This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, RGC Resources Inc. (“Resources” or the “Company”) may announce or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. These statements are based on management’s current expectations and information available at the time of such statements and are believed to be reasonable and are made in good faith. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to those set forth in the following discussion and within Item 1A “Risk Factors” of this Annual Report on Form 10-K. All of these factors are difficult to predict and many are beyond the Company’s control. Accordingly, while the Company believes its forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in the Company’s documents or news releases, the words “anticipate,” “believe,” “intend,” “plan,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs such as “will,” “would,” “should,” “can,” “could” or “may” are intended to identify forward-looking statements.
Forward-looking statements reflect the Company’s current expectations only as of the date they are made. The Company assumes no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations.
Resources Inc. ("Resources" or the "Company") was incorporated in the stateCommonwealth of Virginia on July 31, 1998 for the primary purpose of becoming the holding company for Roanoke Gas Company (“Roanoke Gas”) and, its subsidiaries. Effectiveeffective July 1, 1999, Roanoke Gas and its subsidiaries were reorganized into the Resources holding company structure. Resources is currently composed of the following subsidiaries: Roanoke Gas, Midstream and Diversified Energy Company and RGC Midstream, LLC.
Roanoke Gas, originally established in 1883, was organized as a public service corporation under the laws of the Commonwealth of Virginia in 1912. The principal service of Roanoke Gas is the distribution and sale of natural gas to residential, commercial and industrial customers within its service territory in Roanoke, Virginia and the surrounding localities. Roanoke Gas also provides certain non-regulated services which account for less than 2% of consolidated revenues.
In July 2015, the Company formed RGC Midstream LLC, a limited liability company established for the purpose of becoming a 1% investor in Mountain Valley Pipeline, LLC. Mountain Valley Pipeline,The LLC was created for the purpose of constructing ato construct and operate interstate natural gas pipeline in West Virginia and Virginia.pipelines. Additional information regarding this investment is provided under Note 45 of the Company's annual consolidated financial statements and under the Equity Investment in Mountain Valley Pipeline section of Item 7.
Diversified Energy Companyis currently has no active operations.
Services
Roanoke Gas maintains an integrated natural gas distribution system to deliver natural gas purchased from suppliers to residential, commercial and industrial users in its service territory. The schedule below is a summary of customers, delivered volumes (expressed in decatherms)DTHs), revenues and margin as a percentage of the total for each category:
| 2017 | ||||||||||||||
| Customers | Volume | Revenue | Margin | |||||||||||
| Residential | 91.2 | % | 37 | % | 57 | % | 61 | % | ||||||
| Commercial | 8.7 | % | 31 | % | 33 | % | 25 | % | ||||||
| Industrial | 0.1 | % | 32 | % | 7 | % | 10 | % | ||||||
| Other Utility | 0.0 | % | 0 | % | 1 | % | 2 | % | ||||||
| Other Non-Utility | 0.0 | % | 0 | % | 2 | % | 2 | % | ||||||
| Total Percent | 100.0 | % | 100 | % | 100 | % | 100 | % | ||||||
| Total Value | 59,847 | 8,562,582 | $ | 62,296,870 | $ | 32,809,157 | ||||||||
| 2016 | ||||||||||||||
| Customers | Volume | Revenue | Margin | |||||||||||
| Residential | 91.2 | % | 38 | % | 57 | % | 60 | % | ||||||
| Commercial | 8.7 | % | 31 | % | 33 | % | 25 | % | ||||||
| Industrial | 0.1 | % | 31 | % | 7 | % | 11 | % | ||||||
| Other Utility | 0.0 | % | 0 | % | 1 | % | 2 | % | ||||||
| Other Non-Utility | 0.0 | % | 0 | % | 2 | % | 2 | % | ||||||
| Total Percent | 100.0 | % | 100 | % | 100 | % | 100 | % | ||||||
| Total Value | 59,635 | 8,842,605 | $ | 59,063,291 | $ | 31,564,914 | ||||||||
| 2015 | ||||||||||||||
| Customers | Volume | Revenue | Margin | |||||||||||
| Residential | 91.2 | % | 40 | % | 58 | % | 58 | % | ||||||
| Commercial | 8.7 | % | 30 | % | 33 | % | 26 | % | ||||||
| Industrial | 0.1 | % | 30 | % | 6 | % | 11 | % | ||||||
| Other Utility | 0.0 | % | 0 | % | 1 | % | 3 | % | ||||||
| Other Non-Utility | 0.0 | % | 0 | % | 2 | % | 2 | % | ||||||
| Total Percent | 100.0 | % | 100 | % | 100 | % | 100 | % | ||||||
| Total Value | 59,080 | 9,875,007 | $ | 68,189,607 | $ | 30,206,433 | ||||||||
2021 | ||||||||||||||||
Customers | Volume | Revenue | Margin | |||||||||||||
Residential | 91.3 | % | 37 | % | 58 | % | 63 | % | ||||||||
Commercial | 8.6 | % | 31 | % | 34 | % | 25 | % | ||||||||
Industrial | 0.1 | % | 32 | % | 7 | % | 11 | % | ||||||||
Other Utility | 0.0 | % | 0 | % | 1 | % | 1 | % | ||||||||
Other Non-Utility | 0.0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Total Percent | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Total Value | 62,623 | 9,909,529 | $ | 75,174,779 | $ | 39,969,380 | ||||||||||
2020 | ||||||||||||||||
Customers | Volume | Revenue | Margin | |||||||||||||
Residential | 91.3 | % | 35 | % | 60 | % | 63 | % | ||||||||
Commercial | 8.6 | % | 27 | % | 30 | % | 23 | % | ||||||||
Industrial | 0.1 | % | 38 | % | 8 | % | 12 | % | ||||||||
Other Utility | 0.0 | % | 0 | % | 1 | % | 1 | % | ||||||||
Other Non-Utility | 0.0 | % | 0 | % | 1 | % | 1 | % | ||||||||
Total Percent | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Total Value | 61,964 | 10,357,174 | $ | 63,075,391 | $ | 38,783,925 | ||||||||||
Roanoke Gas’ regulated natural gas distribution business accounted for approximatelymore than 98% of Resources total revenues for fiscal years ending September 30, 2017, 20162021 and 2015.2020. The tables above indicatesindicate that residential customers represent over 91% of the Company’s customer total; however, they represent less than 50%40% of the total gas volumes delivered and more than half of the Company’s consolidated revenues and margin. Industrial customers include primarily transportation customers that purchase their natural gas requirements directly from a supplier other than the Company and utilize Roanoke Gas’ natural gas distribution system for delivery to their operations. Most of the revenue billed for these customers relates only to transportation service, and not to the purchase of natural gas, causing total revenues generated by these deliveries to be approximately 7% of total revenues, even thoughless than 10%, although they represent 32%more than 30% of total natural gas deliveriesvolumes and between 11% and 12% of margin for the year ended September 30, 2017 and approximately 10% to 11% of gross margin for each of the years presented.
The Company’s revenues are affected by changes in gas costs, as well as by changes in consumption volume due to weather and economic conditions and changes in the non gasnon-gas portion of customer billing rates. Increases or decreases in the cost of natural gas are passed on to customers through the purchased gas adjustmentPGA mechanism as explained in further detail in Note 1 of the Company’s annual consolidated financial statements. Significant increases in gas costs may cause customers to conserve or, in the case of industrial customers, to switch to alternative energy sources.
The Company’s residential and commercial sales are seasonal and temperature-sensitive as the majority of the gas sold by Roanoke Gas to these customers is used for heating. For the fiscal year ended September 30, 2017,2021, approximately 65%63% of the Company’s total DTH of natural gas deliveries and 73% of the residential and commercial deliveries were made in the five-month period of November through March. These percentages are comparable to the prior year but lower than fiscal 2015 due to lower volumes attributable to a much warmer heating season in fiscal 2016 and 2017. Total natural gas deliveries were 8.6 million DTH, 8.8 million DTH and 9.9 million DTH in fiscal 2017, 2016 and 2015, respectively.
Roanoke Gas relies on multiple interstate pipelines including those operated by Columbia Gas Transmission Corporation, LLC and Columbia Gulf Transmission Corporation, LLC (together “Columbia”), and East Tennessee Natural Gas, LLC (“East Tennessee”), Tennessee Gas Pipeline, Midwestern Gas Transmission Company and Saltville Gas Storage Company, LLC ("Saltville"), to transport natural gas from the production and storage fields to Roanoke Gas’ distribution system. Roanoke Gas is directly served by two pipelines, Columbia and East Tennessee. Columbia historically has delivered approximately 60%more than 65% of the Company’s required gas supply, whilewith East Tennessee deliversdelivering the balance of the Company’s requirements.balance. The rates paid for interstate natural gas transportation and storage services purchased from the interstate pipeline companies are established by tariffs approved by the Federal Energy Regulatory Commission ("FERC"). These tariffs contain flexible pricing provisions, which, in some instances, authorize these transporters to reduce rates and charges to meet price competition.FERC. The current pipeline contracts expire at various times from 20182022 to 2027. The Company anticipates being able to renew these contracts or enter into other contracts to meet customers’ continuedexisting demand for natural gas.
The Company manages its pipeline contracts and liquefied natural gas storage (“LNG”)LNG facility in order to provide for sufficient capacity to meet the current natural gas demands of its customers. The maximum daily winter capacity available for delivery into Roanoke Gas’ distribution system underfrom the current interstate pipelines is 78,606 DTH per day. The LNG facility which is capable of storing up to 200,000 DTH of natural gas in a liquid state for use during peak demand, has the capability of providing an additional 27,000 DTH per day.demand. Combined, the pipelines and LNG facility canmay provide more than 105,000up to 103,606 DTH on a single winter day.
The Company currently contracts with Sequent Energy Management, L.P. to manage its pipeline transportation, storage rights, gas supply inventories and deliveries and serve as the primary supplier of natural gas for Roanoke Gas. Natural gas purchased under the asset management agreement is priced at indexed-based market prices as reported in major industry pricing publications
. TheThe Company uses summer storage programs to supplement heating season gas supply requirements during the winter months. During the summer months, the Company injects gas into its LNG facility. In addition, therequirements. The Company has contracted for 2.4 million DTH of storage capacity from Columbia, Tennessee Gas Pipeline and Saltville Gas Storage Company, LLC for a combined total of more than 2.4 million DTH of storage capacity.in addition to the capacity available at the Company's LNG facility. The balance of the Company’s annual natural gas requirements are met primarily through market purchases made by its asset manager.
Competition
The Company’s natural gas utility operates in a regulated, monopolistic environment. Roanoke Gas currently holds the only franchises and/or certificates of public convenience and necessityCPCNs to distribute natural gas in its Virginia service areas. These franchises generally extend for multi-year periods and are renewable by the municipalities, including exclusive franchises in the cities of Roanoke and Salem and the Town of Vinton, Virginia. All three franchise agreements were recently renewed for a 20-year term, of 20 years and willset to expire December 31, 2035. In 2019, the SCC issued a final order granting a CPCN to furnish gas to all of Franklin County. Unlike the CPCNs for the other counties served by Roanoke Gas, the Franklin County CPCN will terminate within five years of the date of the order if Roanoke Gas does not furnish gas service to the designated service area. Roanoke Gas plans to serve the Franklin County area with natural gas delivered through the MVP, once MVP is placed into service.
Management anticipates that the Company will be able to renew all of its franchises when they expire. Thereprior to their current expiration date; however, there can be no assurance however, that a given jurisdiction will not refuse to renew a franchise or will not, in connection with the renewal of a franchise, attempt to impose restrictions or conditions that could adversely affect the Company’s business operations or financial condition. Certificates of public convenience and necessity,CPCNs, issued by the Virginia State Corporation Commission (the “SCC”),SCC, are generally of perpetual duration and subject to compliance with regulatory standards.
Although Roanoke Gas has exclusive rights for the distribution of natural gas in its service area, the Company competes with suppliers of other forms of energy such as fuel oil, electricity, propane, coal, wind and solar. Competition can be intense among the other energy sources with price being the primary driver being price in most instances.consideration. This is particularly true for those industrial applications that have the ability to switch to alternative fuels. The relationship between supply and demand has the greatest impact on the price of natural gas. Greater demand for natural gas for electric generation and other uses can provide upward pressure on the price of natural gas. Currently, a plentiful supplyincreased demand and lower storage levels are placing upward pressure on the price of natural gas, mostly duegas.
Competition from renewable energy sources such as solar and wind is likely to improved drilling and extraction processes in shale formations, has served to maintain prices at lower levels. Theincrease as the political environment currently favors these energy sources through incentives or by placing restrictions on emissions from the burning of fossil fuels. Nevertheless, the Company continues to see a demand for its product. New construction activitynatural gas. Growth in residential and commercial service has remained steady over the last few years andbeen strong as the Company continues to grow its customer base through a combination of extending distribution service to new construction and converting existing alternativeother energy source users to natural gas.
Regulation
In addition to the regulatory requirements generally applicable to all companies, Roanoke Gas is also subject to additional regulation at the federal, state and local levels. At the federal level, the Company is subject to pipeline safety regulations issued by the Department of Transportation and theTransportation's Pipeline and Hazardous Materials Safety Administration.
At the state level, the SCC performs regulatory oversight including the approval of rates and other charges for natural gas sold to customers, the approval of agreements between or among affiliated companies involving the provision of goods and services, pipeline safety and certain other corporate activities of the Company, including mergers and acquisitions related to utility operations.
At the local level, Roanoke Gas is further regulated by the municipalities and localities that grant franchises for the placement of gas distribution pipelines and the operation of gas distribution networks within their jurisdictions.
Human Capital Resources
At September 30, 2017,2021, Resources had 10699 full-time employees, and 109 total employees. As of that date, 30which 17 employees, or 28% of the Company’s full-time employees,17%, belonged to the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial International Union, Local No. 515 and were represented under a collective bargaining agreement. The union has been in place at the Company since 1952. The current collective bargaining agreement will expire onbecame effective August 1, 2020 and expires July 31, 2020.2022. Management maintains an amicable relationship with the union.
The Company’s business strategy and ability to serve customers relies on employing talented professionals and attracting, training, developing and retaining a skilled workforce. This is particularly relevant as the Company is facing retirements of key personnel over the next several years.
With respect to the COVID-19 pandemic, the Company continues to evaluate and implement its pandemic plan to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees.
Website Access to Reports
The Company’s website address is
www.rgcresources.com. Information appearing on this website is not incorporated by reference in and is not a part of this annual report. The Company files reports with thePlease carefully consider the risks described below regarding the Company. These risks are not the only ones faced by the Company. Additional risks not presently known to the Company or that the Company currently believes are immaterial may also impair business operations and financial results. If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be adversely affected. In such case, the trading price of the Company’s common stock could decline and investors could lose all or part of their investment. The risk factors below are categorized by operational, regulatory, financial and financial:
OPERATIONAL RISKS
Availability of adequatesufficient and reliable pipeline capacity.
The Company is currently served directly by two interstate pipelines. These two pipelines carry 100% of the natural gas transported to the Company’s distribution system. Depending on weather conditions and the level of customer demand, failure of one or both of these interstate transmission pipelines could have a major impact on the Company’s ability to meet customer demand for natural gas and adversely affect the Company’s earnings as a result of lost revenue and the cost of service restoration and, if sufficiently frequentrestoration. Frequent or prolonged failure could lead customers to turnswitch to alternative energy sources.
Risks associated with the operation of a natural gas distribution pipeline and LNG storage facility.
Numerous potential risks are inherent in the operation of a natural gas distribution system and LNG storage facility, including unanticipated or unforeseen events that are beyond the control of the Company. Examples of such events include adverse weather conditions, acts of terrorism or sabotage, accidents and damage caused by third parties, equipment failure, failure of upstream pipelines and storage facilities, as well as catastrophic events such as explosions, fires, earthquakes, floods, or other similar events. These risks could result in injury or loss of life, property damage, pollution and customer service disruption resulting in potentially significant financial losses. The Company maintains insurance policies with financially sound carrierscoverage to protect against many of these risks. IfHowever, if losses result from an event that is not fully covered by insurance, the Company’s financial condition could be significantly impacted if it were unable to recover such losses from customers through the regulatory rate making process. Even if the Company did not incur a direct financial loss as a result of any of the events noted above, it could encounter significant reputational damage from a reliability, safety, integrity or similar viewpoint, potentially resulting in a longer-term negative earnings impact.impact or decline in share price.
Security incident or cyber-attacks on the Company’s computer or information technology systems.
The Company’s business operations and information technology systems may be vulnerable to an attack by individuals or organizations intending to disrupt the operations of the Company. Such an attack or cyber-security incident on the Company’s information technology systems could result in corruption of the Company’s financial information; disruption of services to our customers; the unauthorized release of confidential customer, employee or vendor information; the interruption of natural gas deliveries to our customers; or compromise the safety of our distribution, transmission and storage systems. The Company has implemented policies, procedures and controls to prevent and detect these activities; however, there are no guarantees that Company processes will adequately protect against unauthorized access. In the event of a successful attack, the Company could be exposed to material financial and reputational risks, possible disruptions in natural gas deliveries or a compromise of the safety of the natural gas distribution system, as well as be exposed to claims by persons harmed by such an attack, all of which could materially increase the Company's costs to protect against such risks. Resources maintains cyber-insurance coverage, which does not protect the Company from cyber incidents but does provide some level of protection to mitigate the financial impacts resulting from such attacks.
Supply disruptions due to weather or other forces.
Hurricanes, floods, fires and other natural or man-made disasters could damage or inhibit production and/or pipeline transportation facilities, which could result in decreased natural gas supplies. Decreased supplies could result in an inability to meet customer demand, service new franchise areas or lead to higher prices and/or service disruptions. Disasters could increase costs to repair damaged facilities and result in delays to restore service to interrupted customers as well as lead to additional governmental regulations that may limit production activity and/or increase production and transportation costs.
Volatility in the price and availability of natural gas.
Natural gas purchases represent the single largest expense of the Company. Increasing demand from other areas, including electricity generation, combined with lower storage balances and production levels, are placing upward pressure on natural gas commodity prices. If these factors continue for an extended period of time, higher natural gas prices could result in declining sales as well as increases in bad debt expense and increased competition from other energy providers.
Inability to attract and retain professional and technical employees.
The ability to implement the Company’s business strategy and serve customers is dependent upon employing talented professionals and attracting, training, developing and retaining a skilled workforce. As the Company may have key personnel retire over the next several years, the failure to transition the skills and knowledge of the departing employees to qualified existing or new employees could increase operating costs and expose the Company to other operational, reputational and financial risks.
Geographic concentration of business activities.
The Company's business activities are concentrated in the Roanoke Valley and surrounding areas. Changes in the local economy, politics, regulations and weather patterns or other factors limiting demand for natural gas could negatively impact the Company's existing customer base, leading to declining usage patterns and financial condition of customers. Furthermore, these changes could also limit the Company's ability to serve its customers or add new customers within its service territory. Any of these factors could adversely affect earnings.
Inability to complete necessary or desirable pipeline expansion or infrastructure improvement projects.
In order to serve new customers or expand service to existing customers, the Company needs to install new pipeline facilities and maintain, expand or upgrade its existing distribution, transmission and/or storage infrastructure. Various factors may prevent or delay the completion of such projects or make them more costly, such as the inability to obtain required approval from local, state and/or federal regulatory and governmental bodies, public opposition to the projects, inability to obtain adequate financing, competition for labor and materials, construction delays, cost overruns, and an inability to negotiate acceptable agreements relating to rights-of-way, construction or other material development components. As a result, the Company may not be able to adequately serve existing customers or expand its distribution system to support customer growth. This could include any potential customer growth or system reliability enhancement resulting from connection to the MVP. Any of these factors could negatively impact earnings.
Impact of weather conditions and related regulatory mechanisms.
The Company’s revenues and earnings are dependent upon weather conditions. The Company’s rate structure currently has a WNA factor that results in either a recovery or refund of revenues due to variation from the 30-year average for heating degree-days. If the WNA mechanism were removed from its rate structure, the Company would be exposed to a much greater risk related to weather variability resulting in earnings volatility.
Competition from other energy providers.
The Company competes with other energy providers in its service territory, including those that provide electricity, propane, coal, fuel oil, wind and solar. Price is a significant competitive factor. Higher natural gas costs or decreases in the price of other energy sources may enhance competition and encourage customers to switch to alternative energy sources, thus lowering natural gas deliveries and earnings. Price considerations could also inhibit customer and revenue growth if builders and developers do not perceive natural gas to be a better value than other energy options and elect to install heating systems that use an energy source other than natural gas.
Inability to renew or obtain new franchise agreements or certificates of public convenience.
Roanoke Gas Company holds either franchises or CPCNs to provide natural gas to customers in its service territory. The franchises are granted by the local municipalities and the CPCNs are granted by the SCC. The ability to renew such agreements is important to the long-term operations of the Company and the ability to obtain new franchises or CPCNs is fundamental to expanding the Company’s service territory. Failure to renew these agreements could result in significant impact to future earnings and the inability to obtain new franchises or CPCNs for new service areas could negatively impact future earnings growth.
REGULATORY RISKS
Environmental laws or regulations associated with climate change.
Several federal and state legislative and regulatory initiatives have been proposed and passed in recent years in an attempt to limit the effects of climate change, including greenhouse gas emissions such as those created by the combustion of fossil fuels, including natural gas. Passage of new environmental legislation or implementation of regulations that mandate reductions in greenhouse gas emissions or other similar restrictions could have a negative effect on the Company’s core operations and its investment in the LLC. Such legislation could impose limitations on greenhouse gas emissions, require funding of new energy efficiency objectives, impose new operational requirements or lead to other additional costs to the Company. Regulations restricting or prohibiting the use of coal as a fuel for electric power generation has increased the demand for natural gas, and could at some point potentially result in natural gas supply concerns and higher costs for natural gas. Legislation or regulations could limit the exploration and development of natural gas reserves, making the price of natural gas less competitive and less attractive as a fuel source for consumers. Future legislation could also place limitations on the amount of natural gas used by businesses and homeowners to reduce the level of emissions, resulting in reduced deliveries and earnings.
Increased compliance and pipeline safety requirements and fines.
The Company is committed to the safe and reliable delivery of natural gas to its customers. Working in concert with this commitment are numerous federal and state laws and regulations. Failure to comply with these laws and regulations could result in the levy of significant fines. There are inherent risks that may be beyond the Company’s control, including third party actions, which could result in damage to pipeline facilities, injury and even death. Such incidents could subject the Company to lawsuits, large fines, increased scrutiny and loss of customers, all of which could have a significant effect on the Company’s financial position and results of operations.
Regulatory actions or failure to obtain timely rate relief.
The Company’s natural gas distribution operations are regulated by the SCC. The SCC approves the rates that the Company charges its customers. If the SCC did not authorize rates that provided for the timely recovery of costs or a reasonable rate of return on investment in natural gas distribution facilities, earnings could be negatively impacted. Issuance of debt and equity by Roanoke Gas is also subject to SCC regulation and approval. Delays or lack of approvals could inhibit the ability to access capital markets and negatively impact liquidity or earnings.
Compliance with and changes in tax laws.
The Company is subject to extensive tax laws and regulations. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future.
Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.
FINANCIAL RISKS
Investment in Mountain Valley Pipeline.
The success of the Company's investment in Mountain Valley Pipeline,the LLC (the "LLC") is predicated on several key factors including but not limited to the ability of all investors to meet their capital calls when due, the timely state and federal approvals and completing the construction of the pipeline within the targeted time frame and budget.pipeline. Any significant delay, cost over-run or the failure to receive the requisite approvals on a timely basis, or at all, could have a significant effect on the Company's earnings and financial position.
Although the LLC over time, which in turn could adversely affectinitially received the Company's earningsnecessary federal and financial performance through its 1% investment.state permits to construct the pipeline, progress on the MVP has been hindered by several legal and regulatory obstacles as the Fourth Circuit, FERC and other governmental agencies have issued stays, stop orders or delayed authorizations affecting portions or all of the project pending resolution of issues or concerns raised as the project has progressed. The LLC's abilityLLC is currently waiting on resolution of the remaining permits needed for the streams and wetlands crossings. FERC has not yet granted a revised authorization to complete construction work in a 8 mile section of the pipeline route. The LLC also needs authorizations from the Bureau of Land Management and capital improvementthe United States Forest Service and resolution of challenges to facilities on schedulethe Biological Opinion and within budget may be adversely affectedIncidental Take Statement issued by escalatingthe U.S. Fish and Wildlife Service.
Several of the prior issues have been resolved; however, the ongoing obstacles as discussed above continue to cause delays in construction and have resulted in significantly higher projected costs and an extended targeted in-service date for materials and labor and regulatory compliance, inability to obtain or renew necessary licenses,
In addition, there are numerous risks facing the LLC, which can adversely affect the Company's earnings and prospects.financial performance through its investment. The LLC may face risks relatedLLC's ability to project siting, financing,retain contract crews to complete construction permitting, governmentalof the pipeline, the inability to obtain or renew ancillary licenses, rights-of-way, permits or other approvals and opposition from pipeline opponents and environmental groups could all influence the negotiationsuccessful completion of project development agreements that may impede its development and operating activities. The LLC must periodically apply for licenses and permits from various local, state, federal and other regulatory authorities and abide by their respective conditions.the pipeline. Should the LLC be unsuccessful in obtaining necessary licenses or permits on acceptable terms, should there be a delay in obtaining or renewing necessary licenses or permits or should regulatory authorities initiate any associated investigations or enforcement actions or impose related penalties or disallowances on the LLC,unable to adequately address these issues, the LLC’s business, financial condition, results of operations and prospects could be adversely affected, which could materially adversely affected.impact the financial condition and results of operations of the Company. Any failure to negotiate successful project development agreements for new facilities with third parties could have similar results.
Once in operation, the LLC’s gas infrastructure facilities and other facilities are subject to many operational risks. Operational risks could result in, among other things, lost revenues due to prolonged outages, increased expenses due to monetary penalties or fines for compliance failures, liability to third parties for property and personal injury damage, a failure to perform under applicable sales agreements and associated loss of revenues from terminated agreements or liability for liquidated damages under continuing agreements. The consequences of these risks could have a material adverse effect on the LLC’s business, financial condition, results of operations and prospects. Uncertainties and risks inherent in operating and maintaining the LLC's facilities include, but are not limited to, risks associated with facility start-up operations, such as whether the facility will achieve projected operating performance on schedule and otherwise as planned. The LLC’s business, financial condition, results of operations and prospects can be materially adversely affected by weather conditions, including, but not limited to, the impact of severe weather. Threats of terrorism and catastrophic events that could resultresulting from terrorism, cyber-attacks, or individuals and/or groups attempting to disrupt the LLC’s business, or the businesses of third parties, may materially adversely affect the LLC’s business, financial condition, results of operations and prospects.
Access to capital to maintain liquidity.
The Company relies on a variety of capital sources to operate its business and fund capital expenditures, including internally generated cash from operations, short-term borrowings under its line-of-credit, proceeds from the issuance of additional shares of its common stock and other sources. Access to a line-of-credit is essential to provide seasonal funding of natural gas operations and provide capital budget bridge financing. Access to capital markets and other long-term funding sources is important for capital outlays and funding of the LLC investment. The ability of the Company to maintain and renew its line-of-credit and to secure longer-term financing is critical to operations. Adverse market trends, market disruptions or deterioration in the financial condition of the Company could increase the cost of borrowing, restrict the Company's ability to issue additional shares of its common stock or otherwise limit the Company’s ability to secure adequate funding.
Failure to comply with debt covenant requirements.
The Company's long-term debt obligations and bank line-of-credit contain financial covenants. Noncompliance with any of these covenants could result in an event of default which, if not cured or waived, could accelerate payment on outstanding debt obligations or cause prepayment penalties. In such an event, the Company may not be sufficient.
Pandemic Outbreak.
A pandemic event such as COVID-19 or other similar diseases could cause a significant economic restriction or recession negatively impacting the Company’s financial position, results of operations and cash flows. Depending on the duration of these impacts, the liquidity of the Company could be strained, reducing the Company’s ability to complete infrastructure investments and its ability to safely and reliably serve its customers.
Impact from commercial customers: In an effort to reduce the spread of disease, businesses, either on their own or by government mandates, may close or reduce operations to limit contact with the contagion. A reduction in business activity could result in lower natural gas consumption for both production activities as well as space heating, thereby reducing revenues and gross profit. The closing or reduction in operations by businesses, whether temporary or prolonged, could result in a permanent loss of some commercial customers.
Impact from residential customers: The closing of businesses may result in job layoffs or other reductions in employee numbers and/or working hours, thus reducing or eliminating customers’ ability to pay their utility bills and resulting in increased bad debt expense.
Impact on suppliers: A pandemic event could reduce the ability of the Company’s suppliers to supply a sufficient level of natural gas limiting our ability to meet customer demands.
Impact to the Company's employees: Orders by government bodies could result in employees of the Company being required to limit contact with customers or work remotely, thus not allowing them to complete tasks normally requiring a physical presence. Also, if a significant number of employees were to contract the virus or be quarantined, the Company may not be able to complete key or critical tasks, not limited to, but including key financial, reporting, and operational controls.
Impact from SCC actions: The SCC could issue orders in response to a pandemic event that result in increased regulatory oversight, operational mandates or restrictions on normal business activities. Any such action could result in increased operating costs or other financial or operational burdens that may negatively impact the Company's results of operations or financial position.
Impact on financing capabilities: A prolonged economic shutdown due to a pandemic could stress the banking system, thereby limiting the Company’s ability to obtain financing on commercially reasonable terms, which could lead to higher interest costs. Furthermore, a distressed equity market could limit the ability to raise capital through the issuance of Resources’ equity instruments due to depressed prices and low trading volumes.
Post-retirement benefits and related funding of obligations.
The costs of providing defined benefit pension and retiree medical plans are dependent on a number of factors such as the rates of return on plan assets, discount rates used in determining plan liabilities, the level of interest rates used to measure the required minimum funding levels of the plan, future government regulation, changes in life expectancy and required or voluntary contributions made to the plan. Changes in actuarial assumptions and differences between the assumptions and actual results, as well as a significant decline in the value of investments that fund these plans, if not offset or mitigated by a decline in plan liabilities, could increase the expense of these plans and require significant
Exposure to comply with debt covenant requirements.
The Company'sCompany is subject to market risks that are beyond the Company’s control, such as commodity price volatility and interest rate risk. The Company is generally isolated from commodity price risk through the PGA mechanism the Company has in place. With respect to interest rate risk, the Company has been operating in a relatively low interest rate environment for both short and long-term debt obligations and bank lineinterest rates. However, increasing interest rates could adversely affect the Company’s future financial results.
GENERAL RISKS
General downturn in the economy or prolonged period of credit contain financial covenants. Noncompliance with any of these covenants couldslow economic recovery.
