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GLOSSARY OF TERMS

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See notes to condensed consolidated financial statements.

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

See notes to condensed consolidated financial statements.

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

See notes to condensed consolidated financial statements.

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

See notes to condensed consolidated financial statements.

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to condensed consolidated financial statements.

RGC RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

Commercial

Transportation and interruptible

Other

Total contracts with customers

Alternative revenue programs

Total operating revenues

Commercial

Transportation and interruptible

Other

Total contracts with customers

Alternative revenue programs

Total operating revenues

Gas utility revenues

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

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

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

Other revenues

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

Alternative revenue program revenues

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

Customer accounts receivable and liabilities 

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

Balance at June 30, 2024

Increase (decrease)

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

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

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 - Parent and other include the unregulated activities of the Company as well as certain corporate reporting adjustments.

Information related to the Company's segments are provided below:

Depreciation

Operating income (loss)

Equity in earnings

Interest expense

Income (loss) before income taxes

Depreciation

Operating income (loss)

Equity in earnings

Interest expense

Income (loss) before income taxes

Depreciation

Operating income (loss)

Equity in earnings

Interest expense

Income before income taxes

Depreciation

Operating income (loss)

(169,217)

Equity in earnings

Interest expense

Income (loss) before income taxes

(1,394,950)

The SCC requires regulated utilities within the state to perform a depreciation study every five years and to submit the study for SCC approval. The Company's current depreciation rates are based on the last depreciation study approved by the SCC in 2019.  As part of the general rate application filed in February 2024, the Company submitted its requisite depreciation study and proposed new depreciation rates.  In July 2024, the Company received administrative approval from the SCC staff that authorized the new depreciation rates.  The new depreciation rates will result in a small decrease in depreciation expense for fiscal 2024, as the new depreciation rates are effective retroactive to October 1, 2023.  This adjustment to depreciation expense will be reflected in the fourth quarter of fiscal 2024. 

On December 2, 2022, Roanoke Gas filed an expedited rate application with the SCC seeking an $ million annual increase in its non-gas base rates, of which $ million was being recovered through the SAVE Rider.  The proposed interim rates went into effect January 1, 2023, subject to refund.  In the fourth quarter of fiscal 2023, the Company reached a settlement with the SCC staff on all outstanding issues in the case.  Under the terms of the settlement, the Company agreed to an annual incremental revenue requirement of $ million. The Company began billing the approved rates effective October 1, 2023. The SCC issued its Final Order in the matter on December 19, 2023 in which it approved the settlement agreement in its entirety.  Refunds, which had previously been accrued, were made to customers in February 2024.

On August 31, 2023, the SCC approved the Company's new SAVE Plan and Rider with rates effective October 1, 2023.  Under this plan, Roanoke Gas can recover costs associated with an estimated $ million in SAVE eligible investment in fiscal 2024 and an estimated cumulative investment of $ million over the proposed five-year plan period ending September 30, 2028.  The plan was approved with a revenue requirement of approximately $ for fiscal 2024.  On June 28, 2024, Roanoke Gas filed for approval of an updated annual SAVE Rider rate to become effective October 1, 2024.   The proposed SAVE rate is based on an estimated $ million of SAVE eligible investment during fiscal 2025 which results in a revenue requirement of $ million.  The Company expects a Final Order from the SCC in September 2024.

By Order dated September 1, 2023, the SCC approved the Company’s RNG Rider effective for the period October 1, 2023 through September 30, 2024.  In its Order, the SCC directed the Company to file an application to update the RNG Rider by May 30, 2024.  In compliance with the SCC’s directive, on May 30, 2024, Roanoke Gas filed for an update to its annual RNG Rider to become effective October 1, 2024.  The revenue requirement associated with the proposed RNG Rider is $ million, offset by the sale of environmental credits in the amount of $ million as well as credits for the over-recovery of costs during the prior year of approximately $, resulting in a net revenue requirement of approximately $.  The Company expects a Final Order from the SCC in September 2024. 

Roanoke Gas is authorized by the SCC to acquire certain natural gas distribution assets from a local housing authority at five separate apartment complexes, located in the Company’s service territory.  The housing authority renews existing natural gas distribution facilities to include mains and services then transfers ownership of these facilities to Roanoke Gas.  In turn, Roanoke Gas assumes responsibility for the operation and maintenance of these assets and recognizes a gain related to the asset acquisition equal to the cost associated with the renewal.

The assets of two complexes were transferred to Roanoke Gas in fiscal 2022.  On September 29, 2023, the housing authority transferred the assets from one additional apartment complex to Roanoke Gas and the Company recorded a pre-tax gain of approximately $ during the fourth quarter of fiscal 2023.  The authority is substantially complete with renewing the fourth complex, which  may be transferred to Roanoke Gas before the end of this fiscal year.  The timing of funding and the completion of the asset renewals for the final complex is uncertain at this time.

While under construction, AFUDC provided the majority of the income recognized by Midstream.  The amount of AFUDC recognized during the current and prior year is included in the equity in earnings of unconsolidated affiliate in the tables below.  AFUDC ceased in June 2024 when the pipeline went into service.

