Item7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,500 residential, commercial and industrial customers in Roanoke, Virginia, and the surrounding localities, through its Roanoke Gas subsidiary. Midstream, a wholly owned subsidiary of Resources, is a less than 1% investor in both the MVP and Southgate. More information regarding the investment in MVP is provided below and under the Equity Investment in Mountain Valley Pipeline section.
The utility operations of Roanoke Gas are regulated by the SCC, which oversees the terms, conditions and rates charged to customers for natural gas service, safety standards, extension of service and depreciation. Nearly all of the Company’s revenues are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates and fees authorized by the SCC. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather. These rates are determined based on various rate applications filed with the SCC. Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates in place at that time. The investment in replacing and upgrading existing infrastructure, as well as recovering increases in non-gas expenses due to inflationary pressures, regulatory requirements or operation needs, are generally not recoverable until a formal rate application is filed to include additional investment and higher costs, and new non-gas base rates are approved.
The Company is also subject to regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines, as well as the FERC, which regulates the prices for the transportation and delivery of natural gas to the Company's distribution system and underground storage services. In addition, Roanoke Gas is subject to other regulations which are not necessarily industry specific.
Beginning January 1, 2023, Roanoke Gas implemented interim, non-gas base rates designed to provide $8.55 million in additional annual revenues in response to higher operating costs and to recover its investment in non-SAVE related projects since the prior non-gas base rate increase in fiscal 2019. Revenues from the SAVE Plan and Rider were incorporated into the interim, non-gas base rates. On December 19, 2023, the SCC issued a final order approving a non-gas base rate increase of $7.45 million. The order also directed Roanoke Gas to refund the excess revenues collected during the time the interim rates were in effect with interest. Refunds to customers, which were accrued in fiscal 2023 and reflected in regulatory liabilities, were made in February 2024. On February 2, 2024, primarily in response to continued inflationary pressures, Roanoke Gas filed for a non-gas base rate increase of $4.33 million. The filing also reflected an increase in the Company's authorized return on equity from 9.44% to 10.35%. The new interim non-gas base rates went into effect for customer billings on or after July 1, 2024, subject to refund. On October 16, 2024, 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 annual incremental revenue requirement increase of $4.08 million based on a return on equity of 9.90%.
Following extended periods of regulatory and judicial delays, as well as receipt of authorization from the FERC, the MVP entered into service on June 14, 2024 and became available for interruptible or short-term firm transportation service. On July 1, 2024, the MVP commenced long-term firm capacity obligations. See the Equity Investment in Mountain Valley Pipeline section for additional information on the MVP.
As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders. In order to mitigate the effect of weather variations and other factors not provided for in the Company's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability to customer bills and earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment. These mechanisms include the SAVE Rider, WNA, ICC, RNG and PGA.
The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until such time a formal rate application is filed incorporating these investments in non-gas base rates. The SAVE Plan and Rider were reset effective January 1, 2023, when the recovery of all prior SAVE Plan investment was incorporated into the new non-gas base rates. Roanoke Gas filed and received approval from the SCC for a new SAVE Plan and Rider with new rates placed into effect on October 1, 2023, and as a result, SAVE Plan revenues declined to approximately $461,000 in fiscal 2024 from approximately $1,104,000 in fiscal 2023. Roanoke Gas filed and received approval from the SCC for an updated annual SAVE Rider rate to become effective October 1, 2024 that will result in approximately $1,389,000 of SAVE-related revenues during fiscal 2025. See Note 4 of the consolidated financial statements for additional information regarding the SAVE Plan and Rider.
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The WNA mechanism reduces the volatility in earnings due to the variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with a level of price protection when the weather is colder than normal. The WNA allows the Company to recover from customers the lost margin, excluding gas costs, from the impact of warmer-than-normal weather and correspondingly requires the Company to refund to customers the excess margin earned for colder-than-normal weather. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal. Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. The Company recorded approximately $3,761,000 and $3,005,000 in additional revenues under the WNA for weather that was approximately 20% and 16% warmer than normal for the fiscal years ended September 30, 2024 and 2023, respectively. The number of heating degree days used to determine normal can change annually as a new year is added to the 30-year period and the oldest year is removed. As a result of adding warmer than normal years to replace colder years, the number of heating degree days that defines normal has trended downward over the last several years.
The Company also has an approved rate structure that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity, to the average cost of natural gas inventory during the period. Total ICC revenues decreased from approximately $967,000 in fiscal 2023 to $728,000 in fiscal 2024 due to lower natural gas commodity prices during the 2023 summer storage injection season resulting in a lower average cost of natural gas in storage. The average price of gas in storage at September 30, 2024 declined by 23% compared to the same period last year. Accordingly, fiscal 2025 ICC revenues are expected to continue to remain below the prior year's levels.
In March 2023, Roanoke Gas began the operation of the RNG facility to produce commercial quality biogas for delivery into its distribution system through a cooperative agreement with the Western Virginia Water Authority. With SCC approval, Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and related operating costs through an RNG Rider added to customer bills. The customer benefits from this program through the monetization of environmental credits generated through RNG production, in which these credits are returned to customers through the RNG Rider. Total RNG revenue increased from approximately $712,000 in fiscal 2023 to $1,629,000 in fiscal 2024 as the facility was operational for a full twelve months in the current year compared to seven months in the prior year. See Note 4 of the consolidated financial statements for more information on RNG.
The cost of natural gas is a pass-through cost and is independent of the Company's non-gas rates. Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs through a quarterly filing (or more frequent if necessary) with the SCC. Once SCC approval is received, the Company adjusts the gas cost component of its rates. As actual costs and usage will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as amounts are reflected in customer billings.
Inflation and Rising Prices
Natural gas commodity, delivery and storage capacity costs constitute the single largest expense of the Company, representing 53% of fiscal 2024 total operating expenses. After peaking in December 2022, natural gas commodity prices decreased significantly through the remainder of fiscal 2023 and fiscal 2024. The decline in prices was primarily due to improved supply availability resulting from a warm winter season. Roanoke Gas recovers natural gas costs through the PGA mechanism as noted above; however, in times where commodity prices rapidly increase, the timing of recovery may lag. Increasing natural gas prices, especially in relation to other energy options, may lead to reductions in energy consumption through customer conservation or fuel switching. In addition, there is potential for higher bad debts related to customers' inability to pay higher natural gas bills.
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Inflation, due to supply chain delays, labor shortages and limited availability of critical supplies, among other factors, affects the Company through increases in non-gas expenses such as labor, employee benefits, materials and supplies, contracted services, corporate insurance and other areas. The Company recovers non-gas related costs through the non-gas portion of its tariff rates, which are adjusted through a non-gas base rate application. Unlike the rate adjustments for the gas portion of rates which are done administratively, the non-gas base rate application process can result in an inherent lag in non-gas expense recovery. Therefore, authorized non-gas base rates may not keep pace with rising costs during inflationary periods. Management regularly evaluates the Company's operations, economic conditions and other factors to assess the need to apply for a non-gas base rate adjustment. Accordingly, management filed a non-gas rate application in February 2024 to incorporate increased expense levels from continued inflationary pressures since the last non-gas base rate application. These new non-gas base rates were implemented effective July 1, 2024, subject to refund. See Note 4 of the consolidated financial statements for more information, including reaching settlement with SCC staff.
Results of Operations
The analysis on the results of operations is based on the consolidated operations of the Company, which are primarily associated with the utility segment. Additional segment analysis is provided when Midstream's investment in affiliates represents a significant component of the comparison. Net income increased by $461,614 from the prior year primarily due to AFUDC and earnings from the MVP and the implementation of new non-gas base rates effective July 1, 2024, partially offset by increased inflationary pressures on operating expenses and higher interest rates.
The Company's operating revenues are affected by the cost of natural gas, as reflected in the consolidated statement of income under the line item cost of gas - utility. The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost. Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as utility revenues less cost of gas, is a useful and relevant measure to analyze financial performance. The term gross utility margin is not intended to represent or replace gross margin, the most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies. A reconciliation between gross utility margin and gross margin is presented under the Gross Utility Margin section below.
The following results of operations analyses will reference gross utility margin.
Fiscal Year 2024 Compared with Fiscal Year 2023
The tables below reflect operating revenues, volume activity and heating degree days.
Operating Revenues
Year Ended September 30, 2024 2023 Increase / (Decrease) Percentage
Delivered Volumes
Year Ended September 30, 2024 2023 Increase / (Decrease) Percentage
Regulated natural gas (DTH)
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Total gas utility operating revenues for the year ended September 30, 2024 decreased by 13% from the year ended September 30, 2023 primarily due to significantly lower natural gas commodity prices and lower deliveries due to warmer weather more than offsetting the implementation of a non-gas base rate increase and increases in WNA and RNG revenues. Natural gas commodity prices for fiscal 2024 purchases declined by 43% per DTH from the prior year and the total commodity component of gas costs decreased by 44% per DTH from the prior year. Total gas costs, including pipeline and storage demand charges, decreased by 29% compared to a year ago, which corresponds to a 31% decline in the gas cost component included in total customer billing rate. Corresponding to the lower average price of natural gas in storage during 2024, ICC revenues declined 25%. In addition, total heating degree days decreased by 6% from the same period last year, resulting in a 2% decline in the weather-sensitive residential and commercial volumes, while transportation and interruptible volumes, primarily driven by business activity rather than weather, increased by 1%. The non-gas base rate increases implemented in 2023 and 2024 were the main contributing factors to an approximate $1.7 million increase in non-gas volumetric revenues, net of lower delivered volumes, and a $522,000 increase in customer base charge revenue. Additionally, the operation of the RNG facility for a full twelve months in the current year compared to seven months in the prior year resulted in increased revenues of approximately $917,000.
