additional capital
investments related to improving the Company's infrastructure until such time a
formal rate application is filed to incorporate these investments in the
Company's non-gas base rates.  The SAVE Rider last reset effective January 2019
in connection with the implementation of new non-gas rates.  Accordingly, SAVE
Plan revenues increased by $261,000 and $585,000 for the three and six month
periods ended March 31, 2021, respectively, compared to the same periods last
year. The increases in SAVE revenues reflects the continued investment in
qualified SAVE Plan infrastructure.



The WNA model reduces earnings volatility related to weather variability in 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. For the three and six months ended March 31, 2021,
the Company accrued approximately $249,000 and $1,196,000 in additional revenues
under the WNA model for weather that was 3% and 9% warmer than normal,
respectively. For the corresponding periods last year, the Company accrued
$1,651,000 and $1,817,000 in additional revenues for weather that was
approximately 20% and 13% warmer than normal, respectively. The current WNA year
ended on March 31, 2021. The 12 month cumulative WNA balance will be collected
from customers during the May 2021 billing cycle.



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RGC RESOURCES, INC. AND SUBSIDIARIES






The Company also has an approved rate structure in place that mitigates the
impact of financing costs associated with its natural gas inventory. Under this
rate structure, Roanoke Gas recognizes revenue for the financing costs, or
"carrying costs," of its inventory. This ICC factor applied to the cost of
inventory is based on the Company's weighted-average cost of capital, including
interest rates on short-term and long-term debt, and the Company's authorized
return on equity.



During times of rising gas costs and rising inventory levels, Roanoke Gas
recognizes ICC revenues to offset higher financing costs associated with higher
inventory balances. Conversely, during times of decreasing gas costs and lower
inventory balances, the Company recognizes less ICC revenue as financing costs
are lower. In addition, ICC revenues are impacted by the changes in the
weighted-average cost of capital. Total ICC revenues for the three and six month
periods ended March 31, 2021 declined by $20,000 and $49,000, respectively, from
the same periods last year primarily due to lower average price of gas in
storage balances and a reduction in the ICC factor used in calculating these
revenues.



The Company's approved billing rates include a component designed to allow for
the recovery of the cost of natural gas used by its customers. The cost of
natural gas is a pass-through cost and is independent of the non-gas base rates
of the Company. This rate component, referred to as the PGA, allows the Company
to pass along to its customers increases and decreases in natural gas costs
incurred by its regulated operations. On a quarterly basis, or more frequently
if necessary, the Company files a PGA rate adjustment request with the SCC to
adjust the gas cost component of its rates up or down depending on projected
price and activity. 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 projections used in establishing the PGA rate, the
Company will either over-recover or under-recover its actual gas costs during
the period. The difference between actual costs incurred and costs recovered
through the application of the PGA is recorded as a regulatory asset or
liability. At the end of the annual deferral period, the balance is amortized
over an ensuing 12-month period as those amounts are reflected in customer
billings.



In February 2021, the central and eastern sections of the country experienced a
polar vortex causing severe cold weather that had a significant
short-term impact on energy prices. As the Company receives a majority of its
natural gas supply from these regions, the average spot commodity price of gas
delivered in February 2021 increased by nearly 200% compared to the prior
month. When combined with capacity fee increases implemented by two of the
pipelines transporting gas for delivery into Roanoke Gas' distribution system,
the higher costs necessitated the Company to file for relief by requesting
an increase in its PGA rate effective March 2021. Although, the commodity price
of gas returned to normal levels in March 2021, the SCC administratively
approved the higher PGA factor through April 2021, allowing the Company to
recover the higher gas costs incurred.



The Company has recognized significant income from equity in earnings of MVP in
the past, as AFUDC has been recorded during the construction activities.
Effective January 1, 2021, the LLC made a determination to
temporarily suspend recognition of AFUDC due to delays in construction related
to the LLC's change in its approach to seeking authorization to cross all
remaining streams and wetlands on the project route. Assuming the necessary
approvals are received for the crossings and construction resumes, AFUDC would
again be recognized until such time as the project is ready to be placed into
service. Accordingly, the Company did not recognize any AFUDC during the second
quarter of fiscal 2021.


