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 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 nine-month earnings presented herein should not be considered as reflective of the Company's consolidated financial results for the fiscal year endingSeptember 30, 2021 . The total revenues and margins realized during the first nine 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 continues to impact the local, state, national and global economies. Significant progress was made in distributing and administering vaccines to the public throughJune 30, 2021 , which has allowed a return to some form of normalcy. 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 largely returned to pre-pandemic levels. 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 or all of the restrictions previously in place. Management continues to monitor current conditions to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees. By statute, the service disconnection moratorium on residential customers, as discussed below under "Regulatory," is scheduled to lapseAugust 30, 2021 . However,Virginia's General Assembly convened for a special session beginningAugust 2, 2021 , during which action could be taken to extend the service moratorium. 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. SinceFebruary 2021 , the Company applied more than$400,000 of CARES Act funds to the delinquent balances of those customers impacted by COVID-19. Total bad debt expense that may be incurred by the Company remains unpredictable primarily due to the continuing and possible extension of the moratorium and a potential resurgence in the pandemic that may lead to reinstatement of restrictions or other similar measures, along with any related economic impact. 22 --------------------------------------------------------------------------------
Overview Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,700 residential, commercial and industrial customers inRoanoke, Virginia and surrounding localities through itsRoanoke Gas subsidiary. In addition, Resources is a more than 1% investor in the MVP through its Midstream subsidiary and a less than 1% investor in Southgate. 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 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. The Company is also subject to other regulations which are not necessarily industry specific. 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. 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. OnOctober 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 afterJanuary 1, 2019 . OnJanuary 24, 2020 , the SCC issued its final order on the general rate application, grantingRoanoke Gas an annualized increase in non-gas base rates of$7.25 million . InMarch 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 sinceJanuary 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 a mechanism through which it recovers costs related to these 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 Rider reset effectiveJanuary 2019 with the implementation of new non-gas rates. Accordingly, SAVE Plan revenues increased by$329,000 and$914,000 for the three and nine month periods endedJune 30, 2021 , respectively, compared to the same periods last year. The increases in SAVE revenues reflect the Company's 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 months endedJune 30, 2021 and 2020, the Company accrued approximately$72,000 and$504,000 in refunds under the WNA model for weather that had 5% and 39% more heating degree days than normal, respectively. For the nine months endedJune 30, 2021 and 2020, the Company accrued approximately$1,124,000 and$1,313,000 in additional revenues under the WNA model for weather that was 7% and 9% warmer than normal, respectively. For the WNA year endingMarch 31, 2021 , the Company billed customers$576,000 of margin for weather that was 4% warmer than normal. 23 --------------------------------------------------------------------------------
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 month period endedJune 30, 2021 compared to the corresponding period last year reflected a slight increase due to rising natural gas commodity prices as the Company began its summer storage refill inApril 2021 . ICC revenues declined by$43,000 for the nine months endedJune 30, 2021 compared to the same period last year due to a combination of lower average price of natural gas in storage and lower average inventory levels. 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. The Company has recognized significant income from equity in earnings of MVP in the past, as AFUDC has been recorded. EffectiveJanuary 1, 2021 , the LLC suspended accruing AFUDC on the project due to a temporary reduction in growth construction activities as it changed its approach in seeking authorization to cross all remaining streams and wetlands on the project route. Beginning inApril 2021 , the LLC resumed accruing AFUDC associated with certain growth construction activities at an amount well below recent historical levels. AFUDC will continue as long as progress continues on completing the MVP, which would include receiving the necessary approvals for the stream crossings. Once MVP is placed in service, AFUDC will cease and future earnings will be derived from fees to transport natural gas on the pipeline.
Effective
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
Net income decreased by
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The tables below reflect operating revenues, volume activity and heating
degree-days.
