RGC Resources(RGCO) - 2021 Q2 - Quarterly Report

Corporate Information This section provides an overview of the company's filing status, key definitions, and structural details Filing Information This section details the company's SEC filing information, identifying RGC Resources, Inc. as a non-accelerated filer and smaller reporting company, with 8,228,769 shares of common stock outstanding as of April 30, 2021 - RGC Resources, Inc. is a non-accelerated filer and a smaller reporting company[4] Title of Each Class | Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | | :------------------ | :------------- | :---------------------------------------- | | Common Stock, $5 Par Value | RGCO | NASDAQ Global Market | - As of April 30, 2021, the company had 8,228,769 shares of Common Stock, $5 Par Value, outstanding[6] Glossary of Terms This section provides definitions for key acronyms and terms used throughout the financial report, covering regulatory bodies, financial concepts, company subsidiaries, and project-specific terminology relevant to RGC Resources, Inc.'s operations - The glossary defines key terms such as AFUDC (Allowance for Funds Used During Construction), ARO (Asset Retirement Obligation), ARP (Alternative Revenue Program), and various regulatory bodies like FASB, FERC, and SCC[8][9][10] - It clarifies company entities like 'Company' (RGC Resources, Inc. or Roanoke Gas Company), 'Resources' (RGC Resources, Inc., parent company), 'Roanoke Gas' (Roanoke Gas Company, a wholly-owned subsidiary), and 'Midstream' (RGC Midstream, L.L.C., a wholly-owned subsidiary)[8][10] - Project-specific terms like MVP (Mountain Valley Pipeline) and Southgate (Mountain Valley Pipeline, LLC's Southgate project) are also defined[9][10] Condensed Consolidated Financial Statements This section presents the company's financial position, performance, and cash flows through condensed consolidated balance sheets, income statements, comprehensive income, changes in equity, and cash flow statements Condensed Consolidated Balance Sheets The balance sheets show an increase in total assets from $281.7 million in September 2020 to $292.2 million in March 2021, primarily driven by growth in utility property and investments in unconsolidated affiliates, with total liabilities and stockholders' equity increasing proportionally Total Assets (March 31, 2021 vs. September 30, 2020) | Metric | March 31, 2021 | September 30, 2020 | | :----- | :------------- | :----------------- | | Total Assets | $292,164,038 | $281,679,507 | | Total Liabilities and Stockholders' Equity | $292,164,038 | $281,679,507 | Key Balance Sheet Changes (March 31, 2021 vs. September 30, 2020) | Item | March 31, 2021 | September 30, 2020 | Change | | :-------------------------------- | :------------- | :----------------- | :----- | | Cash and cash equivalents | $726,549 | $291,066 | +$435,483 | | Accounts receivable | $9,828,956 | $3,404,044 | +$6,424,912 | | Utility plant, net | $203,698,440 | $198,445,093 | +$5,253,347 | | Investment in unconsolidated affiliates | $60,544,494 | $57,542,805 | +$3,001,689 | | Total current liabilities | $20,775,066 | $16,570,742 | +$4,204,324 | | Long-term debt, net | $120,770,429 | $123,819,631 | -$3,049,202 | | Total stockholders' equity | $97,574,608 | $88,887,977 | +$8,686,631 | Condensed Consolidated Statements of Income For the three months ended March 31, 2021, net income decreased by 16% year-over-year, primarily due to a significant decline in equity in earnings from unconsolidated affiliates, despite a 26% increase in total operating revenues Key Income Statement Data (Three Months Ended March 31) | Metric | 2021 | 2020 | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | | Total operating revenues | $28,253,662 | $22,437,731 | +26% | | Cost of gas - utility | $14,447,057 | $8,672,997 | +67% | | Operating income | $7,099,426 | $6,999,616 | +1% | | Equity in earnings (loss) of unconsolidated affiliate | $(3,797) | $1,188,593 | -100% | | Net income | $4,767,478 | $5,680,316 | -16% | | Basic EPS | $0.58 | $0.70 | -17% | | Diluted EPS | $0.58 | $0.70 | -17% | | Dividends Declared Per Common Share | $0.185 | $0.175 | +6% | Key Income Statement Data (Six Months Ended March 31) | Metric | 2021 | 2020 | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | | Total operating revenues | $47,770,679 | $42,223,184 | +13% | | Cost of gas - utility | $22,147,756 | $16,850,803 | +31% | | Operating income | $12,680,813 | $12,081,595 | +5% | | Equity in earnings (loss) of unconsolidated affiliate | $1,352,886 | $2,282,679 | -41% | | Net income | $9,490,741 | $9,687,252 | -2% | | Basic EPS | $1.16 | $1.20 | -3% | | Diluted EPS | $1.16 | $1.19 | -3% | | Dividends Declared Per Common Share | $0.370 | $0.350 | +6% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for the three months ended March 31, 2021, increased significantly to $5.3 million from $4.5 million in the prior year, primarily due to a positive shift in other comprehensive income from a loss to a gain, driven by interest rate swaps Comprehensive Income (Three Months Ended March 31) | Metric | 2021 | 2020 | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | | Net income | $4,767,478 | $5,680,316 | -16% | | Other comprehensive income (loss), net of tax | $509,158 | $(1,199,783) | +142% | | Comprehensive income | $5,276,636 | $4,480,533 | +18% | Comprehensive Income (Six Months Ended March 31) | Metric | 2021 | 2020 | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | | Net income | $9,490,741 | $9,687,252 | -2% | | Other comprehensive income (loss), net of tax | $692,747 | $(919,939) | +175% | | Comprehensive income | $10,183,488 | $8,767,313 | +16% | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $88.9 million at September 30, 2020, to $97.6 million at March 31, 2021, primarily driven by net income and the issuance of common stock, partially offset by cash dividends declared Changes in Stockholders' Equity (Six Months Ended March 31, 2021) | Item | Amount | | :-------------------------------- | :------------- | | Balance - September 30, 2020 | $88,887,977 | | Net Income | $9,490,741 | | Other comprehensive income | $692,747 | | Cash dividends declared | $(3,041,305) | | Issuance of common stock | $1,544,448 | | Balance - March 31, 2021 | $97,574,608 | - The company issued 66,592 shares of common stock (11,979 shares in Q1 and 54,613 shares in Q2) during the six months ended March 31, 2021, contributing to the increase in common stock and capital in excess of par value[18] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased by $1.56 million year-over-year for the six months ended March 31, 2021, primarily due to changes in accounts receivable and regulatory assets/liabilities, while investing activities used less cash and financing activities provided significantly less cash Cash Flow Summary (Six Months Ended March 31) | Cash Flow Activity | 2021 | 2020 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Net cash provided by operating activities | $9,611,402 | $11,168,131 | $(1,556,729) | | Net cash used in investing activities | $(11,691,440) | $(16,353,341) | $4,661,901 | | Net cash provided by financing activities | $2,515,521 | $7,358,090 | $(4,842,569) | | Net increase in cash and cash equivalents | $435,483 | $2,172,880 | $(1,737,397) | - Expenditures for utility property decreased from $10.4 million in 2020 to $9.0 million in 2021, and investment in unconsolidated affiliates decreased from $5.9 million to $2.7 million, leading to a reduction in cash used in investing activities[20] - Proceeds from issuance of unsecured notes significantly decreased from $17.1 million in 2020 to $3.8 million in 2021, contributing to the decline in cash from financing activities[20] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, revenue recognition, income taxes, regulatory matters, investments, derivatives, debt, and other key financial areas Note 1. Basis of Presentation This note clarifies that the unaudited condensed consolidated financial statements include RGC Resources, Inc. and its wholly-owned subsidiaries, Roanoke Gas, Diversified Energy, and Midstream, highlighting the seasonal nature of the business and the ongoing evaluation of ASU 2020-04 - The financial statements are consolidated and include RGC Resources, Inc. and its wholly-owned subsidiaries: Roanoke Gas, Diversified Energy, and Midstream[22] - Quarterly earnings are highly seasonal, with greater earnings generally occurring in winter months, meaning current results are not indicative of the full fiscal year[23] - The company adopted ASU 2018-14 (Defined Benefit Plans Disclosure) effective October 1, 2020, with no material effect on financial position, results of operations, or cash flows, while evaluation of ASU 2020-04 (Reference Rate Reform) is ongoing and could significantly impact