10-Q 1 rgco20231231_10q.htm FORM 10-Q rgco20231231_10q.htm
0001069533 RGC Resources, Inc. false --09-30 Q1 2023 343,304 155,164 5 5 20,000,000 20,000,000 10,059,621 10,059,621 10,015,254 10,015,254 0 0 5,000,000 5,000,000 0 0 0 0 0.20 44,367 0.1975 31,245 5 5 5 5 4.26 4.26 3.58 3.58 4.41 4.41 3.60 3.60 1.20 1.20 2.00 2.00 1.00 1.00 2.49 2.49 2.00 2.00 1.26448 1.26448 3.24 3.24 1.20 1.20 41,667 41,667 3.14 3.14 1.26448 1.26448 400,000 400,000 2.443 2.443 0 0 false false false false Included in accounts receivable in the condensed consolidated balance sheet. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form

10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For Quarterly Period Ended December 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For Transition Period From

to

 

 

Commission File Number 000-26591

 

RGC Resources, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Virginia

54-1909697

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

 

519 Kimball Ave., N.E., Roanoke, VA

24016

(Address of Principal Executive Offices)

(Zip Code)

 

(540) 777-4427

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, $5 Par Value

RGCO

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated-filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at January 31, 2024

Common Stock, $5 Par Value

10,163,395

 

 

 

INDEX

 

Page No.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

 

Condensed Consolidated Balance Sheets

1

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

4

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 5
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

35

Signatures

36

 ​

 

 

GLOSSARY OF TERMS

 

AFUDC

Allowance for Funds Used During Construction

   

AOCI/AOCL

Accumulated Other Comprehensive Income (Loss)

   

ARO

Asset Retirement Obligation

   

ARP

Alternative Revenue Program, regulatory or rate recovery mechanisms approved by the SCC that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets

   
ARPA American Rescue Plan Act of 2021
   

ASC

Accounting Standards Codification

   

ASU

Accounting Standards Update as issued by the FASB

   
ATM At-the-market program whereby a Company can incrementally offer common stock through a broker at prevailing market prices and on an as-needed basis
   

CARES/CARES Act

The Coronavirus Aid, Relief, and Economic Security Act

   

Company

RGC Resources, Inc. or Roanoke Gas Company

   

COVID-19 or Coronavirus

A pandemic disease that causes respiratory illness similar to the flu with symptoms such as coughing, fever, and in more severe cases, difficulty in breathing
   

CPCN

Certificate of Public Convenience and Necessity

   
D.C. Circuit U. S. Court of Appeals for the District of Columbia
   

Diversified Energy

Diversified Energy Company, a wholly-owned subsidiary of Resources

   

DRIP

Dividend Reinvestment and Stock Purchase Plan of RGC Resources, Inc.

   

DTH

Decatherm (a measure of energy used primarily to measure natural gas)

   

EPS

Earnings Per Share

   

ERISA

Employee Retirement Income Security Act of 1974

   

FASB

Financial Accounting Standards Board

   

FDIC

Federal Deposit Insurance Corporation

 

 

FERC

Federal Energy Regulatory Commission

   

Fourth Circuit

U.S. Fourth Circuit Court of Appeals

   
FRA Fiscal Responsibility Act of 2023, bi-partisan legislation containing certain provisions specific to MVP
   

GAAP

Generally Accepted Accounting Principles in the United States

   

HDD

Heating degree day, a measurement designed to quantify the demand for energy. It is the number of degrees that a day’s average temperature falls below 65 degrees Fahrenheit

 

ICC

Inventory carrying cost revenue, an SCC approved rate structure that mitigates the impact of financing costs on natural gas inventory

   

IRS

Internal Revenue Service

   

KEYSOP

RGC Resources, Inc. Key Employee Stock Option Plan

   
LDI Liability Driven Investment approach, a strategy which reduces the volatility in the pension plan's funded status and expense by matching the duration of the fixed income investments with the duration of the corresponding pension liabilities
   

LIBOR

London Inter-Bank Offered Rate

   

LLC

Mountain Valley Pipeline, L.L.C., a joint venture established to design, construct and operate MVP and Southgate

   

LNG

Liquefied natural gas, the cryogenic liquid form of natural gas. Roanoke Gas operates and maintains a plant capable of producing and storing up to 200,000 DTH of liquefied natural gas

 

MGP

Manufactured gas plant

   

Midstream

RGC Midstream, L.L.C., a wholly-owned subsidiary of Resources created to invest in pipeline projects including MVP and Southgate

   

MVP

Mountain Valley Pipeline, a FERC-regulated natural gas pipeline project intended to connect the Equitrans' gathering and transmission system in northern West Virginia to the Transco interstate pipeline in south central Virginia with a planned interconnect to Roanoke Gas’ natural gas distribution system

   

NQDC Plan

RGC Resources, Inc. Non-qualified Deferred Compensation Plan

   

Normal Weather

The average number of heating degree days over the most recent 30-year period

   

PBGC

Pension Benefit Guaranty Corporation

   

Pension Plan

Defined benefit plan that provides pension benefits to employees hired prior to January 1, 2017 who meet certain years of service criteria

   
PGA Purchased Gas Adjustment, a regulatory mechanism, which adjusts natural gas customer rates to reflect changes in the forecasted cost of gas and actual gas costs

 

 

Postretirement Plan

Defined benefit plan that provides postretirement medical and life insurance benefits to eligible employees hired prior to January 1, 2000 who meet years of service and other criteria

   
R&D credit Research and development federal tax credit defined under Internal Revenue Code section 41 and the related regulations
   

Resources

RGC Resources, Inc., parent company of Roanoke Gas, Midstream and Diversified Energy

   

RGCO

Trading symbol for RGC Resources, Inc. on the NASDAQ Global Stock Market

   

Roanoke Gas

Roanoke Gas Company, a wholly-owned subsidiary of Resources

   
ROU Asset Right of Use Asset
   
RNG Renewable Natural Gas
   
RNG Rider

Renewable Natural Gas Rider, the rate component as approved by the SCC that is billed monthly to the Company’s customers to recover the costs associated with the investment in RNG facilities and related operating costs 