Gross Utility Margin
Year Ended September 30, 2024 2023 Increase Percentage
Gross utility margin increased over the prior fiscal year primarily as a result of the implementation of new non-gas base rates, net of SAVE, WNA and RNG revenue, offset by the reductions in ICC revenues. When adjusted for WNA, the volumetric margin increased by approximately $2,430,000. Base charge revenues increased by approximately $522,000 due to the non-gas base rate increase. The RNG Rider contributed an additional $917,000 to margin, as it was operational for all twelve months of fiscal 2024 compared to seven months during fiscal 2023, and ICC revenue declined by $239,000 due to lower cost of gas in storage.
The changes in the components of the gross utility margin are summarized below:
Years Ended September 30, Increase
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Reconciliation between gross utility margin and gross margin is presented below:
Gas Utility Investment in Affiliates Consolidated Total
For the Year Ended September 30, 2024:
Operating revenues
Cost of sales
Corporate and other — — (5,896 )
Gas Utility Investment in Affiliates Consolidated Total
For the Year Ended September 30, 2023:
Operating revenues
Cost of sales
Corporate and other — — (4,645 )
Operations and Maintenance Expense - Operations and maintenance expense increased by $2,450,764, or 15%, over the prior year primarily due to inflationary effects on personnel costs, professional services, costs associated to operate and maintain the RNG facility and lower capitalized overheads. Personnel costs increased by approximately $1,094,000 due to increased staffing and the inflationary impact on salaries and benefits as well as awards of restricted stock. During fiscal 2023, no performance-based restricted stock was awarded, but was reinstated in fiscal 2024. Professional services expenses increased approximately $270,000 primarily due to increased external audit fees, actuarial services, recruiting costs and IT support. Further, costs associated with the RNG facility increased approximately $299,000, as the facility was only operational during seven months of the prior year as compared to all twelve months in the current year. Total capitalized construction overheads declined by approximately $429,000 compared to the prior year primarily due to a reduction in direct construction expenditures related to the RNG project, which was completed in fiscal 2023. Corporate insurance premiums accounted for much of the remaining cost increase.
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Taxes Other Than Income Taxes - Taxes other than income taxes increased by $370,338, or 16%, primarily due to higher property tax rates and growth in utility property, as well as increases in payroll taxes related to increased staffing and compensation.
Depreciation and Amortization - Depreciation and amortization expense increased by $753,416, or 8%, corresponding to a similar increase in net additions to depreciable utility property.
Equity in Earnings of Unconsolidated Affiliate - The equity in earnings of the MVP investment increased by $1,766,881 associated with the recognition of AFUDC as a result of MVP construction activities continuing through May 2024. With the MVP in service, the Company now recognizes its share of operational earnings from the MVP, favorably adjusted for the amortization of a basis difference that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. See Note 5 of the consolidated financial statements for additional information related to the MVP.
Other Income, Net - Other income increased by $382,233, or 59%, primarily due an increase of approximately $471,000 related to donations of certain natural gas distribution assets from a local housing authority. Additionally, revenue sharing related to the asset management agreements increased by approximately $239,000. These increases were offset by an approximate $286,000 decrease in AFUDC related to the RNG facility, which was placed in service in March 2023, and approximately $62,000 less interest income.
Interest Expense - Total interest expense increased by $886,080, or 16%, primarily due to higher interest rates on the Company's variable rate debt and, to a lesser extent, higher borrowing levels. The weighted-average interest rate on the Company's total debt increased from 3.83% during fiscal 2023 to 4.27% during fiscal 2024, representing a 12% increase in the average rate. Total average debt outstanding during fiscal 2024 increased by 3% from fiscal 2023. Total borrowing levels were mitigated by equity issues through the ATM in fiscal 2024.
Roanoke Gas' interest expense increased by $484,454, or 15%, as total average debt outstanding increased by approximately $5,600,000 associated with net borrowings under the Company's line-of-credit. The average interest rate increased slightly from 3.51% in fiscal 2023 to 3.72% in fiscal 2024. All of Roanoke Gas' long-term debt carry fixed rates either due to fixed rate notes or with variable rate debt that has a corresponding swap agreement. See Note 6 and 7 of the consolidated financial statements for more information on the Company's debt.
Midstream's interest expense increased by $401,626, or 17%, as the average interest rate on Midstream's total debt increased from 4.32% to 5.21% related to higher interest rates on the variable rate credit facilities that were refinanced in 2024, net of an approximate $1,600,000 decrease in total average debt outstanding during the period.
The current interest rate environment may result in lower interest costs associated with the Company's variable rate debt.
Income Taxes - Income tax expense increased by $204,700, or 6%, corresponding to an increase in pre-tax income. The effective tax rate was 23.9% and 23.6% for fiscal 2024 and 2023, respectively. The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and tax credits. See Note 9 of the consolidated financial statements for the impact of tax credits on the effective tax rate.
Earnings Per Share and Dividends - Basic and diluted earnings per share were $1.16 in fiscal 2024 compared to $1.14 per share in fiscal 2023. Dividends declared per share of common stock were $0.80 in fiscal 2024 compared to $0.79 in fiscal 2023.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the impact of weather variability, the Company’s primary capital needs are the funding of its capital projects, the seasonal funding of its natural gas inventories and accounts receivables, debt service and payment of dividends to shareholders. The Company anticipates funding these items through its operating cash flows, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.
Cash and cash equivalents decreased by approximately $618,000 in fiscal 2024 compared to $3.4 million in fiscal 2023. The following table summarizes the categories of sources and uses of cash:
Cash Flow Summary Years Ended September 30,
Net decrease in cash and cash equivalents $ (618,246 ) $ (3,386,483 )
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Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas distribution business causes operating cash flows to fluctuate significantly during the year, as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, all contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to the combination of increasing natural gas storage levels and rising customer receivable balances.
Cash flows from operating activities decreased by $6.4 million from the prior year. The table below summarizes the significant components operating cash flow:
Years Ended September 30, Increase
Cash Flows From Operating Activities: 2024 2023 (Decrease)
Non-cash adjustments:
Changes in working capital and regulatory assets and liabilities:
The decline in operating cash flows is primarily due to the reduction in the value of gas withdrawn from storage. The average price of gas in storage during fiscal 2023 was more than $6.00 per DTH compared to approximately $4.00 per DTH during the current fiscal year. The decrease in the unit cost of gas in storage was attributable to much lower commodity prices during last year's summer storage injections as compared to fiscal 2022. Accordingly, as lower-priced gas was withdrawn from storage during fiscal 2024, cash flow levels were reduced when compared to fiscal 2023. Additionally, though the SCC issued its final order in December 2023, Roanoke Gas implemented interim billing rates in January 2023; therefore, the Company began accruing an estimated rate refund representing the amount due customers for the difference between total customer billings at interim rates versus total customer billings at final rates. Upon SCC approval of final rates, Roanoke Gas issued refunds in February 2024 to all customers that were billed at interim rates since January 2023. When compared to the prior year, the distribution of the rate refund to customers reduced cash available for operations by $1.3 million.
Cash Flows Used in Investing Activities:
Investing activities primarily consist of expenditures related to Roanoke Gas' utility property, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet the demands of customer growth. Roanoke Gas' expenditures were approximately $22.1 million and $25.3 million in fiscal 2024 and 2023, respectively. The $3.2 million decrease in expenditures is primarily due to higher prior-year investment for the RNG project, which was placed in service in March 2023. Roanoke Gas renewed 5.4 miles of main and 412 service lines and 5.7 miles of main and 452 service lines in fiscal years 2024 and 2023, respectively. With the recent approval of its new SAVE Plan and Rider, the Company is continuing its focus on SAVE infrastructure replacement projects, including the replacement of pre-1973 first generation plastic pipe. New customer demand for natural gas continues to be strong and therefore extending the natural gas distribution system within its service territory is also a priority. Roanoke Gas’ capital expenditures included costs to extend natural gas distribution mains and services to 521 customers in fiscal 2024, compared to 430 customers in fiscal 2023.
Capital expenditures are expected to be approximately $22 million annually over the next few years as Roanoke Gas continues to focus on its SAVE Plan, as well as system improvements and customer growth. The Company expects to utilize its operating cash flows and credit facilities, as well as to consider additional long-term debt and equity capital, to meet the funding requirements of these planned expenditures.
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Investing cash flows also reflects the fiscal 2024 funding of approximately $18,000 for Midstream's participation in the LLC, down from the $2.1 million in fiscal 2023. Midstream ceased future participation in capital calls following its May 2023 funding payment based on an agreement with the LLC's managing partner. Midstream continues to be invested in the LLC; however, its ownership percentage declined as it did not make additional investments. Now that the MVP is in service, Midstream will incur normal periodic capital investment related to ongoing MVP operations requirements and system improvements, in which it will again participate. Midstream has and will continue to make capital investments in Southgate. The targeted timing for completion of the Southgate project is 2028.