A weak or poorly performing economy can negatively affect the Company’s profitability. An economic downturn can result in loss of commercial and industrial customers due to plant closings, a loss of residential customers as well as slow or declining growth in new customer additions, all of which would result in reduced sales volumes and lower revenues. An economic downturn could also result in rising unemployment and other factors that could lead to a loss of customers and an event of default which, if not cured or waived, could accelerate payment on outstandingincrease in customer delinquencies and bad debt obligations or cause prepayment penalties. In such an event, the Companyexpense.
Insurance coverage may not be ablesufficient.
The Company currently has liability and property insurance to refinancecover a variety of exposures and risks. The insurance policies supporting said coverages are subject to certain limits and deductibles. Insurance coverage for risks against which the Company and its industry peers typically insure may not be offered in the future or repay allsuch policies may expand exclusions that limit the amount of its indebtedness, pay dividendscoverage or have sufficient liquidityremove certain risks completely as insured events. Furthermore, litigation awards continue to meet operatingincrease and capital expenditure requirements. Anythe limits of insurance may not keep pace accordingly. The proceeds received from any such acceleration would causeinsurance may not be paid in a timely manner. The occurrence of any of the foregoing could have a material adverse change in oureffect on the Company’s financial condition.position, results of operations and cash flows.
Included in “Utility Plant”Property” on the Company’s consolidated balance sheet are storage plant, transmission plant, distribution plant and general plant of Roanoke Gas as categorized by natural gas utilities. The Company has approximately 1,1351,157 miles of transmission and distribution pipeline with transmission and distribution plant representing more than 87%89% of the total investment in plant.utility plant investment. The transmission and distribution pipelines are located on or under public roads and highways or private property for which the Company has obtained the legal authorization and rights to operate.
Roanoke Gas currently owns and operates eightsix metering stations through which it measures and regulates the gas being delivered by its suppliers. These stations are located at various points throughout the Company’s distribution system.
Roanoke Gas also owns a liquefied natural gas storage facility located in Botetourt Countyits service territory that has the capacity to store up to 220,000200,000 DTH of natural gas.
The Company’s executive, accounting and business offices, along with its maintenance and service departments, are located on Kimball Avenue in Roanoke, Virginia.
Although the Company considers its present properties to be adequate, management continues to evaluate the adequacy of its current facilities as additional needs arise.
The Company is not known to be a party to any pending legal proceedings.
Item 4.Mine Safety Disclosures.
Not applicable.
Market Information
Resources' common stock is listed on the NASDAQ Global Market under the trading symbol RGCO. Payment of dividends is within the discretion of the Board of Directors and depends on, among other factors, earnings, capital requirements, and the operating and financial condition of the Company.
| Range of Bid Prices | Cash Dividends | |||||||||||
| Year Ending September 30, 2017 | High | Low | Declared | |||||||||
| First Quarter | $ | 20.04 | $ | 15.81 | $ | 0.1450 | ||||||
| Second Quarter | 22.51 | 16.60 | 0.1450 | |||||||||
| Third Quarter | 31.99 | 21.00 | 0.1450 | |||||||||
| Fourth Quarter | 29.95 | 23.65 | 0.1450 | |||||||||
| Year Ending September 30, 2016 | ||||||||||||
| First Quarter | $ | 15.96 | $ | 13.37 | $ | 0.1350 | ||||||
| Second Quarter | 15.59 | 13.77 | 0.1350 | |||||||||
| Third Quarter | 17.33 | 14.30 | 0.1350 | |||||||||
| Fourth Quarter | 16.73 | 14.88 | 0.1350 | |||||||||
Range of Bid Prices | Cash Dividends | |||||||||||
Year Ending September 30, 2021 | High | Low | Declared | |||||||||
First Quarter | $ | 27.40 | $ | 22.82 | $ | 0.185 | ||||||
Second Quarter | 25.60 | 22.08 | 0.185 | |||||||||
Third Quarter | 25.60 | 21.32 | 0.185 | |||||||||
Fourth Quarter | 26.02 | 22.33 | 0.185 | |||||||||
Year Ending September 30, 2020 | ||||||||||||
First Quarter | $ | 30.00 | $ | 27.53 | $ | 0.175 | ||||||
Second Quarter | 31.98 | 24.55 | 0.175 | |||||||||
Third Quarter | 28.85 | 23.15 | 0.175 | |||||||||
Fourth Quarter | 24.86 | 22.58 | 0.175 | |||||||||
As of November 24, 2017,19, 2021, there were 1,159 1,030 holders of record of the Company’s common stock. This number does not include all beneficial owners of common stock who hold their shares in “street name.”
A summary of the Company’s equity compensation plans follows as of September 30, 2017:
(a) | (b) | (c) | ||||||||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
Equity compensation plans approved by security holders | 45,250 | $ | 19.34 | 457,079 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 45,250 | $ | 19.34 | 457,079 | ||||||||
Item 6.Selected Financial Data.
Not applicable.
| (a) | (b) | (c) | |||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||
| Equity compensation plans approved by security holders | 101,575 | $14.31 | 576,018 | ||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||
| Total | 101,575 | $14.31 | 576,018 | ||||||
| Year Ending September 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Operating Revenues | $ | 62,296,870 | $ | 59,063,291 | $ | 68,189,607 | $ | 75,016,134 | $ | 63,205,666 | ||||||||||
| Gross Margin | 32,809,157 | 31,564,914 | 30,206,433 | 29,337,089 | 27,602,891 | |||||||||||||||
| Operating Income | 11,666,309 | 11,212,092 | 10,006,192 | 9,681,868 | 8,795,055 | |||||||||||||||
| Net Income | 6,232,865 | 5,806,866 | 5,094,415 | 4,708,440 | 4,262,052 | |||||||||||||||
Basic Earnings Per Share (1) | $ | 0.86 | $ | 0.81 | $ | 0.72 | $ | 0.67 | $ | 0.60 | ||||||||||
Cash Dividends Declared Per Share (1) | $ | 0.58 | $ | 0.54 | $ | 0.51 | $ | 0.49 | $ | 1.15 | ||||||||||
Book Value Per Share (1) | $ | 8.29 | $ | 7.75 | $ | 7.43 | $ | 7.35 | $ | 7.01 | ||||||||||
Average Shares Outstanding (1) | 7,218,686 | 7,149,906 | 7,092,315 | 7,073,218 | 7,048,091 | |||||||||||||||
| Total Assets | $ | 183,135,071 | $ | 165,552,849 | $ | 145,847,194 | $ | 137,423,321 | $ | 121,658,797 | ||||||||||
| Long-Term Debt (Less Unamortized Debt Expense) | $ | 61,312,011 | $ | 33,636,051 | $ | 30,316,573 | $ | 30,306,919 | $ | 12,984,169 | ||||||||||
| Stockholders' Equity | 60,040,472 | 55,667,072 | 52,840,991 | 52,020,847 | 49,502,422 | |||||||||||||||
Shares Outstanding at Sept. 30(1) | 7,240,846 | 7,182,434 | 7,112,247 | 7,080,567 | 7,063,989 | |||||||||||||||
COVID-19
As was discussed under Item 1A "Risk Factors" above, COVID-19 and the prior years were revisedresulting pandemic continues to reflectimpact the three-for-two stock split.
See the Regulatory section below for information regarding the service disconnection moratorium, CARES Act and ARPA funds.
The full extent to which the COVID-19 pandemic will impact the Company notes that a variety of factors could causedepends on future developments, which are highly uncertain and cannot be reasonably predicted, including the Company’s actual resultsincrease or reduction in governmental restrictions to businesses and experience to differ materially fromindividuals, the anticipated results or expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and resultspotential resurgence of the Company’s business include, but are not limited to, those set forth in the following discussion and within Item 1A “Risk Factors” of this Annual Report on Form 10-K. All of these factors are difficult to predict and many are beyond the Company’s control. Accordingly, while the Company believes its forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in the Company’s documents or news releases, the words “anticipate,” “believe,” “intend,” “plan,” “estimate,” “expect,” “objective,” “projection,��� “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs suchvirus, including variants, as “will,” “would,” “should,” “can,” “could” or “may” are intended to identify forward-looking statements.
Cyber Risk
Cyber attacks are made.a constant threat to businesses and individuals. The Company assumes no duty to updateremains focused on these statements should expectations change or actual results differ from current expectations except as required by applicable lawsthreats and regulations.
Overview
Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,600 residential, commercial and industrial customers in Roanoke, Virginia, and the surrounding localities, through its Roanoke Gas subsidiary. Roanoke Gas also provides certain unregulated services. As a wholly-owned subsidiary of Resources, Midstream is a more than 1% investor in the MVP and a less than 1% investor in Southgate. More than 98%information regarding the investment in MVP is provided under the Equity Investment in Mountain Valley Pipeline section below.
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, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas to Roanoke Gas customers. The SCC authorizescustomers based on rates authorized by the rates and fees the Company charges its customers for these services.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. Normal weather refers
The Company is also subject to federal regulation from the Department of Transportation in regard to the average numberconstruction, operation, maintenance, safety and integrity of heating degree days (anits transmission and distribution pipelines. FERC regulates the prices for the transportation and delivery of natural gas to the Company's distribution system and underground storage services. In addition, Roanoke Gas is subject to other regulations which are not necessarily industry measure by whichspecific.
On October 10, 2018, Roanoke Gas filed a general rate application requesting an annual increase in customer non-gas base rates. Roanoke Gas implemented the average daily temperature falls below 65 degrees Fahrenheit) overinterim non-gas rates contained in its rate application for natural gas service rendered to customers on or after January 1, 2019. On January 24, 2020, the most recent 30-year period.
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 CompanyCompany's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability in earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment. These mechanisms include a purchased gas adjustment factor ("PGA"), weather normalization adjustment factor ("WNA"), inventory carrying cost revenue ("ICC")the SAVE Rider, WNA, ICC and a Steps to Advance Virginia Energy ("SAVE") adjustment rider.
The Company's approved billingCompany’s non-gas base rates include a component designed to allowprovide for the recovery of non-gas related expenses and a reasonable return to shareholders. These rates are determined based on the costfiling of natural gas used by its customers. The cost of natural gas is considered a pass-through cost and is independent of theformal non-gas rates of the Company. This rate component, referred to as the PGA clause, allows the Company to pass along to its customers increases and decreases in natural gas costs incurred by its regulated operations. On a quarterly basis, the Company files a PGA rate adjustment requestapplication with the SCCSCC. Generally, investments related to adjust the gas cost component of its rates up or down depending on projected price and activity. Once administrative approval is received, the Company adjusts the gas cost component of its ratesextending service to reflect the approved amount. As actual costs 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 costsnew customers are recovered through the additional revenues generated by the non-gas base rates currently in place. The investment in replacing and upgrading existing infrastructure is generally not recoverable until a formal rate application is filed to include the additional investment, and new non-gas base rates are approved. The SAVE Rider provides the Company with a mechanism through which it recovers the cost related to SAVE qualified infrastructure investments on a prospective basis, until a formal rate application is filed to incorporate the recovery of these costs in non-gas rates. The SAVE Plan and Rider were reset effective January 1, 2019, when the PGArecovery of all prior SAVE Plan investment was incorporated into the current non-gas rates. Accordingly, SAVE Plan revenues increased to $2,487,000 in fiscal 2021 from $1,272,000 in fiscal 2020. The current SAVE Plan is recorded as a regulatory asset or liability. Atfocused on replacing first generation, pre-1973 plastic pipe and other qualifying infrastructures projects. Additional information regarding the end ofSAVE Plan and Rider is provided under the annual deferral period, the balance is amortized over an ensuing 12-month period as amounts are reflected in customer billings.
The WNA model 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 price protection when the weather is colder than normal. The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal and correspondingly requires the Company to refund the excess margin earned for weather that is colder than normal. The WNA year runs from April through March. Any billings or refunds related to the WNA are completed following the end of theeach WNA year. For the fiscal year, ended September 30, 2017, thewhich runs from April to March. The Company recorded $1,839,000approximately $1,196,000 and $1,193,000 in additional revenue from the WNA for weather that was approximately 18%8% warmer than normal. Duringnormal for the fiscal yearyears ended September 30, 2016, the Company recorded $1,318,000 in additional revenue for the WNA for weather that was approximately 13% warmer than normal. During the fiscal year ended September 30, 2015, the Company reduced revenue by $609,000 due to the WNA for weather that was approximately 6.5% colder than normal. As normal weather is based on the most recent 30-year temperature average, the2021 and 2020. The number of heating degree days used to determine normal will change each yearannually as a new year is added to the 30-year period and the oldest year is removed. As a result of two consecutiveadding recent warmer than normal years of significantly warmer winters,to replace historical colder years, the number of heating degree days that defines normal has declined from 4,000 in fiscal 2013 to 3,959 in fiscal 2017. The Company's rates are designed on 4,000 heating degree days from itsover the last non-gas rate filing; however, the WNA model is recovering on the current normal of 3,959 heating degree days, or about 1% less than for what the rates were designed to recover. The 30-year normal will not be reset in base rates until the next time the Company files for a non-gas rate increase, so until such time as normal is reset, the WNA may slightly under-recover for warmer weather.several years.
The Company also has an approved rate structure in place that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue forby applying the financing costs, or “carrying costs”, of its investment in natural gas inventory. The ICC factor, applied to average inventory is based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity.
The cost of natural gas futures,is a pass-through cost and is independent of the average dollar balance of gas in storage may increase next year; however, an expected increase in debt will potentially reduce the ICC factor and corresponding ICC revenues.
Roanoke Gas is not recoverable until a formal rate applicationrequired to submit an Annual Information Filing ("AIF") each year to the SCC. Included as part of this filing is made to include the additional investment, and new non-gas rates are approved. The SAVE Plan and Rider providesan earnings test, which is required when the Company withhas certain regulatory assets. If the abilityresults of the earnings test indicate that the Company's regulatory earnings exceed the mid-point of its authorized return on equity range, then certain regulatory assets are written-down and recovery accelerated to the point where the actual return for the period adjusts to the mid-point of the range. The Company conducted preliminary earnings tests for fiscal 2021 and 2020 in preparation for the AIF filings in January of the subsequent years. As a result of the preliminary earnings tests, Roanoke Gas expensed $217,000 in deferred COVID costs incurred during fiscal 2021, and fully amortized the remaining $525,000 balance of ESAC assets in fiscal 2020.
Inflation and Rising Prices
Natural gas commodity, delivery and storage capacity costs comprise the single largest expense of the Company representing nearly 58% of fiscal 2021 total operating expenses. Natural gas commodity prices have steadily increased through fiscal 2021 and natural gas futures for the upcoming winter heating season are double September prices. Several factors have contributed to rising natural gas prices including lack of interstate pipeline development, demand rebounding as activity returns to pre-pandemic levels, lower inventory storage levels, increased demand for cleaner energy and lagging production from suppliers. Roanoke Gas can recover rising natural gas costs through the PGA mechanism as noted above; however, in times of rapidly increasing costs, 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 to the potential for rising bad debts related to these investmentscustomers inability to pay higher natural gas bills.
Inflation affects the Company through increases in non-gas expenses such as labor costs, employee benefits, materials and supplies, contracted services and corporate insurance, among other areas. As the country emerges from the pandemic, issues such as supply chain delays, labor shortages and limited availability of key or critical supplies have put upward pressure on a prospective basis rather than on a historical basis. The SAVE Plan provides a mechanism to recover the related depreciation and expenses and provide a return on rate baseseveral categories of the additional capital investments related to improving the Company's infrastructure until such time a formal rate application is filed to incorporate this investment in the Company's non-gas rates. Asexpenses. The Company recovers non-gas related costs through the Company has not filednon-gas portion of its tariff rates, which are adjusted through a non-gas rate application. Unlike the rate adjustments for the gas portion of rates which are done administratively, the non-gas rate application results in an increaseinherent lag in non-gas expense recovery. Therefore, authorized non-gas rates since 2013, SAVE Plan revenues have increased each year correspondingmay not keep pace with the rising costs during inflationary periods. Management must regularly evaluate the Company's operations, economic conditions and other factors to assess the level of SAVE qualifying capital investment. The Company recognized approximately $3,813,000,
Results of Operations
The analysis on the results of operations is based on the consolidated operations of the Company, which is primarily associated with the utility segment. Additional information regarding the SAVE Ridersegment analysis is provided in areas where Midstream's investment in affiliates represents a significant component of the comparison.
The Company's operating revenues are affected by the cost of natural gas, as reflected in the consolidated income statement under the Regulatory Affairs section.
Fiscal Year 20172021 Compared with Fiscal Year 2016
The table below reflects operating revenues, volume activity and heating degree-days.
| Operating Revenues | ||||||||||||||
| Year Ended September 30, | 2017 | 2016 | Increase | Percentage | ||||||||||
| Gas Utilities | $ | 61,252,015 | $ | 58,079,990 | $ | 3,172,025 | 5 | % | ||||||
| Other | 1,044,855 | 983,301 | 61,554 | 6 | % | |||||||||
| Total Operating Revenues | $ | 62,296,870 | $ | 59,063,291 | $ | 3,233,579 | 5 | % | ||||||
| Delivered Volumes | |||||||||||
| Year Ended September 30, | 2017 | 2016 | Decrease | Percentage | |||||||
| Regulated Natural Gas (DTH) | |||||||||||
| Residential and Commercial | 5,840,883 | 6,088,108 | (247,225 | ) | (4 | )% | |||||
| Transportation and Interruptible | 2,721,699 | 2,754,497 | (32,798 | ) | (1 | )% | |||||
| Total Delivered Volumes | 8,562,582 | 8,842,605 | (280,023 | ) | (3 | )% | |||||
| Heating Degree Days (Unofficial) | 3,250 | 3,484 | (234 | ) | (7 | )% | |||||
Operating Revenues | ||||||||||||||||
Year Ended September 30, | 2021 | 2020 | Increase / (Decrease) | Percentage | ||||||||||||
Gas Utility | $ | 75,045,103 | $ | 62,408,925 | $ | 12,636,178 | 20 | % | ||||||||
Non Utility | 129,676 | 666,466 | (536,790 | ) | (81 | )% | ||||||||||
Total Operating Revenues | $ | 75,174,779 | $ | 63,075,391 | $ | 12,099,388 | 19 | % | ||||||||
Delivered Volumes | ||||||||||||||||
Year Ended September 30, | 2021 | 2020 | Increase / (Decrease) | Percentage | ||||||||||||
Regulated Natural Gas (DTH) | ||||||||||||||||
Residential and Commercial | 6,773,819 | 6,419,031 | 354,788 | 6 | % | |||||||||||
Transportation and Interruptible | 3,135,710 | 3,938,143 | (802,433 | ) | (20 | )% | ||||||||||
Total Delivered Volumes | 9,909,529 | 10,357,174 | (447,645 | ) | (4 | )% | ||||||||||
HDD | 3,610 | 3,623 | (13 | ) | (0 | )% | ||||||||||
Total gas utility operating revenues for the year ended September 30, 20172021 increased by 5%20% from the year ended September 30, 20162020 primarily due to higher gas costs and increased SAVE Plan revenues more than offsetting a reduction in natural gas deliveries. The average commodity price of natural gas increased by 11% per decatherm sold due toprices and pipeline storage fees, higher commodity prices. Delivered volumes declined primarily due to weather, as reflected in the lower residential and commercial volumes and an increase in SAVE revenues, partially offset by lower transportation and interruptible volumes. Industrial consumption was nearly unchanged. ResidentialRising natural gas commodity prices combined with higher transportation fees implemented by the Company's pipeline suppliers have resulted in a 41% per dth increase in the commodity component of revenue and a 38% per dth increase in the demand (pipeline and storage fees) component of revenue. These higher gas costs are passed on to customers through the PGA mechanism. The mostly weather sensitive residential and commercial natural gas deliveries tend to be more weather sensitive as reflectedincreased by a 4% decline in volumes6% on 7% fewernearly the same number of heating degree days. Transportation and interruptible volumes, which are primarily driven by production activities rather than weather, decreased by 1%. Other revenues experienced a 6% increase.
| Gross Margin | ||||||||||||||
| Year Ended September 30, | 2017 | 2016 | Increase / (Decrease) | Percentage | ||||||||||
| Gas Utility | $ | 32,332,390 | $ | 31,070,660 | $ | 1,261,730 | 4 | % | ||||||
| Other | 476,767 | 494,254 | (17,487 | ) | (4 | )% | ||||||||
| Total Gross Margin | $ | 32,809,157 | $ | 31,564,914 | $ | 1,244,243 | 4 | % | ||||||
Gross Utility Margin | ||||||||||||||||
Year Ended September 30, | 2021 | 2020 | Increase | Percentage | ||||||||||||
Gas Utility Revenues | $ | 75,045,103 | $ | 62,408,925 | $ | 12,636,178 | 20 | % | ||||||||
Cost of Gas - Utility | 35,179,842 | 23,949,481 | 11,230,361 | 47 | % | |||||||||||
Gross Utility Margin | $ | 39,865,261 | $ | 38,459,444 | $ | 1,405,817 | 4 | % | ||||||||
Gross utility margin increased over the prior fiscal year primarily as a result of the aforementioned higher SAVE revenues and increase in residential and commercial volumes declined due to warmer weather compared toand customer base charges more than offsetting the prior year. Interruptiblereduction in transportation and interruptible deliveries. Total volumetric margin increased for the reasons mentioned above as the increase in residential and commercial DTH sales more than offset the decline in lower-margin interruptible and transportation volumes were nearly unchanged reflecting onlyvolumes. The growth in customer base charge revenues reflect a small decline. The impactcombination of customer additions and the continuation of service to delinquent customers as a result of the warmer weather on volumetric margin was offset by the WNA,disconnection moratorium, which provided approximately $522,000 in revenues. As discussed in more detail above, the WNA allowed the Company to recognize margin related to those natural gas volumes not delivered due to the warmer weather. ICC revenues declined by $63,000 due to lower average gas storage balance and a lower ICC factor.
The changes in the components of the gasgross utility margin are summarized below:
| Twelve Months Ended September 30, | |||||||||||
| 2017 | 2016 | Increase / (Decrease) | |||||||||
| Customer Base Charge | $ | 12,412,753 | $ | 12,364,811 | $ | 47,942 | |||||
| SAVE Plan | 3,813,043 | 2,538,055 | 1,274,988 | ||||||||
| Volumetric | 13,573,704 | 14,099,214 | (525,510 | ) | |||||||
| WNA | 1,839,454 | 1,317,800 | 521,654 | ||||||||
| Carrying Cost | 588,624 | 651,492 | (62,868 | ) | |||||||
| Other | 104,812 | 99,288 | 5,524 | ||||||||
| Total | $ | 32,332,390 | $ | 31,070,660 | $ | 1,261,730 | |||||
Years Ended September 30, | ||||||||||||
2021 | 2020 | Increase / (Decrease) | ||||||||||
Customer Base Charge | $ | 14,563,274 | $ | 14,413,709 | $ | 149,565 | ||||||
SAVE Plan | 2,487,299 | 1,272,070 | 1,215,229 | |||||||||
Volumetric | 21,188,794 | 21,091,007 | 97,787 | |||||||||
WNA | 1,196,499 | 1,192,715 | 3,784 | |||||||||
Carrying Cost | 395,626 | 388,607 | 7,019 | |||||||||
Other Revenues | 33,769 | 101,336 | (67,567 | ) | ||||||||
Total | $ | 39,865,261 | $ | 38,459,444 | $ | 1,405,817 | ||||||
Operations and Maintenance Expense
- Operations and maintenanceGeneral Taxes - General taxes increased $122,944, or 7%, primarily due to higher property taxes associated with increases in utility property.
| Operating Revenues | ||||||||||||||
| Year Ended September 30, | 2016 | 2015 | Decrease | Percentage | ||||||||||
| Gas Utilities | $ | 58,079,990 | $ | 67,094,290 | $ | (9,014,300 | ) | (13 | )% | |||||
| Other | 983,301 | 1,095,317 | (112,016 | ) | (10 | )% | ||||||||
| Total Operating Revenues | $ | 59,063,291 | $ | 68,189,607 | $ | (9,126,316 | ) | (13 | )% | |||||
| Delivered Volumes | |||||||||||
| Year Ended September 30, | 2016 | 2015 | Decrease | Percentage | |||||||
| Regulated Natural Gas (DTH) | |||||||||||
| Residential and Commercial | 6,088,108 | 6,955,594 | (867,486 | ) | (12 | )% | |||||
| Transportation and Interruptible | 2,754,497 | 2,919,413 | (164,916 | ) | (6 | )% | |||||
| Total Delivered Volumes | 8,842,605 | 9,875,007 | (1,032,402 | ) | (10 | )% | |||||
| Heating Degree Days (Unofficial) | 3,484 | 4,253 | (769 | ) | (18 | )% | |||||
| Gross Margin | ||||||||||||||
| Year Ended September 30, | 2016 | 2015 | Increase / (Decrease) | Percentage | ||||||||||
| Gas Utility | $ | 31,070,660 | $ | 29,656,975 | $ | 1,413,685 | 5 | % | ||||||
| Other | 494,254 | 549,458 | (55,204 | ) | (10 | )% | ||||||||
| Total Gross Margin | $ | 31,564,914 | $ | 30,206,433 | $ | 1,358,481 | 4 | % | ||||||
| Twelve Months Ended September 30, | |||||||||||
| 2016 | 2015 | Increase / (Decrease) | |||||||||
| Customer Base Charge | $ | 12,364,811 | $ | 12,240,580 | $ | 124,231 | |||||
| SAVE Plan | 2,538,055 | 1,307,795 | 1,230,260 | ||||||||
| Volumetric | 14,099,214 | 15,757,907 | (1,658,693 | ) | |||||||
| WNA | 1,317,800 | (608,560 | ) | 1,926,360 | |||||||
| Carrying Cost | 651,492 | 833,291 | (181,799 | ) | |||||||
| Other | 99,288 | 125,962 | (26,674 | ) | |||||||
| Total | $ | 31,070,660 | $ | 29,656,975 | $ | 1,413,685 | |||||
Depreciation
- Depreciation expense increased byEquity in Earnings of Unconsolidated Affiliate
- TheOther Expense
Interest Expense
- Total interest expense decreased by $47,273, or 1%, as a decline in the interest rate on the Company's variable rate debt offset higher total debt levels. Total average debt outstanding increased by 14% to meet the funding needs of Roanoke Gas' capital projects and Midstream's continuing investment in MVP. As a result of the declining interest rates on the Company's variable rate debt, the weighted-average interest rate fell by 12%. Declines in other interest contributed to the lower expense levels including lower customer deposit interest.Roanoke Gas' interest expense increased by $123,902, or 8%, due to a 15%$81,285 as total average debt outstanding increased by $8,500,000 associated with an increase in the borrowings under the line-of-credit. The average interest rate decreased slightly from 3.76% in fiscal 2020 to 3.48% in fiscal 2021. Roanoke gas capitalized $68,000 less in AFUDC during the current year due to the absence of construction activities on the two gate stations, which offset a $67,000 reduction in interest expense attributable to fiscal 2020's rate refund.
Midstream's interest expense decreased by $128,558 as the average interest rate on Midstream's total debt declined from 2.76% to 2.23% related to the variable interest rate credit facility more than offsetting a $6,900,000 increase in total average debt outstanding. The increase in average debt levels was attributable to financingoutstanding during the investments in Mountain Valley Pipeline and SAVE related projects and other capital improvements.
Income Taxes
- Income tax expenseNet Income and Dividends
- Net income for fiscalCapital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the related weather sensitivity, the Company’s primary capital needs are for the funding of its continuing construction program,capital projects, investment in MVP, the seasonal funding of its natural gas inventories and accounts receivables and payment of dividends. To meet these needs, the Company relies on its operating cash flows, line-of-credit agreement,credit availability under short-term and long-term debt agreements and capital raised throughproceeds from the Company’s stock plans.sale of its common stock.
Cash and cash equivalents decreasedincreased by $573,612approximately $1.2 million in fiscal 2017 and $341,9822021 compared to a decrease of $1.3 million in fiscal 2016 compared to an increase of $135,477 in fiscal 2015.2020. The following table summarizes the categories of sources and uses of cash:
| Cash Flow Summary | Year Ended September 30, | ||||||||||
| 2017 | 2016 | 2,015 | |||||||||
| Net cash provided by operating activities | $ | 12,980,978 | $ | 14,921,640 | $ | 16,760,827 | |||||
| Net cash used in investing activities | (23,492,555 | ) | (20,996,501 | ) | (13,750,274 | ) | |||||
| Net cash provided by (used in) financing activities | 9,937,965 | 5,732,879 | (2,875,076 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | $ | (573,612 | ) | $ | (341,982 | ) | $ | 135,477 | |||
Cash Flow Summary | Years Ended September 30, | |||||||
2021 | 2020 | |||||||
Net cash provided by operating activities | $ | 11,568,108 | $ | 12,823,903 | ||||
Net cash used in investing activities | (25,849,237 | ) | (30,721,011 | ) | ||||
Net cash provided by financing activities | 15,508,380 | 16,556,826 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 1,227,251 | $ | (1,340,282 | ) | |||
Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year, as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, 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 provided by operating activities was $12,981,000 in fiscal 2017, $14,922,000 in fiscal 2016 and $16,761,000 in fiscal 2015. Cash provided byflow from operating activities decreased by more than $1,900,000nearly $1.3 million from last yearthe prior year. The decrease in cash flow provided by operations was primarily as a resultdriven by the affects of increasing gas commodity prices and changes in certain regulatory assets and liabilities, partially offset by net income exclusive of noncash equity in earnings.
The table below summarizes the significant operating cash flow components:
Years Ended September 30, | ||||||||||||
Cash Flows From Operating Activities: | 2021 | 2020 | Increase (Decrease) | |||||||||
Net Income | $ | 10,102,062 | $ | 10,564,534 | $ | (462,472 | ) | |||||
Non-cash adjustments: | ||||||||||||
Depreciation | 8,669,977 | 8,126,427 | 543,550 | |||||||||
Equity in earnings | (1,667,554 | ) | (4,814,874 | ) | 3,147,320 | |||||||
AFUDC | (55,981 | ) | (330,208 | ) | 274,227 | |||||||
Allowance for doubtful accounts | (461,130 | ) | 592,398 | (1,053,528 | ) | |||||||
ESAC assets | — | 1,022,195 | (1,022,195 | ) | ||||||||
Changes in working capital and regulatory assets and liabilities: | ||||||||||||
Accounts receivable | (1,084,726 | ) | (141,482 | ) | (943,244 | ) | ||||||
Gas in Storage | (2,158,709 | ) | 739,546 | (2,898,255 | ) | |||||||
Prepaid income taxes | (2,457,327 | ) | 510,357 | (2,967,684 | ) | |||||||
Accounts payable and accrued expenses | 2,862,861 | 659,276 | 2,203,585 | |||||||||
Deferred Taxes | 106,188 | 1,327,655 | (1,221,467 | ) | ||||||||
Change in over (under) collection of gas costs | (3,314,446 | ) | (1,895,555 | ) | (1,418,891 | ) | ||||||
Rate refund | — | (3,827,589 | ) | 3,827,589 | ||||||||
WNA | (609,888 | ) | 1,171,342 | (1,781,230 | ) | |||||||
Non-current regulatory liabilities | 2,367,512 | — | 2,367,512 | |||||||||
Other | (730,731 | ) | (880,119 | ) | 149,388 | |||||||
Net cash provided by operating activities | $ | 11,568,108 | $ | 12,823,903 | $ | (1,255,795 | ) | |||||
Increasing natural gas commodity prices ending their steady price declineduring 2021, resulted in reductions in operating cash in several areas. Higher accounts receivable balances, and a smaller increaseincreases in deferredthe under collection of gas costs, and rising gas in storage balances resulted in lower operating cash of $0.9, $1.4 and $2.9 million year over year, respectively. Income tax liabilitiesrefunds not yet received, associated with the continuation of bonus depreciation. Commodity prices had been declining since 2014,R&D credit study conducted by a third party consultant, caused prepaid income taxes to increase significantly year over year, resulting in lowera decrease in operating cash of $3 million. See Note 8 for more information regarding the R&D tax credit.