   

RSPD

RGC Resources, Inc. Restricted Stock Plan for Outside Directors

   

RSPO

RGC Resources, Inc. Restricted Stock Plan for Officers

   

SAVE

Steps to Advance Virginia's Energy, a regulatory mechanism per Chapter 26 of Title 56 of the Code of Virginia that allows natural gas utilities to recover the investment, including related depreciation and expenses and provide return on rate base, in eligible infrastructure replacement projects without the filing of a formal base rate application

   

SAVE Plan

Steps to Advance Virginia's Energy Plan, the Company's proposed and approved operational replacement plan and related spending under the SAVE regulatory mechanism

   

SAVE Rider

Steps to Advance Virginia's Energy Plan Rider, the rate component of the SAVE Plan as approved by the SCC that is billed monthly to the Company’s customers to recover the costs associated with eligible infrastructure projects including the related depreciation and expenses and return on rate base of the investment

   

SCC

Virginia State Corporation Commission, the regulatory body with oversight responsibilities of the utility operations of Roanoke Gas

   
SCOTUS Supreme Court of the United States
   

SEC

U.S. Securities and Exchange Commission

   
SOFR Secured Overnight Financing Rate
   

Southgate

Mountain Valley Pipeline, LLC’s Southgate project, which is a contemplated interstate pipeline that was approved by the FERC to extend from the MVP in south central Virginia to central North Carolina, of which Midstream holds less than a 1% investment

   

S&P 500 Index

Standard & Poor’s 500 Stock Index

   

WNA

Weather Normalization Adjustment, an ARP mechanism which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average

   

Some of the terms above may not be included in this filing

 

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

December 31, 2023

  

September 30,

 
  

Unaudited

  

2023

 

ASSETS

        

CURRENT ASSETS:

        

Cash and cash equivalents

 $2,864,737  $1,512,431 

Accounts receivable (less allowance for credit losses of $343,304, and $155,164, respectively)

  13,158,930   4,194,934 

Materials and supplies

  1,573,190   1,674,462 

Gas in storage

  10,018,097   11,185,601 

Prepaid income taxes

  1,084,515   3,227,544 

Regulatory assets

  2,868,018   2,854,276 

Interest rate swaps

  1,123,194   1,533,057 

Other

  2,079,194   612,957 

Total current assets

  34,769,875   26,795,262 

UTILITY PROPERTY:

        

In service

  323,411,050   318,369,891 

Accumulated depreciation and amortization

  (87,584,583)  (85,752,798)

In service, net

  235,826,467   232,617,093 

Construction work in progress

  14,517,366   14,966,458 

Utility property, net

  250,343,833   247,583,551 

OTHER NON-CURRENT ASSETS:

        

Regulatory assets

  5,350,191   5,389,445 

Investment in unconsolidated affiliates

  18,654,928   17,187,093 

Benefit plan assets

  1,743,208   1,901,902 

Deferred income taxes

  1,115,898   1,163,594 

Interest rate swaps

  2,113,007   3,084,398 

Other

  612,295   624,095 

Total other non-current assets

  29,589,527   29,350,527 

TOTAL ASSETS

 $314,703,235  $303,729,340 

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

December 31, 2023

  

September 30,

 
  

Unaudited

  

2023

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

CURRENT LIABILITIES:

        

Current maturities of long-term debt

 $33,850,000  $10,975,000 

Line-of-credit

  13,252,596   4,353,572 

Dividends payable

  2,032,679   1,978,400 

Accounts payable

  6,058,027   5,838,643 

Customer credit balances

  1,882,100   1,972,132 

Income taxes payable

  174,440    

Customer deposits

  1,646,267   1,476,321 

Accrued expenses

  2,958,931   4,661,722 

Regulatory liabilities

  2,311,025   1,632,716 

Other

  30,657   30,281 

Total current liabilities

  64,196,722   32,918,787 

LONG-TERM DEBT:

        

Notes payable

  102,700,000   126,100,000 

Unamortized debt issuance costs

  (238,804)  (255,272)

Long-term debt, net

  102,461,196   125,844,728 

DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES:

        

Asset retirement obligations

  10,855,794   10,792,831 

Regulatory cost of retirement obligations

  13,404,991   13,029,376 

Benefit plan liabilities

  75,637   47,674 

Deferred income taxes

  1,959,485   2,008,458 

Regulatory liabilities

  17,883,751   18,031,693 

Other

  321,056   323,168 

Total deferred credits and other non-current liabilities

  44,500,714   44,233,200 

STOCKHOLDERS’ EQUITY:

        

Common stock, $5 par; authorized 20,000,000 shares; issued and outstanding 10,059,621 and 10,015,254 shares, respectively

  50,298,105   50,076,270 

Preferred stock, no par, authorized 5,000,000 shares; no shares issued and outstanding

      

Capital in excess of par value

  45,047,443   44,430,786 

Retained earnings

  6,959,593   3,972,280 

Accumulated other comprehensive income

  1,239,462   2,253,289 

Total stockholders’ equity

  103,544,603   100,732,625 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 $314,703,235  $303,729,340 

 

See notes to condensed consolidated financial statements.

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

 

   

Three Months Ended December 31,

 
   

2023

   

2022

 

OPERATING REVENUES:

               

Gas utility

  $ 24,391,854     $ 33,252,767  

Non utility

    27,498       29,568  

Total operating revenues

    24,419,352       33,282,335  

OPERATING EXPENSES:

               

Cost of gas - utility

    10,097,016       20,804,153  

Cost of sales - non utility

    5,150       4,593  

Operations and maintenance

    4,335,197       3,920,513  

General taxes

    632,245       589,050  

Depreciation and amortization

    2,697,707       2,419,541  

Total operating expenses

    17,767,315       27,737,850  

OPERATING INCOME

    6,652,037       5,544,485  

Equity in earnings of unconsolidated affiliate

    1,467,835       1,232  

Other income, net

    120,786       74,606  

Interest expense

    1,636,273       1,369,164  

INCOME BEFORE INCOME TAXES

    6,604,385       4,251,159  

INCOME TAX EXPENSE

    1,584,393       994,754  

NET INCOME

  $ 5,019,992     $ 3,256,405  

BASIC EARNINGS PER COMMON SHARE

  $ 0.50     $ 0.33  

DILUTED EARNINGS PER COMMON SHARE

  $ 0.50     $ 0.33  

DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.2000     $ 0.1975  

 

See notes to condensed consolidated financial statements.