The Company participates in the earnings of the MVP proportionate to its level of investment.  With the MVP in operation, the Company recognizes its share of earnings from the MVP, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022.  This basis difference will be amortized over the operational life of the MVP.  Midstream assesses the value of its investment in the LLC on at least a quarterly basis, and no impairment indicators were identified in fiscal 2023 or fiscal 2024 to date.

Funding for Midstream's investments has been provided through equity contributions from Resources and unsecured promissory notes as detailed in Note 7.

Investment balances of MVP and Southgate, as of June 30, 2024 and September 30, 2023, are reflected in the table below:

Southgate

Investment in unconsolidated affiliates

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

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

Change in accrued capital calls

Equity in earnings of unconsolidated affiliate

Change in investment in unconsolidated affiliates

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

Operating expenses

AFUDC

Other income, net

Net income

Construction work in progress

Property, plant and equipment, net

Other assets

Total assets

Liabilities and Equity:

Current liabilities

Noncurrent liabilities

Capital

Total liabilities and equity

On May 2, 2024, Midstream established a new $ million revolving line of credit facility. The interest rate on the borrowings under the facility is Daily Simple SOFR plus 2.215%; the arrangement included a % upfront fee and % unused line fee.  The facility matures on May 2, 2026. 

On May 29, 2024, Midstream paid in full the $ million note payable that was set to mature June 1, 2024.

On June 28, 2023, Midstream amended and restated its $ million and $ million Term Notes initially entered into on June 12, 2019 and November 1, 2021, respectively.  The amendments revised each of the original Term Note's interest rate from LIBOR plus basis points to Daily Simple SOFR plus basis points, effective July 1, 2023.  On March 6, 2024, Midstream further amended and restated its $ million Term Note. The amendment suspended quarterly principal payments beginning April 1, 2024 through January 1, 2025.  Principal payments will commence again on April 1, 2025.  All other terms and requirements of the Term Notes were retained.  In conjunction with the original amendment of the Term Notes in June 2023, Midstream also amended the corresponding interest rate swaps associated with the Term Notes.  The amendments provided for the floating rates on the interest rate swaps to continue to match the rate of the associated notes as well as retain the overall fixed interest rates of % and %, respectively.  The interest rate swap related to the $ million Term Note was not amended on March 6, 2024, but the Company did re-designate its hedge documentation to address the suspension of repayments.

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

Long-term debt consists of the following:

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

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

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

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

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

Midstream:

Unsecured term note payable at Term SOFR plus 1.75%, due December 31, 2025

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

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

Unsecured term note payable at Daily Simple SOFR plus 1.26448%, due January 1, 2028 with quarterly principal installments of $400,000 that began April 1, 2023, were suspended April 1, 2024, and will resume April 1, 2025 (swap rate at 2.443% on designated principal)

Revolving credit facility at Daily Simple SOFR plus 2.215%, due May 2, 2026

Total long-term debt

Less: current maturities of long-term debt

Total long-term debt, net current maturities

Debt issuance costs are amortized over the life of the related debt. As of June 30, 2024 and September 30, 2023, the Company also had an unamortized loss on the early retirement of debt of $ and $, respectively, which has been deferred as a regulatory asset and is being amortized over a -year period.

All debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that limit consolidated long-term indebtedness to not more than % of total capitalization.  All of the debt agreements provide for Priority Indebtedness (defined in the debt agreements) to not exceed % of consolidated total assets.  The $ million and $ million notes, as well as the line-of-credit, have an interest coverage ratio requirement of not less than  to 1, which excludes the effect of the non-cash impairments on the LLC investments up to the total investment as of December 31, 2021, as revised by the Seventh Amendment to the Credit Agreement.  The $ million revolving line of credit facility also has an interest coverage ratio requirement of not less than to 1.  The Company was in compliance with all debt covenants as of  June 30, 2024 and September 30, 2023. 

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 11 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.

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:

Total

Liabilities:

Natural gas purchases

Total

Total

Liabilities:

Natural gas purchases

Total

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 June 30, 2024 and September 30, 2023, 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 contracts), customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments.  In addition, the carrying amount of the variable rate line-of-credit is a reasonable approximation of its fair value.

The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements:

Notes payable

Total

Notes payable

Total

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.

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.  individual customer amounted to more than 5% of total accounts receivable at  June 30, 2024 and  September 30, 2023.  The Company maintains certain credit standards with its customers and requires a customer deposit if warranted.

Weighted average common shares

Effect of dilutive securities:

Options to purchase common stock

Diluted average common shares

Earnings per share of common stock:

Basic

Diluted

Transfer of realized gains to interest expense

Net interest rate swaps

Defined benefit plans:

Amortization of net actuarial losses

Other comprehensive loss

Three Months Ended June 30, 2023

Interest rate swaps:

Unrealized gains

Transfer of realized gains to interest expense

Net interest rate swaps

Defined benefit plans:

Amortization of net actuarial losses

Other comprehensive income

Transfer of realized gains to interest expense

Net interest rate swaps

Defined benefit plans:

Amortization of net actuarial losses

Other comprehensive loss

Nine Months Ended June 30, 2023

Interest rate swaps:

Unrealized gains

Transfer of realized gains to interest expense

Net interest rate swaps

Defined benefit plans:

Amortization of net actuarial losses

Other comprehensive loss

The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company.  Actuarial gains and losses attributable to the regulated operations are included as a regulatory asset.  See Note 13 for a schedule of regulatory assets.  The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net in the condensed consolidated statements of income.