Operating cash decreases were partially offset by accounts payable and changes in certain regulatory assets and liabilities. Significantly higher accounts payable balances related to increasing natural gas storage costs. Duringcommodity prices provided an additional $2.2 million in operating cash year over year. As there was no rate refund in fiscal 2017, natural gas prices reversed this trend and increased, resulting in higher cost of gas in storage. The Company continues to benefit from the application of bonus depreciation2021, operating cash improved $3.8 million.
Other significant non-cash changes include $1.1 million for federal
| Twelve Months Ended September 30, | |||||||||||
| Cash Flows From Operating Activities: | 2017 | 2016 | Increase (Decrease) | ||||||||
| Net income | $ | 6,232,865 | $ | 5,806,866 | $ | 425,999 | |||||
| Depreciation | 6,378,368 | 5,709,525 | 668,843 | ||||||||
| Decrease in gas in storage | (265,109 | ) | 723,713 | (988,822 | ) | ||||||
| Increase in deferred taxes | 3,325,379 | 4,466,954 | (1,141,575 | ) | |||||||
| Accounts payable and accrued expenses | (989,683 | ) | 15,046 | (1,004,729 | ) | ||||||
| Other | (1,700,842 | ) | (1,800,464 | ) | 99,622 | ||||||
| Net cash provided by operating activities | $ | 12,980,978 | $ | 14,921,640 | $ | (1,940,662 | ) | ||||
Cash Flows Used in Investing Activities:
Investing activities primarily consist of expenditures under the Company’s construction program,related to investment in Roanoke Gas' utility plant, which involves a combination ofincludes replacing aging natural gas pipe with new plastic or coated steel pipe, making improvements to the LNG plant and gas distribution system facilities expandingand expansion of its natural gas system to meet the demands of customer growth, as well as the continued investment in the MVP. The Company’sRoanoke Gas' expenditures related to its pipeline renewal programwere approximately $20 million and other system and infrastructure improvements increased to more than $20,700,000$22.9 million in fiscal 2017 from $18,000,000 in fiscal 20162021 and $13,800,000 in fiscal 2015. The Company renewed 92020, respectively. Roanoke Gas renewed 7.8 miles of natural gas distribution mainmain and 620 service lines and replaced 459 services in fiscal 2017. This compares to 14.99.6 miles of main and 684 services592 service lines in fiscal 2016years 2021 and 10 miles of main and 594 services in fiscal 2015.2020, respectively. The Company completedcurrent SAVE Plan is focused on the replacement of its cast iron and bare steelpre-1973 first generation plastic pipe in late 2016. In addition the Company’sto other SAVE related infrastructure. Furthermore, Roanoke Gas’ capital expenditures included costs to extend natural gas distribution mains and services to 499 new480 customers in fiscal 2021, compared to 448 customers in fiscal 2017 compared to 495 new customers in fiscal 2016 and 609 in fiscal 2015. Although the level of expenditures under the pipeline renewal program declined in fiscal 2017 as the Company transitioned from cast iron and bare steel to first generation plastic pipe replacement, the Company exceeded last year's capital spending with the completion of the automated meter reading ("AMR") project. The AMR project involved the retrofitting of all customer meters with transmitters to allow consumption data to be collected remotely. The AMR system provides the Company with an efficient data collection process for more reliable and accurate measure of natural gas usage by its customers.2020. Depreciation covered approximately 31% of43% and 35% of the current and prior year's capital expenditures, compared to 32% for 2016 and 38% for 2015,respectively, with the balance provided from other operating cash flows and borrowings.
Capital expenditures are expected to remain at elevatedor near current levels over the next few years. The Company is now focusedthree to five years as Roanoke Gas continues to focus on replacing the remaining pre-1973 first generation plastic pipe with polyethylene pipe. This renewal projectits SAVE Plan, which is expected to be completed by 2021. The current capital budget for fiscal 2018 is projected at more than $20,000,000, consistent with fiscal 2017 levels. In addition to the replacement of pre-1973 plastic pipe, the Company plans to invest approximately $3,000,000 for2024, as well as customer growth replace a natural gas transfer station and reinforce sections of the distribution system to meet increasing demand and ensure reliability of gas service.expansion. The Company expects to increaseutilize its borrowing activitycredit facilities, as well as consider additional equity capital, to meet the funding requirements of these planned expenditures.
Investing cash flows also reflect the Company's $2,759,3462021 funding of its$6 million for Midstream's participation in the LLC. The Company expectsMidstream's total expected funding requirement increased to invest a total of $35between $60 and $62 million in the project.as discussed below, with anticipated cash investment for fiscal 2022 to be approximately $10.7 million. Funding for the investment in the LLC is provided through a combination of a $25 millionMidstream's credit facility which maturesand two unsecured notes in 2020, and equity capital. The Company may consider issuing additional common stock in 2018 to supplement the debt financing. When the $25 million credit facility matures, the Company will consider its financing options, which may included longer-term debt financing.combined amount of $24 million. More
Cash Flows Provided by (Used in) Financing Activities:
Financing activities generally consist of borrowings and repayments under debtcredit agreements, issuance of stock and the payment of dividends. As mentioned above, theNet cash flows provided by financing activities were $15.5 million and $16.6 million in fiscal 2021 and 2020, respectively. The Company uses its line-of-credit to fund seasonal working capital needs and provide temporary financing for capital projects, which is then converted into longer-term debt or equity financing. Cash flows provided by financing activities were $9,938,000 in fiscal 2017 and $5,733,000 in fiscal 2016 compared to cash usedprojects. The increase in financing activities of $2,875,000 in fiscal 2015. The combination of greater capital investment related to the pipeline renewal program and other projects, including the Mountain Valley Pipeline, and lower cash flows was derived from operating activities increasedMidstream's net borrowing. As noted above, the Company's operating cash flows have declined since 2015 as the benefits from declining natural gas prices and bonus depreciation have lessened. The Company increased the net utilizationborrowings of more than $8 million to finance its line-of-credit by $3,235,000 to provide bridge financing for its capital budget.investment in MVP. The Company also realized $3.3 million from the issuance of common stock through its ATM program and $1.6 million from the issuance of stock through DRIP activity and the exercise of options. Cash out-flows for dividend payments exceeded $6.0 million as the annualized dividend rate increased from $0.70 to $0.74 per share. The Company’s consolidated capitalization was 41.5% equity and 58.5% long-term debt at September 30, 2021, exclusive of unamortized debt expense. This compares to 41.7% equity and 58.3% long-term debt at September 30, 2020.
On October 29, 2021 Midstream entered into a 5-yearan unsecured promissory note in the principal amount of $7,000,000$8 million with an interest rate based on November30-day LIBOR plus 115 basis points maturing December 1, 2016. The proceeds from2027. Related to this note, were usedMidstream also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.443%. The loan will convert into an installment loan with principal pay-down beginning in fiscal 2023. In addition, this note reduces the borrowing capacity defined by the Third Amendment to convert a portionCredit Agreement and related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the new promissory note. All other terms of the line-of-credit balance supporting Roanoke Gas' capital expenditures into a longer-term financing instrument. The remaining $2,916,000 increase in unsecured notes payable is attributableThird Amendment to the borrowing under Midstream's credit facility to finance the investment in MVP. Proceeds from the issuance of stock were $968,000 under the Company's stock plans. Dividends increased as the annualized dividend rate per share went from $0.51 in fiscal 2015 to $0.54 in fiscal 2016 and $0.58 in fiscal 2017.
On September 30, 2017. This compares to 62.2% equity and 37.8% long-term debt at September 30, 2016. The long-term debt as a percent of long-term capitalization increased significantly over last year due to the extension of the line-of-credit term to more than one year resulting in its transition to a non-current debt as noted below.
On August 20, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $15 million with an interest rate of 1.20% above the 30-day SOFR Average per annum maturing on August 20, 2026. Related to this note, the Company also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.00% The term note funded on October 1, 2021.
On March 25, 2021, Roanoke Gas renewed its unsecured line-of-credit agreement for a two-year term expiring March 31, 2023 with a maximum borrowing limit of $40 million. Amounts drawn against the agreement are considered to be non-current as the balance under the line-of-credit is not subject to repayment within the next 12-month period. The agreement has a variable-interest rate based on 30-day LIBOR plus 100 basis points and an availability fee of 15 basis points applied to the unused balance. The new agreement also maintains theand provides multi-tiered borrowing limits to accommodatealigned with the Company's seasonal borrowing demands and minimize borrowing costs.demand. The Company's total available borrowing limits during the term of the new agreement range from $10,000,000$14 million to $30,000,000. The Company intends to request an extension of the agreement by one year prior to next March when the outstanding debt would become a current liability; however, there is no guarantee that the line-of-credit agreement will be extended or replaced on terms comparable to those currently in place.
On October 2, 2017, the Company issued two 10-yearDecember 6, 2019, Roanoke Gas entered into unsecured notes in the aggregate principal amount of $8,000,000 with$10 million. These notes have a 10-year term from the date of issue at a fixed interest rate of 3.58% per annum. Interest is paid semi-annually on these notes in April and October of each year until the notes mature.3.60%. The proceeds from these notes provided financing for Roanoke Gas' capital budget.
Roanoke Gas has private shelf agreements with two different financial institutions. The first agreement, as amended, provides for the issuance of up to $40 million in unsecured notes in addition to the $28 million previously issued. This shelf agreement will expire on December 6, 2022 unless extended. The second agreement, effective September 30, 2020, provides for the issuance of up to $70 million in unsecured notes during its 5-year term expiring on September 30, 2025. No funds were useddrawn on either of these agreements during fiscal 2021.
On February 14, 2020, Resources filed a prospectus with the SEC utilizing a shelf registration process where the Company may sell shares of common stock, in one or more offerings, of an aggregate amount up to refinance$40 million. The prospectus was filed including a supplement allowing the Company to offer a portion of these shares, up to an aggregate of $15 million, utilizing the line-of-credit balance outstanding at September 30, 2017 into longer-term financing.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
| Recorded contractual obligations: | Less than 1 year | 1-3 Years | 4-5 Years | After 5 Years | Total | ||||||||||||||
| Long-Term Debt - Notes Payable (1) | $ | — | $ | — | $ | 13,312,200 | $ | 30,500,000 | $ | 43,812,200 | |||||||||
| Long-Term Debt - Line of Credit (2) | — | 17,791,760 | — | — | 17,791,760 | ||||||||||||||
| Total | $ | — | $ | 17,791,760 | $ | 13,312,200 | $ | 30,500,000 | $ | 61,603,960 | |||||||||
| (1) See Note 6 to the consolidated financial statements. Does not include scheduled debt payments for the unsecured notes issued on October 2, 2017. | |||||||||||||||||||
| (2) See Note 5 to the consolidated financial statements. New line-of-credit agreement executed for a 2-year term, expiring March 31, 2019. Amounts drawn against agreement are considered non-current as they are not subject to repayment within 12-months. | |||||||||||||||||||
| Unrecorded contractual obligations, not reflected in consolidated balance sheets in accordance with US GAAP: | Less than 1 year | 1-3 Years | 4-5 Years | After 5 Years | Total | ||||||||||||||
| Pipeline and Storage Capacity (3) | $ | 11,232,436 | $ | 17,746,270 | $ | 9,787,494 | $ | 3,067,053 | $ | 41,833,253 | |||||||||
| Gas Supply (4) | — | — | — | — | — | ||||||||||||||
| Interest on Line-of-Credit (5) | 58,338 | 25,800 | — | — | 84,138 | ||||||||||||||
| Interest on Notes Payable (6) | 1,641,613 | 3,283,226 | 2,819,856 | 15,541,764 | 23,286,459 | ||||||||||||||
| Pension Plan Funding (7) | — | — | — | — | — | ||||||||||||||
| Investment in MVP (8) | 25,560,133 | 4,741,780 | — | — | 30,301,913 | ||||||||||||||
| Other Obligations (9) | 146,787 | 10,087 | 4,661 | 25,540 | 187,075 | ||||||||||||||
| Total | $ | 38,639,307 | $ | 25,807,163 | $ | 12,612,011 | $ | 18,634,357 | $ | 95,692,838 | |||||||||
| (3) Recoverable through the PGA process. | |||||||||||||||||||
| (4) Volumetric obligation is for the purchase of contracted decatherms of natural gas at market prices in effect at the time of purchase. Unable to estimate related payment obligation until time of purchase. See Note 11 to the consolidated financial statements. | |||||||||||||||||||
| (5) Accrued interest on line-of-credit balance at September 30, 2017, including minimum facility fee on unused line-of-credit. See Note 5 to the consolidated financial statements. | |||||||||||||||||||
| (6) Calculated interest payments on 20-year $30.5 million Roanoke Gas Co. Prudential note payable due September 18, 2034, 5-year $7 million Roanoke Gas Co. BB&T note payable due November 01, 2021 and on the 09/30/2017 balance on Midstream notes due December 29, 2020. See Note 6 to the consolidated financial statements. Does not include scheduled interest payments on the unsecured notes issued on October 2, 2017. | |||||||||||||||||||
| (7) Estimated minimum funding assuming application of credit balances in plan to offset funding. Minimum funding requirements beyond five years is not available. See Note 8 to the consolidated financial statements for the planned funding in fiscal 2018. | |||||||||||||||||||
| (8) Projected remaining funding of the Company's 1% interest in MVP as entered into on October 1, 2015. | |||||||||||||||||||
| (9) Various lease, maintenance, equipment and service contracts. | |||||||||||||||||||
Equity Investment in Mountain Valley Pipeline
Recent construction activity has been limited based on legal and regulatory challenges. Although certain permits and authorizations were received in the LLC. The purpose of the LLC is to construct and operate the Mountain Valley Pipeline ("MVP"), a natural gas pipeline connecting the Equitrans gathering and transmission system in northern West Virginia to the Transco interstate pipeline in south central Virginia. This project falls under the jurisdiction of FERC and is subject to its approval prior to beginning construction. On October 13, 2017, FERC issued the MVP Certificate of Public Convenience and Necessity ("CPCN"). Pending Virginia and West Virginia state environmental agency permits and other federal agency permits, it is expected that FERC will issue a construction Notice-to-Proceed ("NTP") in late 2017 or early 2018. If the NTP is received on this schedule, the MVP targeted in-service date is late fourth quarter of 2018.
Following a comprehensive review of all outstanding stream and wetland crossings across the approximately 300-mile MVP project route, on February 19, 2021, the LLC will be beneficialsubmitted (i) a joint application package to each of the Huntington, Pittsburgh and Norfolk Districts of the U.S. Army Corps of Engineers (Army Corps) that requests an individual permit from the Army Corps to cross certain streams and wetlands utilizing open cut techniques (the Army Corps Individual Permit) and (ii) an application to amend the MVP project’s CPCN that seeks FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods.
Related to seeking the Army Corps Individual Permit, on March 4, 2021, the LLC submitted applications to each of the West Virginia Department of Environmental Protection (WVDEP) and the Virginia Department of Environmental Quality (VADEQ) seeking Section 401 water quality certification approvals or waivers (such approvals or waivers, the State 401 Approvals). Both the WVDEP and VADEQ submitted requests to the Army Corps for additional time to address the applications, and in late June 2021, the Army Corps granted the WVDEP and the VADEQ additional review time through November 29, 2021 and December 31, 2021, respectively. In early June 2021, the FERC issued a notice of schedule for the Company,LLC's CPCN amendment application. FERC issued its shareholdersenvironmental assessment August 13, 2021. Given that the expected permitting timelines for both the FERC and southwest Virginia. In addition to the potential returns fromArmy Corps remain in-line with the investment inLLC's expectations, the LLC Roanoke Gas will benefit from accesscontinues to another source of natural gas to its distribution system. Currently, Roanoke Gas is served by two pipelines andtarget a liquefied natural gas storage facility. Damage to or interruptionfull in-service date for the MVP project in supply from any of these sources, especially during
In order to complete the MVP project in accordance with the targeted full in-service date and cost, the LLC must, among other things, timely receive the Army Corps Individual Permit (as well as timely receive the State 401 Approvals and, as necessary, certain other state-level approvals) and timely receive authorization from the FERC to amend the CPCN to utilize alternative trenchless construction methods for certain stream and wetland crossings. The LLC also must (i) maintain and, as applicable, timely receive required authorizations, including authorization to proceed with construction, related to the Jefferson National Forest from the Bureau of Land Management, the U.S. Forest Service and the FERC; (ii) continue to have available the orders previously issued by the FERC modifying its prior stop work orders and extending the LLC’s prescribed time to complete the MVP project; (iii) timely receive authorization from the FERC to complete construction work in the portion of the project route currently remaining subject to the FERC's previous stop work order; and (iv) continue to be $3.5 billion. As a 1% member inauthorized to work under the LLC, Midstream's cash contribution is expected to be approximately $35 million. The agreement provides for a scheduleBiological Opinion and Incidental Take Statement issued by the United States Department of cash draws to fund the project. The initial payments are related to pre-construction activities including the acquisition of land, easementsInterior’s Fish and materials. Once the NTP is received and construction begins, more significant cash draws will be required. Initial fundingWildlife Service for the investmentMVP project. In each case, any such foregoing or other authorizations must remain in the LLC is provided through the Midstream credit facility under which Midstream may borrow upeffect notwithstanding any pending or future challenge thereto. Failure to a total of $25 million, through 2020 with the balance coming from equity capital. The Company regularly assesses its overall capital needs and capital structure. Based on these assessments and market conditions during 2018, the Company may fund the LLC investment with proceeds from an equity offeringachieve any one of the Company's common stock.
Resources' current earnings from the MVP investment in MVP relatesare attributable to the AFUDC income generated by the deploymentLLC. The LLC temporarily suspended the accrual of capitalAFUDC on the project from January 1, 2021 (due to a temporary reduction in growth construction activities) through March 31, 2021. Limited growth construction activities resumed in April 2021, and the design, engineering, materials procurement, projectLLC began accruing AFUDC associated with those activities. It is expected that the accrual of AFUDC will be temporarily suspended again for the winter curtailment period, which is expected to begin around November 2021. Additionally, Roanoke Gas continues the suspension of AFUDC accruals on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations.
Management conducted an assessment of its MVP investment in accordance with the provisions of ASC 323, Investments - Equity Method and Joint Ventures. This assessment included a third-party valuation. As a result of its evaluation, management and ultimately construction phaseshas concluded that the investment is not currently impaired as of September 30, 2021. Furthermore, the LLC has conducted its own evaluation of the pipeline. AFUDCproject and also concluded that no impairment exists as of September 30, 2021. Management will continue monitoring the status of the project for circumstances that may lead to future impairment, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any future impairment would be dependent on the specific circumstances at the time of evaluation.
In April 2018, the LLC announced the MVP Southgate project and submitted Southgate's certificate application to the FERC in November 2018. The Final Environmental Impact Statement for the project was issued on February 14, 2020. In June 2020, the FERC issued the CPCN for the MVP Southgate; however, the FERC, while authorizing the project, directed the Office of Energy Projects not to issue a notice to proceed with construction until necessary federal permits are received for the MVP project and the Director of the Office of Energy Projects lifts the stop work order and authorizes the LLC to continue constructing the MVP. On August 11, 2020, the North Carolina Department of Environmental Quality (NCDEQ) denied Southgate's application for a Clean Water Act Section 401 Individual Water Quality Certification and Jordan Lake Riparian Buffer Authorization due to timing of the MVP project's completion. On March 11, 2021, the Fourth Circuit Court of Appeals, pursuant to an appeal filed by the LLC, vacated the NCDEQ's denial and remanded the matter to the NCDEQ for additional review. On April 29, 2021, the NCDEQ reissued its denial of Southgate's application. Based on the targeted full in-service date for the MVP and expectations regarding Southgate permit approval timing, the LLC is an accounting method wherebytargeting the costscommencement of debtthe MVP Southgate construction in 2022 and equity funds usedplacing the MVP Southgate in-service during the spring of 2023.
Midstream has borrowing capacity of $41 million under its current credit facility, which matures in December 2022. As of September 30, 2021, $33.6 million had been utilized. Effective November 1, 2021, the borrowing capacity under this credit facility was reduced to finance$33 million as $8 million of the outstanding balance was termed out in a separate unsecured promissory note. See the Capital Resources and Liquidity section for more information. This credit facility infrastructurewill provide additional financing capacity for MVP funding; however, due to ongoing delays, additional financing will be required. Management is working with the Company's lending institutions to secure the necessary funding. If the legal and regulatory challenges, including any future challenges, are credited to income and charged tonot resolved in a timely manner and/or restrictions are imposed that impact future construction, the cost of the project. MVP and Midstream's capital contributions may increase above current projections.
Regulatory
On January 24, 2020, the SCC issued its final general rate case order awarding Roanoke Gas an annualized non-gas rate increase of $7.25 million and providing for a 9.44% return on equity and directing the write-off of $317,000 of ESAC assets not subject to recovery under the approved rates. Rates authorized by the SCC's final order required the Company to issue customers $3.8 million in rate refunds, which was completed in March 2020.
The levelfinal order also excluded from current rates a return on the investment of investmenttwo interconnect stations with the MVP, but provided Roanoke Gas with the ability to defer the related financing costs of those investments for possible future recovery. As a result, the Company began recognizing AFUDC during the second quarter of fiscal 2020 to capitalize both the equity and debt financing costs incurred during the construction phases. During the first quarter of 2021, Roanoke Gas recognized a total of $55,981 in AFUDC, $41,978 and $14,003 of equity and debt carrying costs, respectively. Beginning January 2021, Roanoke Gas temporarily ceased recording AFUDC on its related MVP will continue to grow at a steady paceinterconnect construction projects until such time FERC issuesas construction activities resume.
The service disconnection moratorium under which the Company has been operating since March 16, 2020, expired August 30, 2021. During the moratorium, utilities were prohibited from disconnecting residential customers for non-payment of their decisionnatural gas service and from assessing late payment fees; therefore, residential customers that ordinarily would have been disconnected for non-payment continued incurring charges for gas service. As a result, the Company’s arrearage balances are at historically high levels, which has resulted in a higher potential for bad debt write-offs.
In December 2020, Roanoke Gas received $403,000 in CARES Act funds to assist customers with growing past due balances. Based on guidance provided by the project. WhenSCC, the NTP isCompany was able to apply the full amount to eligible customer accounts during the second and third fiscal quarters. On October 28, 2021, Roanoke Gas received constructionnotification from the SCC that its application for ARPA funds has been approved. According to the communication, the Company will receive $858,556 based on arrearage balances as of August 31, 2021. The pending receipt of these funds were considered in the pipeline should beginvaluation of the estimated allowance for uncollectibles as of September 30, 2021.
In April 2020, the SCC issued an order allowing regulated utilities in earnestVirginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and both the investment in MVP and the AFUDC will increaseto apply for recovery at a much greater rate untilfuture date. Roanoke Gas deferred certain COVID-19 related costs throughout fiscal 2021. Based on Roanoke Gas's preliminary earnings test for the pipeline is placedperiod ended September 30, 2021, fiscal 2021 earnings exceeded the mid-point of the authorized return resulting in service. Earnings after the pipeline is operational would be derived fromCOVID-19 related costs being expensed during the fees charged for transporting natural gas through the pipeline.
Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Plan. On June 30, 2017,Rider. In May 2021, the Company filed its 2018most recent SAVE Plan application with the SCC. The originalSCC to update the SAVE Plan and Rider were approved by the SCC through an order issued on August 29, 2012 and has been modified, amended or updated each year since. The original SAVE Plan was designed to facilitate the accelerated replacement of the remaining bare steel and cast iron natural gas pipe by providing a mechanism for the Companyperiod October 2021 through September 2022. In its application, Roanoke Gas requested to continue to recover the related depreciation and expenses and return on rate basecosts of the additional capital investment without the filing of a formal application for an increase in non-gas base rates. The projects included under the SAVE Plan will enhance the safety and reliability of the Company’s gas distribution system and reduce greenhouse emissions. The amendments in 2013 and 2014 added projects related to the replacement of barepre-1973 plastic pipe. In addition, the Company requested to include the replacement of certain regulator stations and pre-1971 coated steel and cast iron natural gas pipe as qualifying SAVE projects. The updated SAVE Rider is designed to collect approximately $3.45 million in addition to two other major projects andannual revenues, an increase of approximately $1.1 million from the investment for related meter and regulator installations locatedexisting SAVE Rider rates. The Company received a final order on customer premises. In 2015,August 25, 2021 in which the SCC approved the Company's request to expand the authorized annual spending variance from 10% to 20% and set a 5% cumulative SAVE spending variance. This allows the Company to recover it's investment up to the new variance limits. The 2016 and 2017 applications included provisions to continue the ongoing pipeline renewal project with a focus on pre-1973 plastic pipe, replacement of natural gas custody transfer stations and the replacement of coated steel tubing services and related meter installations. The 2018 SAVE Plan continues the focus on the replacement of the pre-1973 plastic pipe and the replacement of one custody transfer station. On September 28, 2017, the Company received SCC approval to implement the new 2018 SAVE rates related to the proposed qualifying SAVE investments in calendar 2018. The new rates are designed to provide approximately $5,000,000 inCompany’s requested revenue representing an increase of $1,000,000 over the estimated 2017 SAVE Plan year. The additional SAVE Plan revenue as approved by the SCC will allow the Company to forgo a formal non-gas rate increase application at this time.
Critical Accounting Policies and Estimates
The consolidated financial statements of Resources are prepared in accordance with accounting principles generally accepted in the United States of America. 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 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 FASB ASC No. 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 assetsIf, 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.
Revenue recognition
- Regulated utility sales and transportation revenues are based upon rates approved by the SCC. The non-gas cost component of rates may not be changed without a formal rate application and corresponding authorization by the SCC in the form of a Commission order; however, the gas cost component of ratesThe Company also bills customers through a SAVE Rider that provides a mechanism to recover on a prospective basis the costs associated with the Company’s expected investment related to the replacement of natural gas distribution pipe and other qualifying projects. As authorized by the SCC, the Company adjusts billed revenues monthly through the application of the WNA model. As the Company's non-gas rates are established based on the 30-year temperature average, monthly fluctuations in temperature from the 30-year average could result in the recognition of more or less revenue than for what the non-gas rates were designed. The WNA authorizes the Company to adjust monthly revenues for the effects of variation in weather from the 30-year average with a corresponding entry to a WNA receivable or WNA payable. At the end of each WNA year, the Company will refundrefunds excess revenue collected for weather that was colder than the 30-year average or bill the customerbills customers for revenue short-fall forresulting from weather that was warmer than normal. As required under the provisions of FASB ASC No. 980,
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 estimated revenue for estimated natural gas delivered to customers but not yet billed during the accounting period based on weather duringperiod. The following month, the periodunbilled estimate is reversed, the actual usage is billed and current and historical data.a new unbilled estimate is calculated. The consolidated financial statements include unbilled revenue of $965,683$1,191,227 and $1,004,061$1,041,518 as of September 30, 20172021 and 2016,2020, respectively.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and subsequent guidance and amendments effective October 1, 2018. The adoption of the ASU did not have a significant effect on the Company's results of operations, financial position or cash flows as the new guidance resulted in essentially no change in the manner and timing in which the Company recognizes revenues. The primary operation of the Company is the sale and/or delivery of natural gas to customers (the performance obligation) based on SCC approved tariff rates (the transaction price). The Company recognizes revenue through billed and unbilled customer usage as natural gas is delivered. The Company also recognizes revenue through ARPs, including the WNA.
Allowance for Doubtful Accounts
- The Company evaluates the collectability of its accounts receivable balances based upon a variety of factors including loss history, level of delinquent account balances, collections on previously written off accounts and general economic conditions. TheThe Company is committed to working with its customers during these difficult times by Company personnel.
Pension and Postretirement Benefits
- The Company offers aIn selecting the discount rate to be used in determining the benefit liability, the Company utilized the Citigroup yield curvesFTSE Pension Discount Curve, which incorporateincorporates 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 3.72%2.73% and 3.69%2.70%, respectively, for valuing its pension plan liability and postretirement plan liability at September 30, 2017.2021. These discount rates increased overrepresent an increase from the prior year by 0.30%2.47% and 0.36%, respectively.2.44% rates used for valuing the corresponding liabilities at September 30, 2020. The riseincrease in discount rates corresponds to the discount rate is evidenced byinflationary pressures and current market conditions as the economy emerges from the impact of COVID. The yield on the 30-year Treasury rate, which increased from 2.32%1.46% last year to 2.86%. However, corporate2.08% at September 30, 2021. Corporate bond rates increased but toexperienced a lesser degree indicating thatsmaller increase as credit spreads among high quality investments narrowed resulting in a smaller discount rate increase. This increaseappear to have narrowed. The rise in the discount rates was the primary driverfactor in the reduction of the accumulated benefit obligation onobligations for both the pension and the postretirement plan. Mortality assumptions were based on the PRI-2012 Mortality Table with generational mortality improvements using Projection Scale MP-2020 for the current year valuation.
Management has continued to focus on reducing risk in the Company's defined benefit plans with a greater emphasis on pension plan risk. In 2016, the Company offered a one-time, lump-sum payout of the pension benefit to vested former employees who were not receiving payments under the plan. In 2017, the Company implemented a "soft freeze" to the pension plan whereby employees hired on or after January 1, 2017 would not be eligible to participate. Employees hired prior to that date continue to accrue benefits based on compensation and years of service. This "soft freeze" mirrored the strategy in 2000 when the Company implemented a similar freeze in its postretirement plan. In October 2020, the Company again offered a one-time lump-sum payout option of deferred pension benefits to those vested terminated employees not currently receiving pension benefits. Lump sum payments of $717,197 were made to those participants that elected this option and reduced corresponding pension liabilities by approximately $965,000. Each of these strategies have served to limit liability growth and reduce volatility.