Effective January 1, 2021, Roanoke Gas suspended AFUDC on its two gate stations that will connect to MVP until such time as construction activities resume.



Results of Operations


The analysis on the results of operations is based on the consolidated operations of the Company, which is primarily associated with the utility segment. Additional segment analysis is provided in areas where Midstream's investment in affiliates represents a significant component of the comparison.




Management believes that gross utility margin, a non-GAAP financial measure
defined as the difference between condensed consolidated income statement line
items gas utility revenues and cost of gas - utility, is a more useful and
relevant measure to analyze financial performance. The term gross utility margin
is not intended to represent or replace operating income, the most comparable
GAAP financial measure, as an indicator of operating performance and is not
necessarily comparable to similarly titled measures reported by other companies.
The following results of operations analyses will reference gross utility
margin.



Three Months Ended March 31, 2021:




Net income decreased by $912,838, or 16%, for the three months ended March 31,
2021, compared to the same period last year, primarily due to the cessation of
AFUDC earnings on the investment in MVP.



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RGC RESOURCES, INC. AND SUBSIDIARIES






The tables below reflect operating revenues, volume activity and heating
degree-days.



                                             Three Months Ended March 31,
                                                                                  Increase /
                                                2021                2020          (Decrease)        Percentage
Operating Revenues
Gas utility                                $    28,221,274      $ 22,275,719     $   5,945,555               27 %
Non utility                                         32,388           162,012          (129,624 )            (80 )%
Total Operating Revenues                   $    28,253,662      $ 22,437,731     $   5,815,931               26 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial                       3,212,413         2,675,117     $     537,296               20 %
Transportation and Interruptible                   806,981           917,159          (110,178 )            (12 )%
Total Delivered Volumes                          4,019,394         3,592,276     $     427,118               12 %
HDD (Unofficial)                                     1,997             1,661               336               20 %




Total operating revenues for the three months ended March 31, 2021, compared to
the same period last year, increased by 26% due to a combination
of significantly higher natural gas prices and pipeline and storage fees, higher
natural gas deliveries and an increase in SAVE revenues, partially offset by a
reduction in WNA revenues, a decrease in transportation and interruptible
volumes and a decrease in non-utility revenues. A polar vortex in mid-February
2021 in the central and eastern portions of the country resulted in a temporary
spike in the spot prices for natural gas.  In addition, two of the pipeline
suppliers implemented rate increases on the transportation fees for delivering
natural gas into Roanoke's distribution system.  As a result of both events, the
commodity price of natural gas increased by 47% per dth and total pipeline and
storage fees increased by 43% for the quarter.  These higher costs are passed
on to customers through the PGA mechanism.  The quarter ended March 31, 2021 had
20% more heating degree days than the same period last year, which accounted for
the 20% increase in the weather sensitive residential and commercial volumes.
The revenue impact of increased volumes from colder weather was mitigated by a
$1,401,228 reduction in WNA revenues, as compared to prior year.  SAVE Plan
revenues increased by $260,848 due to the ongoing investment in qualified SAVE
infrastructure projects. The transportation and interruptible volumes, primarily
driven by business activity rather than weather, declined by 12% related mostly
to a single multi-fuel customer that switched its primary fuel from natural gas
to an alternate source in response to the rising natural gas commodity prices.
Non-utility revenues decreased due to the completion of a significant long-term
contract in fiscal 2020.