Cash Flows Provided by Financing Activities:
Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends. Net cash flows provided by financing activities were approximately $4.0 million and $200,000 in fiscal 2024 and 2023, respectively. The $3.8 million increase in financing cash flows is primarily attributable to net borrowings of $6.8 million under Roanoke Gas' line-of-credit during fiscal 2024 compared to $4.3 million in net borrowings in the prior year. Additionally, Midstream borrowed a net amount of $680,000 during fiscal 2024 from its amended credit facility compared to net repayments of approximately $196,000 in the prior year. During fiscal 2024, the Company realized $4.7 million from the issuance of 234,645 shares through the ATM program and DRIP activity compared to $3.9 million received from the issuance of 194,719 shares from those same activities, as well as the exercise of stock options, during the prior year. Cash outflows for dividend payments were $8.0 million as the annualized dividend rate increased from $0.79 to $0.80 per share and total outstanding shares increased as a result of the stock issuance activity. The Company’s consolidated capitalization was 44.1% equity and 55.9% long-term debt at September 30, 2024, exclusive of unamortized debt expense. This compares to 44.4% equity and 55.6% long-term debt at September 30, 2023.
The current interest rate environment may result in lower interest costs associated with the Company's variable rate debt.
Management regularly evaluates the Company’s liquidity through a review of its available financing resources and its cash flows. Resources maintains the ability to raise equity capital through its ATM program, private placement or other public offerings. Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including the line of credit and the two private shelf facilities. The first shelf facility provides for the issuance of up to $40 million in unsecured notes in addition to the $28 million previously issued. This shelf agreement is scheduled to expire on December 6, 2025. The second facility provides for the issuance of up to $70 million in unsecured notes during its current term, which expires September 30, 2025.
Roanoke Gas may also adjust capital spending as necessary, if such a need would arise. With the MVP now in service, Midstream's future cash requirements will relate to regular monthly operating expenses, debt service and capital contributions. The Company received its first cash distribution from MVP of approximately $800,000 in October 2024, and should receive similar distributions quarterly. On March 6, 2024, Midstream refinanced its Promissory Notes with one lender, increased the capacity of its $23 million credit facility to $25 million and extended the maturity date to December 31, 2025. Further, on May 2, 2024, Midstream established a new $9 million line of credit facility that matures on May 2, 2026. With these proceeds, Midstream paid in full the $9 million balance on its note payable that matured on June 1, 2024. With the extension of its original credit facility and the establishment of the new credit facility, Midstream's total debt repayment over the succeeding 12 months is $800,000 in principal payments. Management believes that it will be able to meet Midstream's cash requirements over the ensuing 12-month period with its quarterly cash distributions from MVP.
Notes 6 and 7 of the consolidated financial statements provide details on the Company's line-of-credit and borrowing activities.
ATM Program
Resources issued 129,164 shares of common stock for $2,635,200, net of $67,569 in fees, under the ATM program for the year ended September 30, 2024. For the year ended September 30, 2023, Resources issued 127,852 shares of common stock for $2,713,020, net of $69,565 in fees, under the ATM program.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
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Equity Investment in Mountain Valley Pipeline
Midstream owns a less than 1% equity investment in the LLC that owns and operates the MVP. The Company accounts for its interest in the LLC under the equity method of accounting given the LLC maintains specific ownership accounts for each investor, and also considering the Company's rights under the LLC management agreement and the Company's involvement as a customer of the MVP. The Company has been using the equity method since the inception of its investment in fiscal 2016. Following receipt of authorization from the FERC, the MVP entered commercial operation on June 14, 2024 and became available for interruptible or short-term firm transportation service. On July 1, 2024, the MVP commenced long-term firm capacity obligations. Midstream is also a less than 1% investor, accounted for under the cost method, in Southgate, which is in the design and permitting phase. Completion of the Southgate pipeline is targeted for June 2028.
From inception through May 2024, earnings from the LLC were primarily attributable to AFUDC income. With the MVP now in operation, the Company recognizes its share of earnings from the LLC, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. This basis difference amortization is a favorable non-cash adjustment over the operational life of the MVP, or 40 years. For fiscal 2024 and 2023, the Company recorded equity in earnings of consolidated affiliates of $3.9 million and $2.1 million, respectively, which included $3.0 million and $2.1 million from AFUDC. The Company participates in quarterly cash distributions by the LLC, the first of which was in October 2024. The Company's share was approximately $800,000.
Regulatory
See Note 4 of the consolidated financial statements for discussion on Regulatory matters.
Critical Accounting Estimates
The consolidated financial statements of Resources are prepared in accordance with GAAP. The amounts of assets, liabilities, revenues and expenses reported in the Company’s financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and management and professional judgments. Actual results may differ significantly from these estimates and assumptions.
The Company considers an estimate to be critical if it is material to the financial statements and requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. The Company considers the following accounting policies and estimates to be critical.
Regulatory accounting - The Company’s regulated operations follow the accounting and reporting requirements of ASC 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as regulatory assets on the consolidated balance sheet and recorded as expenses in the consolidated statements of income and comprehensive income when such amounts are reflected in rates. Additionally, regulators can impose regulatory liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future.
If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the Company would remove the applicable regulatory assets or liabilities from the consolidated balance sheet and include them in the consolidated statements of income and comprehensive income for the period in which the discontinuance occurred.
Unbilled revenue recognition - The Company bills its regulated natural gas customers on a monthly cycle. The billing cycle for most customers does not coincide with the accounting periods used for financial reporting. The Company accrues revenue for estimated natural gas delivered to customers but not yet billed during the accounting period. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The consolidated financial statements include unbilled revenue of $1,294,798 and $1,240,097 as of September 30, 2024 and 2023, respectively. Because the process is performed monthly, the Company routinely ensures its methodology continues to provide a reasonable estimate.
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Pension and Postretirement Benefits - The Company offers a pension plan and a postretirement plan to eligible employees. The expenses and liabilities associated with these plans, as disclosed in Note 12 of the consolidated financial statements, are based on numerous assumptions and factors, including provisions of the plans, employee demographics, contributions made to the plan, return on plan assets and various actuarial calculations, assumptions and accounting requirements. In regard to the pension plan, specific factors include assumptions regarding the discount rate used in determining future benefit obligations, expected long-term rate of return on plan assets, compensation increases and life expectancies. Similarly, the postretirement medical plan also requires the estimation of many of the same factors as the pension plan in addition to assumptions regarding the rate of medical inflation and Medicare availability. Actual results may differ materially from the results expected from the actuarial assumptions due to changing economic conditions, differences in actual returns on plan assets, different rates of medical inflation, volatility in interest rates and changes in life expectancy. Such differences may result in a material impact on the amount of expense recorded in future periods or the value of the obligations on the consolidated balance sheet.
In selecting the discount rate to be used in determining the benefit liability, the Company utilized the FTSE Pension Discount Curve, which incorporates the rates of return on high-quality, fixed-income investments that corresponded to the length and timing of benefit streams expected under both the pension plan and postretirement plan. The Company used a discount rate of 4.83% for valuing both its pension plan and postretirement plan liabilities at September 30, 2024. These discount rates represent a decrease from the 5.63% for the pension plan and postretirement plan used for valuing the corresponding liabilities at September 30, 2023. The decrease in discount rates reflect the Federal Reserve's easing of interest rates in 2024 and general long-term rate decline. The yield on the 30-year Treasury increased from 3.79% at September 30, 2022 to 4.73% at September 30, 2023 and decreased to 4.14% at September 30, 2024. Corporate bond rates experienced a smaller increase as credit spreads have narrowed. The rise in the discount rates through 2023 was the primary factor in the reduction of the benefit obligations for both the pension and the postretirement plan. Mortality assumptions were based on the PRI-2012 Mortality Table with improvements projected generational using Projection Scale MP-2021 for the current year valuation.
The Company has focused on minimizing the financial risk associated with these plans. With the soft freezes of both the pension and postretirement plans, future liability growth associated with participant service and compensation has been limited. Since January 2017, when the pension plan froze access to new employees, the asset allocation has transitioned from 60% equity and 40% fixed income to 25% equity and 75% fixed. During the same period, the fixed income portion of the plan was transitioned to an LDI approach, with the fixed income assets invested in securities with a duration that corresponds to the duration of the corresponding liability. This synchronization of the pension assets with the pension liabilities has reduced volatility in the funded status of the plan. This is evidenced by the relative stability of the funded status of the pension plan at September 30, 2024 and 2023 with a funded ratio of 104% and 100%, respectively. The 25% allocation to equity investments provides asset growth potential to offset increases in the pension liability related to those employees continuing to accrue benefits. Management will continue to evaluate the investment allocation as the liabilities mature and make adjustments as necessary.
The Company has initiated a transition of the postretirement plan assets from a 50% equity and 50% fixed income allocation to a 30% equity and 70% fixed income allocation. This revision to the investment targets is in response to a greater proportion of participants that have transitioned to retirement. Similar to the pension plan, the revision to the asset allocation will seek to reduce the volatility in funded status while still providing the opportunity for asset growth through the equity portion of the portfolio. The funded status for the postretirement plan was 139% and 116% as of September 30, 2024 and 2023, respectively. The improvement in the funded status was due to stronger-than-expected market performance only partially offset by higher liabilities as the Company is effectively matching durations within the portfolio. Management will continue to monitor and evaluate the asset allocation and adjust as warranted.