financials due to LIBOR-referenced contracts[27][28] Note 2. Revenue Revenue is primarily derived from gas utility sales and delivery, recognized over time based on metered usage and tariff rates, with Alternative Revenue Programs (ARPs) adjusting revenues for external factors and infrastructure investments Total Operating Revenues by Segment (Three Months Ended March 31) | Segment | 2021 | 2020 | Change (%) | | :---------------- | :----------- | :----------- | :--------- | | Gas utility | $28,221,274 | $22,275,719 | +27% | | Non utility | $32,388 | $162,012 | -80% | | Total | $28,253,662 | $22,437,731 | +26% | Total Operating Revenues by Segment (Six Months Ended March 31) | Segment | 2021 | 2020 | Change (%) | | :---------------- | :----------- | :----------- | :--------- | | Gas utility | $47,704,774 | $41,901,325 | +14% | | Non utility | $65,905 | $321,859 | -80% | | Total | $47,770,679 | $42,223,184 | +13% | - Alternative Revenue Programs (ARPs), including WNA and SAVE Plan over/under collection, are SCC-approved mechanisms that adjust revenues for weather variations and infrastructure replacement costs, and are outside the scope of ASC 606[38] Note 3. Income Taxes Income tax expense for the three months ended March 31, 2021, was $1.6 million, down from $1.8 million in the prior year, with an effective tax rate of 25.2%, while for the six months, it increased slightly to $3.1 million with a 24.8% effective rate Income Tax Expense and Effective Tax Rate (Three Months Ended March 31) | Metric | 2021 | 2020 | | :-------------------------------- | :----------- | :----------- | | Income before income taxes | $6,375,413 | $7,467,808 | | Total income tax expense | $1,607,935 | $1,787,492 | | Effective tax rate | 25.2% | 23.9% | Income Tax Expense and Effective Tax Rate (Six Months Ended March 31) | Metric | 2021 | 2020 | | :-------------------------------- | :----------- | :----------- | | Income before income taxes | $12,623,680 | $12,716,331 | | Total income tax expense | $3,132,939 | $3,029,079 | | Effective tax rate | 24.8% | 23.8% | Note 4. Rates and Regulatory Matters The SCC extended the moratorium on residential customer disconnections for non-payment due to COVID-19, leading to uncertainty regarding potential bad debt write-offs, while Roanoke Gas defers COVID-19 related costs and applied $209,000 of CARES Act funds to eligible customer accounts - The SCC extended the moratorium on residential customer disconnections for non-payment and late payment fees due to COVID-19, creating uncertainty for potential bad debt write-offs[43] - Roanoke Gas is deferring incremental, prudently incurred COVID-19 related costs for future recovery, as allowed by an April 2020 SCC order[44] - In December 2020, Roanoke Gas received $403,000 in CARES Act funds, applying $209,000 to eligible customer accounts in February 2021 to assist with past due balances[45][46] Note 5. Other Investments Midstream, a subsidiary, holds an approximately 1% ownership in the Mountain Valley Pipeline (MVP) LLC, which faces delays due to regulatory challenges, leading to the suspension of AFUDC accrual since December 31, 2020, and a targeted full in-service date of summer 2022 - Midstream is an approximately 1% owner of the LLC constructing the MVP, targeting a full in-service date for summer 2022 at a total project cost of approximately $6.2 billion, with Midstream's contribution expected to approach $65 million[47] - The LLC suspended accruing AFUDC on the MVP project subsequent to December 31, 2020, resulting in no AFUDC income recognition from MVP during this suspension[48] Investment in Unconsolidated Affiliates (MVP and Southgate) | Item | March 31, 2021 | September 30, 2020 | | :-------------------------------- | :------------- | :----------------- | | Investment in unconsolidated affiliates | $60,544,494 | $57,542,805 | | Equity in earnings (loss) of unconsolidated affiliate (3 months) | $(3,797) | $1,188,593 | | Equity in earnings (loss) of unconsolidated affiliate (6 months) | $1,352,886 | $2,282,679 | Note 6. Derivatives and Hedging The Company uses interest rate swaps to manage financial market risks, converting variable-rate debt into fixed-rate debt, which qualify as cash flow hedges with fair value changes reported in other comprehensive income, and no derivative instruments for natural gas purchases were outstanding - The Company uses three interest rate swaps to convert