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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Transition Period From
to
Commission File Number 000-26591
RGC Resources, Inc.
(Exact name of Registrant as Specified in its Charter)
Virginia 54-1909697
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification No.)
519 Kimball Ave., N.E.,Roanoke,VA 24016
(Address of Principal Executive Offices) (Zip Code)
(540) 777-4427
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $5 Par ValueRGCONASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated-filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 2021
Common Stock, $5 Par Value 8,215,439



GLOSSARY OF TERMS
AFUDCAllowance for Funds Used During Construction
AOCI/AOCLAccumulated Other Comprehensive Income (Loss)
AROAsset Retirement Obligation
ARPAlternative Revenue Program, regulatory or rate recovery mechanisms approved by the SCC that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets
ASCAccounting Standards Codification
ASUAccounting Standards Update as issued by the FASB
CARESThe Coronavirus Aid, Relief, and Economic Security Act
CompanyRGC Resources, Inc. or Roanoke Gas Company
COVID-19 or CoronavirusA pandemic disease that causes respiratory illness similar to the flu with symptoms such as coughing, fever, and in more severe cases, difficulty in breathing
CPCNCertificate of Public Convenience and Necessity
Diversified EnergyDiversified Energy Company, a wholly-owned subsidiary of Resources
DRIPDividend Reinvestment and Stock Purchase Plan of RGC Resources, Inc.
DTHDecatherm (a measure of energy used primarily to measure natural gas)
EPSEarnings Per Share
ERISAEmployee Retirement Income Security Act of 1974
ESACEligible Safety Activity Costs, a Virginia natural gas utility’s operation and maintenance expenditures that are related to the development, implementation, or execution of the utility’s integrity management plan or programs and measures implemented to comply with regulations issued by the SCC or a federal regulatory body with jurisdiction over pipeline safety
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FERCFederal Energy Regulatory Commission
Fourth CircuitU.S. Fourth Circuit Court of Appeals
GAAPU.S. Generally Accepted Accounting Principles
HDDHeating degree day, a measurement designed to quantify the demand for energy. It is the number of degrees that a day’s average temperature falls below 65 degrees Fahrenheit
ICCInventory carrying cost revenue, an SCC approved rate structure that mitigates the impact of financing costs on natural gas inventory
IRSInternal Revenue Service
KEYSOPRGC Resources, Inc. Key Employee Stock Option Plan
LIBORLondon Inter-Bank Offered Rate
LLCMountain Valley Pipeline, L.L.C., a joint venture established to design, construct and operate the Mountain Valley Pipeline and MVP Southgate
LNGLiquefied natural gas, the cryogenic liquid form of natural gas. Roanoke Gas operates and maintains a plant capable of producing and storing up to 200,000 dth of liquefied natural gas
MGPManufactured gas plant
MidstreamRGC Midstream, L.L.C., a wholly-owned subsidiary of Resources created to invest in pipeline projects including MVP and Southgate
MVPMountain Valley Pipeline, a FERC-regulated natural gas pipeline project intended to connect the Equitran's gathering and transmission system in northern West Virginia to the Transco interstate pipeline in south central Virginia with a planned interconnect to Roanoke Gas’ natural gas distribution system
NQDC PlanRGC Resources, Inc. Non-qualified Deferred Compensation Plan
Normal WeatherThe average number of heating degree days over the most recent 30-year period
PBGCPension Benefit Guaranty Corporation
Pension PlanDefined benefit plan that provides pension benefits to employees hired prior to January 1, 2017 who meet certain years of service criteria
PGAPurchased Gas Adjustment, a regulatory mechanism, which adjusts natural gas customer rates to reflect changes in the forecasted cost of gas and actual gas costs
Postretirement PlanDefined benefit plan that provides postretirement medical and life insurance benefits to eligible employees hired prior to January 1, 2000 who meet years of service and other criteria
ResourcesRGC Resources, Inc., parent company of Roanoke Gas, Midstream and Diversified Energy
RGCOTrading symbol for RGC Resources, Inc. on the NASDAQ Global Stock Market
Roanoke GasRoanoke Gas Company, a wholly-owned subsidiary of Resources
RSPDRGC Resources, Inc. Restricted Stock Plan for Outside Directors
RSPORGC Resources, Inc. Restricted Stock Plan
SAVESteps to Advance Virginia's Energy, a regulatory mechanism per Chapter 26 of Title 56 of the Code of Virginia that allows natural gas utilities to recover the investment, including related depreciation and expenses and provide return on rate base, in eligible infrastructure replacement projects without the filing of a formal base rate application
SAVE PlanSteps to Advance Virginia's Energy Plan, the Company's proposed and approved operational replacement plan and related spending under the SAVE regulatory mechanism.
SAVE RiderSteps to Advance Virginia's Energy Plan Rider, the rate component of the SAVE Plan as approved by the SCC that is billed monthly to the Company’s customers to recover the costs associated with eligible infrastructure projects including the related depreciation and expenses and return on rate base of the investment
SCCVirginia State Corporation Commission, the regulatory body with oversight responsibilities of the utility operations of Roanoke Gas
SECU.S. Securities and Exchange Commission
SouthgateMountain Valley Pipeline, LLC’s Southgate project, which extends from the MVP in south central Virginia to central North Carolina, of which Midstream holds less than a 1% investment
S&P 500 IndexStandard & Poor’s 500 Stock Index
TCJATax Cuts and Jobs Act of 2017
WNAWeather Normalization Adjustment, an ARP mechanism which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average
Some of the terms above may not be included in this filing


RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


December 31, 2020
Unaudited
September 30,
2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$736,665 $291,066 
Accounts receivable (less allowance for uncollectibles of $771,214 and $703,140, respectively)
9,849,308 3,404,044 
Materials and supplies1,032,098 1,027,191 
Gas in storage5,069,010 5,708,761 
Prepaid income taxes 647,623 
Regulatory assets2,385,995 2,503,314 
Other1,830,276 854,562 
Total current assets20,903,352 14,436,561 
UTILITY PROPERTY:
In service261,579,585 258,342,372 
Accumulated depreciation and amortization(72,827,050)(71,386,537)
In service, net188,752,535 186,955,835 
Construction work in progress13,031,858 11,489,258 
Utility plant, net201,784,393 198,445,093 
OTHER ASSETS:
Regulatory assets10,963,668 10,970,094 
Investment in unconsolidated affiliates60,357,044 57,542,805 
Other345,872 284,954 
Total other assets71,666,584 68,797,853 
TOTAL ASSETS$294,354,329 $281,679,507 
1

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2020
Unaudited
September 30,
2020
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt$7,000,000 $ 
Dividends payable1,519,670 1,428,268 
Accounts payable5,469,445 4,442,182 
Capital contributions payable1,447,707 2,512,437 
Customer credit balances2,041,307 1,587,061 
Income taxes payable290,725  
Customer deposits1,619,966 1,611,476 
Accrued expenses2,369,511 3,565,210 
Interest rate swaps501,034 533,795 
Regulatory liabilities267,503 890,313 
Total current liabilities22,526,868 16,570,742 
LONG-TERM DEBT:
Notes payable110,880,200 114,975,200 
Line-of-credit15,538,491 9,143,606 
Less unamortized debt issuance costs(276,987)(299,175)
Long-term debt, net126,141,704 123,819,631 
DEFERRED CREDITS AND OTHER LIABILITIES:
Interest rate swaps1,495,314 1,689,761 
Asset retirement obligations7,288,892 7,180,982 
Regulatory cost of retirement obligations12,892,254 12,678,043 
Benefit plan liabilities6,106,620 6,149,527 
Deferred income taxes14,740,144 13,973,762 
Regulatory liabilities10,612,992 10,729,082 
Total deferred credits and other liabilities53,136,216 52,401,157 
STOCKHOLDERS’ EQUITY:
Common stock, $5 par value; authorized 20,000,000 shares; issued and outstanding 8,172,037 and 8,160,058 shares, respectively
40,860,185 40,800,290 
Preferred stock, no par, authorized 5,000,000 shares; no shares issued and outstanding
  
Capital in excess of par value16,061,608 15,847,121 
Retained earnings38,892,103 35,688,510 
Accumulated other comprehensive loss(3,264,355)(3,447,944)
Total stockholders’ equity92,549,541 88,887,977 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$294,354,329 $281,679,507 
See notes to condensed consolidated financial statements.