                          Three Months Ended March 31,
                             2021                2020          Increase        Percentage
Gross Utility Margin
Gas Utility Revenue     $    28,221,274      $ 22,275,719     $ 5,945,555               27 %
Cost of Gas - Utility        14,447,057         8,672,997       5,774,060               67 %
Gross Utility Margin    $    13,774,217      $ 13,602,722     $   171,495                1 %




Gross utility margin increased from the same period last year primarily as a
result of the aforementioned higher SAVE revenues and customer growth, partially
offset by a reduction in transportation and interruptible
deliveries. WNA-adjusted volumes associated with residential and commercial
customers increased by more than 3% as compared to a 20% increase for the actual
volumes. The transportation and interruptible volumes declined by 12% related
mostly to a single multi-fuel customer that switched its primary fuel from
natural gas to an alternate source. The higher customer base charge
revenue reflects a combination of nominal customer growth and the continuing
service to delinquent customers as a result of the moratorium for disconnecting
natural gas service on past due accounts.



The components of and the change in gas utility margin are summarized below:



                         Three Months Ended March 31,
                            2021                2020          Increase / (Decrease)
Customer Base Charge   $     3,652,055      $  3,610,679     $                41,376
Carrying Cost                   65,446            85,134                     (19,688 )
SAVE Plan                      550,847           289,999                     260,848
Volumetric                   9,226,891         7,934,022                   1,292,869
WNA                            249,330         1,650,558                  (1,401,228 )
Other Gas Revenues              29,648            32,330                      (2,682 )
Total                  $    13,774,217      $ 13,602,722     $               171,495




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RGC RESOURCES, INC. AND SUBSIDIARIES






Operations and maintenance expenses decreased by $178,679 from the same period
last year primarily due to lower compensation costs and bad debt expense,
partially offset by reduced capitalized overheads.  Compensation expense
declined by $220,000 related to lower benefit costs and the absence of
accelerated vesting of officer restricted stock that resulted from a planned
retirement in the prior year. Bad debt expense declined by $155,000 for the
quarter compared to the same period last year due to the application of more
than $200,000 in CARES Act funds. As a result of the applied funds, the growth
in past due balances was temporarily slowed resulting in a smaller increase in
bad debt reserves. Total capitalized overheads declined by $193,000 on a $1.6
million reduction in capital expenditures related to weather and project timing.



General taxes increased by $54,952, or 9%, primarily due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.

Depreciation expense increased by $140,088, or 7%, on a comparable increase in utility plant balances.




Equity in earnings of unconsolidated affiliate decreased by $1,192,390, as the
LLC ceased recognition of AFUDC on the MVP effective January 2021 until such
time as substantive construction activities resume.  See Equity Investment in
Mountain Valley Pipeline section below for more details.



Other income, net declined by $30,344 primarily due to the absence of the equity
portion of AFUDC offset by a $112,000 decrease in the non-service cost
components of net periodic benefit costs.  In the final order on the Company's
non-gas rate application, the SCC allowed Roanoke Gas to defer financing costs
related to the two natural gas transfer stations that will interconnect Roanoke
Gas' distribution system with the MVP.  Beginning in the second quarter of
fiscal 2020, the Company used the industry standard practice of AFUDC to defer
these costs for potential recovery in future rate proceedings.  As noted above,
the LLC stopped recognizing AFUDC related to MVP.  Roanoke Gas also suspended
AFUDC on these two gate stations until such time as construction activities
resume to interconnect the MVP with the Company's distribution system. Under the
requirements of ASC 715, the components of net periodic benefit costs other than
service cost are to be classified outside of income from operations. The
reduction in these costs is attributable to reduced interest cost related to a
lower discount rate applied to the benefit plans' liabilities and higher
projected earnings on plan assets attributable to asset growth.



Interest expense decreased by $30,529, or 3%, despite total average debt
outstanding increasing by 15% between quarters. The higher borrowing levels,
derived from the ongoing investment in MVP and financing expenditures in support
of Roanoke Gas' capital budget, were offset by a 15% reduction in the weighted
average interest rate on the Company's debt. Interest expense was also impacted
by the absence of a credit for the debt portion of AFUDC related to Roanoke's
two gate stations due to the cessation of the accrual, partially offset by the
prior year interest on the rate refund.