variable-rate debt into fixed-rate debt, qualifying them as cash flow hedges[54] - Changes in the fair value of these swaps are reported in other comprehensive income, and no portion of the swaps were deemed ineffective[54] - There were no outstanding derivative instruments for the purchase of natural gas during the periods presented[55] Note 7. Long-Term Debt Roanoke Gas renewed its unsecured line-of-credit agreement for $40 million, expiring March 31, 2023, with a variable interest rate, and total notes payable amounted to $118.8 million as of March 31, 2021, with the company in compliance with all debt covenants - Roanoke Gas renewed its unsecured line-of-credit agreement for a two-year term, expiring March 31, 2023, with a maximum borrowing limit of $40,000,000 and a variable interest rate based on 30-day LIBOR plus 100 basis points[57] Long-Term Debt Summary (March 31, 2021 vs. September 30, 2020) | Debt Type | March 31, 2021 (Principal) | September 30, 2020 (Principal) | | :-------------------------------- | :------------------------- | :----------------------------- | | Total notes payable, current and non-current | $118,755,200 | $114,975,200 | | Less: current maturities of long-term debt | $(7,000,000) | $0 | | Total notes payable | $111,755,200 | $114,975,200 | | Line-of-credit | $9,281,929 | $9,143,606 | | Total long-term debt | $121,037,129 | $124,118,806 | - The Company was in compliance with all debt covenants as of March 31, 2021, and September 30, 2020, including financial covenants limiting consolidated long-term indebtedness to not more than 65% of total capitalization[58] Note 8. Other Comprehensive Income (Loss) Other comprehensive income for the three months ended March 31, 2021, was a gain of $509,158, a significant improvement from a loss of $1,199,783 in the prior year, primarily driven by unrealized gains on interest rate swaps, with a similar shift for the six-month period Other Comprehensive Income (Loss) (Three Months Ended March 31) | Item | 2021 | 2020 | | :-------------------------------- | :----------- | :----------- | | Net interest rate swaps | $494,294 | $(1,216,574) | | Defined benefit plans | $14,864 | $16,791 | | Total other comprehensive income (loss) | $509,158 | $(1,199,783) | Other Comprehensive Income (Loss) (Six Months Ended March 31) | Item | 2021 | 2020 | | :-------------------------------- | :----------- | :----------- | | Net interest rate swaps | $663,019 | $(953,521) | | Defined benefit plans | $29,728 | $33,582 | | Total other comprehensive income (loss) | $692,747 | $(919,939) | Reconciliation of Accumulated Other Comprehensive Income (Loss) | Item | September 30, 2020 | Other Comprehensive Income | March 31, 2021 | | :-------------------------------- | :----------------- | :------------------------- | :------------- | | Interest Rate Swaps | $(1,651,213) | $663,019 | $(988,194) | | Defined Benefit Plans | $(1,796,731) | $29,728 | $(1,767,003) | | Accumulated Other Comprehensive Income (Loss) | $(3,447,944) | $692,747 | $(2,755,197) | Note 9. Commitments and Contingencies The COVID-19 pandemic continues to significantly impact businesses, with ongoing uncertainty regarding its duration, potential resurgence of variants, and vaccine effectiveness, making the extent of its future financial effect on the Company unpredictable - The COVID-19 pandemic continues to have a significant effect on businesses, with disruptions to normal activities and uncertainty regarding future impacts[63] - Factors such as the duration of the outbreak, easing of restrictions, potential for resurgence of variants, and vaccine effectiveness make the future financial impact on the Company highly uncertain and unpredictable[63] Note 10. Earnings Per Share Basic and diluted earnings per common share for the three months ended March 31, 2021, were $0.58, down from $0.70 in the prior year, with similar declines for the six-month period Earnings Per Share (Three Months Ended March 31) | Metric | 2021 | 2020 | | :----- | :---- | :---- | | Basic | $0.58 | $0.70 | | Diluted | $0.58 | $0.70 | Earnings Per Share (Six Months Ended March 31) | Metric | 2021 | 2020 | | :----- | :---- | :---- | | Basic | $1.16 | $1.20 | | Diluted | $1.16 | $1.19 | Weighted Average Common Shares (Six Months Ended March 31) | Metric | 2021 | 2020 | | :------------------------ | :---------- | :---------- | | Weighted average common shares | 8,192,533 | 8,101,887 | | Diluted average common shares | 8,206,154 | 8,129,218 | Note 11. Employee Benefit Plans Net periodic pension cost for the three months ended March 31, 2021, decreased to $48,954 from $93,239 in the prior year, while net postretirement benefit cost also declined, with the Company expecting to contribute $900,000 to both plans during the remaining fiscal year Net Periodic Pension Cost (Three Months Ended March 31) | Component | 2021 | 2020 | | :------------------------ | :--------- | :--------- | | Service cost | $183,570 | $172,902 | | Interest cost | $243,785 | $265,557 | | Expected return on plan assets | $(503,936) | $(459,156) | | Recognized loss | $125,535 | $113,936 | | Net periodic pension cost | $48,954 | $93,239 | Net Postretirement Benefit Cost (Three Months Ended March 31) | Component | 2021 | 2020 | | :------------------------ | :--------- | :--------- | | Service cost | $35,172 | $41,970 | | Interest cost | $107,623 | $132,869 | | Expected return on plan assets | $(149,122) | $(137,599) | | Recognized loss | $38,664 | $59,343 | | Net postretirement benefit cost | $32,337 | $96,583 | Expected Remaining Fiscal Year Contributions | Plan | Contributions | | :---------------- | :------------ | | Pension plan | $500,000 | | Postretirement plan | $400,000 | | Total | $900,000 | Note 12. Fair Value Measurements The Company measures certain financial liabilities, such as natural gas purchases and interest rate swaps, at fair value on a recurring basis, primarily using Level 2 inputs, while long-term debt's fair value is estimated using Level 3 unobservable inputs Fair Value Measurements of Liabilities (March 31, 2021) | Liability | Fair Value | Level 1 | Level 2 | Level 3 | | :---------------- | :----------- | :------ | :----------- | :------ | | Natural gas purchases | $124,948 | $0 | $124,948 | $0 | | Interest rate swaps | $1,330,722 | $0 | $1,330,722 | $0 | | Total | $1,455,670 | $0 | $1,455,670 | $0 | - The fair value of interest rate swaps is determined using counterparty proprietary models and assumptions about market conditions[73] Fair Value of Long-Term Debt (March 31, 2021) | Liability | Carrying Value | Fair Value (Level 3) | | :-------------------------------- | :------------- | :------------------- | | Current maturities of long-term debt | $7,000,000 | $7,000,000 | | Notes payable | $111,755,200 | $118,949,157 | | Total | $118,755,200 | $125,949,157 | Note 13. Segment Information The Company operates in three reportable segments: Gas Utility, Investment in Affiliates (MVP and Southgate projects), and Parent and Other (unregulated activities and corporate eliminations), with segment performance assessed using operating income and equity in earnings - The Company has three reportable segments: Gas Utility, Investment in Affiliates (MVP and Southgate projects), and Parent and Other (unregulated activities and corporate eliminations)[80][81] Operating Income (Loss) by Segment (Three Months Ended March 31, 2021) | Segment | Operating Income (Loss) | | :---------------- | :---------------------- | | Gas Utility | $7,175,532 | | Investment in Affiliates | $(102,295) | | Parent and Other | $26,189 | | Consolidated Total | $7,099,426 | Total Assets by Segment (March 31, 2021) | Segment | Total Assets | | :---------------- | :----------- | | Gas Utility | $218,924,307 | | Investment in Affiliates | $60,987,637 | | Parent and Other | $12,252,094 | | Consolidated Total | $292,164,038 | Note 14. Regulatory Assets and Liabilities Regulatory assets decreased from $13.8 million in September 2020 to $13.1 million in March 2021, primarily due to a reduction in under-recovery of gas costs and accrued pension/postretirement medical, while regulatory liabilities also saw a slight decrease - Regulatory assets and liabilities are recognized under FASB ASC No. 980, allowing deferral of costs or collections that differ from GAAP expense recognition due to regulation[83][84] Total Regulatory Assets (March 31, 2021 vs. September 30, 2020) | Item | March 31, 2021 | September 30, 2020 | | :-------------------------------- | :------------- | :----------------- | | Total current regulatory assets | $1,723,472 | $2,503,314 | | Total non-current regulatory assets | $10,974,638 | $10,970,094 | | Total regulatory assets | $13,096,244 | $13,815,561 | Total Regulatory Liabilities (March 31, 2021 vs. September 30, 2020) | Item | March 31, 2021 | September 30, 2020 | | :-------------------------------- | :------------- | :----------------- | | Total current regulatory liabilities | $222,373 | $890,313 | | Total non-current regulatory liabilities | $31,081,254 | $30,588,107 | | Total regulatory liabilities | $31,303,627 | $31,478,420 | Note 15. Subsequent Events The Company has evaluated subsequent events through the financial statements' issuance date and found no material items requiring disclosure that were not already included - No material subsequent events were identified that would impact the condensed consolidated financial statements[86] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources, including forward-looking statements, the impact of COVID-19, and regulatory developments Forward-Looking Statements This section highlights that the report contains forward-looking statements based on management's current expectations, which are subject to various risks and uncertainties, and cautions that quarterly earnings are not indicative of full fiscal year results due to seasonality - The report contains forward-looking statements based on management's current expectations, subject to risks and uncertainties detailed in Item 1A "Risk Factors" of the 2020 Annual Report on Form 10-K[88] - The Company assumes no duty to update these statements unless required by applicable laws and regulations[89] - Three-month and six-month earnings are not reflective of the full fiscal year due to the seasonal nature of the natural gas business, which results in higher billings during winter months[90] COVID-19 Impact The COVID-19 pandemic continues to impact the economy and the Company's operations, leading to a service moratorium on residential disconnections and a build-up of delinquent account balances, with the ultimate impact on bad debt expense remaining uncertain - COVID-19 continues to impact local, state, national, and global economies, disrupting normal activities in the Company's service territory[91] - Commercial and industrial gas volumes, adjusted for weather, declined by 3% for the quarter and 2% for the six-month period year-over-year, primarily due to a single industrial customer switching fuel sources[93] - The service moratorium on disconnections for non-payment is expected to continue, leading to accumulating delinquent balances, with over $200,000 in CARES Act funds applied to delinquent accounts in February 2021, but total bad debt expense remains unpredictable[94] Overview of Business and Regulatory Environment RGC Resources, Inc. primarily operates as a regulated natural gas utility through Roanoke Gas, serving approximately 63,000 customers, with operations regulated by the SCC and FERC, utilizing mechanisms like SAVE, WNA, ICC, and PGA to mitigate earnings volatility and recover infrastructure investments - Resources is primarily an energy services company engaged in the regulated sale and distribution of natural gas to approximately 63,000 residential, commercial, and industrial customers through its Roanoke Gas subsidiary[97] - The Company's utility operations are regulated by the Virginia State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC), which oversee rates, safety standards, and gas transportation prices[99] - Approved rate mechanisms such as SAVE (Steps to Advance Virginia's Energy), WNA (Weather Normalization Adjustment), ICC (Inventory Carrying Cost), and PGA (Purchased Gas Adjustment) are used to stabilize earnings, adjust for gas price volatility, and recover infrastructure investments[102] Results of Operations The Company's results of operations are primarily driven by its utility segment, with net income decreasing for both the three and six months ended March 31, 2021, largely due to the cessation of AFUDC earnings from the MVP investment, despite increases in gas utility revenues and gross utility margin - Net income decreased by $912,838 (16%) for the three months ended March 31, 2021, primarily due to the cessation of AFUDC earnings on the investment in MVP[114] - Net income decreased by $196,511 (2%) for the six months ended March 31, 2021, mainly due to reductions in MVP earnings related to AFUDC, partially offset by higher natural gas margins and lower operation and maintenance expenses[129] - Gross utility margin, a non-GAAP measure, is considered a more useful and relevant measure for analyzing financial performance[113] Three Months Ended March 31, 2021 This subsection