A summary of the funded status of both the pension and postretirement plans is provided below:
Funded status - September 30, 2024 Pension Postretirement Total
Funded status - September 30, 2023 Pension Postretirement Total
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The Company annually evaluates the long-term rate of return on its targeted investment allocation model, as well as the overall asset allocation of its benefit plans, and reviews both plans' potential long-term rate of return assumptions with its investment advisors to determine the rates used in each plan's actuarial calculations. The long-term rates of return increased slightly from 4.50% in fiscal 2024 to 4.95% for fiscal 2025 for the pension plan and from 4.21% in fiscal 2024 to 4.95% for fiscal 2025 for the postretirement plan. Management will continue to evaluate the return assumptions and asset allocation and adjust both as market conditions warrant.
Management estimates that the Company will have no minimum funding requirements next year. The Company currently does not expect to make contributions to its pension plan and postretirement plan in fiscal 2025 due to the funded position of the plans. The Company will continue to evaluate its benefit plan funding levels in light of funding requirements and ongoing investment returns and make adjustments, as necessary, to avoid benefit restrictions and minimize PBGC premiums.
The following schedule reflects the sensitivity of pension costs to changes in certain actuarial assumptions, assuming that the other components of the calculation remain constant.
Rate of return on plan assets -0.25 % 76,000 N/A
The following schedule reflects the sensitivity of postretirement benefit costs from changes in certain actuarial assumptions, while the other components of the calculation remain constant.
Rate of return on plan assets -0.25 % 37,000 N/A
Derivatives - The Company may hedge certain risks incurred in its operation through the use of derivative instruments. The Company applies the requirements of ASC 815, Derivatives and Hedging, which requires the recognition of derivative instruments as assets or liabilities in the Company’s consolidated balance sheet at fair value. In most instances, fair value is based upon quoted futures prices for natural gas commodities and interest rate futures for interest rate swaps. Changes in the commodity and futures markets will impact the estimates of fair value in the future. Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the values used in determining fair value in prior financial statements. The Company had four interest-rate swaps outstanding at September 30, 2024 related to its variable rate notes. The corresponding fair value of these swaps is reflected on the consolidated balance sheets as of September 30, 2024 and 2023. A 25 basis point decrease and increase on the yield curve would result in a $228,248 decrease and $226,748 increase, respectively, in the fair value of the interest rate swaps on the balance sheet. See Notes 1 and 8 to the consolidated financial statements for additional information regarding the swaps.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 7B.Insider Trading Policy.
The information set forth under "Compensation Philosophy and Objectives" in the Proxy Statement for the 2025 Annual Meeting of Shareholders of Resources is incorporated herein by reference.
Item 8.Financial Statements and Supplementary Data.
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RGC Resources, Inc. and Subsidiaries
Consolidated Financial Statements
for the Years Ended September 30, 2024 and 2023
and Reports of Independent
Registered Public Accounting Firms
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RGC RESOURCES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Consolidated Balance Sheets 32
Consolidated Statements of Income 34
Consolidated Statements of Comprehensive Income (Loss) 35
Consolidated Statements of Stockholders’ Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of RGC Resources, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of RGC Resources, Inc. and subsidiaries (the “Company”) as of September 30, 2024, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for the year ended September 30, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2024, and the results of its operations and its cash flows for the year ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
RateRegulatedBasisofAccounting and Regulatory Matters —Refer to Notes 1 and 4, respectively, to the financial statements
Critical Audit Matter Description
The Company, through its regulated natural gas distribution utility subsidiary, is subject to rate regulation by the Virginia State Corporation Commission (the “SCC”) and follows the accounting and reporting requirements of ASC 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the consolidated balance sheet and recorded as expenses when such amounts are reflected in rates. Similarly, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future. In the event the provisions of ASC 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the consolidated statements of income and comprehensive income in the period which ASC 980 no longer applied.
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We identified the impact of rate regulation as a critical audit matter due to the judgments made by management to support its assertions about impacted account balances and disclosures and the subjectivity involved in assessing the potential impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery of regulatory assets through future rates, and (2) whether a regulatory liability is due to customers. Given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the SCC, auditing these judgments requires specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures to evaluate the accounting for the effects of cost-based rate regulation, including the probable recovery or refund of regulatory assets and liabilities, included the following, among others:
/s/ Deloitte & Touche LLP
Richmond, Virginia
December 4, 2024
We have served as the Company's auditor since 2024.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
RGC Resources, Inc.
Roanoke, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of RGC Resources, Inc. and Subsidiaries (“the Company”) as of September 30, 2023, and the related consolidated statement of income, comprehensive income, stockholders' equity, and cash flows for the year ended September 30, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its operations and its cash flows for the year ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Brown Edwards & Company, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
We have served as the Company's auditor from 2006 to 2023.
Roanoke, Virginia
December 1, 2023
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF September 30, 2024 AND 2023
ASSETS
CURRENT ASSETS:
UTILITY PROPERTY:
OTHER NON-CURRENT ASSETS:
(Continued)
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF September 30, 2024 AND 2023
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
LONG-TERM DEBT:
DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES:
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
See notes to consolidated financial statements.
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED September 30, 2024 AND 2023
OPERATING REVENUES:
OPERATING EXPENSES:
EARNINGS PER COMMON SHARE:
WEIGHTED AVERAGE SHARES OUTSTANDING:
See notes to consolidated financial statements.
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED September 30, 2024 AND 2023
Other comprehensive income (loss), net of tax:
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (926,718 ) 288,925
See notes to consolidated financial statements.
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED September 30, 2024 AND 2023
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Stockholders’
Stock Par Value Earnings Income (Loss) Equity
See notes to consolidated financial statements.
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RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED September 30, 2024 AND 2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operations:
Equity in earnings of unconsolidated affiliate (3,851,871 ) (2,084,990 )
Allowance for funds used during construction — (362,685 )
Changes in assets and liabilities which provided (used) cash:
Accounts receivable and customer deposits, net (275,196 ) 1,393,153
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated affiliates (18,258 ) (2,133,534 )
Proceeds from disposal of utility property 79,032 37,940
CASH FLOWS FROM FINANCING ACTIVITIES:
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Significant noncash investing activities:
See notes to consolidated financial statements.
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RGC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDEDSeptember 30, 2024 AND 2023
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation—RGC Resources, Inc. is an energy services company primarily engaged in the sale and distribution of natural gas. The consolidated financial statements include the accounts of Resources and its wholly owned subsidiaries: Roanoke Gas and Midstream. Roanoke Gas is a natural gas utility, which distributes and sells natural gas to approximately 62,500 residential, commercial and industrial customers within its service areas in Roanoke, Virginia and the surrounding localities. The Company’s business is seasonal in nature as a majority of natural gas sales are for space heating during the winter season. Roanoke Gas is regulated by the SCC. Midstream is a wholly owned subsidiary created primarily to invest in the LLC.
The Company follows accounting and reporting standards established by the FASB and the SEC, including certain provisions allowed under the smaller reporting company exceptions.
Rate Regulated Basis of Accounting—The Company’s regulated operations follow the accounting and reporting requirements of ASC 980,Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of ASC 980no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the consolidated statements of income and comprehensive income in the period which ASC 980no longer applied.
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Regulatory assets and liabilities included in the Company’s consolidated balance sheets as of September 30, 2024 and 2023 are as follows:
September 30
Assets:
Current Assets:
Regulatory assets:
Under-recovery of SAVE Plan revenues 107,678 —
Other Non-Current Assets:
Regulatory assets:
Liabilities and Stockholders' Equity:
Current Liabilities:
Regulatory liabilities:
Over-recovery of SAVE Plan revenues $ — $ 146,861
Deferred Credits and Non-Current Other Liabilities:
Regulatory liabilities:
Amortization of $116,085 and $213,450 of regulatory assets for the years ended September 30, 2024 and 2023, respectively, is included in operations and maintenance expense on the consolidated statements of income. Amortization of $211,863 and $237,911 of regulatory assets for the years ended September 30, 2024 and 2023, respectively, is included in other income, net on the consolidated statements of income. Amortization of $114,187 of regulatory assets for both years ended September 30, 2024 and 2023 is included in interest expense on the consolidated statements of income.
As of September 30, 2024, the Company had regulatory assets in the amount of $9,548,954 on which the Company did not earn a return during the recovery period.
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Utility Property and Depreciation—Utility property is stated at original cost and includes direct labor and materials, contractor costs, and all allocable overhead charges. The Company applies the group method of accounting, where the costs of like assets are aggregated and depreciated by applying a rate based on the average expected useful life of the assets. In accordance with Company policy, expenditures for depreciable assets with a life greater than one year are capitalized, along with any upgrades or improvements to existing assets, when such upgrades or improvements significantly improve or extend the original expected useful life. Expenditures for maintenance, repairs, and minor renewals and betterments are expensed as incurred. The original cost of depreciable property retired is removed from utility property and charged to accumulated depreciation. The cost of asset removals, less salvage, is charged to “regulatory cost of retirement obligations” or “asset retirement obligations” as explained under Asset Retirement Obligations below.
Utility property is composed of the following major classes of assets:
September 30
Provisions for depreciation are computed principally at composite straight-line rates over a range of periods. Rates are determined by depreciation studies, which are required to be performed at least every 5 years on the regulated utility assets of Roanoke Gas. The most recent depreciation study was completed and approved by the SCC staff in fiscal 2024. The composite weighted-average depreciation rate was 3.26% and 3.30% for the years ended September 30, 2024 and 2023, respectively.
