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 six-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 six months reflect higher billings due to the weather sensitive nature of the natural gas business. COVID-19 As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual Report on Form 10-K, COVID-19 and the resulting pandemic continue to impact the local, state, national and global economies. The actions taken to limit the spread and overcome the virus have disrupted normal activities throughout the Company's service territory. Management continues to monitor current conditions to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees. Significant progress has been made in distributing and administering vaccines to the public, which is a critical step on the return to some form of normalcy. Certain restrictions implemented as a result of the pandemic have been eased allowing for increased business, recreational and travel activities. However, the easing of restrictions and the existence of variant strains of COVID-19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place. Although the Company has experienced some decline in natural gas consumption by commercial customers impacted by COVID-19, other customers have increased gas consumption for use in their business processes. When adjusted for variability in weather through the WNA, total commercial and industrial volumes declined by 3% for the quarter and 2% for the six month period, compared to the corresponding periods in the prior year. The decline from the prior year was due to a single industrial customer that switched its primary fuel source from natural gas to an alternate fuel in response to pricing differences. The Company's volume of gas delivered to residential customers, as adjusted for weather variability through the WNA, reflected nominal increases year over year. The Company expects the service moratorium, as discussed below under "Regulatory," to continue at least into the summer of 2021. As a result, management continues to closely monitor and evaluate its provision for bad debts. With the moratorium in place, delinquent account balances are continuing to build among customers that have been affected by COVID-19 and other economic events. InFebruary 2021 , the Company was able to apply more than$200,000 of CARES Act funds to the delinquent balances of those customers impacted by COVID-19. Total bad debt expense incurred by the Company remains unpredictable as several factors including the duration of the moratorium, the speed and extent in which the economy recovers, the utilization of the remaining CARES Act funding, the extent that restrictions on business remain in place, a potential resurgence in the pandemic or other issues remain uncertain or unknown. Any improvements or setbacks among any of the factors listed above could result in a significantly higher or lower level of bad debts as provided for in the consolidated financial statements. The ultimate impact to the Company will depend on future developments, including the factors listed above. The longer the pandemic continues, the greater the potential negative financial effect on the Company and its customers. 20
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Overview Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,000 residential, commercial and industrial customers inRoanoke, Virginia and surrounding localities through itsRoanoke Gas subsidiary.
In addition, Resources is a more than 1% investor in the MVP through its
Midstream subsidiary and provides certain unregulated services through its
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 annual 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 the ability to recover costs related to these SAVE qualified infrastructure investments on a prospective basis. The SAVE Plan provides a mechanism through which the Company may recover the related depreciation and expenses and provides a return on rate base of the additional capital investments related to improving the Company's infrastructure until such time a formal rate application is filed to incorporate these investments in the Company's non-gas base rates. The SAVE Rider last reset effectiveJanuary 2019 in connection with the implementation of new non-gas rates. Accordingly, SAVE Plan revenues increased by$261,000 and$585,000 for the three and six month periods endedMarch 31, 2021 , respectively, compared to the same periods last year. The increases in SAVE revenues reflects the continued investment in qualified SAVE Plan infrastructure. The WNA model reduces earnings volatility related to weather variability in the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when weather is colder than normal. The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal and correspondingly requires the Company to refund the excess margin earned for weather that is colder than normal. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day. For the three and six months endedMarch 31, 2021 , the Company accrued approximately$249,000 and$1,196,000 in additional revenues under the WNA model for weather that was 3% and 9% warmer than normal, respectively. For the corresponding periods last year, the Company accrued$1,651,000 and$1,817,000 in additional revenues for weather that was approximately 20% and 13% warmer than normal, respectively. The current WNA year ended onMarch 31, 2021 . The 12 month cumulative WNA balance will be collected from customers during theMay 2021 billing cycle. 21 --------------------------------------------------------------------------------
