Log in
E-mail
Password
Show password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

RGC RESOURCES, INC.

(RGCO)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

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

08/06/2021 | 08:04am 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 nine-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 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 through June 30, 2021,
which has allowed a return to some form of normalcy. Most restrictions
implemented as a result of the pandemic have been eased, including Virginia's
state of emergency, allowing for increased business, recreational and travel
activities. Natural gas consumption by the Company's commercial customers has
largely returned to pre-pandemic levels. However, the easing of restrictions and
the existence of variant strains of COVID-19 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 lapse August 30, 2021.
However, Virginia's General Assembly convened for a special session beginning
August 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. Since February 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
--------------------------------------------------------------------------------

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 62,700 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 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 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 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 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 effective January 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 ended June 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 ended June 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 ended June 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 ending March 31, 2021, the Company billed customers $576,000 of
margin for weather that was 4% warmer than normal.



                                       23
--------------------------------------------------------------------------------

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 month period
ended June 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 in April 2021.  ICC revenues declined by $43,000 for
the nine months ended June 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. Effective January 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 in
April 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 January 1, 2021, Roanoke Gas suspended AFUDC on its two gate stations that will connect to MVP until such time as construction activities on the stations 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 June 30, 2021:

Net income decreased by $595,738, or 49%, for the three months ended June 30, 2021, compared to the same period last year, primarily due to lower AFUDC earnings on the investment in MVP.

                                       24
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES






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.



                                       25
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES






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 $127,253, or 6%, on a comparable increase in utility plant balances.




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 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. 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
of Roanoke Gas' capital budget, were offset by an 8% reduction in the
weighted-average interest rate on the Company's debt. Interest expense was also
impacted by the absence of the debt portion of AFUDC related to Roanoke Gas' two
gate stations.



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
ended June 30, 2021 and 2020, respectively.



                                       26
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES

Nine Months Ended June 30, 2021:

Net income decreased by $792,249, or 7%, for the nine months ended June 30, 2021, compared to the same period last year due to reductions in non-cash AFUDC earnings in the MVP investment, net of higher natural gas margins and lower operation and maintenance expenses.




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.



                                       27
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES






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 $432,234, or 7%, on a comparable increase in utility plant balances.




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 ended June 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 on Roanoke Gas' two gate
stations that will interconnect with the MVP.  Roanoke Gas temporarily stopped
recognizing AFUDC effective January 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 of
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 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.



                                       28
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES

Roanoke Gas' interest expense increased by $56,575 primarily due to the capitalization of $53,000 less in AFUDC during the current year. Higher interest expense related to a more than $9 million increase in average outstanding debt balances, net of an 8% reduction in the effective interest rate, offset the absence of interest on the rate refund from the prior year.




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 $101,847 on a 6% decline in pre-tax income.

The

effective tax rate was 24.8% and 23.9% for the nine-month periods ended June 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 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 extended through
March 31, 2023.


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.



                                       29
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES






Related to seeking the Army Corps Individual Permit, on March 4, 2021, the LLC
submitted applications to each of the West Virginia Department of Environmental
Protection (WVDEP) and the Virginia Department of Environmental Quality (VADEQ)
seeking Section 401 water quality certification approvals or waivers (such
approvals or waivers, the State 401 Approvals).  Both the WVDEP and VADEQ
submitted requests to the Army Corps for additional time to address the
applications, and in late June 2021, the Army Corps granted the WVDEP and the
VADEQ additional review time through November 29, 2021 and December 31, 2021,
respectively.  In early June 2021, the FERC issued a notice of schedule for the
LLC's CPCN amendment application and the FERC is preparing to issue an
environmental assessment in mid-August 2021.  Given that the expected permitting
timelines for both the FERC and the Army 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 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; (iii) timely receive authorization from the
FERC to complete construction work in the portion of the project route currently
remaining subject to the FERC's previous stop work order; 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. The LLC temporarily suspended the accrual of AFUDC
on the project beginning January 1, 2021 (due to a temporary reduction in
growth construction activities) through March 31, 2021.  Limited
growth construction activities resumed in April 2021, and the LLC began accruing
AFUDC associated with those activities. Additionally, Roanoke Gas continues the
suspension of AFUDC accruals on its two gate stations that will interconnect
with the MVP until such time as construction activities resume on the respective
gate stations.



Management conducted an assessment of its MVP investment in accordance with the
provisions of ASC 323, Investments - Equity Method and Joint Ventures. This
assessment included a third-party valuation. As a result of its evaluation,
management has concluded that the investment is not currently impaired as of
June 30, 2021. Furthermore, the LLC has conducted its own evaluation of the
project and also concluded that no impairment exists as of June 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.



In April 2018, the LLC announced the MVP Southgate project and submitted
Southgate's certificate application to the FERC in November 2018. The Final
Environmental Impact Statement for the project was issued on February 14, 2020.
In June 2020, the FERC issued the CPCN for the MVP Southgate; however, the FERC,
while authorizing the project, directed the Office of Energy Projects not to
issue a notice to proceed with construction until necessary federal permits are
received for the MVP project and the Director of the Office of Energy Projects
lifts the stop work order and authorizes the LLC to continue constructing the
MVP. On August 11, 2020, the North Carolina Department of Environmental Quality
(NCDEQ) denied Southgate's application for a Clean Water Act Section 401
Individual Water Quality Certification and Jordan Lake Riparian Buffer
Authorization due to timing of the MVP project's completion. On March 11, 2021,
the Fourth Circuit 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 June 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
--------------------------------------------------------------------------------

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 first 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, 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. The state of
emergency ended June 30, 2021 and, accordingly, the moratorium on residential
disconnections is set to expire on August 30, 2021. However, Virginia's General
Assembly is scheduled to convene a special session on August 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. In December 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.



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. 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. In May 2021, the Company filed its most recent
SAVE application with the SCC to update the SAVE Rider for the period October
2021 through September 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 by September 30, 2021.



                                       31
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES

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 ended
June 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 $ 14,416,227 $ 12,826,099 Net cash used in investing 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 $ 977,345 $ (430,143 )

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.



                                       32
--------------------------------------------------------------------------------

RGC RESOURCES, INC. AND SUBSIDIARIES






Cash flows from operating activities for the nine months ended June 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:

© Edgar Online, source Glimpses

All news about RGC RESOURCES, INC.
09/30RGC RESOURCES INC : Entry into a Material Definitive Agreement, Creation of a Direct Finan..
AQ
09/27RGC RESOURCES : Sets Quarterly Dividend at $0.185 a Share, Payable Nov. 1 to Shareholders ..
MT
09/27RGC RESOURCES : Declares Quarterly Dividend
AQ
09/27Rgc Resources, Inc. Declares Quarterly Dividend, Payable on November 1, 2021
CI
09/10RGC RESOURCES INC : Regulation FD Disclosure, Financial Statements and Exhibits (form 8-K)
AQ
08/31RGC RESOURCES : Janney Raises Fair Value Estimate for RGC Resources to $37 From $34, Reite..
MT
08/27RGC RESOURCES : Material Definitive Agreement (Form 8-K)
PU
08/26RGC RESOURCES INC : Entry into a Material Definitive Agreement, Creation of a Direct Finan..
AQ
08/09RGC Resources, Inc. Provides Earnings Guidance for the Full Year 2021
CI
08/09RGC RESOURCES INC : Regulation FD Disclosure, Financial Statements and Exhibits (form 8-K)
AQ
More news
Analyst Recommendations on RGC RESOURCES, INC.
More recommendations