The composite rates are composed of two components, one based on average service life and one based on cost of retirement. As a result, the Company accrues the estimated cost of retirement of long-lived assets through depreciation expense. These retirement costs are not a legal obligation but rather the result of cost-based regulation and are accounted for under the provisions of ASC 980. Such amounts are classified as a regulatory liability.
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These reviews have not identified any impairments which would have a material effect on the results of operations or financial condition.
In fiscal 2020, Roanoke Gas implemented the application of AFUDC related to infrastructure investments associated with two gate stations that interconnect with the MVP. Both gate stations were placed in service in fiscal 2024 upon MVP becoming operational. In fiscal 2022, the SCC approved the application of AFUDC on the RNG project during its construction phase. This treatment allowed capitalizing both the equity and debt financing costs during the construction phases. For the year ended September 30, 2023, the Company capitalized $76,785 of debt financing costs and $285,900 of equity financing costs related to the RNG project thereby affecting interest expense and other income, net on the consolidated statements of income. The RNG project was completed and placed in service in March 2023, thus the Company did not capitalize any financing costs related to these projects for the year ended September 30, 2024. See Note 4 for further information.
Asset Retirement Obligations—ASC 410,Asset Retirement and Environmental Obligations, requires entities to record the fair value of a liability for an ARO when there exists a legal obligation for the retirement of the asset. When the liability is initially recorded, the entity capitalizes the cost, thereby increasing the carrying amount of the underlying asset. In subsequent periods, the liability is accreted, and the capitalized cost is depreciated over the useful life of the underlying asset. The Company has recorded AROs for its future regulatory obligations related to purging and capping its distribution mains and services upon retirement, although the timing of such retirements is uncertain.
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The following is a summary of the AROs:
Years Ended September 30
Revisions to estimates and other (150,689 ) —
Cash, Cash Equivalents and Short-Term Investments—From time to time, the Company will have balances on deposit at banks in excess of the amount insured by the FDIC. The Company has not experienced any losses on these accounts and does not consider these amounts to be at risk. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Customer Receivables and Allowance for Credit Losses—Accounts receivable include amounts billed to customers for natural gas sales and related services and gas sales occurring subsequent to normal billing cycles but before the end of the period. The Company provides an estimate for losses on these receivables by utilizing historical information, current account balances, account aging and current economic conditions. Customer accounts are charged off annually when deemed uncollectible or when turned over to a collection agency for action.
A reconciliation of changes in the allowance for credit losses is as follows:
Years Ended September 30
Lease Accounting—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. The operating lease ROU asset also is adjusted for any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease at certain dates, typically at the Company’s own discretion. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. 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 consolidated balance sheet but will be recognized in the consolidated statements of operations on a straight-line basis over the term of the agreement.
Financing Receivables—Financing receivables represent a contractual right to receive money either on demand, or on fixed or determinable dates, and are recognized as assets on the entity’s balance sheet. Trade receivables, resulting from the sale of natural gas and other services to customers, are the Company's primary type of financing receivables. These receivables are short-term in nature with a provision for credit losses included in the consolidated financial statements.
Inventories—Natural gas in storage and materials and supplies inventories are recorded at average cost. Natural gas storage injections are priced at the purchase cost at the time of injection and storage withdrawals are priced at the weighted average cost of gas in storage. Materials and supplies are removed from inventory at average cost.
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Unbilled Revenues—The Company bills its natural gas customers on a monthly cycle; however, the billing cycle for most firm customers does not coincide with the accounting periods used for financial reporting. As the Company recognizes revenue when gas is delivered, an accrual is made to estimate revenues for natural gas delivered to customers but not billed during the accounting period. The amounts of unbilled revenue receivable included in accounts receivable on the consolidated balance sheets at September 30, 2024 and 2023 were $1,294,798 and $1,240,097, respectively.
Income Taxes—Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. A valuation allowance against deferred tax assets is provided if it is more likely than not the deferred tax asset will not be realized. The Company and its subsidiaries file consolidated state and federal income tax returns.
Debt Expenses—Debt issuance expenses are deferred and amortized over the lives of the debt instruments. The unamortized balances are offset against the carrying value of long-term debt.
Over/Under-Recovery of Natural Gas Costs—Pursuant to the provisions of the Company’s PGA clause, the SCC provides the Company with a method of passing along to its customers increases or decreases in natural gas costs incurred by its regulated operations, including gains and losses on natural gas derivative hedging instruments, if utilized. On at least a quarterly basis, the Company files a PGA rate adjustment request with the SCC to increase or decrease the gas cost component of its rates, based on projected price and activity. Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount. As actual costs and usage will differ from the projections used in establishing the PGA rate, the Company may either over-recover or under-recover its actual gas costs during the period. Any difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the deferral period, the balance of the net deferred charge or credit is amortized over an ensuing 12-month period as amounts are reflected in customer bills.
Fair Value—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The Company determines fair value based on the following fair value hierarchy which prioritizes each input to the valuation methods into one of the following three broad levels:
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). All fair value disclosures are categorized within one of the three categories in the hierarchy based on the lowest level that is significant to the valuation. See fair value disclosures below and in Notes 8 and 12.
Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent 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.
Excise and Sales Taxes—Certain excise and sales taxes imposed by the state and local governments in the Company’s service territory are collected by the Company from its customers. These taxes are passed through to the state and local governments and included within accounts payable on the Company's consolidated balance sheets.
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Earnings Per Share—Basic EPS and diluted EPS are calculated by dividing net income by the weighted-average common shares outstanding during the period and the weighted-average common shares outstanding during the period plus potential dilutive common shares, respectively. Potential dilutive common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. The computation of diluted EPS for the years ended September 30, 2024 and 2023 excludes potentially dilutive shares of 2,542 and 1,880, respectively, because to include them would be antidilutive for the period. However, these shares could potentially dilute EPS in the future. A reconciliation of basic and diluted EPS is presented below:
Years Ended September 30
Effect of dilutive securities:
Options to purchase common stock 3,571 4,456
Earnings per share of common stock:
Business and Credit Concentrations—The primary business of the Company is the distribution of natural gas to residential, commercial and industrial customers in its service territories.
No sales to individual customers accounted for more than 5% of total revenue in any period. No individual customer amounted to more than 5% of total accounts receivable at September 30, 2024 and 2023.
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, are renewable by the municipalities and are intended for perpetual duration, including exclusive franchises in the cities of Roanoke, Salem and the Town of Vinton. All franchises are set to expire December 31, 2035.
Roanoke Gas is currently served by three primary pipelines that provide the natural gas supplied to the Company’s customers. Depending upon weather conditions and the level of customer demand, failure of one or all of these transmission pipelines could have a major adverse impact on the Company.
Derivative and Hedging Activities—ASC 815,Derivatives and Hedging, requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheet and measurement of those instruments at fair value.
The Company’s hedging and derivatives policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations. The Company’s hedging and derivatives policy specifically prohibits the use of derivatives for speculative purposes. The key market risks that the Company may hedge against include the price of natural gas and the cost of borrowed funds.
From time to time, the Company has entered into collars, swaps and caps for the purpose of hedging the price of natural gas in order to provide price stability during the winter months. The fair value of these instruments is recorded in the consolidated balance sheets with the offsetting entry to either under- or over-recovery of gas costs. Net income and other comprehensive income are not affected by the change in market value as any cost incurred or benefit received from these instruments is recoverable or refunded through the PGA as the SCC allows for full recovery of prudent costs associated with natural gas purchases. At September 30, 2024 and 2023, the Company had no outstanding derivative instruments for the purchase of natural gas.
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The Company has four interest rate swaps associated with certain of its variable rate debt. 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 two swap agreements corresponding to the $14 million and $8 million variable rate term notes. The swap agreements convert these two notes into fixed rate instruments with effective interest rates of 3.24% 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.
See Notes 7 and 8 for additional information on the swaps and fair value.
Other Comprehensive Income (Loss)—A summary of other comprehensive income is provided below:
Tax
Before Tax (Expense) Net of Tax
Amount or Benefit Amount
Interest rate swaps:
Defined benefit plans:
Interest rate swaps:
Defined benefit plans:
The amortization of actuarial gains or losses are included as a component of net periodic pension and postretirement benefit costs under other income, net in the consolidated statements of income.
Composition of AOCI:
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Recently Issued 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 LIBOR-based variable rate note to a new reference rate as of September 30,2024. Each of the revised notes has a corresponding swap that was also transitioned to align with the related notes. See Note 7 and 8 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 new guidance is effective for the Company for fiscal year beginning October 1, 2024 and interim periods within fiscal year beginning October 1, 2025. The Company is currently evaluating the new standard and determining the additional disclosure requirements.
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 the Company for annual periods beginning October 1, 2025.
In March 2024, the SEC issued its final rule that requires registrants to provide climate disclosures in their annual reports and registration statements. The new guidance requires that registrants provide information about specified financial statement effects of severe weather events and other natural conditions, certain carbon offsets and renewable energy certificates, and material impacts on financial estimates and assumptions in the footnotes to financial statements. The rule also requires additional disclosures outside of the financial statements including governance and oversight of material climate-related risks, the material impact of climate risks on the company's strategy, business model and outlook, risk management processes for material climate-related risks and material climate targets and goals. The Company is currently evaluating the new rule and determining the impact of the additional disclosure requirements, as well as the data needed and the source of that data to comply with required disclosures. The new rule is currently effective for fiscal years beginning in 2027 for smaller reporting companies. The final rule was scheduled to become effective May 28, 2024; however, the SEC has voluntarily stayed the rule's effective date pending judicial review. Depending on when the legal challenges are resolved, the mandatory compliance date may be retained or delayed.