Three Months Ended June 30,
Increase /
2021 2020 (Decrease) Percentage
Operating Revenues
Gas utility $ 14,016,681 $ 10,856,453 $ 3,160,228 29 %
Non utility 32,165 215,465 (183,300 ) (85 )%
Total Operating Revenues $ 14,048,846 $ 11,071,918 $ 2,976,928 27 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 967,402 949,845 $ 17,557 2 %
Transportation and Interruptible 797,276 1,244,246 (446,970 ) (36 )%
Total Delivered Volumes 1,764,678 2,194,091 $ (429,413 ) (20 )%
HDD 351 460 (109 ) (24 )%
Total operating revenues for the three months ended June 30, 2021 , compared to
the same period last year, increased by 27% due to a combination
of significantly higher natural gas prices and pipeline and storage fees, an
increase in SAVE revenues, and increasing residential and commercial natural gas
consumption, partially offset by a decrease in transportation and interruptible
volumes. As the country is emerging from the shut-downs and restrictions imposed
as a result of COVID-19, improving economic activity has increased both the
demand for and the price of natural gas. In addition to this upward pressure on
natural gas commodity prices, two of the pipeline suppliers implemented rate
increases on transportation fees for delivering natural gas into Roanoke's
distribution system during the Company's second fiscal quarter. As a result of
both events, the commodity price of natural gas increased by 64% per dth and
total pipeline and storage fees increased by 75% for the quarter. These higher
costs are passed on to customers through the PGA mechanism. Although the three
months ended June 30, 2021 had 109, or 24%, fewer heating degree days than the
same period last year, the weather sensitive residential and commercial volumes
increased by 2% reflecting economic improvement as businesses and customers are
beginning to return to pre-pandemic activities. SAVE Plan revenues increased by
$329,048 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 36% due 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 June 30,
2021 2020 Increase Percentage
Gross Utility Margin
Gas Utility Revenue $ 14,016,681 $ 10,856,453 $ 3,160,228 29 %
Cost of Gas - Utility 6,289,615 3,680,408 2,609,207 71 %
Gross Utility Margin $ 7,727,066 $ 7,176,045 $ 551,021 8 %
Gross utility margin increased from the same period last year primarily as a
result of the aforementioned higher SAVE revenues and increased economic
activity, partially offset by the reduction in transportation and interruptible
deliveries. The WNA-adjusted volumes associated with residential and commercial
customers increased by 21% as compared to a 2% increase for the actual volumes.
These increased volumes reflect improving economic conditions as discussed
previously. The lower margin transportation and interruptible volumes declined
by 36% related entirely to a single multi-fuel customer that switched its
primary fuel from natural gas to an alternate source. Excluding the multi-fuel
customer from both periods, total transportation and interruptible volumes would
have increased by 17%, indicating the improving business environment. The higher
customer base charge revenue reflects a combination of customer growth and the
continuing service to delinquent customers as a result of the ongoing
disconnection moratorium.
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The components of and the change in gas utility margin are summarized below:
Three Months Ended June 30,
2021 2020 Increase / (Decrease)
Customer Base Charge $ 3,648,899 $ 3,613,710 $ 35,189
Carrying Cost 56,542 50,671 5,871
SAVE Plan 677,482 348,434 329,048
Volumetric 3,357,099 3,660,793 (303,694 )
WNA (72,181 ) (503,615 ) 431,434
Other Gas Revenues 59,225 6,052 53,173
Total $ 7,727,066 $ 7,176,045 $ 551,021
Operations and maintenance expenses increased by $109,411 , or 3%, over the same
period last year primarily due to higher compensation, contracted services costs
and bad debt expense, partially offset by increased capitalized overheads.
Compensation and contracted services increased by $162,000 due to increased
activity as a result of fewer COVID-19 related restrictions compared to last
year. Bad debt expense increased by $15,000 related to the continuation of the
moratorium on service disconnections for customers with past due balances. The
increase in bad debt expense would have been much higher if not for the
application of $194,000 in additional CARES Act funds to COVID-19 qualifying
past-due customers in June. These funds were in addition to the $209,000
applied during the second fiscal quarter. Total capitalized overheads
increased by $104,000 due to higher direct construction expenditures for the
period on which the overheads are applied.
General taxes increased by $33,653 , or 6%, due to higher property taxes related
to ongoing investments in infrastructure replacement, system reinforcements and
customer growth.