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

 

   

Three Months Ended December 31,

 
   

2023

   

2022

 

NET INCOME

  $ 5,019,992     $ 3,256,405  

Other comprehensive income (loss), net of tax:

               

Interest rate swaps

    (1,025,720 )     (183,298 )

Defined benefit plans

    11,893       14,631  

OTHER COMPREHENSIVE LOSS, NET OF TAX

    (1,013,827 )     (168,667 )

COMPREHENSIVE INCOME

  $ 4,006,165     $ 3,087,738  

 

See notes to condensed consolidated financial statements.

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

UNAUDITED

 

  

Three Months Ended December 31, 2023

 
  

Common Stock

  

Capital in Excess of Par Value

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Total Stockholders' Equity

 

Balance - September 30, 2023

 $50,076,270  $44,430,786  $3,972,280  $2,253,289  $100,732,625 

Net income

        5,019,992      5,019,992 

Other comprehensive loss

           (1,013,827)  (1,013,827)

Cash dividends declared ($0.20 per share)

        (2,032,679)     (2,032,679)

Net issuance of common stock (44,367 shares)

  221,835   616,657         838,492 

Balance - December 31, 2023

 $50,298,105  $45,047,443  $6,959,593  $1,239,462  $103,544,603 

 

  

Three Months Ended December 31, 2022

 
  

Common Stock

  

Capital in Excess of Par Value

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Total Stockholders' Equity

 

Balance - September 30, 2022

 $49,102,675  $41,479,459  $544,158  $1,964,364  $93,090,656 

Net income

        3,256,405      3,256,405 

Other comprehensive loss

           (168,667)  (168,667)

Cash dividends declared ($0.1975 per share)

        (1,957,369)     (1,957,369)

Net issuance of common stock (31,245 shares)

  156,225   512,757         668,982 

Balance - December 31, 2022

 $49,258,900  $41,992,216  $1,843,194  $1,795,697  $94,890,007 

 

See notes to condensed consolidated financial statements.

 

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

   

Three Months Ended December 31,

 
   

2023

   

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 5,019,992     $ 3,256,405  

Adjustments to reconcile net income to net cash used in operating activities:

               

Depreciation and amortization

    2,761,920       2,477,084  

Cost of retirement of utility property, net

    (136,639 )     (159,174 )

Amortization of stock option grants

    17,168       16,170  

Equity in earnings of unconsolidated affiliate

    (1,467,835 )     (1,232 )

Allowance for funds used during construction

          (103,771 )

Changes in assets and liabilities which used cash, exclusive of changes and noncash transactions shown separately

    (6,758,953 )     (7,909,883 )

Net cash used in operating activities

    (564,347 )     (2,424,401 )

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Expenditures for utility property

    (5,300,669 )     (7,530,620 )

Investment in unconsolidated affiliates

          (818,178 )

Proceeds from disposal of utility property

    374       209  

Net cash used in investing activities

    (5,300,295 )     (8,348,589 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from issuance of unsecured notes

          1,103,800  

Repayments of notes payable

    (525,000 )     (125,000 )

Borrowings under line-of-credit

    16,390,292       17,952,768  

Repayments under line-of-credit

    (7,491,268 )     (8,560,795 )

Proceeds from issuance of stock

    821,324       652,812  

Cash dividends paid

    (1,978,400 )     (1,915,317 )

Net cash provided by financing activities

    7,216,948       9,108,268  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    1,352,306       (1,664,722 )

BEGINNING CASH AND CASH EQUIVALENTS

    1,512,431       4,898,914  

ENDING CASH AND CASH EQUIVALENTS

  $ 2,864,737     $ 3,234,192  

 

See notes to condensed consolidated financial statements.

 

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

 

1.

Basis of Presentation

 

Resources is an energy services company primarily engaged in the sale and distribution of natural gas. The condensed consolidated financial statements include the accounts of Resources and its wholly-owned subsidiaries: Roanoke Gas, Diversified Energy and Midstream.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present Resources' financial position as of December 31, 2023, cash flows for the three months ended December 31, 2023 and 2022, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three months ended December 31, 2023 and 2022. The results of operations for the three months ended December 31, 2023 are not indicative of the results to be expected for the fiscal year ending September 30, 2024 as quarterly earnings are affected by the highly seasonal nature of the business and weather conditions generally result in greater earnings during the winter months.

 

The unaudited condensed consolidated financial statements and condensed notes are presented under the rules and regulations of the SEC. Pursuant to those rules, certain information and note disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.  Although the Company believes that the disclosures are adequate, the unaudited condensed consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes contained in the Company’s Form 10-K for the year ended September 30, 2023. The September 30, 2023 consolidated balance sheet was included in the Company’s audited financial statements included in Form 10-K.

 

Roanoke Gas’ line of credit is renewed annually in March, and there is approximately $6,700,000 outstanding under the line of credit at the time of this filing. Separately, Midstream has $33,850,000 of current maturities of long-term debt due in the next 12 months.  These amounts, in the aggregate, exceed the liquidity available to the Company through currently executed agreements and anticipated operating cash flows over this period without taking additional actions involving a third party. As a result, under ASU 2014-15, substantial doubt exists about the Company's ability to continue as a going concern.

 

Management's plans are to refinance these amounts and management's discussions with banks regarding refinancing the amounts have been positive.  Additionally, the Company has refinanced this debt in the past and the pending completion of the MVP further supports a favorable likelihood of successful refinancing.  Since such refinancing is not entirely within the Company's control, there can be no assurances that such refinancing can be completed.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements contained in the Company's Form 10-K for the year ended September 30, 2023.