In November 2024, the SEC issued ASU 2024-03,Income Statement - Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures. The new guidance requires public business entities to disclose certain additional detail about expenses including, among other items, purchases of inventory, employee compensation, depreciation and intangible asset amortization included within each income statement expense line items within continuing operations. The guidance also requires disclosure of the total amount of selling expenses and the Company’s definition of selling expenses. Such disclosures must be made on an annual and interim basis and integrated with existing disclosure requirements in a tabular format in the footnotes to the financial statements. The new guidance is effective for the Company for fiscal year beginning October 1, 2027 and interim periods within fiscal year beginning October 1, 2028. The Company is currently assessing the impacts of the new guidance on its financial statement disclosures.
Other accounting standards that have been issued or proposed by the FASB or other standard–setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentations.
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2. 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 for the years ended September 30:
Gas utility Non utility Total operating revenues
Natural Gas (Billed and Unbilled):
Gas utility Non utility Total operating revenues
Natural Gas (Billed and Unbilled):
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. Tariff rates represent the transaction price. Performance obligations include the procurement and transport of natural gas through the Company's distribution system to customers. 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.
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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 transportation and interruptible customers at the end of each month, thereby eliminating any unbilled consideration for these rate classes.
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 revenues 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 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
The Company did not incur any significant costs to obtain contracts during the period. Certain customers elect to pay even amounts monthly, giving rise to assets and liabilities that are in the table above. All amounts clear annually.
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3. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company's executive management in deciding how to allocate resources and assess performance. The Company uses operating income and equity in earnings to assess segment performance.
Intersegment transactions are recorded at cost.
The reportable segments disclosed herein are defined as follows:
Gas Utility - The natural gas distribution segment of the Company generates revenue from its tariff rates and other regulatory mechanisms through which it provides for the sale and distribution of natural gas to its residential, commercial and industrial customers.
Investment in Affiliates - The investment in affiliates segment reflects the income generated through the activities of the Company's investment in the LLC.
Information related to the segments of the Company are provided below:
Gas Utility Investment in Affiliates Consolidated Total
For the Year Ended September 30, 2024:
Corporate and other — — 108,131
Corporate and other — — 88,120
Corporate and other — — 88,008
Gross investment in affiliates $ — $ 18,258 $ 18,258
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Gas Utility Investment in Affiliates Consolidated Total
For the Year Ended September 30, 2023:
Corporate and other — — 114,458
Corporate and other — — 84,062
Corporate and other — — 83,966
4. 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.
In response to continued inflationary pressures, Roanoke Gas filed a general rate application on February 2, 2024 with the SCC seeking to increase its non-gas base rates by $4.33 million and its permitted return on equity from 9.44% to 10.35% reflecting its higher cost of capital, including higher interest expense. The SCC permitted the Company to implement its new rates on an interim basis for customer billings on or after July 1, 2024, subject to refund. On October 16, 2024, 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 annual incremental revenue requirement increase of $4.08 million based on a return on equity of 9.90%. The Company expects a final decision from the Commission by the second quarter of fiscal 2025.
The SCC requires regulated utilities within the state to perform a depreciation study every five years and to submit the study for SCC approval. The Company's prior depreciation rates were based on the last depreciation study approved by the SCC in 2019. As part of the general rate application filed in February 2024, the Company submitted its requisite depreciation study and proposed new depreciation rates. In July 2024, the Company received administrative approval from the SCC staff that authorized the new depreciation rates and instructed the Company to implement the new rates retroactive to October 1, 2023. As a result, in the fourth quarter the Company recorded an approximate $226,000 reduction in annual depreciation expense for the fiscal year ended September 30, 2024.
On December 2, 2022, Roanoke Gas filed an expedited rate 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. The proposed interim rates went into effect January 1, 2023, subject to refund. 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 annual incremental revenue requirement of $7.45 million. The Company began billing the approved rates effective October 1, 2023. The SCC issued its Final Order in the matter on December 19, 2023 in which it approved the settlement agreement in its entirety. Refunds, which had previously been accrued, were made to customers in February 2024.
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On August 31, 2023, the SCC approved the Company's new SAVE Plan and Rider with rates effective October 1, 2023. Under this plan, Roanoke Gas recovers 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. The plan was approved with a revenue requirement of approximately $366,000 for fiscal 2024. On June 28, 2024, Roanoke Gas filed for approval of an updated annual SAVE Rider rate to become effective October 1, 2024. The proposed SAVE rate is based on an estimated $9.13 million of SAVE eligible investment during fiscal 2025 and a revenue requirement of $1.53 million that reflects the cost of capital settled in the 2024 rate case. The Commission approved the Company’s updated SAVE Rider on September 24, 2024, which contained a lower revenue requirement of $1.39 million, largely attributable to SCC Staff’s reliance on the overall cost of capital approved in the 2022 rate case. The difference in the revenue requirements will be trued-up in subsequent SAVE Rider updates to the overall cost of capital settled in the 2024 rate case.
By Order dated September 1, 2023, the SCC approved the Company’s RNG Rider effective for the period October 1, 2023 through September 30, 2024. In its Order, the SCC directed the Company to file an application to update the RNG Rider by May 30, 2024. In compliance with the SCC’s directive, on May 30, 2024, Roanoke Gas filed for an update to become effective October 1, 2024. The revenue requirement associated with the proposed RNG Rider is $1.56 million, offset by the sale of environmental credits in the amount of $1.11 million, as well as credits for the over-recovery of costs during the prior year of approximately $35,000, resulting in a net revenue requirement of approximately $415,000 reflecting the overall cost of capital proposed in the 2024 rate case. The Commission approved the Company’s updated RNG Rider on September 4, 2024, which contained a lower net revenue requirement of approximately $356,000, largely attributable to SCC Staff’s reliance on the overall cost of capital approved in the 2022 rate case. The difference in the revenue requirements will be trued-up in subsequent RNG Rider updates at the overall cost of capital approved in the 2024 rate case.
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. The SCC approved the application in July 2022.
The housing authority completed the transfer of two apartment complexes to Roanoke Gas in fiscal 2022,one complex in fiscal 2023 and one complex in fiscal 2024. The housing authority has notified Roanoke Gas that it intends to complete the remaining complex in fiscal 2025. Roanoke Gas recorded these assets and recognized pre-tax income of approximately $219,000, $311,000 and $782,000 in fiscal 2022,2023 and 2024, respectively, by analogy to ASC 958. The assets are included under utility property, in service on the consolidated balance sheets and the income is recorded in other income, net on the consolidated statements of income. There are no ongoing obligations between the parties for the properties already transferred.
5. OTHER INVESTMENTS
Midstream owns a less than 1% equity investment in the LLC that owns and operates the MVP. The Company accounts for its interest in the LLC under the equity method of accounting given the LLC maintains specific ownership accounts for each investor, and also considering the Company's rights under the LLC management agreement and the Company's involvement as a customer of the MVP. The Company has been using the equity method since the inception of its investment in fiscal 2016. Following receipt of authorization from the FERC, the MVP entered commercial operation on June 14, 2024 and became available for interruptible or short-term firm transportation service. On July 1, 2024, the MVP commenced long-term firm capacity obligations. Midstream is also a less than 1% investor, accounted for under the cost method, in Southgate, which is in the design and permitting phase. Completion of the Southgate pipeline is targeted for June 2028.
While under construction, AFUDC provided the majority of the income recognized by Midstream. 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. AFUDC ceased in June 2024 when the pipeline went into commercial operation.
The Company participates in the earnings of the LLC proportionate to its level of investment. With the MVP now in operation, the Company recognizes its share of earnings from the LLC, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. This basis difference amortization is a favorable non-cash adjustment to income over the operational life of the MVP, which is 40 years. The Company's share of earnings from the LLC and the basis difference amortization are presented under equity in earnings of unconsolidated affiliate on the consolidated statements of income. The Company participates in quarterly cash distributions by the LLC, the first of which was in October 2024. The Company's share was approximately $800,000.
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Midstream assesses the value of its investment in the LLC on at least a quarterly basis, and no impairment indicators were identified in fiscal 2024 or 2023.
Funding for Midstream's investments has been provided through equity contributions from Resources and unsecured promissory notes as detailed in Note 7.
The investments in the LLC are included in the consolidated balance sheets as follows:
September 30
Other Assets:
The change in the investment in unconsolidated affiliates is provided below:
September 30
Change in accrued capital calls — (804,506 )
Change in investment in unconsolidated affiliates $ 3,870,129 $ 3,414,018
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
Years Ended September 30
Balance Sheets
September 30
Assets:
Liabilities and Equity:
Noncurrent liabilities 68,965 —
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6. LINE-OF-CREDIT
On March 24, 2023, Roanoke Gas entered into an unsecured Revolving Note in the principal amount of $25 million. On March 31, 2024, the Revolving Note was amended to extend the maturity date to March 31, 2025. Other key terms and requirements of the Revolving Note were retained. The Revolving Note's variable interest rate is based upon Term SOFR plus 110 basis points and provides multiple tier borrowing limits to accommodate seasonal borrowing demands. The Company's total borrowing limits during the term of the Revolving Note range from $15 million to $25 million. As of September 30, 2024, the Company had an outstanding balance of $11,166,181 under the Revolving Note.