Depreciation expense increased by
Equity in earnings of unconsolidated affiliate decreased by$1,071,710 , with limited growth construction activities resuming. As these activities were on a much smaller scale, the level of AFUDC recognized during the period was significantly lower than in the prior year but higher than the second fiscal quarter when AFUDC temporarily ceased. The amount of AFUDC recognized in future periods will be dependent on the level and timing of construction activities required to complete the MVP.See Equity Investment in Mountain Valley Pipeline section below for additional information. Other income, net increased by$77,630 primarily due to a$112,000 decrease in the non-service cost components of net periodic benefit costs partially offset by the absence of the equity portion of AFUDC. The reduction in the non-service cost components 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. In the final order on the Company's non-gas rate application, the SCC allowedRoanoke Gas to defer financing costs related to the two natural gas transfer stations that will interconnectRoanoke Gas' distribution system with the MVP. As a result, the Company began recognizing AFUDC in the second quarter of fiscal 2020. Roanoke Gas suspended AFUDC on these two gate stations until such time as construction activities resume. Interest expense increased by$14,035 , or 1%, as the total average debt outstanding increased by 11% between quarters. The higher borrowing levels, derived from the ongoing investment in MVP 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. Interest expense was also impacted by the absence of the debt portion of AFUDC related toRoanoke Gas' two gate stations.Roanoke Gas' interest expense increased by$25,563 primarily due to a$6.2 million increase in total average debt outstanding for the period, net of a reduction in the average interest rate from 3.84% to 3.60% associated with the higher borrowings under the variable rate line-of-credit. Midstream's interest expense decreased by$11,528 . 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 2.52% to 2.22%, more than offsetting an increase of$6.4 million in total average debt outstanding. Income tax expense decreased by$205,707 corresponding to a reduction in taxable income. The effective tax rate was 24.2% and 24.9% for the three month periods endedJune 30, 2021 and 2020, respectively. 26 --------------------------------------------------------------------------------
Nine Months Ended
Net income decreased by
The tables below reflect operating revenues, volume activity and heating
degree-days.
Nine Months Ended June 30,
Increase /
2021 2020 (Decrease) Percentage
Operating Revenues
Gas utility $ 61,721,455 $ 52,757,778 $ 8,963,677 17 %
Non utility 98,070 537,324 (439,254 ) (82 )%
Total Operating Revenues $ 61,819,525 $ 53,295,102 $ 8,524,423 16 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 6,230,038 5,874,218 $ 355,820 6 %
Transportation and Interruptible 2,420,913 3,030,987 (610,074 ) (20 )%
Total Delivered Volumes 8,650,951 8,905,205 $ (254,254 ) (3 )%
HDD 3,596 3,561 35 1 %
Total operating revenues for the nine months ended June 30, 2021 , compared to
the same period last year, increased by 16% due to higher natural gas commodity
prices and pipeline and storage fees, higher residential and commercial volumes
and an increase in SAVE revenues, partially offset by lower transportation and
interruptible volumes and a decrease in non-utility revenues. Rising natural gas
demand combined with higher transportation fees implemented by the Company's
pipeline suppliers have resulted in a 30% per dth increase in the average
commodity price for natural gas and a 32% per dth increase in transportation and
storage fees. Total residential and commercial volumes increased by
355,820 dth, or 6%, on a 1% increase in heating degree days.
After adjusting for WNA, total residential and commercial volumes increased by
nearly 5% reflecting greater demand for natural gas as economic conditions began
to improve. SAVE Plan revenues increased by $913,981 due to the ongoing
investment in qualified SAVE infrastructure projects. Transportation and
interruptible volumes, which are excluded from the WNA calculations, decreased
by 20%, due to the single multi-fuel customer that switched its primary fuel
from natural gas to an alternate source as referenced above. Excluding the
multi-fuel customer's usage from both periods, total transportation and
interruptible volumes would have increased by 4%. 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.
Nine Months Ended June 30,
2021 2020 Increase Percentage
Gross Utility Margin
Gas Utility Revenue $ 61,721,455 $ 52,757,778 $ 8,963,677 17 %
Cost of Gas - Utility 28,437,371 20,531,211 7,906,160 39 %
Gross Utility Margin $ 33,284,084 $ 32,226,567 $ 1,057,517 3 %
Gross utility margin increased from the same period last year primarily as a
result of SAVE revenues and increased residential and commercial volumes. Though
total delivered volumes declined by 254,254 dth, increases in residential and
commercial volumes more than offset the decreases in lower-margin interruptible
and transportation volumes. The higher customer base charge revenues reflect
customer growth and continuing service to delinquent customers as a result of
the disconnection moratorium.