details the financial performance for the three-month period ending March 31, 2021, highlighting changes in operating revenues and gross utility margin Operating Revenues (Three Months Ended March 31) | Metric | 2021 | 2020 | Increase / (Decrease) | Percentage | | :------------------------ | :----------- | :----------- | :-------------------- | :--------- | | 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% | - Total operating revenues increased by 26% due to significantly higher natural gas prices and pipeline/storage fees, higher natural gas deliveries (20% increase in HDD), and increased SAVE revenues, partially offset by reduced WNA revenues and a 12% decline in transportation and interruptible volumes[116] Gross Utility Margin (Three Months Ended March 31) | Metric | 2021 | 2020 | Increase | Percentage | | :---------------- | :----------- | :----------- | :--------- | :--------- | | 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% | Six Months Ended March 31, 2021 This subsection details the financial performance for the six-month period ending March 31, 2021, highlighting changes in operating revenues and gross utility margin Operating Revenues (Six Months Ended March 31) | Metric | 2021 | 2020 | Increase / (Decrease) | Percentage | | :------------------------ | :----------- | :----------- | :-------------------- | :--------- | | 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% | - Total operating revenues increased by 13% due to higher natural gas prices, pipeline/storage fees, increased delivered volumes (7% increase in residential/commercial volumes due to 5% more HDDs), and higher SAVE revenues, partially offset by reduced WNA revenues and a 9% decrease in transportation/interruptible volumes[130] Gross Utility Margin (Six Months Ended March 31) | Metric | 2021 | 2020 | Increase | Percentage | | :---------------- | :----------- | :----------- | :--------- | :--------- | | 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% | Critical Accounting Policies and Estimates The Company's financial statements are prepared in accordance with GAAP, relying on estimates and assumptions that may differ from actual results, with no changes to critical accounting policies since the 2020 Annual Report on Form 10-K - The consolidated financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions that affect reported amounts[142] - Actual results may differ significantly from these estimates and assumptions[142] - There have been no changes to the critical accounting policies as reflected in the Company's Annual Report on Form 10-K for the year ended September 30, 2020[143] Asset Management Roanoke Gas utilizes a third-party asset manager to oversee its pipeline transportation, storage rights, and gas supply, with the asset manager paying a monthly utilization fee, a portion of which is retained by the Company and the balance passed through to customers - Roanoke Gas uses a third-party asset manager for pipeline transportation, storage rights, and gas supply inventories and deliveries[144] - The asset manager pays a monthly utilization fee, with a portion retained by the Company and the remainder passed through to customers as reduced gas costs[144] - The current asset manager contract has been renewed through March 31, 2022[144] Equity Investment in Mountain Valley Pipeline The MVP project is approximately 92% complete but faces ongoing legal and regulatory challenges, leading the LLC to suspend AFUDC accrual since December 31, 2020, and now targets a full in-service date of summer 2022 at an estimated total cost of $6.2 billion - The MVP project is approximately 92% complete but faces legal and regulatory challenges, particularly regarding stream and wetland crossings, leading to limited construction activity[145][146] - The LLC suspended the accrual of AFUDC on the MVP project subsequent to December 31, 2020, and Roanoke Gas also suspended AFUDC on its interconnecting gate stations[149] - The MVP project's full in-service date is targeted for summer 2022 at an approximate total cost of $6.2 billion, while the Southgate project aims for construction in 2022 and in-service in spring 2023, but also faces permit approval timing issues[147][152] Regulatory Developments The SCC's final rate case order in January 2020 awarded Roanoke Gas a $7.25 million non-gas rate increase and a 9.44% return on equity, requiring a $3.8 million customer