The Company also has an approved rate structure in place that mitigates the impact of financing costs associated with its natural gas inventory. Under this rate structure,Roanoke Gas recognizes revenue for the financing costs, or "carrying costs," of its inventory. This ICC factor applied to the cost of inventory is based on the Company's weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company's authorized return on equity. During times of rising gas costs and rising inventory levels,Roanoke Gas recognizes ICC revenues to offset higher financing costs associated with higher inventory balances. Conversely, during times of decreasing gas costs and lower inventory balances, the Company recognizes less ICC revenue as financing costs are lower. In addition, ICC revenues are impacted by the changes in the weighted-average cost of capital. Total ICC revenues for the three and six month periods endedMarch 31, 2021 declined by$20,000 and$49,000 , respectively, from the same periods last year primarily due to lower average price of gas in storage balances and a reduction in the ICC factor used in calculating these revenues. The Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. The cost of natural gas is a pass-through cost and is independent of the non-gas base rates of the Company. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs incurred by its regulated operations. On a quarterly basis, or more frequently if necessary, the Company files a PGA rate adjustment request with the SCC to adjust the gas cost component of its rates up or down depending on projected price and activity. Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount. As actual costs will differ from projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as those amounts are reflected in customer billings. InFebruary 2021 , the central and eastern sections of the country experienced a polar vortex causing severe cold weather that had a significant short-term impact on energy prices. As the Company receives a majority of its natural gas supply from these regions, the average spot commodity price of gas delivered inFebruary 2021 increased by nearly 200% compared to the prior month. When combined with capacity fee increases implemented by two of the pipelines transporting gas for delivery intoRoanoke Gas' distribution system, the higher costs necessitated the Company to file for relief by requesting an increase in its PGA rate effectiveMarch 2021 . Although, the commodity price of gas returned to normal levels inMarch 2021 , the SCC administratively approved the higher PGA factor throughApril 2021 , allowing the Company to recover the higher gas costs incurred. The Company has recognized significant income from equity in earnings of MVP in the past, as AFUDC has been recorded during the construction activities. EffectiveJanuary 1, 2021 , the LLC made a determination to temporarily suspend recognition of AFUDC due to delays in construction related to the LLC's change in its approach to seeking authorization to cross all remaining streams and wetlands on the project route. Assuming the necessary approvals are received for the crossings and construction resumes, AFUDC would again be recognized until such time as the project is ready to be placed into service. Accordingly, the Company did not recognize any AFUDC during the second quarter of fiscal 2021.
Effective
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$912,838 , or 16%, for the three months endedMarch 31, 2021 , compared to the same period last year, primarily due to the cessation of AFUDC earnings on the investment in MVP. 22 --------------------------------------------------------------------------------
The tables below reflect operating revenues, volume activity and heating
degree-days.
Three Months Ended March 31,
Increase /
2021 2020 (Decrease) Percentage
Operating Revenues
Gas utility $ 28,221,274 $ 22,275,719 $ 5,945,555 27 %
Non utility 32,388 162,012 (129,624 ) (80 )%
Total Operating Revenues $ 28,253,662 $ 22,437,731 $ 5,815,931 26 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 3,212,413 2,675,117 $ 537,296 20 %
Transportation and Interruptible 806,981 917,159 (110,178 ) (12 )%
Total Delivered Volumes 4,019,394 3,592,276 $ 427,118 12 %
HDD (Unofficial) 1,997 1,661 336 20 %
Total operating revenues for the three months ended March 31, 2021 , compared to
the same period last year, increased by 26% due to a combination
of significantly higher natural gas prices and pipeline and storage fees, higher
natural gas deliveries and an increase in SAVE revenues, partially offset by a
reduction in WNA revenues, a decrease in transportation and interruptible
volumes and a decrease in non-utility revenues. A polar vortex in mid-February
2021 in the central and eastern portions of the country resulted in a temporary
spike in the spot prices for natural gas. In addition, two of the pipeline
suppliers implemented rate increases on the transportation fees for delivering
natural gas into Roanoke's distribution system. As a result of both events, the
commodity price of natural gas increased by 47% per dth and total pipeline and
storage fees increased by 43% for the quarter. These higher costs are passed
on to customers through the PGA mechanism. The quarter ended March 31, 2021 had
20% more heating degree days than the same period last year, which accounted for
the 20% increase in the weather sensitive residential and commercial volumes.