 

Certain amounts previously disclosed have been reclassified to conform to current year presentations.

 

7

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

Recently Issued or Adopted Accounting Standards

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In combination with ASU 2021-01 and ASU 2022-06, the ASU provides temporary optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate change on financial reporting. The new guidance applies specifically to contracts and hedging relationships that reference LIBOR, or any other referenced rate that is expected to be discontinued due to reference rate reform. The new guidance is effective for the Company through December 31, 2024. The Intercontinental Exchange Benchmark Administration, the administrator for LIBOR and other inter-bank offered rates, announced that the LIBOR rates for one-day, one-month, six-month and one-year would cease publication in June 2023 and that no new financial contracts may use LIBOR after December 31, 2021. Subsequent to June 30, 2023, the one-day, one-month, six-month, and one-year LIBOR settings will continue to be published under an unrepresentative synthetic methodology until the end of September 2024 in order to bridge the transition to other reference rates. The Company has transitioned all but one LIBOR-based variable rate note to a new reference rate as of December 31, 2023.  Each of the revised notes has a corresponding swap that was also transitioned to align with the related notes.  The last LIBOR-based variable rate note will mature in fiscal 2024.  See Note 7 and Note 9 for more information. 

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures.  The new guidance is designed to provide users of financial statements with enhanced disclosures regarding the information provided to the chief operating decision maker (CODM) and how the CODM uses the information in assessing the performance of each segment.  The Company is currently evaluating the new standard and determining the additional disclosure requirements.  The new guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 31, 2024.  

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures.  The new guidance requires that on an annual basis public business entities disclose specific categories in the rate reconciliation table and provide additional information for reconciling items that meet a quantitative threshold (items equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory rate).  The required disclosures will provide more granularity regarding the payment of income taxes to federal, state and foreign entities.  The Company does not expect certain requirements of this ASU to have a significant impact to its current disclosures as all of its operations are domestic and reside in two states.  Changes to the rate reconciliation table will result in additional disclosure.  The new guidance is effective for public business entities for annual periods beginning after December 15, 2024.

 

Other accounting standards that have been issued by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

8

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

2.

Leases

 

The Company leases certain assets including office space and land classified as operating leases. The Company determines if an arrangement is a lease at inception of the agreement based on the terms and conditions in the contract. The operating lease ROU assets and operating lease liabilities are recognized as the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses an estimate of its secured incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is determined by management aided by inquiries of a third party.

 

Lease expense for minimum lease payments is recognized on a straight-line basis over the term of the agreement. The Company made an accounting policy election that payments under agreements with an initial term of 12 months or less will not be included on the condensed consolidated balance sheet but will be recognized when paid in the consolidated statements of operations.

 

During fiscal 2023, the Company entered into a land lease in conjunction with its RNG facility that has a 20-year term with two five-year renewal options that are not considered part of the ROU asset and liability as the decision to elect said options will be made by the Company in the future. The Company also has three other operating leases with original terms ranging from 3 to 6 years. The operating lease ROU assets of $354,320 are reflected in other non-current assets in the condensed consolidated balance sheets. The current operating lease liabilities of $30,657 and non-current lease liabilities of $321,056 are included in other current liabilities and deferred credits and other non-current liabilities, respectively, in the condensed consolidated balance sheets. The cost components of the Company’s operating leases are included under operations and maintenance expense in the condensed consolidated statements of income and were less than $50,000 for each period presented.

 

Other information related to leases were as follows:

 

   Three Months Ended December 31, 
  

2023

  

2022

 

Supplemental Cash Flow Information:

        

Cash paid on operating leases

 $6,766  $12,600 

Right of use obtained in exchange for operating lease obligations

  N/A   N/A 

Weighted-average remaining term (in years)

  17.4   2.8 

Weighted-average discount rate

  N/A   N/A 

 

On December 31, 2023, the future minimum rental payments under non-cancelable operating leases by fiscal year were as follows:

 

2024

 $42,300 

2025

  43,065 

2026

  30,038 

2027

  30,038 

2028

  26,400 

Thereafter

  369,600 

Total minimum lease payments

  541,441 

Less imputed interest

  (189,728)

Total

 $351,713 

 

9

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

3.

Revenue

 

The Company assesses new contracts and identifies related performance obligations for promises to transfer distinct goods or services to the customer.  Revenue is recognized when performance obligations have been satisfied.  In the case of Roanoke Gas, the Company contracts with its customers for the sale and/or delivery of natural gas.

 

The following tables summarize revenue by customer, product and income statement classification:

 

  

Three Months Ended December 31, 2023

  

Three Months Ended December 31, 2022

 
  

Gas utility

  

Non utility

  

Total operating revenues

  

Gas utility

  

Non utility

  

Total operating revenues

 

Natural Gas (Billed and Unbilled):

                        

Residential

 $13,824,642  $  $13,824,642  $19,365,840  $  $19,365,840 

Commercial

  7,841,726      7,841,726   12,019,113      12,019,113 

Transportation and interruptible

  1,370,270      1,370,270   1,588,068      1,588,068 

Other

  293,888   27,498   321,386   421,995   29,568   451,563 

Total contracts with customers

  23,330,526   27,498   23,358,024   33,395,016   29,568   33,424,584 

Alternative revenue programs

  1,061,328      1,061,328   (142,249)     (142,249)

Total operating revenues

 $24,391,854  $27,498  $24,419,352  $33,252,767  $29,568  $33,282,335 

 

Gas utility revenues

 

Substantially all of Roanoke Gas' revenues are derived from rates authorized by the SCC through its tariffs. Based on its evaluation, the Company has concluded that these tariff-based revenues fall within the scope of ASC 606, Revenue from Contracts with Customers. Tariff rates represent the transaction price. Performance obligations created under these tariff-based sales include the cost of natural gas sold to customers (commodity) and the cost of transporting natural gas through the Company’s distribution system to customers (delivery). The delivery of natural gas to customers results in the satisfaction of the Company’s respective performance obligations over time.