2

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
 
 Three Months Ended December 31,
 20202019
OPERATING REVENUES:
Gas utility$19,483,500 $19,625,606 
Non utility33,517 159,847 
Total operating revenues19,517,017 19,785,453 
OPERATING EXPENSES:
Cost of gas - utility7,700,699 8,177,806 
Cost of sales - non utility5,387 76,456 
Operations and maintenance3,502,122 3,917,470 
General taxes574,024 543,237 
Depreciation and amortization2,153,398 1,988,505 
Total operating expenses13,935,630 14,703,474 
OPERATING INCOME5,581,387 5,081,979 
Equity in earnings of unconsolidated affiliate1,356,683 1,094,086 
Other income, net330,026 157,643 
Interest expense1,019,829 1,085,185 
INCOME BEFORE INCOME TAXES6,248,267 5,248,523 
INCOME TAX EXPENSE1,525,004 1,241,587 
NET INCOME$4,723,263 $4,006,936 
BASIC EARNINGS PER COMMON SHARE$0.58 $0.50 
DILUTED EARNINGS PER COMMON SHARE$0.58 $0.49 
DIVIDENDS DECLARED PER COMMON SHARE$0.185 $0.175 
See notes to condensed consolidated financial statements.
3

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
 
 Three Months Ended December 31,
 20202019
NET INCOME$4,723,263 $4,006,936 
Other comprehensive income, net of tax:
Interest rate swaps168,725 263,053 
Defined benefit plans14,864 16,791 
OTHER COMPREHENSIVE INCOME, NET OF TAX183,589 279,844 
COMPREHENSIVE INCOME$4,906,852 $4,286,780 
See notes to condensed consolidated financial statements.
4

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
Three Months Ended December 31, 2020
Common StockCapital in Excess of Par ValueRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Balance - September 30, 2020$40,800,290 $15,847,121 $35,688,510 $(3,447,944)$88,887,977 
Net Income— — 4,723,263 — 4,723,263 
Other comprehensive income— — — 183,589 183,589 
Cash dividends declared ($0.185 per share)
— — (1,519,670)— (1,519,670)
Issuance of common stock (11,979 shares)
59,895 214,487 — — 274,382 
Balance - December 31, 2020$40,860,185 $16,061,608 $38,892,103 $(3,264,355)$92,549,541 
Three Months Ended December 31, 2019
Common StockCapital in Excess of Par ValueRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Balance - September 30, 2019$40,366,320 $14,397,072 $30,821,917 $(2,488,917)$83,096,392 
Net Income— — 4,006,936 — 4,006,936 
Other comprehensive income— — — 279,844 279,844 
Cash dividends declared ($0.175 per share)
— — (1,419,236)— (1,419,236)
Issuance of common stock (18,053 shares)
90,265 304,934 — — 395,199 
Balance - December 31, 2019$40,456,585 $14,702,006 $33,409,617 $(2,209,073)$86,359,135 
See notes to condensed consolidated financial statements.

5

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
 Three Months Ended December 31,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$4,723,263 $4,006,936 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,215,525 2,047,695 
Cost of retirement of utility plant, net(138,954)(170,224)
Equity in earnings of unconsolidated affiliate(1,356,683)(1,094,086)
Allowance for funds used during construction(55,980) 
Changes in assets and liabilities which used cash, exclusive of changes and noncash transactions shown separately(5,234,261)(3,972,358)
Net cash provided by operating activities152,910 817,963 
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for utility property(5,332,997)(5,849,460)
Investment in unconsolidated affiliates(2,522,286)(5,039,157)
Proceeds from disposal of utility property1,972 12,881 
Net cash used in investing activities(7,853,311)(10,875,736)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of unsecured notes2,905,000 15,692,000 
Borrowings under line-of-credit10,617,491 9,784,533 
Repayments under line-of-credit(4,222,606)(15,031,241)
Debt issuance expenses (62,198)
Proceeds from issuance of stock274,382 395,199 
Cash dividends paid(1,428,267)(1,339,521)
Net cash provided by financing activities8,146,000 9,438,772 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS445,599 (619,001)
BEGINNING CASH AND CASH EQUIVALENTS291,066 1,631,348 
ENDING CASH AND CASH EQUIVALENTS$736,665 $1,012,347 
See notes to condensed consolidated financial statements.
6

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

1.Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present Resources' financial position as of December 31, 2020, cash flows for the three months ended December 31, 2020 and 2019, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three months ended December 31, 2020 and 2019. The results of operations for the three months ended December 31, 2020 are not indicative of the results to be expected for the fiscal year ending September 30, 2021 as quarterly earnings are affected by the highly seasonal nature of the business and weather conditions generally result in greater earnings during the winter months.