The riseCompany also has focused on its asset investment strategy. A combination of funding strategy and solid investment returns have allowed pension plan assets to increase by $10.7 million over the last three years, while liabilities increased by $8.8 million during the same period primarily due to a decline in the discount rate for determining the liability from 4.11% at September 30, 2018 to 2.73% at September 30, 2021. As of September 30, 2021, the pension plan nearly offsetis 103% funded compared to 94% funded in the increase in liabilitiesprior year. Future pension liability growth associated with additional creditedparticipant service and salary increases resulting in small increases in bothcompensation is limited to employees hired prior to the accumulated benefit obligation andfreeze. With the projected benefit obligation. The Company usedsoft freeze of the RP-2014 Mortality Table, adjustedpension plan, the portion of the liability attributable to 2006, with generational mortality improvements under Projection Scale MP-2016 foractive eligible employees continuing to accrue benefits has declined from 56% of the current year valuation.
The Company has not made a change in investment allocation for the postretirement plan assets as increasing medical and insurance costs warrant the need for a continued higher allocation to equities for future plan asset growth potential. The postretirement plan assets increased by $2.9 million and liabilities increased by $0.6 million over the last three-year period. As the number of participants in the postretirement plan continue to decline through attrition, 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 by $3,143,000 and $2,406,000, respectively. The combination of higher asset totals and higher discount rate also served to reduce pension and postretirement expense in fiscal 2018.
| Funded status - September 30, 2017 | Pension | Postretirement | Total | ||||||||
| Benefit Obligation | $ | 29,657,347 | $ | 17,666,812 | $ | 47,324,159 | |||||
| Fair value of assets | 26,418,671 | 12,691,162 | 39,109,833 | ||||||||
| Funded status | $ | (3,238,676 | ) | $ | (4,975,650 | ) | $ | (8,214,326 | ) | ||
| Funded status - September 30, 2016 | Pension | Postretirement | Total | ||||||||
| Benefit Obligation | $ | 29,494,950 | $ | 18,504,710 | $ | 47,999,660 | |||||
| Fair value of assets | 23,113,057 | 11,122,783 | 34,235,840 | ||||||||
| Funded status | $ | (6,381,893 | ) | $ | (7,381,927 | ) | $ | (13,763,820 | ) | ||
Funded status - September 30, 2021 | Pension | Postretirement | Total | |||||||||
Benefit Obligation | $ | 37,654,468 | $ | 16,796,849 | $ | 54,451,317 | ||||||
Fair value of assets | 38,914,107 | 15,882,342 | 54,796,449 | |||||||||
Funded status | $ | 1,259,639 | $ | (914,507 | ) | $ | 345,132 | |||||
Funded status - September 30, 2020 | Pension | Postretirement | Total | |||||||||
Benefit Obligation | $ | 39,998,002 | $ | 17,925,409 | $ | 57,923,411 | ||||||
Fair value of assets | 37,657,631 | 14,116,253 | 51,773,884 | |||||||||
Funded status | $ | (2,340,371 | ) | $ | (3,809,156 | ) | $ | (6,149,527 | ) | |||
The variability in interest rates and investment returns create the potential for volatility in the Company's benefit plan liabilities, asset values, funded status and expense. Increasing interest rates would serve to reduce the benefit liabilities but may negatively impact returns on fixed income investments in the short-term, while a decline in interest rates would increase benefit liabilities and provide a short-term boost to fixed income returns. Equity
Management estimates that, under the current provisions of HATFA,regarding defined benefit pension plans, the Company will have no minimum funding requirements next year. Although HATFA and MAP-21 allowHowever, the Company some funding relief, management expects to continue its pension funding plan by contributing at least the minimum annual pension contribution requirement or its expense level for subsequent years. The Company currently expects to contribute approximately $1,600,000$500,000 to its pension plan and $600,000$400,000 to its postretirement plan in fiscal 2018 with a continuing goal to improve both plans' funded status.2022. The Company will continue to evaluate its benefit plan funding levels in light of funding requirements
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.
| Actuarial Assumptions - Pension Plan | Change in Assumption | Increase in Pension Cost | Increase in Projected Benefit Obligation | |||||||
| Discount rate | -0.25 | % | $ | 123,000 | $ | 1,225,000 | ||||
| Rate of return on plan assets | -0.25 | % | 66,000 | N/A | ||||||
| Rate of increase in compensation | 0.25 | % | 53,000 | 292,000 | ||||||
Actuarial Assumptions - Pension Plan | Change in Assumption | Increase in Pension Cost | Increase in Projected Benefit Obligation | |||||||||
Discount rate | -0.25 | % | $ | 143,000 | $ | 1,547,000 | ||||||
Rate of return on plan assets | -0.25 | % | 96,000 | N/A | ||||||||
Rate of increase in compensation | 0.25 | % | 57,000 | 285,000 | ||||||||
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.
| Actuarial Assumptions - Postretirement Plan | Change in Assumption | Increase in Postretirement Benefit Cost | Increase in Accumulated Postretirement Benefit Obligation | |||||||
| Discount rate | -0.25 | % | $ | 1,000 | $ | 747,000 | ||||
| Rate of return on plan assets | -0.25 | % | 29,000 | N/A | ||||||
| Medical claim cost increase | 0.25 | % | 45,000 | 723,000 | ||||||
Actuarial Assumptions - Postretirement Plan | Change in Assumption | Increase in Postretirement Benefit Cost | Increase in Accumulated Postretirement Benefit Obligation | |||||||||
Discount rate | -0.25 | % | $ | 41,000 | $ | 652,000 | ||||||
Rate of return on plan assets | -0.25 | % | 35,000 | N/A | ||||||||
Medical claim cost increase | 0.25 | % | 83,000 | 620,000 | ||||||||
Derivatives
- The Company may hedge certain risks incurred in its operation through the use of derivative instruments. The Company applies the requirements of FASB ASC No. 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 hadItem 7A.Quantitative and liabilities shall be adjusted for the effect of a change in tax lawsQualitative Disclosures About Market Risk.
Not applicable.
Item 8.Financial Statements and rates and the effect of such change shall be included in income from continuing operations for the period that includes the date of enactment. If lower federal corporate tax rates are passed, deferred income taxes at the date of enactment would be reduced and the net benefit or expense would flow through income tax expense. However, for Roanoke Gas, any adjustment to deferred taxes would not be reflected in the income statement. Instead, under the requirements of regulatory accounting, those excess deferred taxes would be reclassified to a regulatory liability to be refunded to the utility's customers, as the Company's non gas rates provided for the recovery of income taxes at a federal tax rate of 34%Supplementary Data. As of September 30, 2017, the Company has a net deferred tax liability of approximately $23,100,000 of which Roanoke Gas represented approximately $23,900,000 of that balance while the unregulated operations of Resources had a net deferred tax asset of $800,000. If a corporate tax rate decrease becomes law, then for every one percent decrease in the federal corporate tax rate, approximately $600,000 would be transferred to a regulatory liability and $20,000 would be reflected as additional income tax expense in comprehensive income. Other proposed tax law changes may have impacts, both favorable or unfavorable, to the Company's tax expense and deferred tax balances. No adjustment will be made to deferred taxes or income tax expense until such time as any proposed tax legislation is signed into law.
RGC Resources, Inc.
Consolidated Financial Statements
for the Years Ended September 30, 2017, 2016
and Report of Independent
Registered Public Accounting Firm
TABLE OF CONTENTS
Page | |
Consolidated Financial Statements for the Years Ended September 30, | |
Board of Directors and Stockholders
RGC Resources, Inc.
Roanoke, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RGC Resources, Inc. and Subsidiaries (“the Company”) as of September 30, 20172021 and 2016,2020, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-yeartwo-year period ended September 30, 2017. RGC Resources, Inc.’s management is responsible2021, 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, 2021 and 2020, and the results of its operations and its cash flows for theseeach of the years in the two-year period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements.statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).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. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit includesof 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements referredthat was communicated or required to above present fairly, in allbe communicated to the audit committee and that: (1) relate to accounts or disclosures that are material respects,to the financial positionstatements and (2) involved our especially challenging, subjective, or complex judgments. The communication of RGC Resources, Inc.critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and Subsidiarieswe are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Equity Method Investment in Mountain Valley Pipeline, LLC (“MVP”)
Description of the matter
As of September 30, 2021, the Company has investments in unconsolidated affiliates of $64.9 million. The majority of this amount, $64.5 million consists of an equity method investment in the Mountain Valley Pipeline, LLC. As discussed in Note 5 to the consolidated financial statements, the Company accounts for its investment in MVP under the equity method because it has the ability to exercise significant influence, but not control, over MVP’s operating and financial policies. The Company reviews the carrying value of its investments in unconsolidated entities for impairment whenever events or changes in circumstances indicate a decline in value. When there is evidence of loss in value that is other than temporary, the Company compares the investment's carrying value to its estimated fair value to determine whether impairment has occurred. The Company evaluated its investment in MVP for impairment and determined the fair value exceeded the carrying value at September 30, 2021. Accordingly, no impairment losses were recorded. The Company contracted a third party valuation specialist to perform a valuation of this investment as of September 30, 20172021.
Auditing management’s evaluation of impairment of the equity investment in MVP was complex due to significant judgment required to determine fair value of the investment. In particular, fair value estimates of the investment in MVP were sensitive to significant assumptions, including discounted cash flows. These assumptions could be affected by factors such as adverse macroeconomic conditions or permit and 2016,litigation matters impacting MVP. Audit procedures performed to evaluate the reasonableness of management’s estimates required a high degree of auditor judgement and increased effort.
How We Addressed the consolidated resultsMatter in our Audit
We obtained an understanding of its operationsthe Company’s equity method investment impairment evaluation process and itssignificant assumptions described above. In order to test this process, we performed audit procedures regarding methodologies utilized, significant assumptions, and underlying data in the analyses for completeness and accuracy. We involved valuation specialists from our firm to assist in reviewing valuation methodology and testing the discount rate assumption.
Audit procedures related to discounted future cash flows for eachincluded, among others, procedures to evaluate cash flows considered in the valuation. We performed procedures to assess management’s consideration of potential changes in legal or regulatory trends and how such developments could impact significant assumptions that influence the in-service dates or viability of the years inproject, and evaluated the three-year period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
 | ||
CERTIFIED PUBLIC ACCOUNTANTS | ||
We have served as the Company's auditor since 2006.
Blacksburg, Virginia
December 2, 2021
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBERSeptember 30, 20172021 AND 2016
2021 | 2020 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 1,518,317 | $ | 291,066 | ||||
Accounts receivable, net | 4,949,900 | 3,404,044 | ||||||
Materials and supplies | 1,031,666 | 1,027,191 | ||||||
Gas in storage | 7,867,470 | 5,708,761 | ||||||
Prepaid income taxes | 3,104,950 | 647,623 | ||||||
Regulatory assets | 5,656,453 | 2,503,314 | ||||||
Other | 1,015,099 | 854,562 | ||||||
Total current assets | 25,143,855 | 14,436,561 | ||||||
UTILITY PROPERTY: | ||||||||
In service | 272,382,539 | 258,342,372 | ||||||
Accumulated depreciation and amortization | (76,038,433 | ) | (71,386,537 | ) | ||||
In service, net | 196,344,106 | 186,955,835 | ||||||
Construction work in progress | 15,305,578 | 11,489,258 | ||||||
Utility plant, net | 211,649,684 | 198,445,093 | ||||||
OTHER ASSETS: | ||||||||
Regulatory assets | 6,769,759 | 10,970,094 | ||||||
Investment in unconsolidated affiliates | 64,867,319 | 57,542,805 | ||||||
Benefit plan assets | 1,259,639 | 0 | ||||||
Other | 418,937 | 284,954 | ||||||
Total other assets | 73,315,654 | 68,797,853 | ||||||
TOTAL ASSETS | $ | 310,109,193 | $ | 281,679,507 | ||||
(Continued)
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 69,640 | $ | 643,252 | |||
| Accounts receivable, net | 3,492,703 | 3,478,983 | |||||
| Materials and supplies | 1,021,191 | 824,139 | |||||
| Gas in storage | 7,701,894 | 7,436,785 | |||||
| Prepaid income taxes | 1,796,825 | 1,550,836 | |||||
| Interest rate swap | 26,777 | — | |||||
| Other | 1,576,574 | 1,548,329 | |||||
| Total current assets | 15,685,604 | 15,482,324 | |||||
| UTILITY PROPERTY: | |||||||
| In service | 204,223,714 | 185,577,286 | |||||
| Accumulated depreciation and amortization | (59,765,987 | ) | (56,156,287 | ) | |||
| In service, net | 144,457,727 | 129,420,999 | |||||
| Construction work in progress | 3,470,244 | 2,707,139 | |||||
| Utility plant, net | 147,927,971 | 132,128,138 | |||||
| OTHER ASSETS: | |||||||
| Regulatory assets | 11,796,260 | 14,332,451 | |||||
| Investment in unconsolidated affiliate | 7,445,106 | 3,496,404 | |||||
| Interest rate swap | 90,066 | — | |||||
| Other | 190,064 | 113,532 | |||||
| Total other assets | 19,521,496 | 17,942,387 | |||||
| TOTAL ASSETS | $ | 183,135,071 | $ | 165,552,849 | |||
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBERSeptember 30, 20172021 AND 2016
2021 | 2020 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current maturities of long-term debt | $ | 7,000,000 | $ | 0 | ||||
Dividends payable | 1,549,841 | 1,428,268 | ||||||
Accounts payable | 7,729,707 | 4,442,182 | ||||||
Capital contributions payable | 2,140,637 | 2,512,437 | ||||||
Customer credit balances | 1,539,680 | 1,587,061 | ||||||
Customer deposits | 1,571,342 | 1,611,476 | ||||||
Accrued expenses | 3,819,977 | 3,565,210 | ||||||
Interest rate swaps | 332,389 | 533,795 | ||||||
Regulatory liabilities | 329,959 | 890,313 | ||||||
Total current liabilities | 26,013,532 | 16,570,742 | ||||||
LONG-TERM DEBT: | ||||||||
Notes payable | 116,110,200 | 114,975,200 | ||||||
Line-of-credit | 17,628,897 | 9,143,606 | ||||||
Less unamortized debt issuance costs | (267,670 | ) | (299,175 | ) | ||||
Long-term debt, net | 133,471,427 | 123,819,631 | ||||||
DEFERRED CREDITS AND OTHER LIABILITIES: | ||||||||
Interest rate swaps | 863,694 | 1,689,761 | ||||||
Asset retirement obligations | 7,628,958 | 7,180,982 | ||||||
Regulatory cost of retirement obligations | 13,640,567 | 12,678,043 | ||||||
Benefit plan liabilities | 949,851 | 6,149,527 | ||||||
Deferred income taxes | 14,948,213 | 13,973,762 | ||||||
Regulatory liabilities | 12,891,242 | 10,729,082 | ||||||
Total deferred credits and other liabilities | 50,922,525 | 52,401,157 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 12) | ||||||||
CAPITALIZATION: | ||||||||
Stockholders’ Equity: | ||||||||
Common Stock, $5 par value; authorized 20,000,000 shares; issued and outstanding 8,375,092 and 8,160,058 shares in 2021 and 2020, respectively | 41,875,460 | 40,800,290 | ||||||
Preferred stock, no par; authorized 5,000,000 shares; no shares issued and outstanding in 2021 and 2020 | 0 | 0 | ||||||
Capital in excess of par value | 19,705,387 | 15,847,121 | ||||||
Retained earnings | 39,656,296 | 35,688,510 | ||||||
Accumulated other comprehensive loss | (1,535,434 | ) | (3,447,944 | ) | ||||
Total stockholders’ equity | 99,701,709 | 88,887,977 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 310,109,193 | $ | 281,679,507 | ||||
| 2017 | 2016 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| CURRENT LIABILITIES: | |||||||
| Line-of-credit | $ | — | $ | 14,556,785 | |||
| Dividends payable | 1,050,281 | 970,244 | |||||
| Accounts payable | 5,122,899 | 5,345,575 | |||||
| Capital contributions payable | 1,055,504 | 287,794 | |||||
| Customer credit balances | 1,220,578 | 1,605,608 | |||||
| Customer deposits | 1,471,960 | 1,627,105 | |||||
| Accrued expenses | 3,006,936 | 3,194,255 | |||||
| Over-recovery of gas costs | 1,438,074 | 909,687 | |||||
| Total current liabilities | 14,366,232 | 28,497,053 | |||||
| LONG-TERM DEBT: | |||||||
| Notes payable | 43,812,200 | 33,896,200 | |||||
| Line-of-credit | 17,791,760 | — | |||||
| Less unamortized debt issuance costs | (291,949 | ) | (260,149 | ) | |||
| Long-term debt net of unamortized debt issuance costs | 61,312,011 | 33,636,051 | |||||
| DEFERRED CREDITS AND OTHER LIABILITIES: | |||||||
| Asset retirement obligations | 6,069,993 | 5,682,556 | |||||
| Regulatory cost of retirement obligations | 10,055,189 | 9,348,443 | |||||
| Benefit plan liabilities | 8,214,326 | 13,763,820 | |||||
| Deferred income taxes | 23,076,848 | 18,957,854 | |||||
| Total deferred credits and other liabilities | 47,416,356 | 47,752,673 | |||||
| COMMITMENTS AND CONTINGENCIES (Note 11) | |||||||
| CAPITALIZATION: | |||||||
| Stockholders’ Equity: | |||||||
| Common Stock, $5 par value; authorized 10,000,000 shares; issued and outstanding 7,240,846 and 7,182,434 shares in 2017 and 2016, respectively | 36,204,230 | 23,941,445 | |||||
| Preferred stock, no par; authorized 5,000,000 shares; no shares issued and outstanding in 2017 and 2016 | — | — | |||||
| Capital in excess of par value | 292,485 | 9,509,548 | |||||
| Retained earnings | 24,746,021 | 24,713,310 | |||||
| Accumulated other comprehensive loss | (1,202,264 | ) | (2,497,231 | ) | |||
| Total stockholders’ equity | 60,040,472 | 55,667,072 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 183,135,071 | $ | 165,552,849 | |||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBERSeptember 30, 2017, 20162021 AND 2015
2021 | 2020 | |||||||
OPERATING REVENUES: | ||||||||
Gas utility | $ | 75,045,103 | $ | 62,408,925 | ||||
Non utility | 129,676 | 666,466 | ||||||
Total operating revenues | 75,174,779 | 63,075,391 | ||||||
OPERATING EXPENSES: | ||||||||
Cost of gas - utility | 35,179,842 | 23,949,481 | ||||||
Cost of sales - non utility | 25,557 | 341,985 | ||||||
Operations and maintenance | 14,476,355 | 16,180,229 | ||||||
General taxes | 2,290,096 | 2,194,789 | ||||||
Depreciation and amortization | 8,424,620 | 7,890,725 | ||||||
Total operating expenses | 60,396,470 | 50,557,209 | ||||||
OPERATING INCOME | 14,778,309 | 12,518,182 | ||||||
Equity in earnings of unconsolidated affiliate | 1,667,554 | 4,814,874 | ||||||
Other income, net | 912,146 | 636,296 | ||||||
Interest expense | 4,051,885 | 4,099,158 | ||||||
INCOME BEFORE INCOME TAXES | 13,306,124 | 13,870,194 | ||||||
INCOME TAX EXPENSE | 3,204,062 | 3,305,660 | ||||||
NET INCOME | $ | 10,102,062 | $ | 10,564,534 | ||||
EARNINGS PER COMMON SHARE: | ||||||||
Basic | $ | 1.22 | $ | 1.30 | ||||
Diluted | $ | 1.22 | $ | 1.30 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
Basic | 8,251,802 | 8,125,938 | ||||||
Diluted | 8,264,904 | 8,146,666 | ||||||
| 2017 | 2016 | 2015 | |||||||||
| OPERATING REVENUES: | |||||||||||
| Gas utilities | $ | 61,252,015 | $ | 58,079,990 | $ | 67,094,290 | |||||
| Other | 1,044,855 | 983,301 | 1,095,317 | ||||||||
| Total operating revenues | 62,296,870 | 59,063,291 | 68,189,607 | ||||||||
| COST OF SALES: | |||||||||||
| Gas utilities | 28,919,625 | 27,009,330 | 37,437,315 | ||||||||
| Other | 568,088 | 489,047 | 545,859 | ||||||||
| Total cost of sales | 29,487,713 | 27,498,377 | 37,983,174 | ||||||||
| GROSS MARGIN | 32,809,157 | 31,564,914 | 30,206,433 | ||||||||
| OTHER OPERATING EXPENSES: | |||||||||||
| Operations and maintenance | 13,100,041 | 13,098,086 | 13,486,885 | ||||||||
| General taxes | 1,786,070 | 1,663,126 | 1,606,421 | ||||||||
| Depreciation and amortization | 6,256,737 | 5,591,610 | 5,106,935 | ||||||||
| Total other operating expenses | 21,142,848 | 20,352,822 | 20,200,241 | ||||||||
| OPERATING INCOME | 11,666,309 | 11,212,092 | 10,006,192 | ||||||||
| Equity in earnings of unconsolidated affiliate | 421,646 | 152,864 | — | ||||||||
| Other expense, net | 132,446 | 255,585 | 228,796 | ||||||||
| Interest expense | 1,917,254 | 1,636,321 | 1,512,419 | ||||||||
| INCOME BEFORE INCOME TAXES | 10,038,255 | 9,473,050 | 8,264,977 | ||||||||
| INCOME TAX EXPENSE | 3,805,390 | 3,666,184 | 3,170,562 | ||||||||
| NET INCOME | $ | 6,232,865 | $ | 5,806,866 | $ | 5,094,415 | |||||
| EARNINGS PER COMMON SHARE: | |||||||||||
| Basic | $ | 0.86 | $ | 0.81 | $ | 0.72 | |||||
| Diluted | $ | 0.86 | $ | 0.81 | $ | 0.72 | |||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||
| Basic | 7,218,686 | 7,149,906 | 7,092,315 | ||||||||
| Diluted | 7,256,046 | 7,159,763 | 7,097,514 | ||||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBERSeptember 30, 2017, 20162021 AND 2015
2021 | 2020 | |||||||
NET INCOME | $ | 10,102,062 | $ | 10,564,534 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Interest rate swaps | 763,003 | (987,076 | ) | |||||
Defined benefit plans | 1,149,507 | 28,049 | ||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 1,912,510 | (959,027 | ) | |||||
COMPREHENSIVE INCOME | $ | 12,014,572 | $ | 9,605,507 | ||||
| 2017 | 2016 | 2015 | |||||||||
| NET INCOME | $ | 6,232,865 | $ | 5,806,866 | $ | 5,094,415 | |||||
| Other comprehensive income, net of tax: | |||||||||||
| Interest rate swaps | 72,489 | — | — | ||||||||
| Defined benefit plans | 1,222,478 | (210,686 | ) | (1,147,219 | ) | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 1,294,967 | (210,686 | ) | (1,147,219 | ) | ||||||
| COMPREHENSIVE INCOME | $ | 7,527,832 | $ | 5,596,180 | $ | 3,947,196 | |||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBERSeptember 30, 2017, 20162021 AND 20152020
Accumulated | ||||||||||||||||||||
Capital in | Other | Total | ||||||||||||||||||
Common | Excess of | Retained | Comprehensive | Stockholders’ | ||||||||||||||||
Stock | Par Value | Earnings | Loss | Equity | ||||||||||||||||
Balance - September 30, 2019 | $ | 40,366,320 | $ | 14,397,072 | $ | 30,821,917 | $ | (2,488,917 | ) | $ | 83,096,392 | |||||||||
Net income | 0 | 0 | 10,564,534 | 0 | 10,564,534 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (959,027 | ) | (959,027 | ) | |||||||||||||
Exercise of stock options (29,992 shares) | 149,960 | 289,548 | 0 | 0 | 439,508 | |||||||||||||||
Stock option grants | 0 | 81,380 | 0 | 0 | 81,380 | |||||||||||||||
Cash dividends declared ($0.70 per share) | 0 | 0 | (5,697,941 | ) | 0 | (5,697,941 | ) | |||||||||||||
Issuance costs | 0 | (147,517 | ) | 0 | 0 | (147,517 | ) | |||||||||||||
Issuance of common stock (56,802 shares) | 284,010 | 1,226,638 | 0 | 0 | 1,510,648 | |||||||||||||||
Balance - September 30, 2020 | $ | 40,800,290 | $ | 15,847,121 | $ | 35,688,510 | $ | (3,447,944 | ) | $ | 88,887,977 | |||||||||
Net income | 0 | 0 | 10,102,062 | 0 | 10,102,062 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 1,912,510 | 1,912,510 | |||||||||||||||
Exercise of stock options (9,250 shares) | 46,250 | 91,551 | 0 | 0 | 137,801 | |||||||||||||||
Stock option grants | 0 | 11,100 | 0 | 0 | 11,100 | |||||||||||||||
Cash dividends declared ($0.74 per share) | 0 | 0 | (6,134,276 | ) | 0 | (6,134,276 | ) | |||||||||||||
Issuance costs | 0 | (116,926 | ) | 0 | 0 | (116,926 | ) | |||||||||||||
Issuance of common stock (205,784 shares) | 1,028,920 | 3,872,541 | 0 | 0 | 4,901,461 | |||||||||||||||
Balance - September 30, 2021 | $ | 41,875,460 | $ | 19,705,387 | $ | 39,656,296 | $ | (1,535,434 | ) | $ | 99,701,709 | |||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||
| Balance - September 30, 2014 | $ | 23,601,890 | $ | 8,237,228 | $ | 21,321,055 | $ | (1,139,326 | ) | $ | 52,020,847 | ||||||||
| Net income | — | — | 5,094,415 | — | 5,094,415 | ||||||||||||||
| Other comprehensive loss | — | — | — | (1,147,219 | ) | (1,147,219 | ) | ||||||||||||
| Exercise of stock options (3,900 shares) | 13,000 | 36,366 | — | — | 49,366 | ||||||||||||||
| Stock option grants | — | 83,640 | — | — | 83,640 | ||||||||||||||
| Cash dividends declared ($0.51 per share) | — | — | (3,643,093 | ) | — | (3,643,093 | ) | ||||||||||||
| Issuance of common stock (27,780 shares) | 92,600 | 290,435 | — | — | 383,035 | ||||||||||||||
| Balance - September 30, 2015 | $ | 23,707,490 | $ | 8,647,669 | $ | 22,772,377 | $ | (2,286,545 | ) | $ | 52,840,991 | ||||||||
| Net income | — | — | 5,806,866 | — | 5,806,866 | ||||||||||||||
| Other comprehensive loss | — | — | — | (210,686 | ) | (210,686 | ) | ||||||||||||
| Exercise of stock options (3,300 shares) | 11,000 | 30,762 | — | — | 41,762 | ||||||||||||||
| Stock option grants | — | 64,640 | — | — | 64,640 | ||||||||||||||
| Cash dividends declared ($0.54 per share) | — | — | (3,865,933 | ) | — | (3,865,933 | ) | ||||||||||||
| Issuance of common stock (66,887 shares) | 222,955 | 766,477 | — | — | 989,432 | ||||||||||||||
| Balance - September 30, 2016 | $ | 23,941,445 | $ | 9,509,548 | $ | 24,713,310 | $ | (2,497,231 | ) | $ | 55,667,072 | ||||||||
| Net income | — | — | 6,232,865 | — | 6,232,865 | ||||||||||||||
| Other comprehensive income | — | — | — | 1,294,967 | 1,294,967 | ||||||||||||||
| Exercise of stock options (11,225 shares) | 50,250 | 91,991 | — | — | 142,241 | ||||||||||||||
| Stock option grants | — | 73,780 | — | — | 73,780 | ||||||||||||||
| Cash dividends declared ($0.58 per share) | — | — | (4,195,910 | ) | — | (4,195,910 | ) | ||||||||||||
| Stock split | 12,029,790 | (10,025,546 | ) | (2,004,244 | ) | — | — | ||||||||||||
| Issuance costs | — | (96,508 | ) | — | — | (96,508 | ) | ||||||||||||
| Issuance of common stock (47,187 shares) | 182,745 | 739,220 | — | — | 921,965 | ||||||||||||||
| Balance - September 30, 2017 | $ | 36,204,230 | $ | 292,485 | $ | 24,746,021 | $ | (1,202,264 | ) | $ | 60,040,472 | ||||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBERSeptember 30, 2017, 20162021 AND 20152020
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 10,102,062 | $ | 10,564,534 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 8,669,977 | 8,126,427 | ||||||
Cost of retirement of utility plant, net | (545,443 | ) | (544,696 | ) | ||||
Stock option grants | 11,100 | 81,380 | ||||||
Equity in earnings of unconsolidated affiliate | (1,667,554 | ) | (4,814,874 | ) | ||||
Allowance for funds used during construction | (55,981 | ) | (330,208 | ) | ||||
Deferred income taxes | 106,188 | 1,122,303 | ||||||
Other noncash items, net | (243,496 | ) | 1,837,089 | |||||
Changes in assets and liabilities which provided (used) cash: | ||||||||
Accounts receivable and customer deposits, net | (1,124,860 | ) | 53,213 | |||||
Inventories and gas in storage | (2,163,184 | ) | 734,237 | |||||
Regulatory and other assets | (6,190,720 | ) | (677,488 | ) | ||||
Accounts payable, customer credit balances and accrued expenses, net | 2,862,861 | 659,276 | ||||||
Regulatory liabilities | 1,807,158 | (3,987,290 | ) | |||||
Total adjustments | 1,466,046 | 2,259,369 | ||||||
Net cash provided by operating activities | 11,568,108 | 12,823,903 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Expenditures for utility property | (19,967,567 | ) | (22,916,339 | ) | ||||
Investment in unconsolidated affiliate | (6,028,760 | ) | (7,864,859 | ) | ||||
Proceeds from disposal of utility property | 147,090 | 60,187 | ||||||
Net cash used in investing activities | (25,849,237 | ) | (30,721,011 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings under line-of-credit | 47,043,566 | 24,341,134 | ||||||
Repayments under line-of-credit | (38,558,275 | ) | (23,370,002 | ) | ||||
Proceeds from issuance of unsecured notes | 8,135,000 | 19,463,000 | ||||||
Debt issuance expenses | (21,545 | ) | (70,750 | ) | ||||
Proceeds from issuance of stock | 4,922,337 | 1,802,639 | ||||||
Cash dividends paid | (6,012,703 | ) | (5,609,195 | ) | ||||
Net cash provided by financing activities | 15,508,380 | 16,556,826 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,227,251 | (1,340,282 | ) | |||||
BEGINNING CASH AND CASH EQUIVALENTS | 291,066 | 1,631,348 | ||||||
ENDING CASH AND CASH EQUIVALENTS | $ | 1,518,317 | $ | 291,066 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 3,886,747 | $ | 3,845,382 | ||||
Income taxes | 3,063,083 | 1,673,000 | ||||||
| 2017 | 2016 | 2015 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 6,232,865 | $ | 5,806,866 | $ | 5,094,415 | |||||
| Adjustments to reconcile net income to net cash provided by operations: | |||||||||||
| Depreciation and amortization | 6,378,368 | 5,709,525 | 5,219,893 | ||||||||
| Cost of retirement of utility plant, net | (354,744 | ) | (449,201 | ) | (406,731 | ) | |||||
| Stock option grants | 73,780 | 64,640 | 83,640 | ||||||||
| Equity in earnings of unconsolidated affiliate | (421,646 | ) | (152,864 | ) | — | ||||||
| Deferred income taxes | 3,325,379 | 4,466,954 | 2,416,841 | ||||||||
| Other noncash items, net | 203,743 | 197,298 | 105,815 | ||||||||
| Changes in assets and liabilities which provided (used) cash: | |||||||||||
| Accounts receivable and customer deposits, net | (191,386 | ) | (258,960 | ) | 638,917 | ||||||
| Inventories and gas in storage | (462,161 | ) | 867,682 | 3,168,056 | |||||||
| Over/under recovery of gas costs | 528,387 | (991,739 | ) | 2,082,257 | |||||||
| Other assets | (956,894 | ) | (398,864 | ) | (768,922 | ) | |||||
| Accounts payable, customer credit balances and accrued expenses, net | (1,374,713 | ) | 60,303 | (873,354 | ) | ||||||
| Total adjustments | 6,748,113 | 9,114,774 | 11,666,412 | ||||||||
| Net cash provided by operating activities | 12,980,978 | 14,921,640 | 16,760,827 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Expenditures for utility property | (20,750,181 | ) | (17,945,719 | ) | (13,780,356 | ) | |||||
| Investment in unconsolidated affiliate | (2,759,346 | ) | (3,055,746 | ) | — | ||||||
| Proceeds from disposal of utility property | 16,972 | 4,964 | 30,082 | ||||||||
| Net cash used in investing activities | (23,492,555 | ) | (20,996,501 | ) | (13,750,274 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Borrowings under line-of-credit | 42,569,303 | 38,310,326 | 34,698,924 | ||||||||
| Repayments under line-of-credit | (39,334,328 | ) | (33,094,539 | ) | (34,402,977 | ) | |||||
| Proceeds from issuance of unsecured notes | 9,916,000 | 3,396,200 | — | ||||||||
| Debt issuance expenses | (64,835 | ) | (101,619 | ) | — | ||||||
| Proceeds from issuance of stock | 967,698 | 1,031,194 | 432,401 | ||||||||
| Cash dividends paid | (4,115,873 | ) | (3,808,683 | ) | (3,603,424 | ) | |||||
| Net cash provided by (used in) financing activities | 9,937,965 | 5,732,879 | (2,875,076 | ) | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (573,612 | ) | (341,982 | ) | 135,477 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 643,252 | 985,234 | 849,757 | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 69,640 | $ | 643,252 | $ | 985,234 | |||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid (refunded) during the year for: | |||||||||||
| Interest | $ | 1,734,178 | $ | 1,480,665 | $ | 1,002,462 | |||||
| Income taxes | 726,000 | (907,000 | ) | 1,266,573 | |||||||
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBERSeptember 30, 2017, 20162021 AND 2015
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 ofThe Company follows accounting and reporting standards established by the Financial Accounting Standards Board (“FASB”)FASB and the Securities and Exchange Commission (“SEC”).