 

All customers are billed monthly based on consumption as measured by metered usage with payments due 20 days from the rendering of the bill. Revenue is recognized as bills are issued for natural gas that has been delivered or transported. In addition, the Company utilizes the practical expedient that allows an entity to recognize the invoiced amount as revenue, if that amount corresponds to the value received by the customer. Since customers are billed tariff rates, there is no variable consideration in the transaction price.

 

Unbilled revenue is included in residential and commercial revenues in the preceding table. Natural gas consumption is estimated for the period subsequent to the last billed date and up through the last day of the month. Estimated volumes and approved tariff rates are utilized to calculate unbilled revenue. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The Company obtains metered usage for industrial customers at the end of each month, thereby eliminating any unbilled consideration for these rate classes.

 

10

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

Other revenues

 

Other revenues primarily consist of miscellaneous fees and charges, utility-related revenues not directly billed to utility customers and billings for non-utility activities. Customers are invoiced monthly based on services provided for these activities. The Company utilizes the practical expedient allowing revenue to be recognized based on invoiced amounts. The transaction price is based on a contractually predetermined rate schedule; therefore, the transaction price represents total value to the customer and no variable price consideration exists.

 

Alternative revenue program revenues

 

ARPs, which fall outside the scope of ASC 606, are SCC approved mechanisms that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets. The Company's ARPs include its WNA, which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average; the SAVE Plan over/under collection mechanism, which adjusts revenues for the differences between SAVE Plan revenues billed to customers and the revenue earned, as calculated based on the timing and extent of infrastructure replacement completed during the period; and the RNG over/under collection mechanism, which adjusts revenues similar to the SAVE Plan, but is calculated based on the timing and costs associated with owning, operating and maintaining the RNG facility. These amounts are ultimately collected from, or returned to, customers through future rate changes as approved by the SCC.

 

Customer accounts receivable and liabilities 

 

Accounts receivable, as reflected in the condensed consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below:

 

  

Current Assets

  

Current Liabilities

 
  

Trade accounts receivable(1)

  

Unbilled revenue(1)

  

Customer credit balances

  

Customer deposits

 

Balance at September 30, 2023

 $2,782,025  $1,240,097  $1,972,132  $1,476,321 

Balance at December 31, 2023

  8,302,330   4,757,101   1,882,100   1,646,267 

Increase (decrease)

 $5,520,305  $3,517,004  $(90,032) $169,946 

(1) Included in accounts receivable in the condensed consolidated balance sheet. Amounts shown net of reserve for credit losses. 

 

The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts.

 

 

4.

Income Taxes

 

The effective tax rates for the three-month periods ended December 31, 2023 and 2022 reflected in the table below are less than the combined federal and state statutory rate of 25.74%.  The reduction in the effective tax rate for the three-month period ended December 31, 2023 is due to additional tax deductions from the amortization of excess deferred taxes and amortization of RNG tax credits deferred as a regulatory liability.  The reduction in the effective tax rate for the three-month period ended December 31, 2022 is due to additional tax deductions from the amortization of excess deferred taxes and amortization of R&D tax credits deferred as a regulatory liability.

 

  

Three Months Ended December 31,

 
  

2023

  

2022

 

Effective tax rate

  24.0%  23.4%

 

The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia, and thus subject to examinations by federal and state tax authorities.  The IRS is currently examining the Company's 2018 and 2019 federal tax returns and the ultimate outcome of these examinations is unknown as of the date of this Form 10-Q.  The Company believes its income tax assets and liabilities are fairly stated as of December 31, 2023 and 2022; however, these assets and liabilities could be adjusted as a result of this examination.  The federal returns prior to September 30, 2017, state returns for Virginia prior to September 30, 2018 and state returns for West Virginia prior to  September 30, 2020 are no longer subject to examination.

 

11

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

5.

Rates and Regulatory Matters

 

The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension and depreciation.

 

On December 2, 2022, Roanoke Gas filed an application with the SCC seeking an $8.55 million annual increase in its non-gas base rates, of which $4.05 million was being recovered through the SAVE Rider. Since the Company was seeking to recover the costs associated with its SAVE Plan through interim non-gas base rates effective January 1, 2023, the Company discontinued its SAVE Plan and Rider for the remainder of fiscal 2023.

 

On December 21, 2022, the SCC issued its Order for Notice and Hearing, which authorized the Company to put its proposed rates into effect, on an interim basis and subject to refund, on January 1, 2023, and set the matter for hearing. In the fourth quarter of fiscal 2023, the Company reached a settlement with the SCC staff on all outstanding issues in the case. Under the terms of the settlement, the Company agreed to an incremental revenue requirement of $7.45 million. The Company agreed to begin billing the new rates effective October 1, 2023. The Commission issued its Final Order in the matter on December 19, 2023 in which it approved the settlement agreement in its entirety.

 

The Company has recorded a provision for customer refund, including interest, associated with billings for the difference between the interim rates and the settlement rates.  The Company expects to complete the customer refund process with the February 2024 billing cycle.

 

In December 2023, the Company notified the SCC of its intent to file a general rate case.  The Company filed the general rate application on February 2, 2024.  

 

The Company filed an application with the SCC for a new, five-year SAVE Plan and Rider on March 31, 2023, seeking recovery of costs associated with an estimated $8.5 million in SAVE eligible investment in fiscal 2024 and an estimated cumulative investment of $49.5 million over the proposed five-year plan period ending September 30, 2028. On July 7, 2023, the SCC Staff filed its report on the Company’s SAVE Plan and Rider in which it recommended approval of the $49.5 million, five-year plan with a revenue requirement of approximately $366,000 beginning on October 1, 2023. On August 31, 2023, the SCC approved the new SAVE Plan and Rider with rates effective October 1, 2023.

 

On June 2, 2022, Roanoke Gas filed an application with the SCC to acquire certain natural gas distribution assets from a local housing authority. Under this application, the Company requested the approval to acquire such facilities at five separate apartment complexes, located in the Company’s service territory, that were under housing authority management. Under the proposed plan, the housing authority would renew existing natural gas distribution facilities to include mains, services, and meter installations and then transfer ownership of these facilities to Roanoke Gas. In turn, Roanoke Gas would assume responsibility for the operation and maintenance of these assets and recognize a gain related to the asset acquisition equal to the cost associated with the renewal.