The Company's total available borrowing limits for the remaining term are as follows:
Available
As of Line-of-Credit
A summary of the line-of-credit follows:
September 30
Average rate of interest during year on outstanding balances 6.39 % 5.16 %
Interest rate at year-end 6.29 % 6.43 %
Interest rate on unused line-of-credit 0.15 % 0.15 %
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7. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30
Roanoke Gas:
Midstream:
Less: current maturities of long-term debt (800,000 ) — (10,975,000 ) —
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On March 6, 2024, Midstream entered into the Sixth Amendment to Credit Agreement and related Promissory Notes on the non-revolving credit facility. The Sixth Amendment revised the interest rate from Term SOFR plus 2.00% to Term SOFR plus 2.00% subject to adjustment to Term SOFR plus 1.75% and Term SOFR plus 1.55% upon meeting certain milestones. The Sixth Amendment also consolidated the Promissory Notes to one Promissory Note with one lender, increased the available non-revolving credit facility to $25 million, and extended the maturity date to December 31, 2025. All other terms and requirements remain unchanged.
On May 2, 2024, Midstream established a new $9 million line of credit facility. The interest rate on the borrowings under the facility is SOFR plus 2.215%; the arrangement included a 0.40% upfront fee and 0.125% unused line fee. The facility matures on May 2, 2026.
On May 29, 2024, Midstream paid in full the remaining $9 million term note payable that was set to mature June 1, 2024 with proceeds from the new line of credit.
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. On March 6, 2024, Midstream further amended and restated its $8 million Term Note. The amendment suspended quarterly principal payments beginning April 1, 2024 through January 1, 2025. Principal payments will commence again on April 1, 2025. All other terms and requirements of the Term Notes were retained. In conjunction with the original amendment of the Term Notes in June 2023, 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. The interest rate swap related to the $8 million Term Note was not amended on March 6, 2024.
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 1 for additional information regarding the interest rate swap.
Debt issuance costs are amortized over the life of the related debt. As of September 30, 2024 and 2023, the Company also had an unamortized loss on the early retirement of debt of $1,141,872 and $1,256,059, respectively, which has been deferred as a regulatory asset and is being amortized over a 20-year period.
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All of the 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 (defined in the debt agreements) 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 a non-cash impairment 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 $9 million revolving line of credit facility also has an interest coverage ratio of not less than 1.5 to 1. The Company was in compliance with all debt covenants as of September 30, 2024 and 2023.
The aggregate annual maturities of long-term debt for the next five years ending after September 30, 2024 are as follows:
Year Ending September 30 Maturities
8. FAIR VALUE
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements by level within the fair value hierarchy as defined in Note 1 as of September 30, 2024 and 2023, respectively. There have been no changes to the Company's valuation techniques during fiscal years ended September 30, 2024 and 2023.
Fair Value Measurements - September 30, 2024
Fair Value Level 1 Level 2 Level 3
Assets:
Liabilities:
Fair Value Measurements - September 30, 2023
Fair Value Level 1 Level 2 Level 3
Assets:
Liabilities:
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The fair value of the interest rate swaps are determined by using the counterparty's proprietary models that include observable quoted market interest rates and interest rate futures as well as certain assumptions regarding past, present and future market conditions.
See Note 5 for discussion on the fair value assumptions of the Company's investment in the LLC.
Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on the weighted average first of the month index prices corresponding to the month of the scheduled payment. At September 30, 2024 and 2023, the Company had recorded in accounts payable the estimated fair value of the liability based on the corresponding first of month quoted index prices for which the liability was expected to be settled.
The Company’s non-financial assets and liabilities that are measured at fair value on a nonrecurring basis consist of its AROs. The AROs are measured at fair value at initial recognition based on expected future cash flows to settle the obligation.
The carrying value of cash and cash equivalents, accounts receivable, borrowings under line-of-credit, accounts payable, customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments. In addition, the carrying amount of the variable rate line-of-credit is a reasonable approximation of its fair value. The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the consolidated financial statements as of September 30, 2024 and 2023.
Fair Value Measurements - September 30, 2024
Amount Level 1 Level 2 Level 3
Liabilities:
Current maturities of long-term debt $ 800,000 $ — $ — $ 800,000
Fair Value Measurements - September 30, 2023
Amount Level 1 Level 2 Level 3
Liabilities:
The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt based on the underlying Treasury rate or other Treasury instrument with a corresponding maturity period and estimated credit spread extrapolated based on market conditions since the issuance of the debt.
ASC 825,Financial Instruments, requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants.
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9. INCOME TAXES
Under the provisions of ASC 740, the deferred tax assets and liabilities of the Company were revalued in fiscal 2018 to reflect the reduction in the corporate federal income tax rate. As a result of the revaluation, the excess deferred income taxes of the regulated operations of Roanoke Gas were reclassified to a regulatory liability. The excess deferred taxes related to the depreciable property are being returned to customers over the remaining weighted average useful life of the property with a corresponding reduction in income tax expense. The excess deferred taxes related to the other regulatory basis differences were being collected from customers over a five-year period, which concluded in December 2023.
The details of income tax expense (benefit) are as follows:
Years Ended September 30
Current income taxes:
Deferred income taxes: .
Amortization of R&D tax credits:
Total amortization of R&D tax credits — (131,620 )
Income tax expense for the years ended September 30, 2024 and 2023 differed from amounts computed by applying the U.S. federal income tax rate to earnings before income taxes due to the following:
Years Ended September 30
Corporate federal income tax rate 21 % 21 %
State income taxes, net of federal income tax expense 763,518 720,749
Amortization of R&D tax credits — (131,620 )
Net amortization of RNG tax credits (100,649 ) (58,669 )
Reserve for unrecognized tax benefits 82,000 —
During fiscal 2022, the Company engaged an outside firm to conduct a study of its activities that would qualify for the Research and Development ("R&D") credit under 26 U.S. Code § 41 - Credit for increasing research activities. Upon completion of the 2022 study, the Company filed for the R&D tax credit on its fiscal 2021 federal income tax return. The total credits claimed on the fiscal 2021 income tax return amounted to $659,920. The Company deferred the tax credits as a regulatory liability because they related to utility plant. These credits are being amortized over the 20-year tax-life of the related utility plant. The Company recognized $129,600 of amortization as reduction of income tax expense on the consolidated statement of income in fiscal 2023 related to the federal R&D tax credits. No amortization was recognized in fiscal 2024 as discussed below. The Company has not yet completed a study of R&D activities for fiscal 2023 or 2024 given the IRS audits in process, as discussed further below. Additionally, during fiscal 2023, the Company received refunds for the 2020 and 2021 tax years, neither of which are subject to the IRS audits.
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During fiscal 2022, the Company also applied for a Virginia State tax credit related to the R&D study for its fiscal 2021 tax year. The total credits claimed on the fiscal 2022 tax return were $58,065. Consistent with the treatment of the federal tax credits, the Company deferred the tax credits as a regulatory liability, which are being amortized over the 20-year tax-life of the related utility plant. The Company recognized $2,020 of amortization as a reduction of income tax expense on the consolidated statement of income in fiscal 2023 related to the state R&D tax credits. No amortization was recognized in fiscal 2024 as discussed below. The Company did not apply for a Virginia State tax credit related to R&D for fiscal 2023 or 2024 given the IRS audits in process, as discussed further below.
In accordance with the SCC settlement agreement in relation to the Company’s non-gas rate application, the amortization of the R&D tax credit was halted effective August 1, 2023. As such, no amortization was recognized associated with the R&D tax credits in fiscal 2024. After resolution of the IRS audits, the Company will proceed with refunding the R&D tax credits, net of related fees, to customers through a mechanism to be approved by the SCC. As part of the settlement, the Company grossed up the tax credit consistent with treatment of the excess deferred taxes, thereby creating a deferred tax asset of $990,219 as of September 30, 2023.
During fiscal 2023, the Company engaged an outside firm to conduct a study of its RNG facility to determine eligibility for the Federal Energy Investment Tax Credit under 26 U.S. Code § 48– Energy credit (“RNG tax credit”). Upon completion of the study, the Company determined a credit in the amount of $1,892,164 to be claimed on the fiscal 2023 tax return. Similar to the treatment of the R&D tax credits, the Company deferred the RNG tax credit as a regulatory liability, which is being amortized over the 20-year tax-life of the related asset. Further, as part of the SCC order approving the RNG project and corresponding rates charged to customers, any tax credits attributable to the RNG project are to be used to reduce the cost to customers through the RNG Rider. Accordingly, the Company grossed up the RNG tax credit consistent with treatment of the excess deferred taxes, thereby creating a deferred tax asset of $655,862, which is also being amortized over the 20-year tax-life of the related asset. The Company recognized $127,404 and $74,265 of amortization as part of income tax expense on the consolidated statements of income in fiscal 2024 and 2023, respectively, related to the federal RNG tax credit.
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
September 30
Deferred tax assets:
Accrued pension and postretirement medical benefits $ 512,778 $ 591,841
Regulatory effect of change in federal income tax rate 2,553,086 2,655,951
Deferred tax liabilities:
Deferred tax assets and liabilities are recorded on the consolidated balance sheets on a net basis by taxing jurisdictions. As of September 30, 2024 and 2023, the Company's consolidated balance sheets included net deferred tax liabilities of $1,890,562 and $2,008,458, respectively, in deferred credits and other non-current liabilities and net deferred tax assets of $771,746 and $1,163,594, respectively, in other non-current assets.