The unaudited condensed consolidated financial statements and condensed notes are presented as permitted under the rules and regulations of the SEC. Pursuant to those rules, certain information and note disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information not misleading. Therefore, the unaudited condensed consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes contained in the Company’s Form 10-K for the year ended September 30, 2020. The September 30, 2020 consolidated balance sheet was included in the Company’s audited financial statements included in Form 10-K.

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

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements contained in the Company's Form 10-K for the year ended September 30, 2020.
Recently Issued or Adopted Accounting Standards

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 new guidance is effective for the Company for the annual reporting period ending September 30, 2021. The Company adopted the new guidance effective October 1, 2020. As this ASU only modifies disclosure requirements, the new guidance does not have a material effect on the Company's financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In combination with ASU 2021-01, 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. Management has not yet completed its evaluation of the new guidance. The Company has several contracts and hedging relationships for which LIBOR currently remains in-place; therefore, 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 by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.



7

RGC RESOURCES, INC. AND SUBSIDIARIES

2.Revenue

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

The following tables summarize revenue by customer, product and income statement classification:
Three months ended December 31, 2020Three months ended December 31, 2019
Gas utilityNon utilityTotal operating revenuesGas utilityNon utilityTotal operating revenues
Natural Gas (Billed and Unbilled):
Residential$11,246,194 $ $11,246,194 $12,290,361 $ $12,290,361 
Commercial5,990,020  5,990,020 5,729,218  5,729,218 
Industrial and Transportation1,223,801  1,223,801 1,326,085  1,326,085 
Other161,077 33,517 194,594 215,998 159,847 375,845 
Total contracts with customers18,621,092 33,517 18,654,609 19,561,662 159,847 19,721,509 
Alternative Revenue Programs862,408  862,408 63,944  63,944 
Total operating revenues$19,483,500 $33,517 $19,517,017 $19,625,606 $159,847 $19,785,453 

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’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 for natural gas that has been delivered or transported. In addition, the Company utilizes the practical expedient that allows an entity to recognize the invoiced amount as revenue, if that amount corresponds to the value received by the customer. Since customers are billed tariff rates, there is no variable consideration in the transaction price.

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

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. Non-utility (unregulated) activities provided by the Company include contract paving and other similar services. 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 revenue earned, as calculated based on the timing and extent of
8

RGC RESOURCES, INC. AND SUBSIDIARIES

infrastructure replacement completed during the period. These amounts are ultimately collected from, or returned to, customers through future rate changes as 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 AssetsCurrent Liabilities
Trade accounts receivable(1)
Unbilled revenue(1)
Customer credit balancesCustomer deposits
Balance at September 30, 2020$2,343,492 $1,041,518 $1,587,061 $1,611,476 
Balance at December 31, 20205,767,650 4,064,214 2,041,307 1,619,966 
Increase$3,424,158 $3,022,696 $454,246 $8,490 
(1) Included in accounts receivable in the condensed 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 did not incur any significant costs to obtain contracts.

3.Income Taxes

A reconciliation of income tax expense from applying the federal statutory rates in effect for each period to total income tax expense is presented below:
Three Months Ended December 31,
20202019
Income before income taxes$6,248,267 $5,248,523 
Corporate federal tax rate21.00 %21.00 %
Income tax expense computed at the federal statutory rate$1,312,136 $1,102,190 
State income taxes, net of federal tax benefit302,434 250,037 
Net amortization of excess deferred taxes on regulated operations(86,208)(86,208)
Other, net(3,358)(24,432)
Total income tax expense$1,525,004 $1,241,587 
Effective tax rate24.4 %23.7 %

4.Rates and Regulatory Matters

On March 16, 2020, in response to COVID-19, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service to all customers until May 15, 2020. The Commission extended the moratorium on disconnections through October 5, 2020. Subsequently, the Virginia General Assembly extended the moratorium for residential customers until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to remain in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner. Under the moratorium, utilities are prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees; therefore, residential customers that would normally be disconnected for non-payment will continue incurring costs for gas service until the moratorium is removed, resulting in higher potential write-offs. Roanoke Gas continues to evaluate and adjust its provision for bad debts; however, the potential magnitude of the combined impact from the economy and the service moratorium continues to be uncertain. The Company supports the decision to suspend service disconnections in light of the current economic situation and continues to work with its customers in making arrangements to keep or bring their accounts current.