 

On July 19, 2022, the SCC approved the application and on August 4, 2022, the housing authority transferred the assets from two apartment complexes to Roanoke Gas. Roanoke Gas recorded these assets and recognized a pre-tax gain of approximately $219,000 during the fourth quarter of fiscal 2022. On September 29, 2023, the housing authority transferred the assets from one additional apartment complex to Roanoke Gas and the Company recorded a pre-tax gain of approximately $311,000 during the fourth quarter of fiscal 2023. The authority is awaiting future funding to complete the two remaining apartment complexes. The timing of funding and the completion of the asset renewals for these complexes is unknown at this time. 

 

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RGC RESOURCES, INC. AND SUBSIDIARIES

 

6.

Other Investments

 

Midstream owns a less than 1% equity investment in the LLC constructing the MVP. Midstream is also a less than 1% investor, accounted for under the cost method, in Southgate. Since inception, the MVP has encountered various legal and regulatory issues that have substantially delayed the completion of the project, including a period in 2022 where work on the projected was halted. With the passage of the FRA and certain judicial rulings in mid-2023, construction work was restarted.

 

While under construction, AFUDC has provided the majority of the income recognized by Midstream. The LLC temporarily suspended accruing AFUDC on the project for portions of prior periods. AFUDC accruals resumed in June 2023 when construction activities restarted. The amount of AFUDC recognized during the current and prior year is included in the equity in earnings of unconsolidated affiliate in the tables below. As the MVP project nears completion, AFUDC on completed segments will cease and will only be recorded on areas still being constructed.

 

Midstream reassesses the value of its investment in the LLC on at least a quarterly basis, and no impairment indicators were identified in fiscal 2023 or during the first fiscal quarter of 2024. As noted above, developments in 2023 on the legislative and legal fronts were favorable.  The MVP project is not yet completed and adverse developments, as well as potential macroeconomic factors related to interest rates, cost increases, or other unanticipated events could erode fair value leading to new indicators or impairment. 

 

Funding for Midstream's investments has been provided through equity contributions from Resources and unsecured promissory notes as detailed in Note 9. Midstream expects to refinance the notes maturing in 2024.

 

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 December 31, 2023 and September 30, 2023, are reflected in the table below:

 

Balance Sheet location:

 

December 31, 2023

  

September 30, 2023

 

Other Assets:

        

MVP

 $18,564,311  $17,096,476 

Southgate

  90,617   90,617 

Investment in unconsolidated affiliates

 $18,654,928  $17,187,093 

 

  

Three Months Ended December 31,

 

Income Statement location:

  2023   2022 

Equity in earnings of unconsolidated affiliate

 $1,467,835  $1,232 

 

  

December 31, 2023

  

September 30, 2023

 

Undistributed earnings, net of income taxes, of MVP in retained earnings, excluding impairment

 $10,773,811  $9,683,797 

 

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

 

13

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

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

 

  

Three Months Ended December 31,

 
  

2023

  

2022

 

Cash investment

 $  $818,178 

Change in accrued capital calls

     39,466 

Equity in earnings of unconsolidated affiliate

  1,467,835   1,232 

Change in investment in unconsolidated affiliates

 $1,467,835  $858,876 

 

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 December 31,

 
  

2023

  

2022

 

AFUDC

 $158,562,141  $ 

Other income, net

  2,663,569   160,472 

Net income

 $161,225,710  $160,472 

 

  

Balance Sheets

 
  

December 31, 2023

  

September 30, 2023

 

Assets:

        

Current assets

 $349,417,551  $795,787,358 

Construction work in progress

  8,468,379,830   7,499,128,254 

Other assets

  12,160,170   11,639,586 

Total assets

 $8,829,957,551  $8,306,555,198 
         

Liabilities and Equity:

        

Current liabilities

 $371,508,693  $236,947,158 

Capital

  8,458,448,858   8,069,608,040 

Total liabilities and equity

 $8,829,957,551  $8,306,555,198 

   

 

7.

Derivatives and Hedging

 

The Company’s hedging and derivative policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations, including the price of natural gas and the cost of borrowed funds. This policy specifically prohibits the use of derivatives for speculative purposes.

 

The Company has five interest rate swaps associated with its variable rate debt as of December 31, 2023. Roanoke Gas has two variable-rate term notes in the amounts of $15 million and $10 million, with corresponding swap agreements to convert the variable interest rates into fixed rates of 2.00% and 2.49%, respectively. Midstream has three swap agreements corresponding to the variable rate term notes with original principal amounts of $14 million, $10 million, and $8 million. The swap agreements convert these three notes into fixed rate instruments with effective interest rates of 3.24%, 3.14%, and 2.443%, respectively.  The swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of the swaps were deemed ineffective during the periods presented.

 

The fair value of the current and non-current portions of the interest rate swaps are reflected in the condensed consolidated balance sheets under the caption interest rate swaps. The table in Note 10 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.

 

14

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

8.

Short-Term Debt

 

On March 24, 2023, Roanoke Gas entered into an unsecured Revolving Note in the principal amount of $25 million, which will mature on March 31, 2024.  The Revolving Note's variable interest rate is based upon Term SOFR plus 110 basis points and provides for multiple tier borrowing limits to accommodate seasonal borrowing demands.  The Company's total available borrowing limits during the term of the Revolving Note range from $4 million to $25 million.  As of December 31, 2023, the Company had an outstanding balance of $13,252,596 under the Revolving Note.

 

 

9.

Long-Term Debt

 

On June 28, 2023, Midstream amended and restated its $14 million and $8 million Term Notes initially entered into on June 12, 2019 and November 1, 2021, respectively.  The amendments revised each of the original Term Note's interest rate from LIBOR plus 115 basis points to Daily Simple SOFR plus 126.448 basis points, effective July 1, 2023.  All other terms and requirements of the Term Notes were retained. In conjunction with the amendment of the Term Notes, Midstream also amended the corresponding interest rate swaps associated with the Term Notes.  The amendments provided for the floating rates on the interest rate swaps to continue to match the rate of the associated notes as well as retain the overall fixed interest rates of 3.24% and 2.443%, respectively.  