Roanoke Gas' interest expense increased by $45,535 primarily due to a $10.5 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 3.86% to 3.51% associated with the higher borrowings under the variable rate line-of-credit.




Midstream's interest expense decreased by $76,064. The decline in the average
variable interest rate of Midstream's credit facility resulted in the average
interest rate on total Midstream debt decreasing from 3.09% to 2.25%, more than
offsetting the effect of the $6,472,000 increase in total average debt
outstanding.



Income tax expense decreased by $179,557 corresponding to a reduction in taxable
income. The effective tax rate was 25.2% and 23.9% for the three month periods
ended March 31, 2021 and 2020, respectively. The effective tax rate for the
prior year was lower due to excess deductions related to the vesting of
restricted stock and the exercise of stock options.



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RGC RESOURCES, INC. AND SUBSIDIARIES

Six Months Ended March 31, 2021:

Net income decreased by $196,511, or 2%, for the six months ended March 31, 2021, compared to the same period last year. Reductions in the earnings of MVP related to AFUDC, net of higher natural gas margins and lower operation and maintenance expenses, were the contributing factors to the earnings decline.




The tables below reflect operating revenues, volume activity and heating
degree-days.



                                             Six Months Ended March 31,
                                                                                Increase /
                                                2021              2020          (Decrease)        Percentage
Operating Revenues
Gas utility                                $   47,704,774     $ 41,901,325     $   5,803,449               14 %
Non utility                                        65,905          321,859          (255,954 )            (80 )%
Total Operating Revenues                   $   47,770,679     $ 42,223,184     $   5,547,495               13 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial                      5,262,636        4,924,373     $     338,263                7 %
Transportation and Interruptible                1,623,637        1,786,741          (163,104 )             (9 )%
Total Delivered Volumes                         6,886,273        6,711,114     $     175,159                3 %
HDD (Unofficial)                                    3,245            3,101               144                5 %




Total operating revenues for the six months ended March 31, 2021, compared to
the same period last year, increased by 13% due to higher natural gas prices and
pipeline and storage fees, higher delivered volumes and an increase in SAVE
revenues, partially offset by a reduction in WNA revenues, a decrease in
transportation and interruptible volumes and a decrease in non-utility
revenues. Total delivered volumes increased by 175,159 dth while the weather
sensitive residential and commercial volumes increased by 7% due to a 5%
increase in heating degree days. After adjusting for WNA, the weather sensitive
volumes reflected an increase of 3% as the cooler weather reduced the level
of WNA revenues by $620,854. SAVE Plan revenues increased by $584,933 due to the
ongoing investment in qualified SAVE infrastructure projects. Transportation and
interruptible volumes, which are excluded from the WNA calculations, decreased
by 9%, primarily due to the single multi-fuel customer that switched its primary
fuel from natural gas to an alternate source as referenced above. Non-utility
revenues decreased due to the completion of a significant long-term contract in
fiscal 2020, which accounted for more than 75% of total non-utility revenues.





                          Six Months Ended March 31,
                             2021              2020          Increase        Percentage
Gross Utility Margin
Gas Utility Revenue     $   47,704,774     $ 41,901,325     $ 5,803,449               14 %
Cost of Gas - Utility       22,147,756       16,850,803       5,296,953               31 %
Gross Utility Margin    $   25,557,018     $ 25,050,522     $   506,496                2 %




Gross utility margin increased from the same period last year primarily as a
result of the increased SAVE revenues attributable to the continuing investment
in qualified SAVE Plan infrastructure projects. Total WNA-adjusted volumes
declined slightly with reductions in interruptible and transportation volumes
more than offsetting the higher normalized residential and commercial volumes.
The higher customer base charge revenues, associated with customer growth,
offset reductions in ICC and other revenues.