refund, while the COVID-19 service moratorium continues to impact residential customers - The SCC's January 2020 final rate case order granted Roanoke Gas a $7.25 million annualized non-gas rate increase and a 9.44% return on equity, resulting in a $3.8 million customer refund[154] - The COVID-19 service moratorium on residential disconnections continues, leading to deferred COVID-19 related costs and the application of $209,000 in CARES Act funds to eligible customer accounts[156][157] - The SAVE Plan and Rider were updated in September 2020, increasing annual revenues for infrastructure replacement projects to approximately $2.3 million from $1.2 million[158] Capital Resources and Liquidity The Company's capital needs are met by operating cash flows, credit agreements, and equity programs, with net cash provided by operating activities decreasing by $1.56 million year-over-year, and Roanoke Gas renewing its $40 million line-of-credit, while Midstream may require additional financing for MVP - Primary capital needs include funding utility plant capital projects, investment in MVP, seasonal natural gas inventories, and accounts receivable, met by operating cash flows, credit agreements, and equity programs[159] - Net cash provided by operating activities decreased by $1,556,729 for the six months ended March 31, 2021, primarily due to changes in accounts receivable and regulatory assets/liabilities, net of a prior year rate refund[162][163] - Roanoke Gas renewed its $40 million unsecured line-of-credit through March 31, 2023, and Midstream has $41 million in borrowing capacity, with $29.3 million utilized, but ongoing MVP delays may necessitate additional financing, with Resources' long-term capitalization ratio at 43% equity and 57% debt as of March 31, 2021[167][169][170] Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the reporting period - This item is not applicable for the current reporting period[172] Controls and Procedures The Company's disclosure controls and procedures were deemed effective at a reasonable assurance level as of March 31, 2021, with management routinely reviewing and enhancing internal controls, and no material changes reported during the fiscal quarter - The Company's disclosure controls and procedures were evaluated and concluded to be effective at the reasonable assurance level as of March 31, 2021[174] - Management routinely reviews and makes changes to enhance the effectiveness of internal controls[175] - No control changes materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the fiscal quarter ended March 31, 2021[175] Part II – Other Information This section covers various other required disclosures, including legal proceedings, risk factors, sales of equity securities, defaults, mine safety, and a list of exhibits Legal Proceedings There are no material legal proceedings to report - No material legal proceedings are reported[178] Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2020 - No material changes from the risk factors previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2020[179] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - None to report[180] Defaults Upon Senior Securities There were no defaults upon senior securities to report - None to report[181] Mine Safety Disclosures Mine safety disclosures are not applicable to the Company's operations - Not applicable[182] Other Information There is no other information to report under this item - None to report[183] Exhibits This section lists the exhibits filed with the Form 10-Q, including various debt agreements, certifications from executive officers, and XBRL-related documents - Exhibits include modifications to promissory notes and revolving line of credit agreements with Wells Fargo Bank, N.A.[184] - Certifications from the Principal Executive Officer and Principal Financial Officer (Rule 13a–14(a)/15d–14(a) and Section 1350) are furnished[184] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are included[184] Signatures This section contains the required signatures, confirming the due authorization and filing of the report on behalf of RGC Resources, Inc. by its Vice President, Interim Chief Financial Officer, Corporate Secretary, and Treasurer - The report is signed by Lawrence T. Oliver, Vice President, Interim Chief Financial Officer, Corporate Secretary, and Treasurer, on behalf of RGC Resources, Inc. on May 13, 2021[186][187][188]