 

On March 24, 2023, Roanoke Gas amended and restated the $10 million Term Note originally entered into on September 24, 2021.  The amendment revised the original Term Note's interest rate from LIBOR plus 100 basis points to Term SOFR plus 100 basis points.  All other terms and requirements of the original Term Note were retained.  The effective date of the Amended Term Note was  April 1, 2023.  In addition, on April 3, 2023, the interest rate swap was amended to align with the Amended Term Note and retained the fixed interest rate of 2.49%.  In connection with the Revolving Note and Amended Term Note, Roanoke Gas also amended and restated the Loan Agreement dated September 24, 2021.  The amendment provides for borrowing limits on the Revolving Note and amends certain financial conditions required of Roanoke Gas and Resources.  All other terms and requirements of the original Loan Agreement were retained.  See Note 7 for additional information regarding the interest rate swap and Note 8 for additional information regarding the Revolving Note.  

 

On July 28, 2023, Midstream entered into the Fifth Amendment to Credit Agreement and related Promissory Notes on the non-revolving credit facility.  The Fifth Amendment revised the interest rate from Term SOFR plus 1.50% to Term SOFR plus 2.00% and extended the maturity date of the Promissory Notes to December 31, 2024. All other terms and requirements remain unchanged.

 

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RGC RESOURCES, INC. AND SUBSIDIARIES

 

Long-term debt consists of the following:

 

  

December 31, 2023

  

September 30, 2023

 
  

Principal

  

Unamortized Debt Issuance Costs

  

Principal

  

Unamortized Debt Issuance Costs

 

Roanoke Gas:

                

Unsecured senior notes payable at 4.26%, due September 18, 2034

 $30,500,000  $103,782  $30,500,000  $106,195 

Unsecured term notes payable at 3.58%, due October 2, 2027

  8,000,000   18,060   8,000,000   19,264 

Unsecured term notes payable at 4.41%, due March 28, 2031

  10,000,000   22,711   10,000,000   23,495 

Unsecured term notes payable at 3.60%, due December 6, 2029

  10,000,000   21,136   10,000,000   22,017 

Unsecured term note payable at 30-day SOFR plus 1.20%, due August 20, 2026 (swap rate at 2.00%)

  15,000,000      15,000,000    

Unsecured term note payable at Term SOFR plus 1.00%, due October 1, 2028 (swap rate at 2.49%)

  10,000,000   31,983   10,000,000   33,666 

Midstream:

                

Unsecured term notes payable at Term SOFR plus 2.00%, due December 31, 2024

  23,000,000   16,217   23,000,000   23,386 

Unsecured term note payable at Daily Simple SOFR plus 1.26448%, due June 12, 2026 (swap rate at 3.24%)

  14,000,000   6,019   14,000,000   6,621 

Unsecured term note payable at 30-day LIBOR plus 1.20%, due June 1, 2024 with monthly principal installments of $41,667 that began July 1, 2022 (swap rate at 3.14%)

  9,250,000   982   9,375,000   1,571 

Unsecured term note payable at Daily Simple SOFR plus 1.26448%, due January 1, 2028 with quarterly principal installments of $400,000 that began April 1, 2023 (swap rate at 2.443%)

  6,800,000   17,914   7,200,000   19,057 

Total long-term debt

  136,550,000   238,804   137,075,000   255,272 

Less: current maturities of long-term debt

  (33,850,000)     (10,975,000)   

Total long-term debt, net current maturities

 $102,700,000  $238,804  $126,100,000  $255,272 

 

Debt issuance costs are amortized over the life of the related debt. As of December 31, 2023 and September 30, 2023, the Company also had an unamortized loss on the early retirement of debt of $1,227,512 and $1,256,059, respectively, which has been deferred as a regulatory asset and is being amortized over a 20-year period.

 

All debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that limit consolidated long-term indebtedness to not more than 65% of total capitalization.  All of the debt agreements provide for priority indebtedness to not exceed 15% of consolidated total assets.  The $15 million and $10 million notes, as well as the line-of-credit, have an interest coverage ratio requirement of not less than 1.5 to 1, which excludes the effect of the non-cash impairments on the LLC investments up to the total investment as of December 31, 2021, as revised by the Seventh Amendment to the Credit Agreement.  The Company was in compliance with all debt covenants as of  December 31, 2023 and September 30, 2023

 

16

 

RGC RESOURCES, INC. AND SUBSIDIARIES

 

10.

Other Comprehensive Income (Loss)

 

A summary of other comprehensive income and loss is provided below:

 

      Tax    
  

Before-Tax

  

(Expense)

  

Net-of-Tax

 
  

Amount

  

or Benefit

  

Amount

 

Three Months Ended December 31, 2023

            

Interest rate swaps:

            

Unrealized losses

 $(836,071) $215,205  $(620,866)

Transfer of realized gains to interest expense

  (545,183)  140,329   (404,854)

Net interest rate swaps

  (1,381,254)  355,534   (1,025,720)

Defined benefit plans:

            

Amortization of actuarial losses

  16,015   (4,122)  11,893 

Other comprehensive loss

 $(1,365,239) $351,412  $(1,013,827)

Three Months Ended December 31, 2022

            

Interest rate swaps:

            

Unrealized gains

 $43,947  $(11,311) $32,636 

Transfer of realized gains to interest expense

  (290,779)  74,845   (215,934)

Net interest rate swaps

  (246,832)  63,534   (183,298)

Defined benefit plans:

            

Amortization of actuarial losses

  19,703   (5,072)  14,631 

Other comprehensive loss

 $(227,129) $58,462  $(168,667)

 

The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company. Actuarial gains and losses attributable to the regulated operations are included as a regulatory asset. See Note 16 for a schedule of regulatory assets. The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net in the condensed consolidated statements of income.