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ASC 740 provides for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recognized in the financial statements. The Company has evaluated its tax positions and recorded a reserve for unrecognized tax benefits of $273,936 as of September 30, 2024. These unrecognized tax benefits relate to tax positions taken in the Company's prior tax returns. A reconciliation of the Company's unrecognized tax benefits is as follows:
September 30
Beginning balance $ —
Increase resulting from prior period tax positions 273,936
The Company’s policy is to classify interest associated with uncertain tax positions as interest expense in the financial statements. Tax penalties, if any, are netted against other income.
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. The focus of the exam relates to research and development credits, and the results of its exam have not been presented to the Company. The Company believes its income tax assets and liabilities are fairly stated as of September 30, 2024 and 2023; however, these assets and liabilities could be adjusted as a result of this examination. The Company's federal returns for fiscal 2018 and 2019 remain open related to the exam. Aside from these exceptions, the federal returns and the state returns for Virginia and West Virginia for the tax years ended prior to September 30,2021 are no longer subject to examination.
10. COMMON STOCK OPTIONS
The KEYSOP provides for the issuance of common stock options to officers and certain other full-time salaried employees to acquire shares of the Company’s common stock. As of September 30, 2024, the number of shares available for future grants was 16,000.
ASC 718,Compensation-Stock Compensation, requires that compensation expense be recognized for the issuance of equity instruments to employees. During the fiscal year ended September 30, 2024, the Board approved stock option grants to certain officers. As required by the KEYSOP, each option's exercise price per share equaled the fair value of the Company's common stock on the grant date. Pursuant to the plan, the options vest over a six-month period and are exercisable over a ten-year period from the date of issuance. No options were granted during the fiscal year ended September 30, 2023.
As the Company's stock options are not traded on the open market, the fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model including the following assumptions:
Years Ended September 30
Expected volatility 32.07 % N/A
Expected dividends 2.84 % N/A
Expected exercise term (years) 7 N/A
Risk-free interest rate 4.95 % N/A
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The underlying methods regarding each assumption are as follows:
Expected volatility is based on the historical volatility of the daily closing price of the Company's common stock.
Expected dividend rate is based on historical dividend payout trends.
Expected exercise term is based on the average time historical option grants were outstanding before being exercised.
Risk-free interest rate is based on the 7-year Treasury rate on the date of option grant.
Forfeitures are recognized when they occur.
Stock option transactions under the Company's plans are summarized below.
(1) Aggregate intrinsic value includes only those options where the exercise price is below the market price.
Years Ended September 30
Weighted-average grant date option fair value $ 5.15 $ —
Intrinsic value of options exercised — 46,921
Proceeds from exercise of stock options — 200,000
Stock-based compensation related to stock options disclosed in the table above is included within operations and maintenance expense on the consolidated statements of income.
11. OTHER STOCK PLANS
Dividend Reinvestment and Stock Purchase Plan
The Company offers a DRIP plan to shareholders of record for the reinvestment of dividends and the opportunity to purchase of up to $100,000 per year in additional shares of common stock of the Company. Under the DRIP, the Company issued 33,226 and 32,805 shares in 2024 and 2023, respectively.
After taking into account the activity discussed above and dividends reinvested, as of September 30, 2024, the Company had 232,398 shares of stock available for issuance under the DRIP.
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Restricted Stock Plan for Outside Directors
The Board of Directors of the Company implemented the RSPD in 1997. Under the RSPD, each director may elect annually to have up to 100% of his or her fees paid in shares of common stock ("Director Restricted Stock"); however, a minimum of 40% of the monthly retainer fee must be paid to each non-employee director of Resources in shares of Director Restricted Stock until such time as the director has accumulated at least 10,000 shares. The number of shares of Director Restricted Stock awarded each month is determined based on the closing sales price of Resources' common stock on the NASDAQ Global Market on the first business day of the month. The Director Restricted Stock issued under the Plan vests only in the case of a participant's death, disability, retirement, or in the event of a change in control of Resources. The Director Restricted Stock may not be sold, transferred, assigned or pledged by the participant until the shares have vested under the terms of the Plan. The shares of Director Restricted Stock will be forfeited to Resources by a participant's voluntary resignation during his or her term on the Board or removal for cause as a director.
The Company assumes all directors will complete their term and there will be no forfeiture of the Director Restricted Stock. Since the inception of the RSPD, no director has forfeited any shares of Director Restricted Stock. The Company recognizes as compensation the market value of the Director Restricted Stock in the period it is issued.
The following table reflects the director compensation activity pursuant to the Plan:
The fair market value of the Director Restricted Stock included as compensation was $299,200 during fiscal years ended September 30, 2024 and 2023, and included within operations and maintenance expense on the consolidated statements of income. No Director Restricted Stock was forfeited during fiscal years ended September 30, 2024 or 2023. During fiscal year ended September 30, 2023, an additional 200,000 shares were registered and added to the RSPD, as authorized and approved by shareholders at the Annual Shareholder meeting on January 23, 2023.
After taking into account the activity discussed above and dividends reinvested, as of September 30, 2024, the Company had 173,298 shares available for issuance under the RSPD.
RGC Resources, Inc. Restricted Stock Plan
The Board of Directors of the Company implemented the RSPO in 2017 as approved by shareholders. Under the RSPO, the Compensation Committee of the Board of Directors may grant shares of common stock ("Officer Restricted Stock") that vest over time to key employees and officers for the purpose of attracting and retaining those individuals essential to the operation and growth of the Company. The RSPO provides for certain restrictions and non-transferability requirements until minimum levels of ownership are obtained. Such restrictions may continue beyond the vesting period.
The Company assumes all officers will complete their requirements and there will be no forfeiture of the Officer Restricted Stock.
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The following table reflects the officer compensation activity pursuant to the RSPO:
The fair market value of the Officer Restricted Stock included as compensation during fiscal years ended September 30, 2024 and 2023 was $660,424 and $169,879, respectively, and included within operations and maintenance expense on the consolidated statements of income. As of September 30, 2024 and 2023, there was $285,683 and $25,989, respectively, of unamortized compensation expense related to unvested Officer Restricted Stock. No Officer Restricted Stock was forfeited during fiscal years ended September 30, 2024 or 2023.
After taking into account the activity discussed above and dividends reinvested, as of September 30, 2024, the Company had 319,313 shares available for issuance under the RSPO.
Stock Bonus Plan
Shares from the Stock Bonus Plan may be issued to certain employees and management personnel in recognition of their performance and service. Under the Stock Bonus Plan, the Company issued 1,562 and 105 shares valued at $24,841 and $2,500, respectively, during the fiscal years ended September 30, 2024 and 2023.
As of September 30, 2024, the Company had 3,118 shares of stock available for issuance under the Stock Bonus Plan.
12. EMPLOYEE BENEFIT PLANS
The Company sponsors both a noncontributory pension plan and a postretirement plan. The pension plan covers all employees hired prior to January 2017 and benefits fully vest after 5 years of credited service. Benefits paid to retirees are based on age at retirement, years of service and average compensation. Effective January 1, 2017, a "soft freeze" to the pension plan was implemented, and employees hired on or after that date are no longer eligible to participate. Commensurate with the "soft freeze" in the pension plan, the Company amended its 401(k) Plan, allowing management to authorize a discretionary contribution to the 401(k) account for those employees hired on or after January 1, 2017. The amount, if any, of this discretionary contribution would be determined each year and would be applied to the eligible employees in the following calendar year. This Company contribution would be in addition to any employee elected deferrals and employer match as provided for under the 401(k) Plan.
The postretirement plan provides certain health care, supplemental retirement and life insurance benefits to retired employees who meet specific age and service requirements. Employees hired prior to January 1,2000 are eligible to participate in the postretirement plan. Employees must have a minimum of 10 years of service and retire after attaining the age of 55 in order to vest in the postretirement plan. Retiree contributions to the plan are based on the number of years of service to the Company as determined under the pension plan.
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Employers who sponsor defined benefit plans must recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in their statements of financial position and recognize changes in that funded status in the year in which the changes occur through comprehensive income. For pension plans, the benefit obligation is the projected benefit obligation, and for other postretirement plans, the benefit obligation is the accumulated benefit obligation. The Company established a regulatory asset for the portion of the obligation expected to be recovered through rates in future periods. The regulatory asset is adjusted for the recognition of actuarial gains and losses. The portion of the obligation attributable to the unregulated operations of the holding company is recognized in other comprehensive income, with actuarial gains and losses recognized using the corridor method.
The following table sets forth the benefit obligation, fair value of plan assets, the funded status of the plans, and amounts recognized in the Company’s consolidated financial statements:
Pension Plan Postretirement Plan
Change in benefit obligation:
Change in fair value of plan assets:
Employer contributions — — — —
Amounts recognized in the consolidated balance sheet consist of:
Amounts recognized in accumulated other comprehensive income:
Amounts deferred to a regulatory asset (liability):
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The Company expects that approximately $41,000, before tax, of AOCI will be recognized in net periodic benefit costs in fiscal 2025 and approximately $43,000 of amounts deferred as regulatory assets and approximately $174,000 of amounts deferred as regulatory liabilities will be amortized and recognized in net periodic benefit costs in fiscal 2025.