In April 2020, the SCC 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. Formal guidance has not been provided by the SCC at this time. Roanoke Gas expects to defer certain COVID related costs during fiscal 2021 and
9

RGC RESOURCES, INC. AND SUBSIDIARIES

plans to seek recovery of these deferrals at the appropriate time. CARES Act funds have been provided to assist customers with past due balances. In December 2020, Roanoke Gas received $403,000 in CARES Act funds and is currently working with the SCC to determine the amount of funding for each eligible customer.

5.Other Investments

Midstream is currently a 1% owner of the LLC constructing the MVP. Pipeline construction has been delayed due to regulatory and legal challenges that have restricted the recent focus to maintenance and restoration activities. During the first quarter of fiscal 2021, Midstream's total investment in MVP increased $2.8 million, including its cash investment and the recognition of non-cash equity in earnings of the LLC. Subsequent to December 31, 2020, the LLC announced a change in its approach to seeking authorization to cross all remaining streams and wetlands on the project route. The LLC will request an individual permit from the U.S. Army Corps of Engineers to cross certain streams and wetlands utilizing open cut techniques and will apply to amend the MVP project's CPCN to seek FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods. The LLC continues to target a full in-service date for the MVP project in late calendar 2021 at a total project cost of $5.8 to $6.0 billion, excluding AFUDC.

Funding for Midstream's investments in the LLC for both the MVP and Southgate projects is being provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement, maturing in December 2022, and two additional notes issued in June 2019. See Note 7 for a schedule of debt instruments.

The investments in the LLC are included in the accompanying financial statements as follows:
Balance Sheet location:December 31, 2020September 30, 2020
Other Assets:
     MVP$59,971,692 $57,183,063 
     Southgate385,352 359,742 
     Investment in unconsolidated affiliates$60,357,044 $57,542,805 
Current Liabilities:
     MVP$1,431,946 $2,501,883 
     Southgate15,761 10,554 
     Capital contributions payable$1,447,707 $2,512,437 

Three Months Ended
Income Statement location:December 31, 2020December 31, 2019
    Equity in earnings of unconsolidated affiliate$1,356,683 $1,094,086 

December 31, 2020September 30, 2020
Undistributed earnings, net of income taxes, of MVP in retained earnings$7,850,176 $6,842,702 

The change in the investment in unconsolidated affiliates is provided below:
Three Months Ended
December 31, 2020December 31, 2019
Cash investment$2,522,286 $5,039,157 
Change in accrued capital calls(1,064,730)(4,132,921)
Equity in earnings of unconsolidated affiliate1,356,683 1,094,086 
Change in investment in unconsolidated affiliates$2,814,239 $2,000,322 





10

RGC RESOURCES, INC. AND SUBSIDIARIES

Summary unaudited financial statements of MVP are presented below. Southgate financial statements, which are accounted for under the cost method, are not included:
Income Statements
Three Months Ended
December 31, 2020December 31, 2019
AFUDC$133,757,314 $110,025,474 
Other income (expense), net(52,608)734,182 
Net income$133,704,706 $110,759,656 

Balance Sheets
December 31, 2020September 30, 2020
Assets:
Current assets$269,359,900 $513,713,429 
Construction work in progress5,844,594,039 5,536,248,668 
Other assets 3,703,896 4,597,441 
Total assets$6,117,657,835 $6,054,559,538 
Liabilities and Equity:
Current liabilities$216,782,311 $187,581,804 
Noncurrent liabilities303,706 245,000 
Capital5,900,571,818 5,866,732,734 
Total liabilities and equity$6,117,657,835 $6,054,559,538 

6.Derivatives and Hedging

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

The Company has three interest rate swaps associated with its variable rate debt. Roanoke Gas has a swap agreement that effectively converts the $7,000,000 term note based on LIBOR into fixed-rate debt with a 2.30% effective interest rate. Midstream has two swap agreements corresponding to the $14,000,000 and $10,000,000 variable rate term notes. The swap agreements convert these two notes into fixed rate instruments with effective interest rates of 3.24% and 3.14%, respectively. The swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of the swaps were deemed ineffective during the periods presented.

The Company had no outstanding derivative instruments for the purchase of natural gas.

The fair value of the current and non-current portions of the interest rate swaps are reflected in the condensed consolidated balance sheets under the caption interest rate swaps. The table in Note 8 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.