 

Reconciliation of Accumulated Other Comprehensive Income (Loss)

 

          

Accumulated

 
          

Other

 
  

Interest Rate

  

Defined Benefit

  

Comprehensive

 
  

Swaps

  

Plans

  

Income (Loss)

 

Balance at September 30, 2023

 $3,428,922  $(1,175,633) $2,253,289 

Other comprehensive income (loss)

  (1,025,720)  11,893   (1,013,827)

Balance at December 31, 2023

 $2,403,202  $(1,163,740) $1,239,462 

 

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RGC RESOURCES, INC. AND SUBSIDIARIES

 

11.

Commitments and Contingencies

 

Roanoke Gas currently holds the only franchises and/or CPCNs to distribute natural gas in its service area.  These franchises generally extend for multi-year periods and are renewable by the municipalities, including exclusive franchises in the cities of Roanoke and Salem and the Town of Vinton, Virginia.  All three franchises are set to expire December 31, 2035. In 2019, the SCC issued an order granting a CPCN to furnish gas to all of Franklin County.  Unlike the CPCNs for the other counties served by Roanoke Gas, the Franklin County CPCN was scheduled to terminate within five years of the date of the order if Roanoke Gas did not furnish gas service to the designated service area.  In November 2023, the SCC granted Roanoke Gas a three-year extension on the CPCN.  Roanoke Gas plans to serve the Franklin County area with natural gas delivered through the MVP, once MVP is placed into service.

 

Due to the nature of the natural gas distribution business, the Company has entered into agreements with both suppliers and pipelines for natural gas commodity purchases, storage capacity and pipeline delivery capacity.  The Company utilizes an asset manager to assist in optimizing the use of its transportation, storage rights and gas supply in order to provide a secure and reliable source of natural gas to its customers.  The Company also has storage and pipeline capacity contracts to store and deliver natural gas to the Company’s distribution system.  Roanoke Gas is currently served directly by two primary pipelines that deliver all of the natural gas supplied to the Company’s distribution system.  Depending on weather conditions and the level of customer demand, failure of one of these transmission pipelines could have a major adverse impact on the Company's ability to deliver natural gas to its customers and its results of operations.  The MVP will provide Roanoke Gas with access to an additional delivery source to its distribution system, increasing system reliability and the Company's ability to meet future demands for natural gas.

 

 

12.

Earnings Per Share

 

Basic earnings per common share for the three months ended December 31, 2023 and 2022 were calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share were calculated by dividing net income by the weighted average common shares outstanding during the period plus potential dilutive common shares.

 

A reconciliation of basic and diluted earnings per share is presented below:

 

  

Three Months Ended December 31,

 
  

2023

  

2022

 

Net income

 $5,019,992  $3,256,405 

Weighted average common shares

  10,029,243   9,830,206 

Effect of dilutive securities:

        

Options to purchase common stock

  2,111   6,982 

Diluted average common shares

  10,031,354   9,837,188 

Earnings per share of common stock:

        

Basic

 $0.50  $0.33 

Diluted

 $0.50  $0.33 

 

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RGC RESOURCES, INC. AND SUBSIDIARIES

 

13.

Employee Benefit Plans

 

The Company has both a pension plan and a postretirement plan. The pension plan covers the Company’s employees hired before January 1, 2017 and provides a retirement benefit based on years of service and employee compensation. The postretirement plan, covering employees hired before January 1, 2000, provides certain health care and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense is detailed as follows:

 

  

Three Months Ended December 31,

 
  

2023

  

2022

 

Components of net periodic pension cost:

        

Service cost

 $81,066  $91,635 

Interest cost

  367,206   343,025 

Expected return on plan assets

  (294,958)  (308,149)

Recognized loss

  79,132   79,181 

Net periodic pension cost

 $232,446  $205,692 

 

  

Three Months Ended December 31,

 
  

2023

  

2022

 

Components of postretirement benefit cost:

        

Service cost

 $7,599  $11,475 

Interest cost

  153,369   155,156 

Expected return on plan assets

  (133,311)  (116,012)

Recognized gain

  (10,149)   

Net postretirement benefit cost

 $17,508  $50,619 

 

The components of net periodic benefit cost, excluding the service cost component, are included in other income, net in the condensed consolidated statements of income. Service cost is included in operations and maintenance expense in the condensed consolidated statements of income.

 

For the three-month period ended December 31, 2023, no funding contributions were made to the pension plan or postretirement plan. The Company is not currently planning to make any funding contributions to either plan for the remainder of fiscal 2024. 

 

 

14.

Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three levels:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

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RGC RESOURCES, INC. AND SUBSIDIARIES

 

Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date, which require the Company to develop its own assumptions.

 

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).

 

The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy:

 

  

Fair Value Measurements - December 31, 2023

 
      

Quoted

  

Significant

     
      

Prices

  

Other

  

Significant

 
      

in Active

  

Observable

  

Unobservable

 
  

Fair

  

Markets

  

Inputs

  

Inputs

 
  

Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Assets:

                

Interest rate swaps

 $3,236,201  $  $3,236,201  $ 

Total

 $3,236,201  $  $3,236,201  $ 
                 

Liabilities:

                

Natural gas purchases

 $1,234,072  $  $1,234,072  $ 

Total

 $1,234,072  $  $1,234,072  $ 

 

  

Fair Value Measurements - September 30, 2023

 
      

Quoted

  

Significant

     
      

Prices

  

Other

  

Significant

 
      

in Active

  

Observable

  

Unobservable

 
  

Fair

  

Markets

  

Inputs

  

Inputs

 
  

Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Assets:

                

Interest rate swaps

 $4,617,455  $  $4,617,455  $ 

Total

 $4,617,455  $  $4,617,455  $ 
                 

Liabilities:

                

Natural gas purchases

 $1,022,662  $  $1,022,662  $ 

Total

 $1,022,662  $  $1,022,662  $ 

 

The fair value of the interest rate swaps are determined by using the counterparty's proprietary models and certain assumptions regarding past, present and future market conditions.

 

Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and