The components of and the change in gas utility margin are summarized below:



                         Six Months Ended March 31,
                            2021              2020          Increase / (Decrease)
Customer Base Charge   $    7,274,520     $  7,191,428     $                83,092
Carrying Cost                 192,202          241,041                     (48,839 )
SAVE Plan                   1,055,545          470,612                     584,933
Volumetric                 15,774,483       15,237,865                     536,618
WNA                         1,196,301        1,817,155                    (620,854 )
Other Gas Revenues             63,967           92,421                     (28,454 )
Total                  $   25,557,018     $ 25,050,522     $               506,496




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RGC RESOURCES, INC. AND SUBSIDIARIES




Operations and maintenance expenses decreased by $594,027 from the same period
last year primarily due to the write-down and amortization of ESAC regulatory
assets during the prior year, lower compensation costs and bad debt expense,
partially offset by lower capitalized overheads. In January 2020, the SCC issued
their final order on Roanoke Gas' non-gas base rate application. Included in the
order approving the rate award on the non-gas base rate application was a
requirement to write-down $317,000 in ESAC assets that were not subject to
recovery. In addition, the first six months of fiscal 2020 included $153,000 of
ESAC asset amortization. No ESAC amortization is included the current year as
the Company accelerated recovery of the remaining balance in September 2020. As
discussed previously, compensation expense declined by $300,000 primarily due to
the vesting of restricted stock in the prior fiscal year.  Bad debt expense
declined by $185,000 due to the application of more than $200,000 in CARES Act
funds to eligible customers with past due balances. Total capitalized overheads
declined by $253,000 on reduced capital expenditures related to a combination
of weather and project timing.



General taxes increased by $85,739, or 8%, due to higher property taxes related
to ongoing investments in infrastructure replacement, system reinforcements and
customer growth.


Depreciation expense increased by $304,981, or 8%, on a comparable increase in utility plant balances.

Equity in earnings of unconsolidated affiliate decreased by $929,793, or 41%, due to the cessation of AFUDC recognition by the LLC on the MVP effective January 2021.




Other income, net increased by $142,039 primarily due to a $225,000 decrease in
the non-service cost components of net periodic benefit costs partially offset
by $121,000 reduction in the equity portion of AFUDC on the two gate stations
that will interconnect the MVP with Roanoke's distribution system.  The Company
temporarily stopped recognizing AFUDC on these gate stations effective January
2021 until the resumption of construction activities closer to the completion of
the MVP project.


Interest expense decreased by $95,885, or 5%, despite total average debt outstanding increasing by 17% associated with funding Roanoke Gas' capital projects and Midstream's continuing investment in MVP. As a result of the declining interest rates on the Company's variable rate debt, the weighted-average interest rate fell by 16%. Interest expense was also reduced by the absence of rate refund interest in the current year and reduced AFUDC related to the delayed completion of the MVP project.

Roanoke Gas' interest expense increased by $31,012 primarily due to the capitalization of $40,000 less in AFUDC during the current year. Higher interest expense related to a more than $11 million increase in average outstanding debt balances offset the absence of interest on the rate refund from the prior year.




Midstream's interest expense decreased by $126,897. The average interest rate of
Midstream's debt declined from 3.13% to 2.27% due to significant reductions in
the interest rate on its variable rate debt, which more than offset the
$7,120,000 increase in total average debt outstanding during the period.



Income tax expense increased by $103,860 on a less than 1% decline in pre-tax
income.  The effective tax rate was 24.8% and 23.8% for the six-month periods
ended March 31, 2021 and 2020, respectively. A combination of vesting
of restricted stock and the exercise of stock options provided additional tax
benefits that resulted in a net lower effective tax rate during the prior year.



Critical Accounting Policies and Estimates




The consolidated financial statements of Resources are prepared in accordance
with GAAP. The amounts of assets, liabilities, revenues and expenses reported in
the Company's consolidated financial statements are affected by accounting
policies, estimates and assumptions that are necessary to comply with generally
accepted accounting principles. Estimates used in the financial statements are
derived from prior experience, statistical analysis and management judgments.
Actual results may differ significantly from these estimates and assumptions.