The revenue impact of increased volumes from colder weather was mitigated by a
$1,401,228 reduction in WNA revenues, as compared to prior year. SAVE Plan
revenues increased by $260,848 due to the ongoing investment in qualified SAVE
infrastructure projects. The transportation and interruptible volumes, primarily
driven by business activity rather than weather, declined by 12% related mostly
to a single multi-fuel customer that switched its primary fuel from natural gas
to an alternate source in response to the rising natural gas commodity prices.
Non-utility revenues decreased due to the completion of a significant long-term
contract in fiscal 2020.
Three Months Ended March 31,
2021 2020 Increase Percentage
Gross Utility Margin
Gas Utility Revenue $ 28,221,274 $ 22,275,719 $ 5,945,555 27 %
Cost of Gas - Utility 14,447,057 8,672,997 5,774,060 67 %
Gross Utility Margin $ 13,774,217 $ 13,602,722 $ 171,495 1 %
Gross utility margin increased from the same period last year primarily as a
result of the aforementioned higher SAVE revenues and customer growth, partially
offset by a reduction in transportation and interruptible
deliveries. WNA-adjusted volumes associated with residential and commercial
customers increased by more than 3% as compared to a 20% increase for the actual
volumes. The transportation and interruptible volumes declined by 12% related
mostly to a single multi-fuel customer that switched its primary fuel from
natural gas to an alternate source. The higher customer base charge
revenue reflects a combination of nominal customer growth and the continuing
service to delinquent customers as a result of the moratorium for disconnecting
natural gas service on past due accounts.
The components of and the change in gas utility margin are summarized below:
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Customer Base Charge $ 3,652,055 $ 3,610,679 $ 41,376
Carrying Cost 65,446 85,134 (19,688 )
SAVE Plan 550,847 289,999 260,848
Volumetric 9,226,891 7,934,022 1,292,869
WNA 249,330 1,650,558 (1,401,228 )
Other Gas Revenues 29,648 32,330 (2,682 )
Total $ 13,774,217 $ 13,602,722 $ 171,495
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Operations and maintenance expenses decreased by$178,679 from the same period last year primarily due to lower compensation costs and bad debt expense, partially offset by reduced capitalized overheads. Compensation expense declined by$220,000 related to lower benefit costs and the absence of accelerated vesting of officer restricted stock that resulted from a planned retirement in the prior year. Bad debt expense declined by$155,000 for the quarter compared to the same period last year due to the application of more than$200,000 in CARES Act funds. As a result of the applied funds, the growth in past due balances was temporarily slowed resulting in a smaller increase in bad debt reserves. Total capitalized overheads declined by$193,000 on a$1.6 million reduction in capital expenditures related to weather and project timing.
General taxes increased by
Depreciation expense increased by
Equity in earnings of unconsolidated affiliate decreased by$1,192,390 , as the LLC ceased recognition of AFUDC on the MVP effectiveJanuary 2021 until such time as substantive construction activities resume.See Equity Investment in Mountain Valley Pipeline section below for more details. Other income, net declined by$30,344 primarily due to the absence of the equity portion of AFUDC offset by a$112,000 decrease in the non-service cost components of net periodic benefit costs. In the final order on the Company's non-gas rate application, the SCC allowedRoanoke Gas to defer financing costs related to the two natural gas transfer stations that will interconnectRoanoke Gas' distribution system with the MVP. Beginning in the second quarter of fiscal 2020, the Company used the industry standard practice of AFUDC to defer these costs for potential recovery in future rate proceedings. As noted above, the LLC stopped recognizing AFUDC related to MVP.Roanoke Gas also suspended AFUDC on these two gate stations until such time as construction activities resume to interconnect the MVP with the Company's distribution system. Under the requirements of ASC 715, the components of net periodic benefit costs other than service cost are to be classified outside of income from operations. The reduction in these costs is attributable to reduced interest cost related to a lower discount rate applied to the benefit plans' liabilities and higher projected earnings on plan assets attributable to asset growth. Interest expense decreased by$30,529 , or 3%, despite total average debt outstanding increasing by 15% between quarters. The higher borrowing levels, derived from the ongoing investment in MVP and financing expenditures in support ofRoanoke Gas' capital budget, were offset by a 15% reduction in the weighted average interest rate on the Company's debt. Interest expense was also impacted by the absence of a credit for the debt portion of AFUDC related toRoanoke's two gate stations due to the cessation of the accrual, partially offset by the prior year interest on the rate refund.
