Note 6 - Other Investments

9 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Equity Method Investments and Joint Ventures Disclosure [Text Block]

6. Other Investments

Midstream is an approximately 1% equity investment owner of the LLC constructing the MVP, a 303 mile natural gas inter-state pipeline that is designed to extend from northern West Virginia to southern Virginia.  Since inception, the MVP has encountered various legal and regulatory issues that have delayed the completion of the project.  While under construction, AFUDC has provided the majority of the income recognized by Midstream.  However, due to limited growth construction activities, AFUDC accruals were suspended by the LLC from November 2021 until June 2023 when growth activities resumed as a result of the passage of the FRA. In July 2023, growth activities stopped when the Fourth Circuit issued two stays halting construction for the project, which resulted in the MVP's emergency application to the SCOTUS. Forward construction resumed following the SCOTUS vacating the Fourth Circuit's stays.

Midstream is a less than 1% investor in Southgate, which is being accounted for under the cost method.

On May 4, 2023, Midstream agreed with the LLC’s managing partner and primary interest owner that the primary interest owner would make Midstream’s future capital contributions to the LLC up to the point of project in-service or cancellation, as a result of which Midstream's ownership interest percentage in the LLC as it relates to the MVP project has been and will be proportionately adjusted.

In the second quarter of fiscal 2022, Midstream incurred an other-than-temporary decline in the fair value of its equity investment in the LLC, primarily due to unfavorable decisions by the Fourth Circuit that vacated and remanded key authorizations, which required a pre-tax impairment charge of approximately $39.8 million.  During the fourth quarter of fiscal 2022, Midstream incurred an additional other-than-temporary decline in value in its equity investment in the LLC due to increased uncertainty in the permitting process for the MVP project as a result of legal developments and regulatory uncertainties at that time, as well as macroeconomic pressures primarily due to increased interest rates impacting the discount rate. As a result of the impairment, the carrying value of Midstream’s equity investment in the LLC was further reduced by $15.3 million pre-tax.

Midstream estimated the fair value of its investment in the LLC, with the assistance of a valuation specialist, using an income-based approach that primarily considered probability-weighted scenarios of discounted future cash flows based on the estimated project costs at completion and projected revenues. These scenarios reflected assumptions and judgments regarding the ultimate outcome of further matters relating to, or resulting from the Fourth Circuit rulings, as well as various other ongoing legal and regulatory matters affecting MVP and Southgate. Such assumptions and judgments also included certain additional potential delays and related cost increases that could result from unfavorable decisions on these proceedings and matters. Midstream’s analysis considered probability weighted growth expectations from additional compression expansion opportunities, how ongoing or new legal and regulatory matters may further delay the completion and increase the total costs of the project and the potential of MVP and Southgate cancellation.

Midstream reassesses the value of its investment in the LLC on at least a quarterly basis. With the assistance of a valuation specialist, Midstream conducted the quarterly evaluation of its investment in the LLC as of June 30, 2023 and determined that its investment was fairly stated and no further impairment was required.  The fair value of the investment in the LLC was determined under a Level 3 measurement considering the significant assumptions and judgments required in estimating the fair value of the Company's investment in the LLC.

There is risk that Midstream’s equity investment in the LLC may be impaired further in the future. There are continuing, and potential future, legal and regulatory matters related to MVP and Southgate, any of which could affect the ability to complete and/or operate the project, as well as potential macroeconomic factors, changes in interest rates, cost increases, other unanticipated events and legal and regulatory matters that must be resolved.  While macroeconomic factors in and of themselves may not be a direct indicator of impairment, should an impairment indicator be identified in the future, macroeconomic factors such as changes in interest rates could ultimately impact the size and scope of any potential impairment.  Assumptions and estimates utilized in assessing the fair value of Midstream’s investment in the LLC may change depending on the nature or timing of resolutions to the legal and regulatory matters or based on other relevant developments.  Adverse changes in circumstances relevant to the likelihood of project or expansion completion could prompt Midstream, in future assessments, to apply lower probability of project or expansion completion.  Such changes in assumptions or estimates, including discount rates, could have a material adverse effect on the fair value of Midstream’s investment in the LLC and potentially result in additional impairment, which could have a material adverse effect on the results of operations and financial position of Midstream and the Company as a whole. 

On July 27, 2023, two recent stays issued by the Fourth Circuit were vacated by the SCOTUS after an emergency application was filed by the LLC, which allowed the project to resume construction in the fourth quarter of fiscal 2023. 

Funding for Midstream's investments in the LLC for both MVP and Southgate has been provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement and three additional notes as detailed in Note 9, as well as by equity contributions from Resources.

The Company will participate in the earnings generated from the transportation of natural gas through both pipelines proportionate to its level of investment once the pipelines are placed in service.

Investment balances of MVP and Southgate, as of June 30, 2023, are reflected in the table below:

Balance Sheet location:	June 30, 2023		September 30, 2022
Other Assets:
MVP	$	15,535,067	$	13,689,370
Southgate		90,270		83,705
Investment in unconsolidated affiliates	$	15,625,337	$	13,773,075
Current Liabilities:
MVP	$	—	$	804,404
Southgate		508		102
Capital contributions payable	$	508	$	804,506

	Three Months Ended				Nine Months Ended
Income Statement location:	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Equity in earnings of unconsolidated affiliate	$	519,482	$	235	$	523,581	$	71,917

	June 30, 2023		September 30, 2022
Undistributed earnings, net of income taxes, of MVP in retained earnings, excluding impairment	$	8,524,294	$	8,135,482

The undistributed earnings does not include the impairment of the investment in the LLC.

The change in the investment in unconsolidated affiliates is provided below:

	Nine Months Ended
	June 30, 2023			June 30, 2022
Cash investment	$	2,132,679		$	4,345,712
Change in accrued capital calls		(803,998	)		(1,299,387	)
Pre-tax impairment		—			(39,822,213	)
Equity in earnings of unconsolidated affiliate		523,581			71,917
Change in investment in unconsolidated affiliates	$	1,852,262		$	(36,703,971	)

Summary unaudited financial statements of MVP are presented below. Southgate financial statements, which are accounted for under the cost method, are not included.

	Income Statements
	Three Months Ended				Nine Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
AFUDC	$	49,744,717	$	—	$	49,744,717	$	6,883,069
Other income, net		304,093		82,394		723,805		46,576
Net income	$	50,048,810	$	82,394	$	50,468,522	$	6,929,645

	Balance Sheets
	June 30, 2023		September 30, 2022
Assets:
Current assets	$	360,817,998	$	76,474,981
Construction work in progress		6,914,678,901		6,667,146,408
Other assets		9,684,447		8,021,877
Total assets	$	7,285,181,346	$	6,751,643,266
Liabilities and Equity:
Current liabilities	$	128,011,871	$	115,061,723
Capital		7,157,169,475		6,636,581,543
Total liabilities and equity	$	7,285,181,346	$	6,751,643,266