Rate Regulated Basis of Accounting
—The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No.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 FASB ASC No.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 periodRegulatory assets and liabilities included in the Company’s consolidated balance sheets as of September 30, 20172021 and 20162020 are as follows:
| September 30 | ||||||||
| 2017 | 2016 | |||||||
| Regulatory Assets: | ||||||||
| Current Assets: | ||||||||
| Accounts receivable: | ||||||||
| Accrued WNA revenues | $ | 248,840 | $ | 148,663 | ||||
| Other: | ||||||||
| Accrued pension and postretirement medical | 658,786 | 835,704 | ||||||
| Utility Property: | ||||||||
| In service: | ||||||||
| Other | 11,945 | 11,945 | ||||||
| Other Assets: | ||||||||
| Regulatory assets: | ||||||||
| Premium on early retirement of debt | 1,941,182 | 2,055,369 | ||||||
| Accrued pension and postretirement medical | 8,643,524 | 11,460,738 | ||||||
| Other | 1,211,554 | 816,344 | ||||||
| Total regulatory assets | $ | 12,715,831 | $ | 15,328,763 | ||||
| Regulatory Liabilities: | ||||||||
| Current Liabilities: | ||||||||
| Over-recovery of gas costs | $ | 1,438,074 | $ | 909,687 | ||||
| Accrued expenses: | ||||||||
| Over-recovery of SAVE Plan revenues | 215,514 | 238,694 | ||||||
| Deferred Credits and Other Liabilities: | ||||||||
| Asset retirement obligations | 6,069,993 | 5,682,556 | ||||||
| Regulatory cost of retirement obligations | 10,055,189 | 9,348,443 | ||||||
| Total regulatory liabilities | $ | 17,778,770 | $ | 16,179,380 | ||||
September 30 | ||||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Current Assets: | ||||||||
Regulatory assets: | ||||||||
Accrued WNA revenues | $ | 8,104 | $ | 0 | ||||
Under-recovery of gas costs | 5,048,164 | 1,733,718 | ||||||
Under-recovery of SAVE Plan revenues | 305,502 | 108,550 | ||||||
Accrued pension and postretirement medical | 206,679 | 576,731 | ||||||
Other deferred expenses | 88,004 | 84,315 | ||||||
Total current | 5,656,453 | 2,503,314 | ||||||
Utility Property: | ||||||||
In service: | ||||||||
Other | 11,945 | 11,945 | ||||||
Construction work in progress: | ||||||||
AFUDC | 386,189 | 330,208 | ||||||
Other Assets: | ||||||||
Regulatory assets: | ||||||||
Premium on early retirement of debt | 1,484,433 | 1,598,620 | ||||||
Accrued pension and postretirement medical | 5,154,713 | 9,156,546 | ||||||
Other deferred expenses | 130,613 | 214,928 | ||||||
Total non-current | 6,769,759 | 10,970,094 | ||||||
Total regulatory assets | $ | 12,824,346 | $ | 13,815,561 | ||||
Liabilities and Stockholders' Equity: | ||||||||
Current Liabilities: | ||||||||
Regulatory liabilities: | ||||||||
WNA | $ | 0 | $ | 601,784 | ||||
Deferred income taxes | 329,959 | 205,353 | ||||||
Other deferred liabilities | 0 | 83,176 | ||||||
Total current | 329,959 | 890,313 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Asset retirement obligations | 7,628,958 | 7,180,982 | ||||||
Regulatory cost of retirement obligations | 13,640,567 | 12,678,043 | ||||||
Regulatory liabilities: | ||||||||
Deferred income taxes | 12,891,242 | 10,729,082 | ||||||
Total non-current | $ | 34,160,767 | $ | 30,588,107 | ||||
Total regulatory liabilities | $ | 34,490,726 | $ | 31,478,420 | ||||
Amortization of $84,315 and $1,106,511 of regulatory assets for the years ended September 30, 2021 and 2020, respectively, is included in operations and maintenance expense on the consolidated statements of income. See Note 3 for more information.
As of September 30, 2017,2021, the Company had regulatory assets in the amount of $12,703,886$12,812,401 on which the Company did not earn a return during the recovery period. These assets primarily pertain to the net funded position of the Company’s benefit plans related to its regulated operations. As such, the amortization period is not specifically defined.
Utility Plant and Depreciation—Utility plant 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 they significantly improve or extend the original expected useful life of an asset. Expenditures for maintenance, repairs, and minor renewals and betterments are expensed as incurred. The original cost of depreciable property retired is removed from utility plant 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 plant is composed of the following major classes of assets:
| Years Ended September 30 | ||||||||
| 2017 | 2016 | |||||||
| Distribution and transmission | $ | 177,845,619 | $ | 160,354,300 | ||||
| LNG storage | 13,299,288 | 12,594,294 | ||||||
| General and miscellaneous | 13,078,807 | 12,628,692 | ||||||
| Total utility plant in service | $ | 204,223,714 | $ | 185,577,286 | ||||
September 30 | ||||||||
2021 | 2020 | |||||||
Distribution and transmission | $ | 241,493,911 | $ | 227,753,620 | ||||
LNG storage | 14,966,584 | 14,798,453 | ||||||
General and miscellaneous | 15,922,044 | 15,790,299 | ||||||
Total utility plant in service | $ | 272,382,539 | $ | 258,342,372 | ||||
Provisions for depreciation are computed principally at composite straight-line rates over periods ranging from 5 to 76 years.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 Company completed its last depreciation study was completed and approved by the SCC staff in June 2014.fiscal 2019. The Company will be required to complete a new depreciation study no later than fiscal 2024. The composite weighted-average depreciation rate realized using the most recently completed depreciation study was 3.29%3.28% and 3.30% for the fiscal yearyears ended September 30, 20172021 and 3.25% for the fiscal years ended September 30, 2016 and 2015.
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. RetirementThese retirement costs are not a legal obligation but rather the result of cost-based regulation and are accounted for under the provisions of FASB ASC No.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 will interconnect with the MVP. This treatment allows capitalizing both the equity and debt financing costs during the construction phases. For the years ended September 30, 2021, and 2020, the Company capitalized $14,003 and $81,629 of debt financing costs and $41,978 and $248,579 of equity financing costs, respectively, thereby affecting the interest expense and other income, net lines of the related consolidated statements of income. See Note 3 for further information.
Asset Retirement Obligations
—FASB ASC No.410,Asset Retirement and Environmental Obligations, requires entities to record the fair value of a liability for anThe Company’s composite depreciation rates include a component to provide for the cost of retirement of assets. As a result, the Company accrues the estimated cost of retirement of its utility plant through depreciation expense and creates a corresponding regulatory liability. The costs of retirement considered in the development of the depreciation component include those costs associated with the legal liability. Therefore, the asset retirement obligationARO is reclassified from the regulatory cost of retirement obligation. If the legal obligations were to exceed the regulatory liability provided for in the depreciation rates, the Company would establish a regulatory asset for such difference with the anticipation of future recovery through rates charged to customers. In 2017, the Company increased its asset retirement obligation to reflect revisions to the estimated cash flows for asset retirements.
The following is a summary of the asset retirement obligation:
| Years Ended September 30 | ||||||||
| 2017 | 2016 | |||||||
| Beginning balance | $ | 5,682,556 | $ | 5,295,868 | ||||
| Liabilities incurred | 65,556 | 85,263 | ||||||
| Liabilities settled | (137,304 | ) | (176,090 | ) | ||||
| Accretion | 312,503 | 310,568 | ||||||
| Revisions to estimated cash flows | 146,682 | 166,947 | ||||||
| Ending balance | $ | 6,069,993 | $ | 5,682,556 | ||||
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Beginning balance | $ | 7,180,982 | $ | 6,788,683 | ||||
Liabilities incurred | 214,533 | 165,524 | ||||||
Liabilities settled | (160,064 | ) | (150,345 | ) | ||||
Accretion | 393,507 | 377,120 | ||||||
Ending balance | $ | 7,628,958 | $ | 7,180,982 | ||||
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 theCustomer Receivables and Allowance for Doubtful Accounts
—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.Due to the impact of COVID-19 on businesses and individuals, customer delinquent and past due balances increased significantly over the last two years. The allowance for doubtful accounts disclosed below has been adjusted to reflect the impact of $859,000 in pending ARPA funds. Without the ARPA and CARES Act funds, the allowance for doubtful accounts would have been more than $1 million as of September 30, 2021. See Notes 3 and 15 for additional information.
A reconciliation of changes in the allowance for doubtful accounts is as follows:
| Years Ended September 30 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Beginning balance | $ | 76,934 | $ | 52,721 | $ | 70,747 | ||||||
| Provision for doubtful accounts | 84,587 | 14,074 | 87,908 | |||||||||
| Recoveries of accounts written off | 110,725 | 137,055 | 139,282 | |||||||||
| Accounts written off | (172,790 | ) | (126,916 | ) | (245,216 | ) | ||||||
| Ending balance | $ | 99,456 | $ | 76,934 | $ | 52,721 | ||||||
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Beginning balance | $ | 703,140 | $ | 110,743 | ||||
Provision for doubtful accounts | (400,614 | ) | 556,112 | |||||
Recoveries of accounts written off | 88,893 | 139,113 | ||||||
Accounts written off | (149,409 | ) | (102,828 | ) | ||||
Ending balance | $ | 242,010 | $ | 703,140 | ||||
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,Inventories
—Unbilled Revenues
—The Company bills its natural gas customers on a monthly cycle; however, the billing cycleIncome 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 consolidated 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’sFair 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:• | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
• | Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• | Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity which require the Company to develop its own assumptions. |
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1)1) and the lowest priority to unobservable inputs (Level 3)3). All fair value disclosures are categorized within one of the three categories in the hierarchy. See fair value disclosures below and in Notes 89 and 12.
Use of Estimates
—The preparation of consolidated financial statements in conformity withExcise 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 accounted for on a net basis and therefore are not included as revenues in the Company’sEarnings Per Share—Basic earnings per shareEPS and diluted earnings per shareEPS 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 dilutive potential common shares, respectively. Dilutive potential 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. A reconciliation of basic and diluted earnings per shareEPS is presented below:
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Net Income | $ | 10,102,062 | $ | 10,564,534 | ||||
Weighted-average common shares | 8,251,802 | 8,125,938 | ||||||
Effect of dilutive securities: | ||||||||
Options to purchase common stock | 13,102 | 20,728 | ||||||
Diluted average common shares | 8,264,904 | 8,146,666 | ||||||
Earnings Per Share of Common Stock: | ||||||||
Basic | $ | 1.22 | $ | 1.30 | ||||
Diluted | $ | 1.22 | $ | 1.30 | ||||
| Years Ended September 30 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net Income | $ | 6,232,865 | $ | 5,806,866 | $ | 5,094,415 | ||||||
| Weighted-average common shares | 7,218,686 | 7,149,906 | 7,092,315 | |||||||||
| Effect of dilutive securities: | ||||||||||||
| Options to purchase common stock | 37,360 | 9,857 | 5,199 | |||||||||
| Diluted average common shares | 7,256,046 | 7,159,763 | 7,097,514 | |||||||||
| Earnings Per Share of Common Stock: | ||||||||||||
| Basic | $ | 0.86 | $ | 0.81 | $ | 0.72 | ||||||
| Diluted | $ | 0.86 | $ | 0.81 | $ | 0.72 | ||||||
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 or amounted to more than 5% of total accounts receivable.
Roanoke Gas currently holds the only franchises and certificates of public convenience and necessityCPCNs to distribute natural gas in its service area. These franchises are effective through January 1,2036. The Company's current certificates of public convenience and necessityCPCNs in Virginia are exclusive and are intended for perpetual duration.
Roanoke Gas is served directly by two primary pipelines that provide all of the natural gas supplied to the Company’s customers. Depending upon weather conditions and the level of customer demand, failure of one or both of these transmission pipelines could have a major adverse impact on the Company.
Derivative and Hedging Activities
—FASB ASC No.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 RGC Resources, Inc. hedgesthe Company may hedge against include the price of natural gas and the cost of borrowed funds.
The Company historically 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 sheetsheets with the offsetting entry to either under-recovery of gas costsunder- 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, 20172021 and 2016,2020, the Company had no outstanding derivative instruments for the purchase of natural gas.
The Company had onehas five interest rate swapswaps associated with its $7,000,000variable rate debt. Roanoke Gas has a swap on its $7 million term note with Branch Banking & Trust as discussed in Note 6. Effective November 1, 2017, the swap agreementthat effectively converts the floatingvariable interest rate note based on LIBOR into a fixed rate debt with a 2.30% effectivefixed interest rate. TheDuring fiscal 2021, Roanoke Gas entered into two delayed draw variable-rate term notes in the amounts of $15 million and $10 million, with corresponding swap qualifiesagreements to convert the variable interest rates into fixed rates of 2.00% and 2.49%, respectively. Proceeds associated with the delayed draw notes were not received during the current fiscal year; therefore, the swaps associated with those notes were not effective during fiscal 2021. Midstream has two variable-rate term notes in the amount of $14 million and $10 million with corresponding swap agreements to convert the variable interest rates into fixed rates of 3.24% and 3.14%, respectively. All swaps qualify as a cash flow hedge with changes in fair value reported in other comprehensive income. Any cash flows from interest rate swaps are classified as interest expense. No portion of the swap wasswaps were deemed ineffective during the period.
See Notes 7 and its corresponding classification in the consolidated balance sheets.
| September 30 | |||||||
| 2017 | 2016 | ||||||
| Derivatives designated as hedging instruments: | |||||||
| Current assets: | |||||||
| Interest rate swap | $ | 26,777 | $ | — | |||
| Other assets: | |||||||
| Interest rate swap | $ | 90,066 | $ | — | |||
| Total derivatives designated as hedging instruments | $ | 116,843 | $ | — | |||
Non-Cash Activity —A non-cash increase in investmentdecrease in unconsolidated affiliate and corresponding increasedecrease in capital contributions payable of $767,710$371,800 and $287,794$2,512,387 occurred for the fiscal years ended September 30, 20172021 and 2016,2020, respectively.
Other Comprehensive Income (Loss)
—A summary of other comprehensive income is provided below:Before Tax Amount | Tax (Expense) or Benefit | Net of Tax Amount | ||||||||||
| Year Ended September 30, 2017: | ||||||||||||
| Interest rate swap: | ||||||||||||
| Unrealized gains | $ | 116,843 | $ | (44,354 | ) | $ | 72,489 | |||||
| Net interest rate swap | 116,843 | (44,354 | ) | 72,489 | ||||||||
| Defined benefit plans: | ||||||||||||
| Net gain arising during period | $ | 1,715,505 | $ | (651,892 | ) | $ | 1,063,613 | |||||
| Amortization of actuarial losses | 256,234 | (97,369 | ) | 158,865 | ||||||||
| Net defined benefit plans | 1,971,739 | (749,261 | ) | 1,222,478 | ||||||||
| Other comprehensive income | $ | 2,088,582 | $ | (793,615 | ) | $ | 1,294,967 | |||||
| Year Ended September 30, 2016: | ||||||||||||
| Defined benefit plans: | ||||||||||||
| Net loss arising during period | $ | (560,887 | ) | $ | 213,137 | $ | (347,750 | ) | ||||
| Amortization of actuarial losses | 221,070 | (84,006 | ) | 137,064 | ||||||||
| Net defined benefit plans | (339,817 | ) | 129,131 | (210,686 | ) | |||||||
| Other comprehensive loss | $ | (339,817 | ) | $ | 129,131 | $ | (210,686 | ) | ||||
| Year Ended September 30, 2015: | ||||||||||||
| Defined benefit plans: | ||||||||||||
| Net loss arising during period | (1,910,573 | ) | 726,017 | (1,184,556 | ) | |||||||
| Amortization of actuarial losses | 60,221 | (22,884 | ) | 37,337 | ||||||||
| Net defined benefit plans | (1,850,352 | ) | 703,133 | (1,147,219 | ) | |||||||
| Other comprehensive loss | $ | (1,850,352 | ) | $ | 703,133 | $ | (1,147,219 | ) | ||||
Tax | ||||||||||||
Before Tax | (Expense) | Net of Tax | ||||||||||
Amount | or Benefit | Amount | ||||||||||
Year Ended September 30, 2021: | ||||||||||||
Interest rate swaps: | ||||||||||||
Unrealized gains | $ | 473,880 | $ | (121,978 | ) | $ | 351,902 | |||||
Transfer of realized losses to interest expense | 553,593 | (142,492 | ) | 411,101 | ||||||||
Net interest rate swaps | 1,027,473 | (264,470 | ) | 763,003 | ||||||||
Defined benefit plans: | ||||||||||||
Net gains arising during period | $ | 1,467,879 | $ | (377,832 | ) | $ | 1,090,047 | |||||
Amortization of actuarial losses | 80,069 | (20,609 | ) | 59,460 | ||||||||
Net defined benefit plans | 1,547,948 | (398,441 | ) | 1,149,507 | ||||||||
Other comprehensive income | $ | 2,575,421 | $ | (662,911 | ) | $ | 1,912,510 | |||||
Year Ended September 30, 2020: | ||||||||||||
Interest rate swaps: | ||||||||||||
Unrealized losses | $ | (1,594,126 | ) | $ | 410,328 | $ | (1,183,798 | ) | ||||
Transfer of realized losses to interest expense | 264,911 | (68,189 | ) | 196,722 | ||||||||
Net interest rate swaps | (1,329,215 | ) | 342,139 | (987,076 | ) | |||||||
Defined benefit plans: | ||||||||||||
Net loss arising during period | $ | (52,669 | ) | $ | 13,557 | $ | (39,112 | ) | ||||
Amortization of actuarial losses | 90,441 | (23,280 | ) | 67,161 | ||||||||
Net defined benefit plans | 37,772 | (9,723 | ) | 28,049 | ||||||||
Other comprehensive loss | $ | (1,291,443 | ) | $ | 332,416 | $ | (959,027 | ) | ||||
The amortization of actuarial gains or losses isare included as a component of net periodic pension and postretirement benefit costs in operations and maintenance expense.
Composition of Accumulated Other Comprehensive Income (Loss):AOCI:
Interest Rate Swaps | Defined Benefit Plans | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance September 30, 2019 | $ | (664,137 | ) | $ | (1,824,780 | ) | $ | (2,488,917 | ) | |||
Other comprehensive income (loss) | (987,076 | ) | 28,049 | (959,027 | ) | |||||||
Balance September 30, 2020 | (1,651,213 | ) | (1,796,731 | ) | (3,447,944 | ) | ||||||
Other comprehensive income | 763,003 | 1,149,507 | 1,912,510 | |||||||||
Balance September 30, 2021 | $ | (888,210 | ) | $ | (647,224 | ) | $ | (1,535,434 | ) | |||
Interest Rate Swaps | Defined Benefit Plans | Accumulated Other Comprehensive Income (Loss) | ||||||||||
| Balance September 30, 2014 | $ | — | $ | (1,139,326 | ) | $ | (1,139,326 | ) | ||||
| Other comprehensive income (loss) | — | (1,147,219 | ) | (1,147,219 | ) | |||||||
| Balance September 30, 2015 | — | (2,286,545 | ) | (2,286,545 | ) | |||||||
| Other comprehensive income (loss) | — | (210,686 | ) | (210,686 | ) | |||||||
| Balance September 30, 2016 | — | (2,497,231 | ) | (2,497,231 | ) | |||||||
| Other comprehensive income (loss) | 72,489 | 1,222,478 | 1,294,967 | |||||||||
| Balance September 30, 2017 | $ | 72,489 | $ | (1,274,753 | ) | $ | (1,202,264 | ) | ||||
Recently Adopted Accounting Standards
In November 2015, February 2016, the FASB issued ASU 2015-17,
The Company adopted ASU 2016-02 and related guidance effective October 1, 2019. At the time of adoption, the Company had one operating lease. This lease, which was renewed in fiscal 2021, calls for monthly payments in the amount of $1,100 and is permitted. Management has not completed its evaluationset to expire in September 2025. As the value of the new guidance. However,this lease obligation was determined to be de minimis and the Company has completed its inventory of leases and does not currently expect the entered into any additional lease obligations, this new guidance todoes not have a material effect on itsthe Company's financial position, results of operations or cash flows.
In MarchAugust 2017, the FASB issued ASU 2017-07,
In August 2018, the FASB issued ASU 2018-15,Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU reduces the complexity of accounting for costs of implementing a cloud computing service arrangement and aligns the following requirements to capitalize implementation costs: 1) those incurred in a hosting arrangement that is a service contract, and 2) those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal software license. The Company adopted the new guidance effective October 1, 2019. The new guidance did not have a material effect on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14,Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The Company adopted the new guidance effective October 1, 2020. The new guidance did not have a material effect on the Company's consolidated financial statements.
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 2021-01, 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, 2022. The Intercontinental Exchange (ICE) 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 will cease publication in June 2023 and that no new financial contracts may use LIBOR after December 31, 2021. Currently, all of the Company's LIBOR based financial contracts are based on the one-month LIBOR rate. None of the holders of these financial contracts have indicated when a transition from LIBOR will occur. Accordingly, the Company does not anticipate adopting this guidance until fiscal 2022. The new guidance could result in a significant impact on the Company's financial position, results of operations, and cash flows when the reference rate is changed for related contracts.
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.
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 Directors approved a three-for-two stock splitRoanoke 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:
2021 | ||||||||||||
Gas utility | Non-utility | Total operating revenues | ||||||||||
Natural Gas (Billed and Unbilled): | ||||||||||||
Residential | $ | 43,108,790 | $ | 0 | $ | 43,108,790 | ||||||
Commercial | 25,217,030 | 0 | 25,217,030 | |||||||||
Industrial and Transportation | 4,973,885 | 0 | 4,973,885 | |||||||||
Other | 429,397 | 129,676 | 559,073 | |||||||||
Total contracts with customers | 73,729,102 | 129,676 | 73,858,778 | |||||||||
Alternative Revenue Programs | 1,316,001 | 0 | 1,316,001 | |||||||||
Total operating revenues | $ | 75,045,103 | $ | 129,676 | $ | 75,174,779 | ||||||
2020 | ||||||||||||
Gas utility | Non-utility | Total operating revenues | ||||||||||
Natural Gas (Billed and Unbilled): | ||||||||||||
Residential | $ | 37,022,219 | $ | 0 | $ | 37,022,219 | ||||||
Commercial | 18,387,674 | 0 | 18,387,674 | |||||||||
Industrial and Transportation | 5,188,069 | 0 | 5,188,069 | |||||||||
Other | 489,943 | 666,466 | 1,156,409 | |||||||||
Total contracts with customers | 61,087,905 | 666,466 | 61,754,371 | |||||||||
Alternative Revenue Programs | 1,321,020 | 0 | 1,321,020 | |||||||||
Total operating revenues | $ | 62,408,925 | $ | 666,466 | $ | 63,075,391 | ||||||
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 created under these tariff-based sales include commodity (the cost of natural gas sold to customers) and delivery (transporting natural gas through the Company’s distribution system to customers). The delivery of natural gas to customers results in the satisfaction of the Company'sCompany’s respective performance obligations over time.
All customers are billed monthly based on consumption as measured by metered usage. Revenue is recognized as bills are issued and outstanding common stock. The stock split was effectedfor 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 form of a 50% stock dividend entitling each shareholdertransaction price.
Unbilled revenue is included in residential and commercial revenues in the preceding table. Natural gas consumption is estimated for the period subsequent to receive one additional share of common stock for every two shares owned. The stock dividend was payable March 1, 2017 to shareholders of record on February 15, 2017. As the par valuelast billed date and up through the last day of the common stock remainedmonth. Estimated volumes and approved tariff rates are utilized to calculate unbilled revenue. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The Company obtains metered usage for industrial customers at $5 per share,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. Regarding these activities, the customer is invoiced monthly based on services provided. 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, and 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. These amounts are ultimately collected from, or returned to, customers through future rate changes approved by the SCC.
Customer Accounts Receivable
Accounts receivable, as reflected in the condensed consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below:
Current Assets | Current Liabilities | |||||||||||||||
Trade accounts receivable (1) | Unbilled revenue (1) | Customer credit balances | Customer deposits | |||||||||||||
September 30, 2020 | $ | 2,343,492 | $ | 1,041,518 | $ | 1,587,061 | $ | 1,611,476 | ||||||||
September 30, 2021 | 3,722,916 | 1,191,227 | 1,539,680 | 1,571,342 | ||||||||||||
Increase (decrease) | $ | 1,379,424 | $ | 149,709 | $ | (47,381 | ) | $ | (40,134 | ) | ||||||
(1)Included in "Accounts receivable, net" in the consolidated balance sheet. Amounts shown net of reserve for bad debts. |
The Company had no significant contract assets or liabilities during the period. Furthermore, the Company reclassified $10,025,546 from "Capital in excess of par value" and $2,004,244 from "Retained earnings"did not incur any significant costs to "Common stock" associated with the issuance of 2,405,958 shares. Corresponding prior year amounts of share and per share data have been restated retrospectively to reflect the 50% stock dividend.
3. | |
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 accounting and depreciation.
In May 2021, Roanoke Gas filed with the SCC its most recent SAVE (Stepsapplication with the SCC to Advance Virginia's Energy) Plan and Rider. Theupdate the SAVE Plan provides a mechanismRider for the period October 2021 through September 2022. The application requested the continued recovery of pre-1973 plastic pipe replacement costs, as well as inclusion of the replacement of several regulator stations and pre-1971 coated steel pipe as qualifying projects. On August 25, 2021, the SCC issued its final order that approved the Company's requested $3.25 million in annual revenue, which is a $1.1 million increase over the existing SAVE Rider rates.
On January 24, 2020, the SCC issued its final order on the general rate application. Under the provisions of this order, Roanoke Gas was granted an annualized non-gas rate increase of $7.25 million and provided for a 9.44% return on equity. In March 2020, the Company completed the refund of $3.8 million for revenues collected from the interim rates in excess of the final approved rates, including interest.
The final order did not provide for a return on Roanoke Gas infrastructure investments associated with two gate stations that will interconnect with the MVP; however, the order did provide for the ability to recoverdefer financing costs related to these investments for consideration of future recovery. The Company is deferring these costs through the application of AFUDC, which capitalizes both the equity and debt financing costs during the construction phases. Roanoke Gas applied AFUDC treatment retroactively to January 1, 2019, the date new non-gas rates became effective. The January 1, 2019 date was affirmed by the SCC in its October 1, 2020 order in the Company’s 2019 annual informational filing docket. Amounts capitalized are disclosed in the Utility Plant and Depreciation section of Note 1.
In 2020, Roanoke Gas accelerated amortization of the remaining balance of its ESAC assets. This acceleration was the result of the Company's preliminary earnings test for fiscal 2020. The SCC requires regulated utilities with certain regulatory assets to perform and submit an annual earnings test. Specific to ESAC assets, if the results indicate that earnings exceed the mid-point of its authorized return on equity range, the Company must write-down certain regulatory assets to the point where the actual return for the period falls to the mid-point. As Roanoke Gas' fiscal 2020 unadjusted earnings exceeded the mid-point, the Company accelerated amortization of the related depreciationESAC assets.
The service disconnection moratorium, under which the Company has been operating since March 16, 2020 in response to COVID-19, expired August 30, 2021. During the moratorium utilities were prohibited from disconnecting customers for non-payment and expenses and return on rate basefrom assessing late payment fees; therefore, residential customers that ordinarily would have been disconnected for non-payment continued incurring charges for gas service. As a result, the Company's arrearage balances were at historic levels prior to the application of the CARES Act funds and pending application of the ARPA funds.