Midstream's interest expense decreased by$76,064 . The decline in the average variable interest rate of Midstream's credit facility resulted in the average interest rate on total Midstream debt decreasing from 3.09% to 2.25%, more than offsetting the effect of the$6,472,000 increase in total average debt outstanding. Income tax expense decreased by$179,557 corresponding to a reduction in taxable income. The effective tax rate was 25.2% and 23.9% for the three month periods endedMarch 31, 2021 and 2020, respectively. The effective tax rate for the prior year was lower due to excess deductions related to the vesting of restricted stock and the exercise of stock options. 24 --------------------------------------------------------------------------------
Six Months Ended
Net income decreased by
The tables below reflect operating revenues, volume activity and heating
degree-days.
Six Months Ended March 31,
Increase /
2021 2020 (Decrease) Percentage
Operating Revenues
Gas utility $ 47,704,774 $ 41,901,325 $ 5,803,449 14 %
Non utility 65,905 321,859 (255,954 ) (80 )%
Total Operating Revenues $ 47,770,679 $ 42,223,184 $ 5,547,495 13 %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial 5,262,636 4,924,373 $ 338,263 7 %
Transportation and Interruptible 1,623,637 1,786,741 (163,104 ) (9 )%
Total Delivered Volumes 6,886,273 6,711,114 $ 175,159 3 %
HDD (Unofficial) 3,245 3,101 144 5 %
Total operating revenues for the six months ended March 31, 2021 , compared to
the same period last year, increased by 13% due to higher natural gas prices and
pipeline and storage fees, higher delivered volumes and an increase in SAVE
revenues, partially offset by a reduction in WNA revenues, a decrease in
transportation and interruptible volumes and a decrease in non-utility
revenues. Total delivered volumes increased by 175,159 dth while the weather
sensitive residential and commercial volumes increased by 7% due to a 5%
increase in heating degree days. After adjusting for WNA, the weather sensitive
volumes reflected an increase of 3% as the cooler weather reduced the level
of WNA revenues by $620,854 . SAVE Plan revenues increased by $584,933 due to the
ongoing investment in qualified SAVE infrastructure projects. Transportation and
interruptible volumes, which are excluded from the WNA calculations, decreased
by 9%, primarily due to the single multi-fuel customer that switched its primary
fuel from natural gas to an alternate source as referenced above. Non-utility
revenues decreased due to the completion of a significant long-term contract in
fiscal 2020, which accounted for more than 75% of total non-utility revenues.
Six Months Ended March 31,
2021 2020 Increase Percentage
Gross Utility Margin
Gas Utility Revenue $ 47,704,774 $ 41,901,325 $ 5,803,449 14 %
Cost of Gas - Utility 22,147,756 16,850,803 5,296,953 31 %
Gross Utility Margin $ 25,557,018 $ 25,050,522 $ 506,496 2 %
Gross utility margin increased from the same period last year primarily as a
result of the increased SAVE revenues attributable to the continuing investment
in qualified SAVE Plan infrastructure projects. Total WNA-adjusted volumes
declined slightly with reductions in interruptible and transportation volumes
more than offsetting the higher normalized residential and commercial volumes.
The higher customer base charge revenues, associated with customer growth,
offset reductions in ICC and other revenues.