There have been no changes to the critical accounting policies as reflected in the Company's Annual Report on Form 10-K for the year ended September 30, 2020.




Asset Management



Roanoke Gas uses a third-party asset manager to oversee its pipeline
transportation, storage rights and gas supply inventories and deliveries. In
return for being able to utilize the excess capacities of the transportation and
storage rights, the asset manager pays Roanoke Gas a monthly utilization fee. In
accordance with an SCC order issued in 2018, a portion of the utilization fee is
retained by the Company with the balance passed through to customers through
reduced gas costs. The current asset manager contract has been renewed through
March 31, 2022.



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RGC RESOURCES, INC. AND SUBSIDIARIES

Equity Investment in Mountain Valley Pipeline




While the total MVP project work is approximately 92% complete, recent
construction activity has been limited based on legal and regulatory challenges.
Although certain permits and authorizations were received in the fourth quarter
of fiscal 2020 and the first quarter of fiscal 2021, there remain pending
challenges and authorization requests impacting current progress.



Following a comprehensive review of all outstanding stream and wetland crossings
across the approximately 300-mile MVP project route, on February 19, 2021, the
LLC submitted (i) a joint application package to each of the Huntington,
Pittsburgh and Norfolk Districts of the U.S. Army Corps of Engineers (Army
Corps) that requests an individual permit from the Army Corps to cross certain
streams and wetlands utilizing open cut techniques (the Army Corps Individual
Permit) and (ii) an application to amend the MVP project's CPCN that seeks FERC
authority to cross certain streams and wetlands utilizing alternative trenchless
construction methods.



Related to seeking the Army Corps Individual Permit, on March 4, 2021, the LLC
submitted applications to each of the West Virginia Department of Environmental
Protection (WVDEP) and the Virginia Department of Environmental Quality (VADEQ)
seeking Section 401 water quality certification approvals or waivers. While the
LLC anticipated that the applications would be acted upon within approximately
six months and the agencies are continuing to process the applications, both the
VADEQ and WVDEP submitted requests to the Army Corps for additional time to
address the applications. Based on ongoing discussions, involving the Army Corps
and the VADEQ and WVDEP regarding the requested extensions, the LLC expects that
the Army Corps will grant the VADEQ and WVDEP additional review time and, in
light of the agencies' rationales for seeking extensions, is supportive of that
action. Taking into account that discussions are ongoing, the likelihood of a
longer review period than originally anticipated and, as a result, the potential
for certain time of year restrictions (unless waived or alternative crossing
authority is obtained) and seasonal challenges to affect construction, as well
as seasonal carrying costs, the LLC is targeting a full in-service date for the
MVP project in summer 2022 at a total project cost of approximately $6.2 billion
(excluding AFUDC).



In order to complete the MVP project in accordance with the targeted full
in-service date and cost, the LLC must, among other things, timely receive the
Army Corps Individual Permit (as well as timely receive the State 401 Approvals
and, as necessary, certain other state-level approvals) and timely receive
authorization from the FERC to amend the CPCN to utilize alternative trenchless
construction methods for certain stream and wetland crossings. The LLC also
must (i) maintain and, as applicable, timely receive required authorizations,
including authorization to proceed with construction, related to the Jefferson
National Forest from the Bureau of Land Management, the U.S. Forest Service and
the FERC; (ii) continue to have available the orders previously issued by the
FERC modifying its prior stop work orders and extending the LLC's prescribed
time to complete the MVP project; and (iv) continue to be authorized to work
under the Biological Opinion and Incidental Take Statement issued by the United
States Department of the Interior's Fish and Wildlife Service for the MVP
project. In each case, any such foregoing or other authorizations must remain in
effect notwithstanding any pending or future challenge thereto. Failure to
achieve any one of the above items could lead to additional delays and higher
project costs.