11


7.Long-Term Debt

Long-term debt consists of the following:
December 31, 2020September 30, 2020
PrincipalUnamortized Debt Issuance CostsPrincipalUnamortized Debt Issuance Costs
Roanoke Gas Company:
Unsecured senior notes payable, at 4.26% due on September 18, 2034
$30,500,000 $132,743 $30,500,000 $135,157 
Unsecured term note payable, at 30-day LIBOR plus 0.90%, due November 1, 2021
7,000,000 2,779 7,000,000 3,613 
Unsecured term notes payable, at 3.58% due on October 2, 2027
8,000,000 32,508 8,000,000 33,712 
Unsecured term notes payable, at 4.41% due on March 28, 2031
10,000,000 32,109 10,000,000 32,892 
Unsecured term notes payable, at 3.60% due on December 6, 2029
10,000,000 31,705 10,000,000 32,585 
RGC Midstream, LLC:
Unsecured term notes payable, at 30-day LIBOR plus 1.35%, due December 29, 2022
28,380,200 23,847 25,475,200 38,728 
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026
14,000,000 13,242 14,000,000 13,844 
Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024
10,000,000 8,054 10,000,000 8,644 
Total notes payable$117,880,200 $276,987 $114,975,200 $299,175 
Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2022
$15,538,491 $ $9,143,606 $ 
Less: current maturities(7,000,000)—  — 
Total long-term debt $126,418,691 $276,987 $124,118,806 $299,175 

8.Other Comprehensive Income (Loss)
A summary of other comprehensive income and loss is provided below:
 
Before-Tax
Amount
Tax
Expense
Net-of-Tax
Amount
Three Months Ended December 31, 2020
Interest rate swaps:
Unrealized gains$89,770 $(23,107)$66,663 
Transfer of realized losses to interest expense137,438 (35,376)102,062 
Net interest rate swaps227,208 (58,483)168,725 
Defined benefit plans:
Amortization of actuarial losses20,017 (5,153)14,864 
Other comprehensive income$247,225 $(63,636)$183,589 
Three Months Ended December 31, 2019
Interest rate swaps:
Unrealized gains$350,693 $(90,269)$260,424 
Transfer of realized losses to interest expense3,540 (911)2,629 
Net interest rate swaps354,233 (91,180)263,053 
Defined benefit plans:
Amortization of actuarial losses22,610 (5,819)16,791 
Other comprehensive income$376,843 $(96,999)$279,844 
12

RGC RESOURCES, INC. AND SUBSIDIARIES

The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company. The regulated operations are included as a regulatory asset. The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net.

Reconciliation of Accumulated Other Comprehensive Income (Loss)
 
Interest Rate
Swaps
Defined Benefit
Plans
Accumulated
Other
Comprehensive
Income (Loss)
Balance at September 30, 2020$(1,651,213)$(1,796,731)$(3,447,944)
Other comprehensive income168,725 14,864 183,589 
Balance at December 31, 2020$(1,482,488)$(1,781,867)$(3,264,355)

9.Commitments and Contingencies

The outbreak of COVID-19 continues to have a significant effect on businesses and individuals throughout the nation and the world. The COVID-19 pandemic has forced all levels of government, as well as businesses and individuals, to take actions to limit the spread of the disease. The result is a significant disruption to normal activities as many businesses have either shut down or are operating on a limited basis resulting in higher unemployment and government imposed social distancing mandates. The extent to which COVID-19 will affect the Company over future periods will depend on ongoing developments, which are highly uncertain and cannot be reasonably predicted, including the duration of the outbreak, the easing of restrictions to businesses and individuals, the potential for a resurgence of the virus, the effectiveness and timeliness of vaccines, as well as other factors. The longer COVID-19 persists, the greater the potential negative financial effect on the Company.

10.Earnings Per Share

Basic earnings per common share for the three months ended December 31, 2020 and 2019 were calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share were calculated by dividing net income by the weighted average common shares outstanding during the period plus potential dilutive common shares.