In December 2020, Roanoke Gas received $403,000 in CARES Act funds and was able to apply the funds to eligible customer accounts.
The Company applied for ARPA funds to assist its customers with their arrearages. On October 28, 2021, Roanoke Gas received SCC communication that it had qualified for and will receive ARPA funds in the amount of $858,556 pursuant to Chapter 1 of the 2021 Virginia Acts of Assembly, Special Session II. The Company's arrearage balances will be favorably impacted when these funds are received and applied to customer accounts in early fiscal 2022. See Note 15 for additional capital investment without information.
In April 2020, the filingSCC issued an order allowing regulated utilities in Virginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and to apply for recovery at a future date. Roanoke Gas deferred $217,000 in COVID-19 related costs during fiscal 2021; however, due to preliminary earnings results that were outside of a formal application for an increase in non-gas base rates. Under the current application,authorized range, the Company submittedreversed the regulatory asset and recognized the COVID-19 related costs as expense in the fourth quarter of fiscal 2021.
4. | 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 chief operating decision maker 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 report for collecting the shortfall in SAVE revenues collected under the 2016 SAVE Plantariff rates and proposed new 2018 SAVE rates to be implementedother regulatory mechanisms through which it provides for the ongoing investment in SAVE Plan projects. On September 28, 2017, the Company received approval of its application to implement the new 2018 SAVE rates related to proposed qualifying SAVE investments in calendar 2018. The SCC also approved the True-Up factor to provide collection on the remaining under-collected 2016 SAVE Plan for a modification to the SAVE Plansale and Rider.
Investment in Affiliates - The investment in affiliates segment reflects the Federal Energy Regulatory Commission issuedincome generated through the Certificateactivities of Public Conveniencethe Company's investment in MVP and Necessity subjectSouthgate projects.
Parent and Other - Parent and other include the unregulated activities of the Company as well as certain corporate eliminations.
Information related to certain conditions and requirements. With FERC approval,the segments of the Company are provided below:
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
For the Year Ended September 30, 2021: | ||||||||||||||||
Operating revenues | $ | 75,045,103 | $ | 0 | $ | 129,676 | $ | 75,174,779 | ||||||||
Depreciation | 8,424,620 | 0 | 0 | 8,424,620 | ||||||||||||
Operating income (loss) | 14,955,375 | (267,391 | ) | 90,325 | 14,778,309 | |||||||||||
Equity in earnings | 0 | 1,667,554 | 0 | 1,667,554 | ||||||||||||
Interest expense | 2,812,107 | 1,239,778 | 0 | 4,051,885 | ||||||||||||
Income before income taxes | 13,043,470 | 171,861 | 90,793 | 13,306,124 | ||||||||||||
As of September 30, 2021: | ||||||||||||||||
Total assets | $ | 231,737,427 | $ | 65,686,376 | $ | 12,685,390 | $ | 310,109,193 | ||||||||
Gross additions to utility property | 19,967,567 | 0 | 0 | 19,967,567 | ||||||||||||
Gross investment in MVP and Southgate | 0 | 6,028,760 | 0 | 6,028,760 | ||||||||||||
Gas Utility | Investment in Affiliates | Parent and Other | Consolidated Total | |||||||||||||
For the Year Ended September 30, 2020: | ||||||||||||||||
Operating revenues | $ | 62,408,925 | $ | 0 | $ | 666,466 | $ | 63,075,391 | ||||||||
Depreciation | 7,890,725 | 0 | 0 | 7,890,725 | ||||||||||||
Operating income (loss) | 12,429,613 | (220,194 | ) | 308,763 | 12,518,182 | |||||||||||
Equity in earnings | 0 | 4,814,874 | 0 | 4,814,874 | ||||||||||||
Interest expense | 2,730,822 | 1,368,336 | 0 | 4,099,158 | ||||||||||||
Income before income taxes | 10,350,946 | 3,233,233 | 286,015 | 13,870,194 | ||||||||||||
As of September 30, 2020: | ||||||||||||||||
Total assets | $ | 211,994,364 | $ | 57,660,105 | $ | 12,025,038 | $ | 281,679,507 | ||||||||
Gross additions to utility property | 22,916,339 | 0 | 0 | 22,916,339 | ||||||||||||
Gross investment in MVP and Southgate | 0 | 7,864,859 | 0 | 7,864,859 | ||||||||||||
5. | OTHER INVESTMENTS |
Midstream is an approximately 1% equity investment owner of the LLC constructing the MVP. Due to various legal and regulatory delays, the LLC changed its approach in seeking authorization to cross all remaining streams and wetlands on the project route. It requested individual permits from the U.S. Army Corps of Engineers to cross certain streams and wetlands utilizing open cut techniques and has applied to amend the MVP project's CPCN to seek FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. The LLC is targeting a full in-service date for the MVP project in summer 2022 at a total project cost of approximately $6.2 billion, with Midstream's total cash contribution expected to approach $65 million.
The LLC temporarily suspended accruing AFUDC on the project beginning January 1, 2021 and through March 31, 2021 due to a temporary reduction in growth construction activities. The LLC resumed accruing AFUDC beginning April 1, 2021 associated with certain growth construction activities resuming. The amount of AFUDC recognized during the current and prior years is included in the tables below.
Roanoke Gas will continue to suspend accruing AFUDC on its two gate stations that will interconnect with the processMVP until such time as construction activities resume on the respective gate stations. Roanoke Gas recognized $55,981 of obtainingAFUDC associated with these gate stations during the necessary approvals and permits from other federal and state government agencies. Assuming no significant delaysfirst fiscal quarter ended December 31, 2020.
In April 2018, the LLC announced the MVP Southgate project. Midstream is a less than 1% investor in the permitting process,project, which is being accounted for under the pipeline is expected to be in service by late 2018.
Funding for Midstream's investments in the LLC will require a total estimated cash investment of approximately $35 million, provided by periodic capital contributions throughoutfor both the designMVP and construction phases of the project. Midstream held an approximate $7.4 million equity method investment in the LLC at September 30, 2017. Initial funding for Midstream's investment in the LLCSouthgate projects is being provided through two variable rate unsecured Promissory Notes, each withpromissory notes, under a 5-year term, as further describednon-revolving credit agreement maturing in December 2022, and two additional notes issued in June 2019. See Note 6 below.
The Company will participate in the earnings generated from the transportation of natural gas through the pipeline in proportionboth pipelines proportionate to its level of investment.
Midstream utilized a third-party business valuation specialist to assist in Management's assessment of the MVP investment in accordance with ASC 323,Investments - Equity Method and Joint Ventures. As a result of its evaluation, including consideration of the valuation specialist's report, management has concluded that the investment is not currently impaired as of September 30, 2021. Furthermore, the LLC has conducted its own evaluation of the project and has also concluded that 0 impairment exists as of September 30, 2021. Management will continue monitoring the status of the project for circumstances that may lead to future impairment, including any significant delays or denials of necessary permits and approvals. If necessary, the amount and timing of any future impairment would be dependent on the specific circumstances at the time of evaluation.
The investments in the LLC are included in the consolidated financial statements as follows:
September 30 | ||||||||
Balance Sheet location: | 2021 | 2020 | ||||||
Other Assets: | ||||||||
MVP | $ | 64,462,194 | $ | 57,183,063 | ||||
Southgate | 405,125 | 359,742 | ||||||
Investment in unconsolidated affiliates | $ | 64,867,319 | $ | 57,542,805 | ||||
Current Liabilities: | ||||||||
MVP | $ | 2,139,696 | $ | 2,501,883 | ||||
Southgate | 941 | 10,554 | ||||||
Capital contributions payable | $ | 2,140,637 | $ | 2,512,437 | ||||
| September 30 | ||||||||||||
| Balance Sheet Location of Other Investments: | 2017 | 2016 | ||||||||||
| Other Assets: | ||||||||||||
| Investment in unconsolidated affiliate | $ | 7,445,106 | $ | 3,496,404 | ||||||||
| Current Liabilities: | ||||||||||||
| Capital contributions payable | $ | 1,055,504 | $ | 287,794 | ||||||||
| For the Years ended September 30 | ||||||||||||
| Income Statement Location of Other Investments: | 2017 | 2016 | 2015 | |||||||||
| Equity in earnings of unconsolidated affiliate | $ | 421,646 | $ | 152,864 | $ | — | ||||||
Years Ended September 30 | ||||||||
Income Statement location: | 2021 | 2020 | ||||||
Equity in earnings of unconsolidated affiliate | $ | 1,667,554 | $ | 4,814,874 | ||||
September 30 | ||||||||
2021 | 2020 | |||||||
Undistributed earnings, net of income taxes, of MVP in retained earnings | $ | 8,081,027 | $ | 6,842,702 | ||||
The change in the investment in unconsolidated affiliates is provided below:
September 30 | ||||||||
2021 | 2020 | |||||||
Cash investment | $ | 6,028,760 | $ | 7,864,859 | ||||
Change in accrued capital calls | (371,800 | ) | (2,512,387 | ) | ||||
Equity in earnings of unconsolidated affiliate | 1,667,554 | 4,814,874 | ||||||
Change in investment in unconsolidated affiliates | $ | 7,324,514 | $ | 10,167,346 | ||||
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 | ||||||||
2021 | 2020 | |||||||
AFUDC | $ | 165,048,237 | $ | 479,586,911 | ||||
Net other income (expense) | (388,436 | ) | 714,128 | |||||
Net income | $ | 164,659,801 | $ | 480,301,039 | ||||
Balance Sheets | ||||||||
September 30 | ||||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Current assets | $ | 208,961,113 | $ | 513,713,429 | ||||
Construction work in progress | 6,281,991,035 | 5,536,248,668 | ||||||
Other assets | 980,410 | 4,597,441 | ||||||
Total assets | $ | 6,491,932,558 | $ | 6,054,559,538 | ||||
Liabilities and Equity: | ||||||||
Current liabilities | $ | 200,441,027 | $ | 187,581,804 | ||||
Noncurrent liabilities | 13,000 | 245,000 | ||||||
Capital | 6,291,478,531 | 5,866,732,734 | ||||||
Total liabilities and equity | $ | 6,491,932,558 | $ | 6,054,559,538 | ||||
6. | LINE-OF-CREDIT |
On March 27, 2017, 25, 2021, Roanoke Gas entered into a newrenewed its unsecured line-of-credit agreement. This line-of-credit agreement replaced the agreement which expired on for a two-year term expiring March 31, 2017. The expired agreement was for2023 with a termmaximum borrowing limit of one year and all amounts drawn against that agreement were considered to be current liabilities. The new line-of-credit agreement is for a two-year term expiring March 31, 2019.$40 million. Amounts drawn against the new agreement are considered to be non-current as the balance under the line-of-credit is not subject to repayment within the next 12-month12-month period.
The Company's total available borrowing limits for the remaining term are as follows:
| As of | Available Line-of-Credit | |||
| September 30, 2017 | $ | 21,000,000 | ||
| March 1, 2018 | 17,000,000 | |||
| July 22, 2018 | 22,000,000 | |||
| September 22, 2018 | 30,000,000 | |||
Available | ||||
As of | Line-of-Credit | |||
September 30, 2021 | $ | 32,000,000 | ||
March 1, 2022 | 25,000,000 | |||
July 20, 2022 | 32,000,000 | |||
October 19, 2022 | 40,000,000 | |||
March 1, 2023 | 34,000,000 | |||
A summary of the line-of-credit follows:
| September 30 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Line-of-credit at year-end | $ | 21,000,000 | $ | 24,000,000 | $ | 24,000,000 | ||||||
| Outstanding balance at year-end | 17,791,760 | 14,556,785 | 9,340,997 | |||||||||
| Highest month-end balance outstanding | 17,791,760 | 15,246,089 | 17,366,052 | |||||||||
| Average daily balance | 10,936,114 | 9,620,914 | 6,377,040 | |||||||||
| Average rate of interest during year on outstanding balances | 1.92 | % | 1.40 | % | 1.17 | % | ||||||
| Interest rate at year-end | 2.23 | % | 1.53 | % | 1.20 | % | ||||||
| Interest rate on unused line-of-credit | 0.15 | % | 0.15 | % | 0.15 | % | ||||||
September 30 | ||||||||
2021 | 2020 | |||||||
Available line-of-credit at year-end | $ | 32,000,000 | $ | 19,000,000 | ||||
Outstanding balance at year-end | 17,628,897 | 9,143,606 | ||||||
Highest month-end balance outstanding | 17,628,897 | 12,983,210 | ||||||
Average daily balance | 10,042,073 | 3,286,033 | ||||||
Average rate of interest during year on outstanding balances | 1.12 | % | 2.16 | % | ||||
Interest rate at year-end | 1.08 | % | 1.15 | % | ||||
Interest rate on unused line-of-credit | 0.15 | % | 0.15 | % | ||||
Associated with the line-of-credit is a credit agreement that contains various representations, warranties and covenants including a requirement that the Company maintain an interest coverage ratio of not less than 1.5 to 1 and a long-term debt to long-term capitalization ratio of less than 65%.
7. | |
LONG-TERM DEBT |
On NovemberOctober 29, 2021 Midstream entered into an unsecured promissory note in the principal amount of $8 million with an interest rate based on 30-day LIBOR plus 115 basis points maturing December 1, 2016, 2027. Related to this note, Midstream also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.443%. The loan will convert into an installment loan with principal pay-down beginning in fiscal 2023. In addition, this note reduces the borrowing capacity defined by the Third Amendment to Credit Agreement and related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the new promissory note. All other terms of the Third Amendment to Credit Agreement remain unchanged.
On September 24, 2021, Roanoke Gas entered into a 5-yearLoan Agreement ("Agreement") and an unsecured note with Branch Banking & TrustDelayed Draw Promissory Note in the principal amount of $7,000,000. $10 million ("Promissory Note"). Under the provisions of the Agreement, Roanoke Gas will receive a first advance of $5 million on or about April 1, 2022 with the remaining $5 million received on or about October 1, 2022. The note isPromissory Note has an interest rate of 30-day LIBOR plus 100 basis points and a maturity date of October 1, 2028. The proceeds from this Promissory Note will be used to finance Roanoke Gas' infrastructure enhancement and replacement projects. Also, on September 24, 2021, Roanoke Gas entered into an interest rate swap agreement for $10 million corresponding to the term and draw provisions of the Agreement, which effectively converts the variable rate Promissory Note to a fixed instrument with an effective annual interest basedrate of 2.49%.
On August 20, 2021, Roanoke Gas entered into an unsecured Delayed Draw Term Note in the principal amount of $15 million ("Term Note") with an interest rate of 1.20% above 30-day SOFR Average per annum maturing on 30-day LIBOR plus 90 basis points. August 20, 2026. In addition,connection with the Term Note, Roanoke Gas also entered into the Sixth Amendment to its Credit Agreement ("Amendment"), which amends the original Credit Agreement with the corresponding bank dated March 31, 2016 and all subsequent amendments. The Amendment aligns the termination date and the maximum principal amount available under the Term Note and retains all other terms and requirements of prior credit agreements. The proceeds from this Term Note will be used to finance Roanoke Gas' infrastructure enhancement and replacement projects, as well as to refinance a portion of its existing debt. Also, on August 20, 2021, Roanoke Gas entered into an interest rate swap agreement for $15 million corresponding to the duration of the Term Note, which effectively converts the variable rate note to a fixed rate instrument with an effective annual interest rate of 2.00%. The Term Note funded in full on October 1, 2021.
Roanoke Gas also has other unsecured notes at varying fixed interest rates as well as a variable-rate note with interest based on 30-day LIBOR plus 90 basis points. The variable rate note is hedged by a swap agreement, with Branch Banking & Trust to convertwhich converts the variable rate debt into a fixed-rate instrument with an annual interest rate of 2.30%. The swap agreement is not effective until November 1, 2017, with the monthly interest rate on the note floating until the swap period begins. The proceeds from the note were used to convert a portion of the Company's line-of-credit balance into longer-term financing.
Midstream has two unsecured Promissory Notes ("Notes") which provide up to a total of $25 million in borrowing limits over a period of 5 years, with an interest variable rate of 30-day LIBOR plus 160 basis points. Midstream issued the Notes in December 2015 to provide financing for capital investment in respect of its 1% interestnotes in the LLC. In accordance withamounts of $14 million and $10 million that are hedged by swap agreements, which effectively convert the terms of the debt, at such point in time as Midstream has borrowed $17.5 million under the Notes, Midstream is requiredinterest rates to provide the next $5 million towards its capital contributions to the LLC. Once Midstream has completed its $5 million in contributions, it may resume borrowing under the Notes up to the $25 million limit.3.24% and 3.14%, respectively.
Long-term debt consists of the following:
September 30 | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||
Roanoke Gas: | ||||||||||||||||
Unsecured senior notes payable, at 4.26%, due September 18, 2034 | $ | 30,500,000 | $ | 125,502 | $ | 30,500,000 | $ | 135,157 | ||||||||
Unsecured term note payable, at 30-day LIBOR plus 0.90%, due November 1, 2021 | 7,000,000 | 278 | 7,000,000 | 3,613 | ||||||||||||
Unsecured term notes payable, at 3.58% due October 2, 2027 | 8,000,000 | 28,896 | 8,000,000 | 33,712 | ||||||||||||
Unsecured term notes payable at 4.41%, due March 28, 2031 | 10,000,000 | 29,760 | 10,000,000 | 32,892 | ||||||||||||
Unsecured term notes payable at 3.60%, due December 6, 2029 | 10,000,000 | 29,062 | 10,000,000 | 32,585 | ||||||||||||
Unsecured delayed draw notes payable | — | 21,545 | — | — | ||||||||||||
Midstream: | ||||||||||||||||
Unsecured term notes payable, at 30-day LIBOR plus 1.35% due December 29, 2022 | 33,610,200 | 14,904 | 25,475,200 | 38,728 | ||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026 | 14,000,000 | 11,437 | 14,000,000 | 13,844 | ||||||||||||
Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024 | 10,000,000 | 6,286 | 10,000,000 | 8,644 | ||||||||||||
Total notes payable, current and noncurrent | $ | 123,110,200 | $ | 267,670 | $ | 114,975,200 | $ | 299,175 | ||||||||
Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2023 | 17,628,897 | — | 9,143,606 | — | ||||||||||||
Total long-term debt | $ | 140,739,097 | $ | 267,670 | $ | 124,118,806 | $ | 299,175 | ||||||||
Less: current maturities of long-term debt | (7,000,000 | ) | — | — | — | |||||||||||
Total long-term debt, net current maturities | $ | 133,739,097 | $ | 267,670 | $ | 124,118,806 | $ | 299,175 | ||||||||
| September 30 | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||
| Roanoke Gas Company: | ||||||||||||||||
| Unsecured senior notes payable, at 4.26%, due on September 18, 2034 | $ | 30,500,000 | $ | 164,119 | $ | 30,500,000 | $ | 173,773 | ||||||||
| Unsecured term note payable, at 30-day LIBOR plus 0.90%, November 1, 2021 | 7,000,000 | 13,618 | — | — | ||||||||||||
| Pending unsecured note | — | 48,160 | — | — | ||||||||||||
| RGC Midstream, LLC: | ||||||||||||||||
| Unsecured term notes payable, at 30-day LIBOR plus 1.60% due December 29, 2020 | $ | 6,312,200 | $ | 66,052 | $ | 3,396,200 | $ | 86,376 | ||||||||
| Total notes payable | $ | 43,812,200 | $ | 291,949 | $ | 33,896,200 | $ | 260,149 | ||||||||
| Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2019 | 17,791,760 | — | — | — | ||||||||||||
| Total long-term debt | $ | 61,603,960 | $ | 291,949 | $ | 33,896,200 | $ | 260,149 | ||||||||
Debt issuance costs are amortized over the life of the related debt. As of September 30, 20172021 and 2016,2020, the Company also had an unamortized loss on the early retirement of debt of $1,941,182$1,484,433 and $2,055,369,$1,598,620, respectively, which has been deferred as a regulatory asset and is being amortized over a 20 year period.
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 Indebtednessrequire the ratio of long-term debt to long-term capitalization to not more than exceed 65% of total capitalization.. All of the debt agreements except for the line-of-credit provide for priority indebtedness to not exceed 15% of consolidated total assets.
The aggregate annual maturities of long-term debt for the next five years ending after September 30, 20172021 are as follows:
Year Ending September 30 | Maturities | |||
2022 | $ | 7,000,000 | ||
2023 | 51,239,097 | |||
2024 | 10,000,000 | |||
2025 | 0 | |||
2026 | 14,000,000 | |||
Thereafter | 58,500,000 | |||
Total | $ | 140,739,097 | ||
| Year Ending September 30 | Maturities | ||
| 2018 | $ | — | |
| 2019 | 17,791,760 | ||
| 2020 | — | ||
| 2021 | 6,312,200 | ||
| 2022 | 7,000,000 | ||
| Thereafter | 30,500,000 | ||
| Total | $ | 61,603,960 | |
8. | |
INCOME TAXES |
Under the provisions of ASC 740 - Income Taxes, 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 through reduced billings 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 are being collected from customers over a five year period.
During fiscal 2021, 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 this study, the Company filed amended federal income tax returns for the 2017,2018 and 2019 fiscal years to claim the R&D tax credit. The Company also filed for the R&D tax credit on its fiscal 2020 federal income tax return. The total credits claimed on the income tax returns amounted to $3,169,656, which was offset by an increase of $636,694 in income tax resulting from the add back to taxable income of an amount equal to the total tax credits claimed for the 2017,2018 and 2019 fiscal years. The Company deferred the remaining tax credits as a regulatory liability because they related to utility plant. These credits will be amortized over the 20 year tax-life of the related utility plant. A portion of these tax credits were generated as a result of expenditures that qualify under the SAVE Plan and are subject to return to customers through a reduction in the corresponding SAVE rates in future periods. Annual amortization of the tax credits is expected to be approximately $124,000 with a reduction in annual SAVE revenues of approximately $40,000.
The Company also applied for a Virginia State tax credit related to the R&D study. The amount to be awarded has not yet been determined and therefore is not included in the consolidated financial statements at this time.
The current year tax expense includes the recognition of a federal solar tax credit and Virginia Neighborhood Assistance Tax Credits.
The details of income tax expense are as follows:
| Years Ended September 30 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current income taxes: | ||||||||||||
| Federal | $ | 72,368 | $ | (1,216,745 | ) | $ | 379,180 | |||||
| State | 407,643 | 415,975 | 374,541 | |||||||||
| Total current income taxes | 480,011 | (800,770 | ) | 753,721 | ||||||||
| Deferred income taxes: | ||||||||||||
| Federal | 3,129,925 | 4,302,906 | 2,289,729 | |||||||||
| State | 195,454 | 164,048 | 127,112 | |||||||||
| Total deferred income taxes | 3,325,379 | 4,466,954 | 2,416,841 | |||||||||
| Total income tax expense | $ | 3,805,390 | $ | 3,666,184 | $ | 3,170,562 | ||||||
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Current income taxes: | ||||||||
Federal | $ | 2,527,997 | $ | 1,841,124 | ||||
State | 569,877 | 342,233 | ||||||
Total current income taxes | 3,097,874 | 2,183,357 | ||||||
Deferred income taxes: | ||||||||
Federal | (137,159 | ) | 644,682 | |||||
State | 243,347 | 477,621 | ||||||
Total deferred income taxes | 106,188 | 1,122,303 | ||||||
Total income tax expense | $ | 3,204,062 | $ | 3,305,660 | ||||
Income tax expense for the years ended September 30, 2017, 20162021 and 20152020 differed from amounts computed by applying the U.S. Federalfederal income tax rate of 34% to earnings before income taxes due to the following:
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Income before income taxes | $ | 13,306,124 | $ | 13,870,194 | ||||
Corporate federal income tax rate | 21 | % | 21 | % | ||||
Income tax expense computed at the federal statutory rate | $ | 2,794,286 | $ | 2,912,741 | ||||
State income taxes, net of federal income tax benefit | 642,447 | 647,685 | ||||||
Net amortization of excess deferred taxes on regulated operations | (162,228 | ) | (162,228 | ) | ||||
Tax benefit recognized on stock compensation | (4,099 | ) | (114,984 | ) | ||||
Tax credits | (86,839 | ) | 0 | |||||
Other, net | 20,495 | 22,446 | ||||||
Total income tax expense | $ | 3,204,062 | $ | 3,305,660 | ||||
| Years Ended September 30 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Income before income taxes | $ | 10,038,255 | $ | 9,473,050 | $ | 8,264,977 | ||||||
| Income tax expense computed at the federal statutory rate | $ | 3,413,007 | $ | 3,220,837 | $ | 2,810,092 | ||||||
| State income taxes, net of federal income tax benefit | 398,044 | 382,815 | 331,091 | |||||||||
| Other, net | (5,661 | ) | 62,532 | 29,379 | ||||||||
| Total income tax expense | $ | 3,805,390 | $ | 3,666,184 | $ | 3,170,562 | ||||||
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
| September 30 | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for uncollectibles | $ | 37,752 | $ | 29,203 | ||||
| Accrued pension and postretirement medical benefits | 1,747,429 | 2,532,672 | ||||||
| Accrued vacation | 239,414 | 262,273 | ||||||
| Over-recovery of gas costs | 545,894 | 345,318 | ||||||
| Costs of gas held in storage | 1,009,206 | 1,077,849 | ||||||
| Deferred compensation | 824,281 | 770,868 | ||||||
| Other | 348,833 | 340,121 | ||||||
| Total gross deferred tax assets | 4,752,809 | 5,358,304 | ||||||
| Deferred tax liabilities: | ||||||||
| Utility plant | 27,630,486 | 24,264,165 | ||||||
| MVP investment | 154,817 | 40,776 | ||||||
| Other | 44,354 | 11,217 | ||||||
| Total gross deferred tax liabilities | 27,829,657 | 24,316,158 | ||||||
| Net deferred tax liability | $ | 23,076,848 | $ | 18,957,854 | ||||
September 30 | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Allowance for uncollectibles | $ | 62,292 | $ | 180,986 | ||||
Accrued pension and postretirement medical benefits | 195,044 | 651,356 | ||||||
Regulatory effect of change in federal income tax rate | 2,761,667 | 2,814,525 | ||||||
Accrued paid time off | 137,175 | 140,635 | ||||||
Cost of gas held in storage | 753,344 | 604,962 | ||||||
Deferred compensation | 915,749 | 992,605 | ||||||
Interest rate swaps | 307,873 | 572,343 | ||||||
Accrued gas cost | 289,801 | 0 | ||||||
Other | 98,642 | 97,564 | ||||||
Total gross deferred tax assets | $ | 5,521,587 | $ | 6,054,976 | ||||
Deferred tax liabilities: | ||||||||
Utility plant | $ | 18,643,863 | $ | 18,310,474 | ||||
MVP investment | 1,825,937 | 1,693,075 | ||||||
Other | 0 | 25,189 | ||||||
Total gross deferred tax liabilities | $ | 20,469,800 | $ | 20,028,738 | ||||
Net deferred tax liability | $ | 14,948,213 | $ | 13,973,762 | ||||
FASB ASC No.740 -
Income Taxes 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 accordingly has not identified any significant uncertain tax positions. In regard to the R&D tax credit, the firm engaged to conduct the study has done numerous such projects with successful outcomes with the IRS. The Company’s policy is to classify interest associated with uncertain tax positions as interest expense in the financial statements. Penalties areThe Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia. With the amendment of the federal returns for fiscal 2017,2018 and 2019, these years will remain open for three more years. The federal returns and the state returns for both Virginia and West Virginia for the tax years ended prior to September 30, 20142017 are no longer subject to examination.
9. | |
EMPLOYEE BENEFIT PLANS |
The Company sponsors both a noncontributory defined benefit pension plan ("pension plan") and a postretirement benefit plan ("postretirement plan").plan. The pension plan covers substantially 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. In November 2016, the Board of Directors approved Effective January 1, 2017, a "soft freeze" to the pension plan whereby nowas implemented, and employees hired on or after January 1, 2017 will bethat date are no longer eligible to participate. Employees hired prior to January 1, 2017
The postretirement benefit 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 benefit 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 defined benefitpension plan.
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 inthrough rates in future periods. The regulatory asset is adjusted for the amortization of the transition obligation and 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.