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The components of and the change in gas utility margin are summarized below:
Nine Months Ended June 30,
2021 2020 Increase / (Decrease)
Customer Base Charge $ 10,923,419 $ 10,805,138 $ 118,281
Carrying Cost 248,744 291,712 (42,968 )
SAVE Plan 1,733,027 819,046 913,981
Volumetric 19,131,582 18,898,658 232,924
WNA 1,124,120 1,313,540 (189,420 )
Other Gas Revenues 123,192 98,473 24,719
Total $ 33,284,084 $ 32,226,567 $ 1,057,517
Operations and maintenance expenses decreased by $484,616 , or 4%, from the same
period last year primarily due to the prior year write-down and amortization of
ESAC regulatory assets, lower bad debt expense and compensation costs, partially
offset by higher contracted services and lower capitalized overheads. In
accordance with the SCC's final order on the non-gas base rate application, the
Company wrote-down $317,000 in ESAC assets last year that were not subject to
recovery. In addition, $198,000 of ESAC asset amortization was recorded in the
first nine months of fiscal 2020. No ESAC amortization is included the current
year as the Company fully amortized the remaining balance of all ESAC assets
in September 2020 . Bad debt expense declined by $170,000 due to the application
of more than $400,000 in CARES Act funds to eligible customers with past due
balances. If not for the CARES Act funds, bad debt expense would have increased
by approximately $230,000 compared to the same period last year. Compensation
expense declined by $205,000 primarily due to the accelerated vesting of
restricted stock in the prior fiscal year. The reduction in compensation
expense was more than offset by an increase of $271,000 in contracted services
to supplement increased operational needs. Total capitalized overheads declined
by $148,000 on $2 million in reduced capital expenditures related to project
timing.
General taxes increased by $119,392 , or 7%, due to higher property taxes related
to ongoing investments in infrastructure replacement, system reinforcements and
customer growth.
Depreciation expense increased by
Equity in earnings of unconsolidated affiliate decreased by$2,001,503 , or 57%, with limited growth construction activities resuming in the fiscal third quarter. As growth construction activities have been limited throughout the nine months endedJune 30, 2021 , the level of AFUDC recognized during the period was significantly lower than in the prior year. Other income, net increased by$219,669 primarily due to a$337,000 decrease in the non-service cost components of net periodic benefit costs partially offset by$163,000 reduction in the equity portion of AFUDC onRoanoke Gas' two gate stations that will interconnect with the MVP.Roanoke Gas temporarily stopped recognizing AFUDC effectiveJanuary 2021 until the resumption of construction activities on these stations. Interest expense decreased by$81,850 , or 3%, as a decline in the interest rate on the Company's variable rate debt more than offset higher total debt levels. Total average debt outstanding increased by 15% to meet the funding needs ofRoanoke 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 13% compared to the same period last
year. Furthermore, interest expense was also reduced by the absence of rate
refund interest in the current year net of lower AFUDC associated with borrowed
funds related to the delayed completion of the MVP project.
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--------------------------------------------------------------------------------Midstream's interest expense decreased by$138,425 . The average interest rate on Midstream's debt declined from 2.92% to 2.25% due to significant reductions in the interest rate on its variable rate debt, which more than offset the$6.9 million increase in total average debt outstanding during the period.
Income tax expense decreased by
The
effective tax rate was 24.8% and 23.9% for the nine-month periods endedJune 30, 2021 and 2020, respectively. A combination of accelerated 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. Allowance for Doubtful Accounts: The Company evaluates the collectability of its accounts receivable balances based on a variety of factors including loss history, level of delinquent account balances, collections on previously written off accounts and current economic conditions. The historical model used in valuing bad debt reserves has been consistently applied over the years and has produced reasonable estimates for valuing the potential loss on customer accounts receivable. With the arrival of COVID-19 and the widespread impact deriving from the pandemic, including the disconnection moratorium, the estimation of the Company's bad debt reserves became more subjective with greater reliance on qualitative assessments and judgments than on quantitative measures. The Company continues to analyze and evaluate available information related to the valuation allowance for bad debts. Nevertheless, the next several months could result in significant changes to the reserve balance and bad debt expense.
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
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 contract has been extended throughMarch 31, 2023 .