The components of and the change in gas utility margin are summarized below:
Six Months Ended March 31,
2021 2020 Increase / (Decrease)
Customer Base Charge $ 7,274,520 $ 7,191,428 $ 83,092
Carrying Cost 192,202 241,041 (48,839 )
SAVE Plan 1,055,545 470,612 584,933
Volumetric 15,774,483 15,237,865 536,618
WNA 1,196,301 1,817,155 (620,854 )
Other Gas Revenues 63,967 92,421 (28,454 )
Total $ 25,557,018 $ 25,050,522 $ 506,496
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Operations and maintenance expenses decreased by$594,027 from the same period last year primarily due to the write-down and amortization of ESAC regulatory assets during the prior year, lower compensation costs and bad debt expense, partially offset by lower capitalized overheads. InJanuary 2020 , the SCC issued their final order onRoanoke Gas' non-gas base rate application. Included in the order approving the rate award on the non-gas base rate application was a requirement to write-down$317,000 in ESAC assets that were not subject to recovery. In addition, the first six months of fiscal 2020 included$153,000 of ESAC asset amortization. No ESAC amortization is included the current year as the Company accelerated recovery of the remaining balance inSeptember 2020 . As discussed previously, compensation expense declined by$300,000 primarily due to the vesting of restricted stock in the prior fiscal year. Bad debt expense declined by$185,000 due to the application of more than$200,000 in CARES Act funds to eligible customers with past due balances. Total capitalized overheads declined by$253,000 on reduced capital expenditures related to a combination of weather and project timing. General taxes increased by$85,739 , or 8%, due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.
Depreciation expense increased by
Equity in earnings of unconsolidated affiliate decreased by
Other income, net increased by$142,039 primarily due to a$225,000 decrease in the non-service cost components of net periodic benefit costs partially offset by$121,000 reduction in the equity portion of AFUDC on the two gate stations that will interconnect the MVP withRoanoke's distribution system. The Company temporarily stopped recognizing AFUDC on these gate stations effectiveJanuary 2021 until the resumption of construction activities closer to the completion of the MVP project.
Interest expense decreased by
Midstream's interest expense decreased by$126,897 . The average interest rate of Midstream's debt declined from 3.13% to 2.27% due to significant reductions in the interest rate on its variable rate debt, which more than offset the$7,120,000 increase in total average debt outstanding during the period. Income tax expense increased by$103,860 on a less than 1% decline in pre-tax income. The effective tax rate was 24.8% and 23.8% for the six-month periods endedMarch 31, 2021 and 2020, respectively. A combination of vesting of restricted stock and the exercise of stock options provided additional tax benefits that resulted in a net lower effective tax rate during the prior year.
Critical Accounting Policies and Estimates
The consolidated financial statements of Resources are prepared in accordance with GAAP. The amounts of assets, liabilities, revenues and expenses reported in the Company's consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and management judgments. Actual results may differ significantly from these estimates and assumptions.
There have been no changes to the critical accounting policies as reflected in
the Company's Annual Report on Form 10-K for the year ended
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 renewed throughMarch 31, 2022 . 26
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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. 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. While the LLC anticipated that the applications would be acted upon within approximately six months and the agencies are continuing to process the applications, both the VADEQ and WVDEP submitted requests to theArmy Corps for additional time to address the applications. Based on ongoing discussions, involving theArmy Corps and the VADEQ and WVDEP regarding the requested extensions, the LLC expects that theArmy Corps will grant the VADEQ and WVDEP additional review time and, in light of the agencies' rationales for seeking extensions, is supportive of that action. Taking into account that discussions are ongoing, the likelihood of a longer review period than originally anticipated and, as a result, the potential for certain time of year restrictions (unless waived or alternative crossing authority is obtained) and seasonal challenges to affect construction, as well as seasonal carrying costs, the LLC is targeting a full in-service date for the MVP project in summer 2022 at a total project cost of approximately$6.2 billion (excluding AFUDC). In order to complete the MVP project in accordance with the targeted full in-service date and cost, the LLC must, among other things, timely receive the Army Corps Individual Permit (as well as timely receive the State 401 Approvals and, as necessary, certain other state-level approvals) and timely receive authorization from 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; 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. As a result of the above-described approach to seeking authorization to cross all remaining streams and wetlands on the project route, limited construction activities on the project are expected during the process