The following tables set forth the benefit obligation, fair value of plan assets, the funded status of the benefit plans, amounts recognized in the Company’s consolidated financial statements and the assumptions used.
| Pension Plan | Postretirement Plan | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accumulated benefit obligation | $ | 25,481,993 | $ | 25,090,968 | $ | 17,666,812 | $ | 18,504,710 | ||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 29,494,950 | $ | 27,167,621 | $ | 18,504,710 | $ | 15,355,668 | ||||||||
| Service cost | 706,677 | 694,375 | 183,267 | 148,018 | ||||||||||||
| Interest cost | 995,598 | 1,132,776 | 626,822 | 624,579 | ||||||||||||
| Actuarial (gain) loss | (824,361 | ) | 2,440,957 | (1,199,722 | ) | 2,812,516 | ||||||||||
| Benefit payments, net of retiree contributions | (715,517 | ) | (1,940,779 | ) | (448,265 | ) | (436,071 | ) | ||||||||
| Benefit obligation at end of year | $ | 29,657,347 | $ | 29,494,950 | $ | 17,666,812 | $ | 18,504,710 | ||||||||
| Change in fair value of plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 23,113,057 | $ | 21,394,399 | $ | 11,122,783 | $ | 10,443,629 | ||||||||
| Actual return on plan assets, net of taxes | 3,021,131 | 2,159,437 | 1,016,644 | 615,225 | ||||||||||||
| Employer contributions | 1,000,000 | 1,500,000 | 1,000,000 | 500,000 | ||||||||||||
| Benefit payments, net of retiree contributions | (715,517 | ) | (1,940,779 | ) | (448,265 | ) | (436,071 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 26,418,671 | $ | 23,113,057 | $ | 12,691,162 | $ | 11,122,783 | ||||||||
| Funded status | $ | (3,238,676 | ) | $ | (6,381,893 | ) | $ | (4,975,650 | ) | $ | (7,381,927 | ) | ||||
| Amounts recognized in the balance sheets consist of: | ||||||||||||||||
| Noncurrent liabilities | $ | (3,238,676 | ) | $ | (6,381,893 | ) | $ | (4,975,650 | ) | $ | (7,381,927 | ) | ||||
| Amounts recognized in accumulated other comprehensive loss: | ||||||||||||||||
| Net actuarial loss, net of tax | $ | 572,740 | $ | 1,583,345 | $ | 702,013 | $ | 913,886 | ||||||||
| Total amounts included in other comprehensive loss, net of tax | $ | 572,740 | $ | 1,583,345 | $ | 702,013 | $ | 913,886 | ||||||||
| Amounts deferred to a regulatory asset: | ||||||||||||||||
| Net actuarial loss | $ | 5,471,547 | $ | 6,732,800 | $ | 3,830,763 | $ | 5,563,642 | ||||||||
| Amounts recognized as regulatory assets | $ | 5,471,547 | $ | 6,732,800 | $ | 3,830,763 | $ | 5,563,642 | ||||||||
Pension Plan | Postretirement Plan | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Accumulated benefit obligation | $ | 33,341,841 | $ | 34,821,069 | $ | 16,796,849 | $ | 17,925,409 | ||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 39,998,002 | $ | 35,550,987 | $ | 17,925,409 | $ | 18,030,399 | ||||||||
Service cost | 734,282 | 691,602 | 140,691 | 167,879 | ||||||||||||
Interest cost | 975,139 | 1,062,227 | 430,490 | 531,480 | ||||||||||||
Actuarial loss (gain) | (2,237,486 | ) | 3,620,400 | (1,109,181 | ) | (325,269 | ) | |||||||||
Benefit payments, net of retiree contributions | (1,815,469 | ) | (927,214 | ) | (590,560 | ) | (479,080 | ) | ||||||||
Benefit obligation at end of year | $ | 37,654,468 | $ | 39,998,002 | $ | 16,796,849 | $ | 17,925,409 | ||||||||
Change in fair value of plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 37,657,631 | $ | 33,586,671 | $ | 14,116,253 | $ | 13,082,610 | ||||||||
Actual return on plan assets, net of taxes | 2,571,945 | 4,198,174 | 1,956,649 | 1,112,723 | ||||||||||||
Employer contributions | 500,000 | 800,000 | 400,000 | 400,000 | ||||||||||||
Benefit payments, net of retiree contributions | (1,815,469 | ) | (927,214 | ) | (590,560 | ) | (479,080 | ) | ||||||||
Fair value of plan assets at end of year | $ | 38,914,107 | $ | 37,657,631 | $ | 15,882,342 | $ | 14,116,253 | ||||||||
Funded status | $ | 1,259,639 | $ | (2,340,371 | ) | $ | (914,507 | ) | $ | (3,809,156 | ) | |||||
Amounts recognized in the consolidated balance sheet consist of: | ||||||||||||||||
Noncurrent assets | $ | 1,259,639 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Noncurrent liabilities | 0 | (2,340,371 | ) | (914,507 | ) | (3,809,156 | ) | |||||||||
Amounts recognized in accumulated other comprehensive loss: | ||||||||||||||||
Net actuarial loss, net of tax | $ | 527,720 | $ | 1,181,744 | $ | 119,504 | $ | 614,987 | ||||||||
Total amounts included in accumulated other comprehensive loss, net of tax | $ | 527,720 | $ | 1,181,744 | $ | 119,504 | $ | 614,987 | ||||||||
Amounts deferred to a regulatory asset: | ||||||||||||||||
Net actuarial loss | $ | 4,562,834 | $ | 6,977,944 | $ | 798,558 | $ | 2,755,333 | ||||||||
Amounts recognized as regulatory assets | $ | 4,562,834 | $ | 6,977,944 | $ | 798,558 | $ | 2,755,333 | ||||||||
During 2016,fiscal 2021, the Company offered a one-time,one-time, lump sum pay out option for vested, terminated employees not currently receiving payments under the pension plan. The lump sum offer was accepted by 4017 eligible participants resulting in a distribution of the 63 eligible participants. In September 2016, the pension$717,197 in plan distributed $1,241,529 to the participants electing to receive the lump sum payments, which resulted inassets with a corresponding reduction of approximately $1,500,000 in the projected pensionbenefit plan obligation.
The Company expects that an approximately $24,000$60,000 credit, before tax, of accumulated other comprehensive incomeAOCI will be recognized as a reduction in net periodic benefit costs in fiscal 20182022 and approximately $659,000$207,000 of amounts deferred as regulatory assets will be amortized and recognized in net periodic benefit costs in fiscal 2018.2022.
The reduction in the benefit obligations for both the pension plan and postretirement plan was primarily attributed to actuarial gains resulting from the increase in the discount rate used to calculate the benefit obligations and improvement in the mortality scale.
The following table details the actuarial assumptions used in determining the projected benefit obligations and net benefit cost of the pension and the accumulated benefit obligations and net benefit cost of the postretirement plan for 2017, 2016 and 2015.
| Pension Plan | Postretirement Plan | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| Assumptions used to determine benefit obligations: | ||||||||||||||||||
| Discount rate | 3.72 | % | 3.42 | % | 4.22 | % | 3.69 | % | 3.33 | % | 4.15 | % | ||||||
| Expected rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | N/A | N/A | N/A | |||||||||
| Assumptions used to determine benefit costs: | ||||||||||||||||||
| Discount rate | 3.42 | % | 4.22 | % | 4.22 | % | 3.33 | % | 4.15 | % | 4.10 | % | ||||||
| Expected long-term rate of return on plan assets | 7.00 | % | 7.00 | % | 7.00 | % | 4.84 | % | 4.89 | % | 4.90 | % | ||||||
| Expected rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | N/A | N/A | N/A | |||||||||
Pension Plan | Postretirement Plan | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Assumptions used to determine benefit obligations: | ||||||||||||||||
Discount rate | 2.73 | % | 2.47 | % | 2.70 | % | 2.44 | % | ||||||||
Expected rate of compensation increase | 4.00 | % | 4.00 | % | N/A | N/A | ||||||||||
Assumptions used to determine benefit costs: | ||||||||||||||||
Discount rate | 2.47 | % | 3.03 | % | 2.44 | % | 3.00 | % | ||||||||
Expected long-term rate of return on plan assets | 5.40 | % | 5.50 | % | 4.25 | % | 4.26 | % | ||||||||
Expected rate of compensation increase | 4.00 | % | 4.00 | % | N/A | N/A | ||||||||||
To develop the expected long-term rate of return on assets assumption, the Company, with input from the plans'Plans' actuaries and investment advisors, considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of each plan’s portfolio.
Components of net periodic benefit cost are as follows:
| Pension Plan | Postretirement Plan | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
| Service cost | $ | 706,677 | $ | 694,375 | $ | 654,782 | $ | 183,267 | $ | 148,018 | $ | 167,580 | ||||||||||||
| Interest cost | 995,598 | 1,132,776 | 1,025,908 | 626,822 | 624,579 | 600,096 | ||||||||||||||||||
| Expected return on plan assets | (1,616,412 | ) | (1,492,241 | ) | (1,440,846 | ) | (571,513 | ) | (507,858 | ) | (516,656 | ) | ||||||||||||
| Recognized loss | 662,180 | 501,678 | 257,378 | 429,758 | 250,173 | 197,058 | ||||||||||||||||||
| Net periodic benefit cost | $ | 748,043 | $ | 836,588 | $ | 497,222 | $ | 668,334 | $ | 514,912 | $ | 448,078 | ||||||||||||
Pension Plan | Postretirement Plan | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Service cost | $ | 734,282 | $ | 691,602 | $ | 140,691 | $ | 167,879 | ||||||||
Interest cost | 975,139 | 1,062,227 | 430,490 | 531,480 | ||||||||||||
Expected return on plan assets | (2,015,743 | ) | (1,836,623 | ) | (596,488 | ) | (550,394 | ) | ||||||||
Recognized loss | 502,141 | 455,744 | 154,659 | 237,371 | ||||||||||||
Net periodic benefit cost | $ | 195,819 | $ | 372,950 | $ | 129,352 | $ | 386,336 | ||||||||
Service cost is included in operation and maintenance expense of the consolidated income statement. All other components of net periodic benefit costs are included in the other income, net line.
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for the postretirement medical plan as of September 30, 2017, 2016 and 2015 are presented below:
Pre 65 | Post 65 | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Health care cost trend rate assumed for next year | 6.50 | % | 7.00 | % | 5.20 | % | 5.20 | % | ||||||||
Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 5.50 | % | 5.50 | % | 5.20 | % | 5.20 | % | ||||||||
Year that the rate reaches the ultimate trend rate | 2023 | 2023 | 2021 | 2020 | ||||||||||||
| Pre 65 | Post 65 | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| Health care cost trend rate assumed for next year | 7.00 | % | 7.50 | % | 8.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||
| Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||
| Year that the rate reaches the ultimate trend rate | 2021 | 2021 | 2021 | 2017 | 2016 | 2015 | ||||||||||||
The health care cost trend rate assumptions could have a significant effect on the amounts reported. A change of 1% would have the following effects:
| 1% Increase | 1% Decrease | |||||||
| Effect on total service and interest cost components | $ | 153,000 | $ | (121,000 | ) | |||
| Effect on accumulated postretirement benefit obligation | 2,961,000 | (2,385,000 | ) | |||||
1% Increase | 1% Decrease | |||||||
Effect on total service and interest cost components | $ | 111,000 | $ | (88,000 | ) | |||
Effect on accumulated postretirement benefit obligation | 2,575,000 | (2,106,000 | ) | |||||
The primary objectives of the Plan’sboth plans' investment policypolicies are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’corresponding actuarial assumptions achieve asset returns that are competitive with like institutions employing similar investment strategies and meet expected future benefits in both the short-term and long-term. The investment policyCompany's pension plan allocation approach seeks to match the duration of the fixed income portion of the portfolio with the duration of the plan's liabilities. Such a match is designed to reduce the overall volatility in the pension plan relative to the funded status. The 30% equity allocation in the pension plan provides for a rangepotential returns to offset growth in the liabilities as eligible participants continue to accrue benefits.
Based on its most recent evaluation of returns for the asset classes within each plan's investment allocations to allow for flexibility in responding to market conditions. The investment policy is periodically reviewed byportfolio, the Company set the expected long-term rate of return for the pension plan and a third-party investment advisor.
The Company’s target and actual asset allocation in the pension and postretirement benefit plans as of September 30, 20172021 and 20162020 were:
| Pension Plan | Postretirement Plan | |||||||||||||||||
| Target | 2017 | 2016 | Target | 2017 | 2016 | |||||||||||||
| Asset category: | ||||||||||||||||||
| Equity securities | 60 | % | 63 | % | 63 | % | 50 | % | 51 | % | 52 | % | ||||||
| Debt securities | 40 | % | 36 | % | 36 | % | 50 | % | 48 | % | 47 | % | ||||||
| Cash | — | % | 1 | % | 1 | % | — | % | 1 | % | — | % | ||||||
| Other | — | % | — | % | — | % | — | % | — | % | 1 | % | ||||||
Pension Plan | Postretirement Plan | |||||||||||||||||||||||
Target | 2021 | 2020 | Target | 2021 | 2020 | |||||||||||||||||||
Asset category: | ||||||||||||||||||||||||
Equity securities | 30 | % | 30 | % | 30 | % | 50 | % | 49 | % | 51 | % | ||||||||||||
Debt securities | 70 | % | 69 | % | 69 | % | 50 | % | 50 | % | 48 | % | ||||||||||||
Cash | 0 | % | 1 | % | 1 | % | 0 | % | 1 | % | 1 | % | ||||||||||||
Other | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
The plans assets of the plans are invested in mutual funds. The Company uses the fair value hierarchy described in Note 1 to classify these assets. The mutual funds are included under Level 21 in the fair value hierarchy as their fair values are determined based on individual prices for each security that comprises the mutual funds. Most of the individual investmentsThe common and collective trust funds are determined based on quoted market prices for each security; however, certain fixed income securities and other investments are not actively traded and are valued based on similar investments.included under Level 2. The following tabletables contains the fair value classifications of the benefit planplans' assets:
Pension Plan | ||||||||||||||||
Fair Value Measurements - September 30, 2021 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset Class: | ||||||||||||||||
Cash | $ | 429,764 | $ | 429,764 | $ | — | $ | — | ||||||||
Common and Collective Trust and Pooled Funds: | ||||||||||||||||
Bonds | ||||||||||||||||
Liability Driven Investment | 26,898,651 | — | 26,898,651 | — | ||||||||||||
Equities | ||||||||||||||||
Domestic Large Cap Growth | 3,430,962 | — | 3,430,962 | — | ||||||||||||
Domestic Large Cap Value | 3,480,915 | — | 3,480,915 | — | ||||||||||||
Domestic Small/Mid Cap Core | 1,752,186 | — | 1,752,186 | — | ||||||||||||
Foreign Large Cap Value | 1,561,512 | — | 1,561,512 | — | ||||||||||||
Mutual Funds: | ||||||||||||||||
Equities | ||||||||||||||||
Foreign Large Cap Growth | 1,071,719 | 1,071,719 | — | — | ||||||||||||
Foreign Large Cap Value | 288,398 | 288,398 | — | — | ||||||||||||
Total | $ | 38,914,107 | $ | 1,789,881 | $ | 37,124,226 | $ | — | ||||||||
| Defined Benefit Pension Plan Fair Value Measurements - September 30, 2017 | ||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Asset Class: | ||||||||||||||||
| Cash | $ | 265,100 | $ | 265,100 | $ | — | $ | — | ||||||||
| Common and Collective Trust and Pooled Funds: | ||||||||||||||||
| Bonds | ||||||||||||||||
| Liability Driven Investment | 9,635,998 | — | 9,635,998 | — | ||||||||||||
| Equities | ||||||||||||||||
| Domestic Large Cap Growth | 5,068,282 | — | 5,068,282 | — | ||||||||||||
| Domestic Large Cap Value | 5,046,530 | — | 5,046,530 | — | ||||||||||||
| Domestic Small/Mid Cap Core | 2,393,221 | — | 2,393,221 | — | ||||||||||||
| Foreign Large Cap Value | 2,139,733 | — | 2,139,733 | — | ||||||||||||
| Mutual Funds: | ||||||||||||||||
| Bonds | ||||||||||||||||
| Equities | ||||||||||||||||
| Foreign Large Cap Growth | 399,909 | — | 399,909 | — | ||||||||||||
| Foreign Large Cap Value | 398,995 | — | 398,995 | — | ||||||||||||
| Foreign Large Cap Core | 1,070,903 | — | 1,070,903 | — | ||||||||||||
| Total | $ | 26,418,671 | $ | 265,100 | $ | 26,153,571 | $ | — | ||||||||
| Defined Benefit Pension Plan Fair Value Measurements - September 30, 2016 | ||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Asset Class: | ||||||||||||||||
| Cash | $ | 117,265 | $ | 117,265 | $ | — | $ | — | ||||||||
| Common and Collective Trust and Pooled Funds: | ||||||||||||||||
| Bonds | ||||||||||||||||
| Domestic Fixed Income | 4,497,373 | — | 4,497,373 | — | ||||||||||||
| Equities | ||||||||||||||||
| Domestic Large Cap Growth | 3,426,041 | — | 3,426,041 | — | ||||||||||||
| Domestic Large Cap Value | 4,543,385 | — | 4,543,385 | — | ||||||||||||
| Domestic Small/Mid Cap Core | 2,149,566 | — | 2,149,566 | — | ||||||||||||
| Foreign Large Cap Value | 1,795,897 | — | 1,795,897 | — | ||||||||||||
| Mutual Funds: | ||||||||||||||||
| Bonds | ||||||||||||||||
| Domestic Fixed Income | 3,615,209 | — | 3,615,209 | — | ||||||||||||
| Foreign Fixed Income | 234,622 | — | 234,622 | — | ||||||||||||
| Equities | ||||||||||||||||
| Domestic Large Cap Growth | 1,043,395 | — | 1,043,395 | — | ||||||||||||
| Foreign Large Cap Growth | 366,420 | — | 366,420 | — | ||||||||||||
| Foreign Large Cap Value | 373,480 | — | 373,480 | — | ||||||||||||
| Foreign Large Cap Core | 950,404 | — | 950,404 | — | ||||||||||||
| Total | $ | 23,113,057 | $ | 117,265 | $ | 22,995,792 | $ | — | ||||||||
Pension Plan | ||||||||||||||||
Fair Value Measurements - September 30, 2020 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset Class: | ||||||||||||||||
Cash | $ | 339,287 | $ | 339,287 | $ | — | $ | — | ||||||||
Common and Collective Trust and Pooled Funds: | ||||||||||||||||
Bonds | ||||||||||||||||
Liability Driven Investment | 26,038,966 | — | 26,038,966 | — | ||||||||||||
Equities | ||||||||||||||||
Domestic Large Cap Growth | 3,462,841 | — | 3,462,841 | — | ||||||||||||
Domestic Large Cap Value | 3,351,694 | — | 3,351,694 | — | ||||||||||||
Domestic Small/Mid Cap Core | 1,665,005 | — | 1,665,005 | — | ||||||||||||
Foreign Large Cap Value | 1,473,427 | — | 1,473,427 | — | ||||||||||||
Mutual Funds: | ||||||||||||||||
Equities | ||||||||||||||||
Foreign Large Cap Growth | 1,047,274 | 1,047,274 | — | — | ||||||||||||
Foreign Large Cap Value | 279,137 | 279,137 | — | — | ||||||||||||
Total | $ | 37,657,631 | $ | 1,665,698 | $ | 35,991,933 | $ | — | ||||||||
Postretirement Plan | ||||||||||||||||
Fair Value Measurements - September 30, 2021 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset Class: | ||||||||||||||||
Cash | $ | 157,957 | $ | 157,957 | $ | 0 | $ | 0 | ||||||||
Mutual Funds: | ||||||||||||||||
Bonds | ||||||||||||||||
Domestic Fixed Income | 7,109,967 | 7,109,967 | 0 | 0 | ||||||||||||
Foreign Fixed Income | 757,422 | 757,422 | 0 | 0 | ||||||||||||
Equities | ||||||||||||||||
Domestic Large Cap Growth | 2,346,401 | 2,346,401 | 0 | 0 | ||||||||||||
Domestic Large Cap Value | 2,361,583 | 2,361,583 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Growth | 295,628 | 295,628 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Value | 248,317 | 248,317 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Core | 557,739 | 557,739 | 0 | 0 | ||||||||||||
Foreign Large Cap Growth | 594,573 | 594,573 | 0 | 0 | ||||||||||||
Foreign Large Cap Value | 1,352,329 | 1,352,329 | 0 | 0 | ||||||||||||
Foreign Large Cap Core | 85,871 | 85,871 | 0 | 0 | ||||||||||||
Other | 14,555 | 0 | 14,555 | 0 | ||||||||||||
Total | $ | 15,882,342 | $ | 15,867,787 | $ | 14,555 | $ | 0 | ||||||||
| Postretirement Benefit Plan Fair Value Measurements - September 30, 2017 | ||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Asset Class: | ||||||||||||||||
| Cash | $ | 64,616 | $ | 64,616 | $ | — | $ | — | ||||||||
| Mutual Funds | ||||||||||||||||
| Bonds | ||||||||||||||||
| Domestic Fixed Income | 5,727,258 | — | 5,727,258 | — | ||||||||||||
| Foreign Fixed Income | 359,460 | — | 359,460 | — | ||||||||||||
| Equities | ||||||||||||||||
| Domestic Large Cap Growth | 1,998,971 | — | 1,998,971 | — | ||||||||||||
| Domestic Large Cap Value | 1,998,714 | — | 1,998,714 | — | ||||||||||||
| Domestic Small/Mid Cap Growth | 209,332 | — | 209,332 | — | ||||||||||||
| Domestic Small/Mid Cap Value | 209,630 | — | 209,630 | — | ||||||||||||
| Domestic Small/Mid Cap Core | 455,867 | — | 455,867 | — | ||||||||||||
| Foreign Large Cap Growth | 39,107 | — | 39,107 | — | ||||||||||||
| Foreign Large Cap Value | 1,079,766 | — | 1,079,766 | — | ||||||||||||
| Foreign Large Cap Core | 511,298 | — | 511,298 | — | ||||||||||||
| Other | 37,143 | — | 37,143 | — | ||||||||||||
| Total | $ | 12,691,162 | $ | 64,616 | $ | 12,626,546 | $ | — | ||||||||
| Postretirement Benefit Plan Fair Value Measurements - September 30, 2016 | ||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Asset Class: | ||||||||||||||||
| Cash | $ | 43,455 | $ | 43,455 | $ | — | $ | — | ||||||||
| Mutual Funds | ||||||||||||||||
| Bonds | ||||||||||||||||
| Domestic Fixed Income | 5,109,834 | — | 5,109,834 | — | ||||||||||||
| Foreign Fixed Income | 87,821 | — | 87,821 | — | ||||||||||||
| Equities | ||||||||||||||||
| Domestic Large Cap Growth | 1,824,796 | — | 1,824,796 | — | ||||||||||||
| Domestic Large Cap Value | 1,770,664 | — | 1,770,664 | — | ||||||||||||
| Domestic Small/Mid Cap Growth | 195,319 | — | 195,319 | — | ||||||||||||
| Domestic Small/Mid Cap Value | 198,884 | — | 198,884 | — | ||||||||||||
| Domestic Small/Mid Cap Core | 427,409 | — | 427,409 | — | ||||||||||||
| Foreign Large Cap Value | 964,827 | — | 964,827 | — | ||||||||||||
| Foreign Large Cap Core | 456,100 | — | 456,100 | — | ||||||||||||
| Other | 43,674 | — | 43,674 | — | ||||||||||||
| Total | $ | 11,122,783 | $ | 43,455 | $ | 11,079,328 | $ | — | ||||||||
Postretirement Plan | ||||||||||||||||
Fair Value Measurements - September 30, 2020 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset Class: | ||||||||||||||||
Cash | $ | 73,908 | $ | 73,908 | $ | 0 | $ | 0 | ||||||||
Mutual Funds: | ||||||||||||||||
Bonds | ||||||||||||||||
Domestic Fixed Income | 6,163,808 | 6,163,808 | 0 | 0 | ||||||||||||
Foreign Fixed Income | 638,709 | 638,709 | 0 | 0 | ||||||||||||
Equities | ||||||||||||||||
Domestic Large Cap Growth | 2,197,839 | 2,197,839 | 0 | 0 | ||||||||||||
Domestic Large Cap Value | 2,119,433 | 2,119,433 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Growth | 262,726 | 262,726 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Value | 235,216 | 235,216 | 0 | 0 | ||||||||||||
Domestic Small/Mid Cap Core | 552,607 | 552,607 | 0 | 0 | ||||||||||||
Foreign Large Cap Growth | 548,967 | 548,967 | 0 | 0 | ||||||||||||
Foreign Large Cap Value | 1,224,420 | 1,224,420 | 0 | 0 | ||||||||||||
Foreign Large Cap Core | 77,471 | 77,471 | 0 | 0 | ||||||||||||
Other | 21,149 | 0 | 21,149 | 0 | ||||||||||||
Total | $ | 14,116,253 | $ | 14,095,104 | $ | 21,149 | $ | 0 | ||||||||
Each mutual fund or common collective trust fund has been categorized based on its primary investment strategy.
The Company expects to contribute $1,600,000$500,000 to its pension plan and $600,000$400,000 to its postretirement benefit plan in fiscal 2018.
The following table reflects expected future benefit payments:
| Fiscal year ending September 30 | Pension Plan | Postretirement Plan | ||||||
| 2018 | $ | 817,861 | $ | 618,241 | ||||
| 2019 | 879,779 | 644,666 | ||||||
| 2020 | 966,930 | 671,228 | ||||||
| 2021 | 1,041,200 | 710,495 | ||||||
| 2022 | 1,139,637 | 749,674 | ||||||
| 2023-2027 | 6,981,849 | 4,148,403 | ||||||
Pension | Postretirement | |||||||
Fiscal year ending September 30 | Plan | Plan | ||||||
2022 | $ | 1,095,464 | $ | 730,324 | ||||
2023 | 1,154,843 | 740,565 | ||||||
2024 | 1,221,199 | 717,641 | ||||||
2025 | 1,371,276 | 721,176 | ||||||
2026 | 1,487,113 | 717,684 | ||||||
2027 - 2031 | 8,715,094 | 3,697,782 | ||||||
The Company alsoestablished an NQDC Plan in fiscal 2021. The NQDC Plan is an unfunded, nonqualified benefit plan offered to select members of senior management not eligible to participate in the pension plan. Under the NQDC Plan, participants have the right to defer a percentage of base salary as well as receive discretionary credits from the Company. The Company's discretionary credits vest over time. Any benefits distributed from the NQDC Plan plan are paid from the general assets of the Company. As the plan is unfunded, the balance reflected in the table below is a noncurrent liability included in the benefit plan liabilities line on the consolidated balance sheet.
2021 | 2020 | |||||||
Beginning deferred compensation balance | $ | 0 | $ | 0 | ||||
Employer contributions | 48,100 | 0 | ||||||
Participant contributions | 0 | 0 | ||||||
Earnings | 2,297 | 0 | ||||||
Distributions | (15,053 | ) | 0 | |||||
Ending deferred compensation balance | $ | 35,344 | $ | 0 | ||||
The Company sponsors a defined contribution plan (the “401k Plan”)401k Plan covering all employees who elect to participate. Employees may contribute from 1% to 50% of their annual compensation to the 401k Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service.IRS. The Company matches 100% of the participant’s first 4% of contributions and 50% on the next 2% of contributions. The Company matchingalso provided discretionary contributions were $361,702, $353,793 and $338,896 for 2017, 2016 and 2015, respectively.
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Matching contribution | $ | 383,340 | $ | 364,773 | ||||
Discretionary contribution | 43,093 | 18,313 | ||||||
10. | |
COMMON STOCK OPTIONS |
The KESOP 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, 2017,2021, the number of shares available for future grants was 36,000.
FASB ASC No.718 -
Compensation-Stock Compensation requires that compensation expense be recognized for the issuance of equity instruments to employees. During the fiscalAs 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, | |||||
| 2017 | 2016 | 2015 | |||
| Expected volatility | 26.09% | 28.78% | 34.34% | ||
| Expected dividends | 3.81% | 3.99% | 4.11% | ||
| Expected exercise term (years) | 7.00 | 7.00 | 7.00 | ||
| Risk-free interest rate | 2.20% | 2.10% | 1.98% | ||
Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Expected volatility | 32.05 | % | 31.53 | % | ||||
Expected dividends | 2.75 | % | 2.74 | % | ||||
Expected exercise term (years) | 7 | 7 | ||||||
Risk-free interest rate | 1.24 | % | 0.51 | % | ||||
The underlying methods regarding each assumption are as follows:
Expected volatility
is based on the historicalExpected 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 theForfeitures
are recognized when they occur.Stock option transactions under the Company's plans for the years ended September 30, 2017, 2016 and 2015 are summarized below. The information contained in the tables below have been restated to reflect the effect of the stock split:
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (years) | Aggregate Intrinsic Value 1 | ||||||||||
| Options outstanding, September 30, 2014 | 57,000 | $ | 12.65 | 8.8 | $ | 34,840 | |||||||
| Options granted | 25,500 | 14.40 | |||||||||||
| Options exercised | (3,900 | ) | 12.66 | ||||||||||
| Options expired | — | — | |||||||||||
| Options forfeited | — | — | |||||||||||
| Options outstanding, September 30, 2015 | 78,600 | 13.22 | 8.3 | 43,086 | |||||||||
| Options granted | 24,000 | 14.15 | |||||||||||
| Options exercised | (3,300 | ) | 12.65 | ||||||||||
| Options expired | — | — | |||||||||||
| Options forfeited | (12,000 | ) | 13.20 | ||||||||||
| Options outstanding, September 30, 2016 | 87,300 | 13.50 | 7.8 | 200,211 | |||||||||
| Options granted | 25,500 | 16.37 | |||||||||||
| Options exercised | (11,225 | ) | 12.67 | ||||||||||
| Options expired | — | — | |||||||||||
| Options forfeited | — | — | |||||||||||
| Options outstanding, September 30, 2017 | 101,575 | $ | 14.31 | 7.6 | $ | 1,448,338 | |||||||
| Vested and exercisable at September 30, 2017 | 101,575 | $ | 14.31 | 7.6 | $ | 1,448,338 | |||||||
Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (years) | Aggregate Intrinsic Value1 | |||||||||||||
Options outstanding, September 30, 2019 | 68,492 | $ | 14.91 | 6.2 | $ | 981,170 | ||||||||||
Options granted | 13,000 | 27.87 | ||||||||||||||
Options exercised | (29,992 | ) | 14.65 | |||||||||||||
Options expired | — | — | ||||||||||||||
Options forfeited | — | — | ||||||||||||||
Options outstanding, September 30, 2020 | 51,500 | $ | 18.34 | 6.4 | $ | 320,797 | ||||||||||
Options granted | 3,000 | 22.93 | ||||||||||||||
Options exercised | (9,250 | ) | 14.90 | |||||||||||||
Options expired | — | — | ||||||||||||||
Options forfeited | — | — | ||||||||||||||
Options outstanding, September 30, 2021 | 45,250 | $ | 19.34 | 6.0 | $ | 213,898 | ||||||||||
Vested and exercisable at September 30, 2021 | 45,250 | $ | 19.34 | 6.0 | $ | 213,898 | ||||||||||
1
Aggregate intrinsic value includes only those options where the exercise price is below the market price.Years Ended September 30 | ||||||||
2021 | 2020 | |||||||
Weighted-average grant date option fair value | $ | 5.55 | $ | 6.26 | ||||
Stock option expense | 11,100 | 81,380 | ||||||
Intrinsic value of options exercised | 70,297 | 411,638 | ||||||
Proceeds from exercise of stock options | 137,802 | 439,509 | ||||||
| Years Ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Weighted-average grant date option fair value | $ | 2.89 | $ | 2.69 | $ | 3.28 | |||||
| Stock option expense | 73,780 | 64,640 | 83,640 | ||||||||
| Intrinsic value of options exercised | 99,929 | 8,418 | 5,624 | ||||||||
| Proceeds from exercise of stock options | 142,241 | 41,762 | 49,366 | ||||||||
11. | |
OTHER STOCK PLANS |
Dividend Reinvestment and Stock Purchase Plan
The Company offers a Dividend Reinvestment and Stock PurchaseDRIP Plan (the “DRIP”) to shareholders of record for the reinvestment of dividends and the purchase of up to $40,000$100,000 per year in additional shares of common stock of the Company. Under the DRIP, the Company issued 36,446, 52,14629,604 and 12,64728,191 shares in 2017, 20162021 and 2015,2020, respectively. As of September 30, 2017,2021, the Company had 448,973332,719 shares of stock available for issuance under the DRIP.
Restricted Stock Plan for Outside Directors
The Board of Directors of the Company implemented the Restricted Stock Plan for Outside Directors (the “Plan”) effective January 27, RSPD in 1997. Under the Plan,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 was paid in shares of common stock (“Director Restricted Stock”).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. Effective October 1, 2016, the Board of Directors amended the Plan to remove the requirement that directors take a minimum 40% of their retainer in Restricted Stock for those directors who owned at least 10,000 shares of Resources stock.