Resources' current earnings from the MVP investment are attributable to AFUDC
income generated by the LLC. As a result of the above-described approach to
seeking authorization to cross all remaining streams and wetlands on the project
route, limited construction activities on the project are expected during the
process to obtain the requisite approvals. Accordingly, the LLC suspended the
accrual of AFUDC on the project subsequent to December 31, 2020 and until growth
construction resumes and, as a result, Resources will not recognize AFUDC income
from MVP during this suspension. Additionally, Roanoke Gas will continue to
suspend accruing AFUDC on its two gate stations that will interconnect with the
MVP until such time as construction activities resume on the respective gate
stations.



Management has conducted an assessment of its MVP investment in accordance with
the provisions of ASC 323, Investments - Equity Method and Joint Ventures. As a
result of its evaluation, management has concluded that the investment is not
currently impaired as of March 31, 2021. Furthermore, the LLC has conducted its
own evaluation of the project and also concluded that no impairment exists as of
March 31, 2021. Management will continue monitoring the status of the project
for circumstances that may lead to future impairment, including any significant
delays or denials of necessary permits and approvals. If necessary, the amount
and timing of any future impairment would be dependent on the specific
circumstances at the time of evaluation.



In April 2018, the LLC announced the MVP Southgate project and submitted
Southgate's certificate application to the FERC in November 2018. The Final
Environmental Impact Statement for the project was issued on February 14, 2020.
In June 2020, the FERC issued the CPCN for the MVP Southgate; however, the FERC,
while authorizing the project, directed the Office of Energy Projects not to
issue a notice to proceed with construction until necessary federal permits are
received for the MVP project and the Director of the Office of Energy Projects
lifts the stop work order and authorizes the LLC to continue constructing the
MVP. On August 11, 2020, the North Carolina Department of Environmental Quality
(NCDEQ) denied Southgate's application due to timing of the MVP project's
completion. On March 11, 2021, the Fourth Circuit Court of Appeals, pursuant to
an appeal filed by the LLC, vacated the NCDEQ's denial and remanded the matter
to the NCDEQ for additional review. On April 29, 2021, the NCDEQ reissued its
denial of Southgate's application. Based on the updated targeted full in-service
date for the MVP and expectations regarding Southgate permit approval timing,
the LLC is targeting commencing construction on the MVP Southgate project in
2022 and placing the MVP Southgate in-service during the spring of 2023.



Midstream has borrowing capacity of $41 million under its current credit
facility, which matures in December 2022. As of March 31, 2021, $29.3 million
had been utilized. This credit facility will provide additional financing
capacity for MVP funding; however, due to ongoing delays, additional financing
will be required. Management is working with the Company's lending institutions
to secure the necessary funding. 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
and Midstream's capital contributions may increase above current projections.



                                       27
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RGC RESOURCES, INC. AND SUBSIDIARIES





Regulatory



On January 24, 2020, the SCC issued its final general rate case order awarding
Roanoke Gas an annualized non-gas rate increase of $7.25 million and providing
for a 9.44% return on equity. The final order directed the Company to write-off
a portion of ESAC assets that were excluded from recovery under the rate award.
As a result, in the second quarter of fiscal 2020 Roanoke Gas expensed an
additional $317,000 of ESAC assets above the normal amortization amount. Rates
authorized by the SCC's final order required the Company to issue customers $3.8
million in rate refunds, which was completed in March 2020.



The final order also excluded from current rates a return on the investment of
two interconnect stations with the MVP, but noted Roanoke Gas could defer the
related financing costs of those investments for possible future recovery. As a
result, the Company began recognizing AFUDC during the second quarter of fiscal
2020 to capitalize both the equity and debt financing costs incurred during the
construction phases. During the first quarter of 2021, Roanoke Gas recognized a
total of $55,981 in AFUDC, $41,978 and $14,003 of equity and debt carrying
costs, respectively. Beginning January 2021, the LLC temporarily ceased
recording AFUDC as MVP construction was temporarily inactive while
awaiting resolution of regulatory and permitting issues. Similarly, Roanoke Gas
temporarily ceased recording AFUDC on its related MVP interconnect construction
projects until such time as construction activities resume.