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, 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 project's CPCN that seeksFERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. 29
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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). Both the WVDEP and VADEQ submitted requests to theArmy Corps for additional time to address the applications, and in lateJune 2021 , theArmy Corps granted the WVDEP and the VADEQ additional review time throughNovember 29, 2021 andDecember 31, 2021 , respectively. In earlyJune 2021 , theFERC issued a notice of schedule for the LLC's CPCN amendment application and theFERC is preparing to issue an environmental assessment inmid-August 2021 . Given that the expected permitting timelines for both theFERC and theArmy Corps are in-line with the LLC's expectations, the LLC continues to target 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 theFERC 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 theJefferson National Forest from theBureau of Land Management , theU.S. Forest Service and theFERC ; (ii) continue to have available the orders previously issued by theFERC modifying its prior stop work orders and extending the LLC's prescribed time to complete the MVP project; (iii) 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 (iv) continue to be authorized to work under the Biological Opinion and Incidental Take Statement issued by theUnited 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. The LLC temporarily suspended the accrual of AFUDC on the project beginningJanuary 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. Additionally,Roanoke Gas continues the suspension of AFUDC accruals on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations. Management conducted an assessment of its MVP investment in accordance with the provisions of ASC 323, Investments -Equity Method and Joint Ventures . This assessment included a third-party valuation. As a result of its evaluation, management has concluded that the investment is not currently impaired as ofJune 30, 2021 . Furthermore, the LLC has conducted its own evaluation of the project and also concluded that no impairment exists as ofJune 30, 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. InApril 2018 , the LLC announced the MVP 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 the MVP 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 the MVP project and the Director of theOffice of Energy Projects lifts the stop work order and authorizes the LLC to continue constructing the 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 timing of the MVP project's completion. OnMarch 11, 2021 , theFourth 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. OnApril 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 inDecember 2022 . As ofJune 30, 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. 30 --------------------------------------------------------------------------------
Regulatory OnJanuary 24, 2020 , the SCC issued its final general rate case order awardingRoanoke 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 first quarter of fiscal 2020Roanoke 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 inMarch 2020 . The final order also excluded from current rates a return on the investment of two interconnect stations with the MVP, but notedRoanoke 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. BeginningJanuary 2021 ,Roanoke Gas temporarily ceased recording AFUDC on its related MVP interconnect construction projects until such time as construction activities resume. OnMarch 16, 2020 , in response to COVID-19, the SCC issued an order applicable to all utilities operating inVirginia to suspend disconnection of service to all customers untilMay 15, 2020 . The Commission extended the moratorium on disconnections throughOctober 5, 2020 . Subsequently, theVirginia 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. The state of emergency endedJune 30, 2021 and, accordingly, the moratorium on residential disconnections is set to expire onAugust 30, 2021 . However,Virginia's General Assembly is scheduled to convene a special session onAugust 2, 2021 , during which action could be taken to extend the service moratorium. While the moratorium is in place, 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. InDecember 2020 ,Roanoke Gas received$403,000 in CARES Act funds to assist customers with growing past due balances. Based on guidance provided by the SCC, the Company was able to apply the full amount to eligible customer accounts during the second and third fiscal quarters.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. 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 continues to defer certain COVID-19 related costs during fiscal 2021 and plans to seek recovery of these deferrals at the appropriate time. Such deferrals are made under the provisions of FASB ASC No. 980, Regulated Operations. If the Company should determine that ASC 980 no longer applies to these deferrals, the Company would write-off any amount not subject to future rate recovery.Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Plan. InMay 2021 , the Company filed its most recent SAVE application with the SCC to update the SAVE Rider for the periodOctober 2021 throughSeptember 2022 . 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. The updated SAVE Rider is designed to collect approximately$3.45 million in annual revenues, an increase of approximately$1.1 million in annual revenues from the existing SAVE Rider rates. The Company expects a final order from the SCC on this application bySeptember 30, 2021 . 31 --------------------------------------------------------------------------------
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$977,345 for the nine-month period endedJune 30, 2021 , compared to a$430,143 decrease for the same period last year. The following table summarizes the sources and uses of cash: Nine Months Ended June 30, Cash Flow Summary 2021 2020
Net cash provided by operating activities
(19,001,279 ) (23,506,062 )
Net cash provided by financing activities 5,562,397 10,249,820
Increase (decrease) in cash and cash equivalents
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.
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Cash flows from operating activities for the nine months endedJune 30, 2021 increased by$1,590,128 from the same period last year. The increase in cash flow provided by operations was primarily driven by the prior year rate refund and changes in accounts payable, accounts receivable and gas in storage balances.
The table below summarizes the significant operating cash flow components:
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