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 Plan, 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:
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Shares | Weighted-Average Fair Value on Date of Grant | Shares | Weighted-Average Fair Value on Date of Grant | Shares | Weighted-Average Fair Value on Date of Grant | |||||||||||||||
| Beginning of year balance | 107,023 | $ | 10.11 | 100,373 | $ | 9.80 | 94,267 | $ | 9.53 | |||||||||||
| Granted | 4,870 | 16.77 | 6,650 | 14.79 | 6,106 | 13.92 | ||||||||||||||
| Vested | — | — | — | — | — | — | ||||||||||||||
| Forfeited | — | — | — | — | — | — | ||||||||||||||
| End of year balance | 111,893 | $ | 10.56 | 107,023 | $ | 10.11 | 100,373 | $ | 9.80 | |||||||||||
2021 | 2020 | |||||||||||||||
Shares | Weighted-Average Fair Value on Date of Grant | Shares | Weighted-Average Fair Value on Date of Grant | |||||||||||||
Beginning of year balance | 99,070 | $ | 14.06 | 104,680 | $ | 12.51 | ||||||||||
Granted | 11,374 | 23.67 | 9,193 | 26.28 | ||||||||||||
Vested | 0 | 0 | (14,803 | ) | 10.68 | |||||||||||
Forfeited | 0 | 0 | 0 | 0 | ||||||||||||
End of year balance | 110,444 | $ | 15.05 | 99,070 | $ | 14.06 | ||||||||||
The fair market value of the Director Restricted Stock issued asincluded in compensation during fiscal 2017, 20162021 and 20152020 was $99,400, $98,334$269,200 and $85,000. No$241,617, respectively. NaN Director Restricted Stock vested or was forfeited during fiscal 2017, 2016 and 2015.
As of September 30, 2017,2021, the Company had 85,23335,937 shares available for issuance under the Plan.
RGC Resources, Inc. Restricted Stock Plan
The Board of Directors of the Company implemented the RGC Resources, Inc. Restricted Stock Plan (the “Restricted Stock Plan”)RSPO in 2017 following approval as approved by the shareholders at the Company's annual meeting held on February 6, 2017.shareholders. Under the Restricted Stock Plan,RSPO, the Compensation Committee of the Board of Directors may grant shares of restrictedcommon 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 Restricted Stock PlanRSPO 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.
The following table reflects the officer compensation activity pursuant to the RSPO:
2021 | 2020 | |||||||||||||||
Shares | Weighted-Average Fair Value on Date of Grant | Shares | Weighted-Average Fair Value on Date of Grant | |||||||||||||
Beginning of year balance | 6,815 | $ | 28.55 | 10,185 | $ | 28.65 | ||||||||||
Granted | 16,656 | 24.21 | 14,951 | 28.17 | ||||||||||||
Vested | (11,635 | ) | 25.77 | (18,321 | ) | 28.30 | ||||||||||
Forfeited | 0 | 0 | 0 | 0 | ||||||||||||
End of year balance | 11,836 | $ | 25.17 | 6,815 | $ | 28.55 | ||||||||||
The fair market value of the Officer Restricted Stock Plan originally authorized 300,000included as compensation during fiscal 2021 and 2020 was $366,869 and $450,677, respectively. As of September 30, 2021, the Company had 396,357 shares to be available for issuance; however, following the three-for-two stock split on March 1, 2017, the total authorized shares increased to 450,000. As of September 30, 2017, no shares have been grantedissuance under the Restricted Stock Plan.
Stock Bonus Plan
Shares from the Stock Bonus Plan may also be issued to certain employees and management personnel in recognition of their performance and service. Under the Stock Bonus Plan, the Company issued 1,628, 2,8130 shares in 2021 and 4,097 shares valued at $30,154, $39,819 and $59,332, respectively, in 2017, 2016 and 2015.2020. As of September 30, 20172021 the Company had 4,785 shares of stock available for issuance under the Stock Bonus Plan. The Stock Bonus Plan is currently inactive.
12. | |
COMMITMENTS AND CONTINGENCIES |
Long-Term Contracts
Due to the nature of the natural gas distribution business, the CompanyRoanoke Gas enters into agreements with both suppliers and pipelines to contract for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The CompanyRoanoke Gas obtains most of its regulated natural gas supply through ana third party asset management contract betweencontract. Roanoke Gas and a third party asset manager. The Company utilizes an asset manager to optimize the use of its transportation, storage rights and gas supply inventories, which helps to ensure a secure and reliable source of natural gas. Under the current asset management contract, the CompanyRoanoke Gas has designated the asset manager to act as agent for the Company'sits storage capacity and all gas balances in storage. The CompanyRoanoke Gas retains ownership of gas in storage. Under provisions of this contract, the CompanyRoanoke Gas is obligated to purchase its winter storage requirements from the asset manager during the spring and summer injection periods at market price. The table below details the volumetric obligations as of September 30, 20172021 for the remainder of the contract period. The current asset management contract was renewed in August 2021 for a one year period which will expire in March 2018.
Natural Gas Contracts | ||||
Year | (In DTHs) | |||
2021-2022 | 2,320,859 | |||
2022-2023 | 295,866 | |||
Total | 2,616,725 | |||
In addition to the volumetric commitment above, the Company also has a fixed price agreement to purchase approximately 2.1 million dth, from October 2021 to March 2022, at prices ranging from $2.82 to $3.34 per DTH.
Roanoke Gas also has contracts for pipeline and storage capacity which extend for various periods. These capacity costs and related fees are valued at tariff rates in place as of September 30, 2017.2021. These rates may increase or decrease in the future based upon rate filings and rate orders granting a rate change to the pipeline or storage operator. Roanoke Gas expended approximately $28,496,000, $24,852,000$33,894,000 and $33,405,000$21,881,000 under the asset management, pipeline and storage contracts in fiscal years 2017, 20162021 and 2015,2020, respectively. The table below details the pipeline and storage capacity obligationscommitments as of September 30, 20172021 for the remainder of the contract period.
| Year | Pipeline and Storage Capacity | |||
| 2017-2018 | $ | 11,232,436 | ||
| 2018-2019 | 10,113,115 | |||
| 2019-2020 | 7,633,155 | |||
| 2020-2021 | 5,221,751 | |||
| 2021-2022 | 4,565,743 | |||
| Thereafter | 3,067,053 | |||
| Total | $ | 41,833,253 | ||
Pipeline and | ||||
Year | Storage Capacity | |||
2021 - 2022 | $ | 15,432,720 | ||
2022 - 2023 | 13,671,397 | |||
2023 - 2024 | 11,789,154 | |||
2024 - 2025 | 7,206,347 | |||
2025 - 2026 | 2,249,852 | |||
Thereafter | 1,813,618 | |||
Total | $ | 52,163,088 | ||
Roanoke Gas maintains franchise agreements granted by the local cities and towns served by the Company. Roanoke Gas renewed its franchise agreements with the City of Roanoke, the City of Salem and the Town of Vinton in 2016 for 20-year terms to expire in December 2035. Per these agreements, franchise fees increase at a rate of 3% annually. As of September 30, 2021, $2,180,752 in future obligations remain under the franchise agreements.
Other Contracts
The Company maintains other agreements in the ordinary course of business covering various lease, maintenance, equipment and service contracts. These agreements currently extend through December 2031 and are not material to the Company.
Legal
From time to time, the Company may become involved in litigation or claims arising out of its operations in the normal course of business. At the current time, the Company is not known to be a party to any legal proceedings that would be expected to have a materially adverse impact on its financial position, results of operations or cash flows.
Environmental Matters
Roanoke Gas and a previously owned gas subsidiary operated manufactured gas plants (MGPs)an MGP as a source of fuel for lighting and heating until the early 1950’s. A by-product of operating MGPsthe MGP was coal tar, and the potential exists for tar waste contaminants at the former plant sites.site. While the Company does not currently recognize any commitments or contingencies related to environmental costs, at either site, should the Company ever be required to remediate eitherthe site, it will pursue all prudent and reasonable means to recover any related costs, including the use of insurance claims and regulatory approval for rate case recognition of expenses associated with any work required.
13. | |
FAIR VALUE MEASUREMENTS |
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, 2017 2021 and 2016,2020, respectively:
| Fair Value Measurements - September 30, 2017 | ||||||||||||||||
| Fair Value | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Interest rate swaps | $ | 116,843 | $ | — | $ | 116,843 | $ | — | ||||||||
| Total | $ | 116,843 | $ | — | $ | 116,843 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Natural gas purchases | $ | 805,159 | $ | — | $ | 805,159 | $ | — | ||||||||
| Total | $ | 805,159 | $ | — | $ | 805,159 | $ | — | ||||||||
| Fair Value Measurements - September 30, 2016 | ||||||||||||||||
| Fair Value | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Natural gas purchases | $ | 1,052,930 | $ | — | $ | 1,052,930 | $ | — | ||||||||
| Total | $ | 1,052,930 | $ | — | $ | 1,052,930 | $ | — | ||||||||
Fair Value Measurements - September 30, 2021 | ||||||||||||||||
Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Natural gas purchases | $ | 2,728,935 | $ | 0 | $ | 2,728,935 | $ | 0 | ||||||||
Interest rate swaps | 1,196,083 | 0 | 1,196,083 | 0 | ||||||||||||
Total | $ | 3,925,018 | $ | 0 | $ | 3,925,018 | $ | 0 | ||||||||
Fair Value Measurements - September 30, 2020 | ||||||||||||||||
Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Natural gas purchases | $ | 470,755 | $ | 0 | $ | 470,755 | $ | 0 | ||||||||
Interest rate swaps | 2,223,556 | 0 | 2,223,556 | 0 | ||||||||||||
Total | $ | 2,694,311 | $ | 0 | $ | 2,694,311 | $ | 0 | ||||||||
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, 2017 2021 and 2016,2020, the Company had recorded in accounts payable the estimated fair value of the liability determined on the corresponding first of month index prices for which the liability was expected to be settled.
The Company’s nonfinancialnon-financial assets and liabilities that are measured at fair value on a nonrecurring basis consist of its asset retirement obligations. The asset retirement obligations 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 (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the shorter-term nature of these financial instruments. 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, 2017 2021 and 2016.
| Fair Value Measurements - September 30, 2017 | ||||||||||||||||
| Carrying Amount | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Long-term debt | $ | 43,812,200 | $ | — | $ | — | $ | 45,689,238 | ||||||||
| Total | $ | 43,812,200 | $ | — | $ | — | $ | 45,689,238 | ||||||||
| Fair Value Measurements - September 30, 2016 | ||||||||||||||||
| Carrying Amount | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Long-term debt | $ | 33,896,200 | $ | — | $ | — | $ | 36,163,523 | ||||||||
| Total | $ | 33,896,200 | $ | — | $ | — | $ | 36,163,523 | ||||||||
Fair Value Measurements - September 30, 2021 | ||||||||||||||||
Carrying | Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Current maturities of long-term debt | $ | 7,000,000 | $ | 0 | $ | 0 | $ | 7,000,000 | ||||||||
Notes payable | 116,110,200 | 0 | 0 | 124,691,896 | ||||||||||||
Total | $ | 123,110,200 | $ | 0 | $ | 0 | $ | 131,691,896 | ||||||||
Fair Value Measurements - September 30, 2020 | ||||||||||||||||
Carrying | Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Notes payable | $ | 114,975,200 | $ | 0 | $ | 0 | $ | 124,740,970 | ||||||||
Total | $ | 114,975,200 | $ | 0 | $ | 0 | $ | 124,740,970 | ||||||||
The fair value of long-term debt for Roanoke Gas is estimated by discounting the future cash flows of the fixed rate debt based on the underlying 20-year20-year 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. A 64 basis point increase in the 20-year Treasury in fiscal 2017 partially offset by a reduction in the assumed credit spreads accounted for the smaller differential between the fair value and the carrying amount of the notes payable at the end of the year. The fair value for the RGC Midstream debt is estimated by discounting the estimated credit spread extrapolated based on market conditions.
FASB 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.14. | |
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
Quarterly financial data for the years ended September 30, 2017 2021 and 20162020 is summarized as follows:
First | Second | Third | Fourth | |||||||||||||
2021 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Operating revenues | $ | 19,517,017 | $ | 28,253,662 | $ | 14,048,846 | $ | 13,355,254 | ||||||||
Operating income | $ | 5,581,387 | $ | 7,099,426 | $ | 1,542,333 | $ | 555,163 | ||||||||
Net income | $ | 4,723,263 | $ | 4,767,478 | $ | 610,840 | $ | 481 | ||||||||
Earnings (loss) per share of common stock: | ||||||||||||||||
Basic | $ | 0.58 | $ | 0.58 | $ | 0.07 | $ | 0 | ||||||||
Diluted | $ | 0.58 | $ | 0.58 | $ | 0.07 | $ | 0 | ||||||||
First | Second | Third | Fourth | |||||||||||||
2020 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Operating revenues | $ | 19,785,453 | $ | 22,437,731 | $ | 11,071,918 | $ | 9,780,289 | ||||||||
Operating income (loss) | $ | 5,081,979 | $ | 6,999,616 | $ | 1,335,663 | $ | (899,076 | ) | |||||||
Net income (loss) | $ | 4,006,936 | $ | 5,680,316 | $ | 1,206,578 | $ | (329,296 | ) | |||||||
Earnings (loss) per share of common stock: | ||||||||||||||||
Basic | $ | 0.50 | $ | 0.70 | $ | 0.15 | $ | (0.04 | ) | |||||||
Diluted | $ | 0.49 | $ | 0.70 | $ | 0.15 | $ | (0.04 | ) | |||||||
| 2017 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Operating revenues | $ | 18,788,585 | $ | 21,900,013 | $ | 11,435,824 | $ | 10,172,448 | ||||||||
| Gross margin | $ | 9,390,905 | $ | 10,829,730 | $ | 6,634,402 | $ | 5,954,120 | ||||||||
| Operating income | $ | 3,982,275 | $ | 5,589,207 | $ | 1,328,207 | $ | 766,620 | ||||||||
| Net income | $ | 2,232,218 | $ | 3,225,199 | $ | 615,562 | $ | 159,886 | ||||||||
| Earnings per share of common stock: | ||||||||||||||||
| Basic | $ | 0.31 | $ | 0.45 | $ | 0.09 | $ | 0.02 | ||||||||
| Diluted | $ | 0.31 | $ | 0.45 | $ | 0.08 | $ | 0.02 | ||||||||
| 2016 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Operating revenues | $ | 16,010,056 | $ | 21,777,773 | $ | 11,295,197 | $ | 9,980,265 | ||||||||
| Gross margin | $ | 8,738,116 | $ | 10,649,269 | $ | 6,312,340 | $ | 5,865,189 | ||||||||
| Operating income | $ | 3,498,052 | $ | 5,444,314 | $ | 1,453,350 | $ | 816,376 | ||||||||
| Net income | $ | 1,922,790 | $ | 3,111,447 | $ | 627,068 | $ | 145,561 | ||||||||
| Earnings per share of common stock: | ||||||||||||||||
| Basic | $ | 0.27 | $ | 0.44 | $ | 0.09 | $ | 0.02 | ||||||||
| Diluted | $ | 0.27 | $ | 0.44 | $ | 0.09 | $ | 0.02 | ||||||||
15. | |
SUBSEQUENT EVENTS |
On October 2, 2017, 28, 2021, Roanoke Gas received SCC communication that it had qualified for and will receive ARPA funds in the amount of $858,556 pursuant to Chapter 1 of the 2021 Virginia Acts of Assembly, Special Session II. The ARPA funds are to be applied to residential customer accounts with arrearages greater than 60 days as of August 31, 2021. When received, Roanoke Gas plans to apply the funds to eligible customer accounts. The receipt of the funds was not recorded or applied to accounts receivable balances as of September 30, 2021; however, the Company included the pending receipt of these funds in its estimation of the allowance for uncollectible accounts. As a result, the allowance for uncollectible accounts declined to approximately $242,000 as recorded within the accompanying financial statements and disclosed in Note 1 above.
On October 29, 2021 Midstream entered into two 10-yearan unsecured notes with Prudential Investment Managementpromissory note in the total principal amount of $8,000,000. The notes have$8.0 million with an interest rate based on 30-day LIBOR plus 115 basis points maturing December 1, 2027. Related to this note, Midstream also entered into an interest rate swap agreement that effectively converts the variable rate note into a fixed rate instrument with an effective annual interest rate of 3.58%2.443%. The proceedsloan will convert into an installment loan with principal pay-down beginning in fiscal 2023. In addition, this note reduces the borrowing capacity defined by the Third Amendment to Credit Agreement and amendments to the related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the note will be used to convert a portionnew promissory note. All other terms of the Company's line-of-credit balance into longer-term financing.
The Company has evaluated subsequent events through the date the financial statements were issued. There were no other items not otherwise disclosed which would have materially impacted the Company’s consolidated financial statements.
None.
Item 9A.Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”),SEC, and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.
As of September 30, 2017,2021, the Company completed an evaluation, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017.
Management routinely reviews the Company’s internal control over financial reporting and makes changes, as necessary, to enhance the effectiveness of the internal controls over financial reporting. There were no changes in the internal controls over financial reporting during the fourth quarter of the fiscal year covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of AmericaGAAP and include those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Projections of the effectiveness to future periods are subject to the risk that the internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate. The Company’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
The Company has conducted an evaluation of the design and effectiveness of the Company’s system of internal control over financial reporting as of September 30, 2017,2021, based on the framework set forth in ”
None
 |
For information with respect to the executive officers of the registrant, see “Executive Officers" section in the Proxy Statement for the For information regarding the process for identifying and evaluating candidates to be nominated as directors, see "Director Nominations" in the Proxy Statement for the Information with respect to compliance with Section 16(a) of the Exchange Act, which is set forth under the caption The Company has adopted a Code of Ethics applicable to all of its officers, directors and employees. The Company has posted the text of its Code of Ethics on its website at The information set forth under "Compensation of Directors", "Compensation Discussion and Analysis" and "Report of the Compensation Committee" in the Proxy Statement for the For information pertaining to securities authorized for issuance under equity compensation plans, see Part II, Item 5 above. The information pertaining to shareholders beneficially owning more than five percent of the registrant’s common stock and the security ownership of management, which is set forth under the caption “Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the The information pertaining to director independence is set forth under the caption “Board of Directors and Committees of the Board of Directors” and pertaining to transactions with related persons is set forth under the caption "Transactions with Related Persons" in the Proxy Statement for the The information set forth under the caption "Report of the Audit Committee" in the Proxy Statement for the Item 15.Exhibits and Financial Statement Schedules. (a) List of documents filed as part of this report: 1. Financial statements filed as part of this report: All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K. 2. Financial statement schedules filed as part of this report: All information is inapplicable or presented in the consolidated financial statements or related notes thereto. 3. Exhibits. 1 (a) 3 (a) 3 (b) 4 (a) 4 (b) 4 (c) 10 (a) P Firm Transportation Agreement between East Tennessee Natural Gas Company and Roanoke Gas Company dated November 1, 1993 (incorporated herein by reference to Exhibit 10(a) of the Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (SEC file number reference 0-367)) 10 (b) 10 (c) 10 (d) 10 (e) 10 10 10 (h) P Gas Transportation Agreement, for use under IT rate schedule, between Tennessee Gas Pipeline Company and Roanoke Gas Company dated September 1, 1993 (incorporated herein by reference to Exhibit 10(l) of the Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (SEC file number reference 0-367)) 10 (i) 10 (k) 10 (l) 10 10 (n) 10 10 10 (q) 10 (s) 10 (t) 10 (u) 10 (v) 10 (w) 10 (x) P Certificate of Public Convenience and Necessity for Bedford County dated February 21, 1966 (incorporated herein by reference to Exhibit 10(o) of Registration Statement No. 33-36605, on Form S-2, filed with the Commission on August 29, 1990, and amended by Amendment No. 1, filed with the Commission on September 19, 1990) 10 P Certificate of Public Convenience and Necessity for Roanoke County dated October 19, 1965 (incorporated herein by reference to Exhibit 10(p) of Registration Statement No. 33-36605, on Form S-2, filed with the Commission on August 29, 1990, and amended by Amendment No. 1, filed with the Commission on September 19, 10 P Certificate of Public Convenience and Necessity for Botetourt County dated August 30, 1966 (incorporated herein by reference to Exhibit 10(q) of Registration Statement No. 33-36605, on Form S-2, filed with the Commission on August 29, 1990, and amended by Amendment No. 1, filed with the Commission on September 19, 10 (a)(a) P Certificate of Public Convenience and Necessity for Montgomery County dated July 8, 1985 (incorporated herein by reference to Exhibit 10(r) of Registration Statement No. 33-36605, on Form S-2, filed with the Commission on August 29, 1990, and amended by Amendment No. 1, filed with the Commission on September 19, 10 (b)(b) P Resolution of the Council for the Town of Fincastle, Virginia dated June 8, 1970 (incorporated herein by reference to Exhibit 10(f) of Registration Statement No. 33-11383, on Form S-4, filed with the Commission on January 16, 10 (c)(c) P Resolution of the Council for the Town of Troutville, Virginia dated November 4, 1968 (incorporated herein by reference to Exhibit 10(g) of Registration Statement No. 33-11383, on Form S-4, filed with the Commission on January 16, 10 (d)(d) 10 (e)(e) 10 10 10 10 10 10 10 10 10 10 (o)(o) 10 10 10 10 (s)(s) 10 (t)(t) 10 (u)(u) 10 (x)(x) 10 10 10 10 10 10 10 (e)(e)(e) 10 10 (g)(g)(g) 10 (h)(h)(h) 10 10 10 10 10 (m)(m)(m) 10 10 10 10 (q)(q)(q) 10 (r)(r)(r) 10 (s)(s)(s) 10 (t)(t)(t) 10 (u)(u)(u) 10 (v)(v)(v) 10 (w)(w)(w) 10 (x)(x)(x) 10 (y)(y)(y) 10 (z)(z)(z) 10 (a)(a)(a)(a) 10 (b)(b)(b)(b) ** 10 10 (d)(d)(d)(d) 10 (e)(e)(e)(e) 10 (f)(f)(f)(f) 10 (g)(g)(g)(g) 10 (h)(h)(h)(h) 10 (i)(i)(i)(i) * These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. ** Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission. P These original exhibits were filed with the SEC in paper form and therefore are not hyper-linked to the original filing. Not applicable. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. RGC RESOURCES, INC. By: /S/ LAWRENCE T. OLIVER December 2, 2021 Lawrence T. Oliver Date Vice President, Interim CFO, Corporate Secretary and Treasurer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/ PAUL W. NESTER President and Chief Executive Officer, Director Paul W. Nester Date (Principal Executive /S/ LAWRENCE T. OLIVER Vice President, Interim CFO, Corporate Secretary and Treasurer Lawrence T. Oliver Date (Principal Financial /S/ JOHN B. WILLIAMSON, III Chairman of the John B. Williamson, III Date /S/ NANCY H. AGEE Director Nancy H. Agee Date /S/ JACQUELINE L. ARCHER Director Jacqueline L. Archer Date /S/ ABNEY S. BOXLEY, III Director Abney S. Boxley, III Date /S/ T. JOE CRAWFORD Director T. Joe Crawford Date /S/ MARYELLEN F. GOODLATTE Director Maryellen F. Goodlatte Date /S/ J. ALLEN LAYMAN Director J. Allen Layman Date /S/ S. FRANK SMITH Director S. Frank Smith DateItem 9B.Other Information.NoneItem 10.Directors, Executive Officers and Corporate Governance.20182022 Annual Meeting of Shareholders of Resources incorporated herein by reference. For information with respect to the Company’s directors and nominees and the Company’s Audit Committee, see Proposal 1 “Election of Directors of Resources” and “Report of the Audit Committee”, respectively, in the Proxy Statement for the 20182022 Annual Meeting of Shareholders of Resources, which information is incorporated herein by reference. In addition, the Board of Directors has determined that Abney S. Boxley, III George W. Logan and Raymond D. Smoot, Jr.Jacqueline L. Archer are audit committee financial experts under applicable SEC rules.20182022 Annual Meeting of Shareholders of Resources, which is incorporated herein by reference."Section 16 (a) Beneficial Ownership Reporting Compliance""Delinquent Section 16(a) Reports" in the Proxy Statement for the 20182022 Annual Meeting of Shareholders of Resources, is incorporated herein by reference.Item 11.Executive Compensation.20182022 Annual Meeting of Shareholders of Resources is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.20182022 Annual Meeting of Shareholders of Resources, is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions, and Director Independence.20182022 Annual Meeting of Shareholders of Resources, which information is incorporated herein by reference.Item 14.Principal Accounting Fees and Services.20182022 Annual Meeting of Shareholders of Resources is incorporated herein by reference.PART IVItem 15.Exhibits and Financial Statement Schedules.(a)List of documents filed as part of this report:1.Financial statements filed as part of this report:2.Financial statement schedules filed as part of this report:3.ExhibitsMarch 5, 2020) 10 (f) 10 (o) 10 (i)(i)13212331.131.232.1*32.2*101The following documents from the Registrant’s Annual Report on Form 10-K for the years ended September 30, 2017, 2016 and 2015, formatted in XBRL (eXtensible Business Reporting Language); Consolidated Balance Sheets at September 30, 2017 and 2016, (ii) Consolidated Statements of Income for the years ended September 30, 2017, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the years ended September 30, 2017, 2016 and 2015, (iv) Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2017, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the years ended September 30, 2017, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.*These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 16.Form 10-K Summary.Not applicable.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.RGC RESOURCES, INC.By:/S/ PAUL W. NESTER December 8, 2017Paul W. NesterDateVice President, Secretary, Treasurer and CFO(principal accounting and financial officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated./S/ JOHN S. D'ORAZIO December 8, 2017President and Chief Executive Officer, DirectorJohn S. D'OrazioDate/S/ PAUL W. NESTER December 8, 2017Vice President, Treasurer and CFO(principal accounting and financial officer)Paul W. NesterDate/S/ JOHN B. WILLIAMSON, III December 8, 2017Chairman of the Board and DirectorJohn B. Williamson, IIIDate/S/ NANCY H. AGEE December 8, 2017DirectorNancy H. AgeeDate/S/ ABNEY S. BOXLEY, III December 8, 2017DirectorAbney S. Boxley, IIIDate/S/ MARYELLEN F. GOODLATTE December 8, 2017DirectorMaryellen F. GoodlatteDate/S/ J. ALLEN LAYMAN December 8, 2017DirectorJ. Allen LaymanDate/S/ GEORGE W. LOGAN December 8, 2017DirectorGeorge W. LoganDate/S/ S. FRANK SMITH December 8, 2017DirectorS. Frank SmithDate/S/ RAYMOND D. SMOOT, JR. December 8, 2017DirectorRaymond D. Smoot, Jr.DateEXHIBIT INDEXExhibit No.Description3 (a) 3 4 (a)4 (b) 10 (f) (g)(f) (h)(g)P10 (i)P 10 (j) PGas Storage ContractTransportation Agreement, for use under FT-A rate schedule, FS (Market Area) Portland between Tennessee Gas Pipeline Company and Roanoke Gas Company originally dated November 1, 1993 (incorporated herein by reference to Exhibit 10(k)(k) of the Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (SEC file number reference 0-367))as amended. 10 (m) (n)(m) 10(o) (p)(o) (q)(p) 10 (r) P (x)(y)1990)1990 (SEC file number reference 0-367)) (y)(z)1990)1990 (SEC file number reference 0-367)) 10 (z)P1990)1990 (SEC file number reference 0-367)) 10 (a)(a)PCertificate of Public Convenience and Necessity for Franklin County dated September 8, 1964 (incorporated herein by reference to Exhibit 10(t) of Registration Statement No. 33-36605, on Form S-2, filed with the Commission on August 29, 1990, and amended by Amendment No. 1, filed with the Commission on September 19, 1990)1987)1987 (SEC file number reference 0-367)) 1987)1987 (SEC file number reference 0-367)) (e)(e)(f)(f) (f)(f)(g)(g) (g)(g)(h)(h) (h)(h)(i)(i) (i)(i)(j)(j) (j)(j)(k)(k) (k)(k)(l)(l) (l)(l)(m)(m) (m)(m)(n)(n) 10 (n)(n) (o)(o)(p)(p) (p)(p)(q)(q) (q)(q)(r)(r) 10 (r)(r)(v)(v) 10 (w)(w) Sixth Amendment to Credit Agreement by and between Roanoke Gas Company and Wells Fargo Bank, N.A., including Guarantor's Consent and Reaffirmation, dated as of August 20, 2021 (incorporated herein by reference to Exhibit 10.2 on Form 8-K as filed August 26, 2021). (s)(s)(y)(y) 10 (t)(t) (u)(u)(z)(z) (v)(v)(a)(a)(a) (w)(w)(b)(b)(b) (x)(x)(c)(c)(c) (y)(y)(d)(d)(d) 10 (z)(z)10 (a)(a)(a) (b)(b)(b)(f)(f)(f) (c)(c)(c)(i)(i)(i) (d)(d)(d)(j)(j)(j) (e)(e)(e)(k)(k)(k) 10 (f)(f)(f)10 (g)(g)(g)10 (h)(h)(h)10 (i)(i)(i) (j)(j)(j)(l)(l)(l) (k)(k)(k)(n)(n)(n) (l)(l)(l)(o)(o)(o) (m)(m)(m)(p)(p)(p)10 (n)(n)(n)**10 (o)(o)(o)** (p)(p)(p)(c)(c)(c)(c) 13 21 23 Swap Agreement by and between Roanoke Gas Company and Wells Fargo Bank, N.A., executed on August 20, 2021 (incorporated by reference to Exhibit 10.3 on Form 8-K as filed August 26, 2021). 10 (j)(j)(j)(j) Promissory Note in the principal amount of $10,000,000 by Roanoke Gas Company with Pinnacle Bank, dated as of September 24, 2021 (incorporated herein by reference to Exhibit 10.1 on Form 8-K as filed September 30, 2021). 10 (k)(k)(k)(k) 10 (l)(l)(l)(l) 10 (m)(m)(m)(m) Promissory Note in the principal amount of $8,000,000 by RGC Midstream, LLC with Atlantic Union Bank, dated as of November 1, 2021 (incorporated herein by reference to Exhibit 10.1 on Form 8-K as filed November 4, 2021). 32.1* OfficerOfficer) 32.2* OfficerOfficer) 101 The following documents fromDecember 2, 2021Registrant’s Annual Report on Form 10-K for the years ended September 30, 2017, 2016Board and 2015, formatted in XBRL (eXtensible Business Reporting Language); Consolidated Balance Sheets at September 30, 2017 and 2016, (ii) Consolidated Statements of Income for the years ended September 30, 2017, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the years ended September 30, 2017. 2016 and 2015, (iv) Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2017, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the years ended September 30, 2017, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.Director *These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.**Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission.PThese original exhibits were filed with the SEC in paper form and therefore are not hyper-linked to the original filing.December 2, 2021 December 2, 2021 December 2, 2021 December 2, 2021 December 2, 2021 December 2, 2021 December 2, 2021