A reconciliation of basic and diluted earnings per share is presented below:
 
Three Months Ended December 31,
 20202019
Net Income$4,723,263 $4,006,936 
Weighted average common shares8,167,793 8,081,837 
Effect of dilutive securities:
Options to purchase common stock14,390 31,948 
Diluted average common shares8,182,183 8,113,785 
Earnings Per Share of Common Stock:
Basic$0.58 $0.50 
Diluted$0.58 $0.49 
 





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11.Employee Benefit Plans

The Company has both a pension plan and a postretirement plan. The pension plan covers the Company’s employees hired before January 1, 2017 and provides retirement income based on years of service and employee compensation. The postretirement plan provides certain health care and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense is detailed as follows:
 
 Three Months Ended
December 31,
 20202019
Components of net periodic pension cost:
Service cost$183,570 $172,902 
Interest cost243,785 265,557 
Expected return on plan assets(503,936)(459,156)
Recognized loss125,535 113,936 
Net periodic pension cost$48,954 $93,239 
 
 Three Months Ended
December 31,
 20202019
Components of postretirement benefit cost:
Service cost$35,172 $41,970 
Interest cost107,623 132,869 
Expected return on plan assets(149,122)(137,599)
Recognized loss38,664 59,343 
Net postretirement benefit cost$32,337 $96,583 

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

The table below reflects the Company's actual contributions made fiscal year-to-date and the expected contributions to be made during the balance of the current fiscal year.  
Fiscal Year-to-Date ContributionsRemaining Fiscal Year Contributions
Pension plan$ $500,000 
Postretirement plan 400,000 
Total$ $900,000 

12.Fair Value Measurements
FASB ASC No. 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three levels:

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



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RGC RESOURCES, INC. AND SUBSIDIARIES

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

Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).
 
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy:
 
 Fair Value Measurements - December 31, 2020
 Fair
Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Natural gas purchases$983,151 $ $983,151 $ 
Interest rate swaps1,996,348  1,996,348  
Total$2,979,499 $ $2,979,499 $ 
 Fair Value Measurements - September 30, 2020
 Fair
Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Natural gas purchases$470,755 $ $470,755 $ 
Interest rate swaps2,223,556  2,223,556  
Total$2,694,311 $ $2,694,311 $ 

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

Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on weighted average first of the month index prices corresponding to the month of the scheduled payment. At December 31, 2020 and September 30, 2020, the Company had recorded in accounts payable the estimated fair value of the liability valued at the corresponding first of month index prices for which the liability is expected to be settled.

The Company’s nonfinancial assets and liabilities measured at fair value on a nonrecurring basis consist of its AROs. The AROs are measured at fair value at initial recognition based on expected future cash flows required 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 short-term nature of these financial instruments. In addition, the carrying amount of the variable rate line-of-credit is a reasonable approximation of its fair value.






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The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements:
 
 Fair Value Measurements - December 31, 2020
 Carrying
Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Current maturities of long-term debt$7,000,000   $7,000,000 
Notes payable110,880,200 $ $ 122,370,235 
Total$117,880,200 $ $ $129,370,235 
 Fair Value Measurements - September 30, 2020
 Carrying
Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
Notes payable$114,975,200 $ $ $124,740,970 
Total$114,975,200 $ $ $124,740,970 
 
The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt based on the underlying Treasury rate or other Treasury instruments with a corresponding maturity period and estimated credit spread extrapolated based on market conditions since the issuance of the debt.

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. As of December 31, 2020 and September 30, 2020, no single customer accounted for more than 5% of the total accounts receivable balance. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants.
 
13.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 segment of the Company generates revenue from its tariff rates and other regulatory mechanisms through which it provides the sale and distribution of natural gas to its residential, commercial and industrial customers.

Investment in Affiliates - The investment in affiliates segment reflects the income generated through the activities of the Company's investment in the MVP and Southgate projects.

Parent and Other - The category parent and other includes the unregulated activities of the Company as well as certain corporate eliminations.




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RGC RESOURCES, INC. AND SUBSIDIARIES

Information related to the segments of the Company are provided below:
Three Months Ended December 31, 2020
Gas UtilityInvestment in AffiliatesParent and OtherConsolidated Total
Operating revenues$19,483,500 $ $33,517 $19,517,017 
Depreciation2,153,398   2,153,398 
Operating income (loss)5,613,042 (50,847)19,192 5,581,387 
Equity in earnings 1,356,683  1,356,683 
Interest expense704,330 315,499  1,019,829 
Income before income taxes5,236,000 992,925 19,342 6,248,267 
Three Months Ended December 31, 2019
Gas UtilityInvestment in AffiliatesParent and OtherConsolidated Total
Operating revenues$19,625,606 $