On March 16, 2020, in response to COVID-19, the SCC issued an order applicable
to all utilities operating in Virginia to suspend disconnection of service to
all customers until May 15, 2020. The Commission extended the moratorium on
disconnections through October 5, 2020. Subsequently, the Virginia General
Assembly extended the moratorium for residential customers until the Governor
determines that the economic and public health conditions have improved such
that the prohibition does not need to remain in place, or until at least 60 days
after such declared state of emergency ends, whichever is sooner. Under the
moratorium, utilities are prohibited from disconnecting residential customers
for non-payment of their natural gas service and from assessing late payment
fees; therefore, residential customers that would normally be disconnected for
non-payment will continue incurring costs for gas service until the moratorium
is removed, resulting in higher potential bad debt write-offs. Roanoke Gas
continues to evaluate and adjust its provision for bad debts; however, the
potential magnitude of the combined impact from the economy and the moratorium
on bad debts continues to be uncertain.



In April 2020, the SCC issued an order allowing regulated utilities in Virginia
to defer certain incremental, prudently incurred costs associated with the
COVID-19 pandemic and to apply for recovery at a future date. Roanoke Gas
continues to defer certain COVID-19 related costs during fiscal 2021 and plans
to seek recovery of these deferrals at the appropriate time. In December 2020,
Roanoke Gas received $403,000 in CARES Act funds to assist customers with past
due balances. Based on guidance provided by the SCC, the Company was able to
apply $209,000 to eligible customer accounts in the second quarter.  Customers
with eligible arrearages as of April 30, 2021, will be able to apply for the
remaining funds.



Roanoke Gas continues to recover the costs of its infrastructure replacement
program through its SAVE Plan. In May 2020, the Company filed its most recent
SAVE application with the SCC to further amend its SAVE Plan and for approval of
a SAVE Rider for the period October 2020 through September 2021. In its
application, Roanoke Gas requested to continue to recover the costs of the
replacement of pre-1973 plastic pipe. In addition, the Company requested to
include the replacement of certain regulator stations and pre-1971 coated steel
pipe as qualifying SAVE projects. In September 2020, the SCC issued its order
approving the updated SAVE Plan and Rider effective with the October 2020
billing cycle. The new SAVE Rider is designed to collect approximately $2.3
million in annual revenues, an increase from the approximate $1.2 million in
annual revenues from the prior SAVE Rider rates.



Capital Resources and Liquidity




Due to the capital intensive nature of the utility business, as well as the
related weather sensitivity, the Company's primary capital needs are the funding
of its utility plant capital projects, investment in the MVP, the seasonal
funding of its natural gas inventories and accounts receivable and the payment
of dividends. To meet these needs, the Company relies on its operating cash
flows, available financing under short-term and long-term credit agreements and
proceeds from its equity program.



Cash and cash equivalents increased by $435,483 for the six-month period ended
March 31, 2021, compared to a $2,172,880 increase for the same period last year.
The following table summarizes the sources and uses of cash:



                                              Six Months Ended March 31,
Cash Flow Summary                               2021              2020

Net cash provided by operating activities $ 9,611,402 $ 11,168,131 Net cash used in investing activities (11,691,440 ) (16,353,341 ) Net cash provided by financing activities 2,515,521 7,358,090 Increase in cash and cash equivalents $ 435,483 $ 2,172,880

                                       28
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RGC RESOURCES, INC. AND SUBSIDIARIES

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, 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.



Cash flows from operating activities for the six months ended March 31, 2021
decreased by $1,556,729 from the same period last year. The decrease in cash
flow provided by operations was primarily driven by changes in accounts
receivable and regulatory assets and liabilities, net of the prior year rate
refund.


The table below summarizes the significant operating cash flow components:

© Edgar Online, source Glimpses

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