to obtain the requisite approvals. Accordingly, the LLC suspended the accrual of AFUDC on the project subsequent toDecember 31, 2020 and until growth construction resumes and, as a result, Resources will not recognize AFUDC income from MVP during this suspension. Additionally,Roanoke Gas will continue to suspend accruing AFUDC on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations. Management has conducted an assessment of its MVP investment in accordance with the provisions of ASC 323, Investments -Equity Method and Joint Ventures . As a result of its evaluation, management has concluded that the investment is not currently impaired as ofMarch 31, 2021 . Furthermore, the LLC has conducted its own evaluation of the project and also concluded that no impairment exists as ofMarch 31, 2021 . Management will continue monitoring the status of the project for circumstances that may lead to future impairment, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any future impairment would be dependent on the specific circumstances at the time of evaluation. 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 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 ofMarch 31, 2021 ,$29.3 million had been utilized. This credit facility will provide additional financing capacity for MVP funding; however, due to ongoing delays, additional financing will be required. Management is working with the Company's lending institutions to secure the necessary funding. If the legal and regulatory challenges, including any future challenges, are not resolved in a timely manner and/or restrictions are imposed that impact future construction, the cost of the MVP and Midstream's capital contributions may increase above current projections. 27
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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 second 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 , the LLC temporarily ceased recording AFUDC as MVP construction was temporarily inactive while awaiting resolution of regulatory and permitting issues. Similarly,Roanoke Gas temporarily ceased recording AFUDC on its related MVP interconnect construction projects until such time as construction activities resume. 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. Under the moratorium, utilities are prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees; therefore, residential customers that would normally be disconnected for non-payment will continue incurring costs for gas service until the moratorium is removed, resulting in higher potential bad debt write-offs.Roanoke Gas continues to evaluate and adjust its provision for bad debts; however, the potential magnitude of the combined impact from the economy and the moratorium on bad debts continues to be uncertain. 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. InDecember 2020 ,Roanoke Gas received$403,000 in CARES Act funds to assist customers with past due balances. Based on guidance provided by the SCC, the Company was able to apply$209,000 to eligible customer accounts in the second quarter. Customers with eligible arrearages as ofApril 30, 2021 , will be able to apply for the remaining funds.Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Plan. InMay 2020 , the Company filed its most recent SAVE application with the SCC to further amend its SAVE Plan and for approval of a SAVE Rider for the periodOctober 2020 throughSeptember 2021 . In its application,Roanoke Gas requested to continue to recover the costs of the replacement of pre-1973 plastic pipe. In addition, the Company requested to include the replacement of certain regulator stations and pre-1971 coated steel pipe as qualifying SAVE projects. InSeptember 2020 , the SCC issued its order approving the updated SAVE Plan and Rider effective with theOctober 2020 billing cycle. The new SAVE Rider is designed to collect approximately$2.3 million in annual revenues, an increase from the approximate$1.2 million in annual revenues from the prior SAVE Rider rates.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the related weather sensitivity, the Company's primary capital needs are the funding of its utility plant capital projects, investment in the MVP, the seasonal funding of its natural gas inventories and accounts receivable and the payment of dividends. To meet these needs, the Company relies on its operating cash flows, available financing under short-term and long-term credit agreements and proceeds from its equity program. Cash and cash equivalents increased by$435,483 for the six-month period endedMarch 31, 2021 , compared to a$2,172,880 increase for the same period last year. The following table summarizes the sources and uses of cash: Six Months Ended March 31, Cash Flow Summary 2021 2020
Net cash provided by operating activities
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--------------------------------------------------------------------------------Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to increases in natural gas storage levels and rising customer receivable balances. Cash flows from operating activities for the six months endedMarch 31, 2021 decreased by$1,556,729 from the same period last year. The decrease in cash flow provided by operations was primarily driven by changes in accounts receivable and regulatory assets and liabilities, net of the prior year rate refund.
The table below summarizes the significant operating cash flow components:
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