Reconciliation of Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss)

Balance at June 30, 2024

The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia, and thus subject to examinations by federal and state tax authorities.  The IRS is currently examining the Company's 2018 and 2019 amended federal tax returns and the ultimate outcome of these examinations is unknown as of the date of this Form 10-Q.  The Company believes its income tax assets and liabilities are fairly stated as of June 30, 2024 and 2023; however, these assets and liabilities could be adjusted as a result of this examination.  Aside from the September 30, 2018 and 2019 amended returns, the federal returns prior to September 30, 2020 are no longer subject to examination as of the date of this Form 10-Q.  Additionally, the state returns for Virginia and West Virginia prior to September 30, 2020 are no longer subject to examination as of the date of this Form 10-Q.

Under-recovery of gas costs

Under-recovery of RNG revenues

Accrued pension

Other deferred expenses

Total current

Other Non-Current Assets:

Regulatory assets:

Premium on early retirement of debt

Accrued pension

Other deferred expenses

Total non-current

Total regulatory assets

Regulatory liabilities included in the Company’s accompanying balance sheets are as follows: 

Rate refund

Deferred income taxes

Supplier refunds

Other deferred liabilities

Total current

Deferred Credits and Other Non-Current Liabilities:

Asset retirement obligations

Regulatory cost of retirement obligations

Regulatory liabilities:

Deferred income taxes

Deferred postretirement medical

Total non-current

Total regulatory liabilities

As of June 30, 2024 and September 30, 2023, the Company had regulatory assets in the amount of $ and $, respectively, on which the Company did not earn a return during the recovery period.

Interest cost

Expected return on plan assets

Recognized loss

Net periodic pension cost

Interest cost

Expected return on plan assets

Recognized gain

Net postretirement benefit cost

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

For the three-month and nine-month periods ended June 30, 2024, funding contributions were made to the pension plan or postretirement plan.  The Company is not currently planning to make any funding contributions to either plan for the remainder of fiscal 2024. 

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

Other information related to leases were as follows:

Right of use obtained in exchange for operating lease obligations

Weighted-average remaining term (in years)

Weighted-average discount rate

Supplemental Cash Flow Information:

Cash paid on operating leases

Right of use obtained in exchange for operating lease obligations

Weighted-average remaining term (in years)

Weighted-average discount rate

On June 30, 2024, the future minimum rental payments under non-cancelable operating leases by fiscal year were as follows:

RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements that relate to future transactions, events or expectations.  In addition, Resources may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, operational impacts 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 other 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” in the Company’s 2023 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,” “predict,” “target,” “expect,” “objective,” “projection,” “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs such as “will,” “would,” “should,” “can,” “could,” “may” or "might" 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.

The three-month and nine-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2024.  The total revenues and margins realized during the first nine months reflect higher billings due to the weather-sensitive nature of the natural gas business.

Overview

Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,800 residential, commercial and industrial customers in Roanoke, Virginia and surrounding localities through its Roanoke Gas subsidiary.  Midstream, a wholly owned subsidiary of Resources, is a less than 1% investor in both the MVP and Southgate.  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.  The Company is also subject to regulation from the United States Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its 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, the Company is subject to other regulations which are not necessarily industry specific. 

RGC RESOURCES, INC. AND SUBSIDIARIES

Nearly all of the Company’s revenues are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates and fees authorized by the SCC.  These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather.  These rates are determined based on various rate applications filed with the SCC.  Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates in place at that time.  The investment in replacing and upgrading existing infrastructure, as well as recovering increases in non-gas expenses due to inflationary pressures, regulatory requirements or operational needs, are generally not recoverable until a formal rate application is filed to include the additional investment and higher costs, and new non-gas base rates are approved.

Beginning January 1, 2023, Roanoke Gas implemented interim, non-gas base rates designed to provide $8.55 million in additional annual revenues in response to higher operating costs and to recover its investment in non-SAVE related projects since the prior non-gas base rate increase in fiscal 2019.  Revenues from the SAVE Plan and Rider were incorporated into the interim, non-gas base rates.  On December 19, 2023, the SCC issued a final order approving a non-gas base rate increase of $7.45 million.  The order also directed Roanoke Gas to refund the excess revenues collected during the time the interim rates were in effect with interest.  Refunds to customers, which were accrued in fiscal 2023 and reflected in regulatory liabilities, were made in February 2024.  On February 2, 2024, primarily in response to continued inflationary pressures, Roanoke Gas filed for a non-gas base rate increase of $4.33 million, which reflected an increase in the Company's authorized return on equity from 9.44% to 10.35%.  The new interim non-gas base rates went into effect for customer billings on or after July 1, 2024, subject to refund.  These additional revenues are subject to refund pending audit, which is currently underway.  A hearing has been set for November 7, 2024.  See the Regulatory section for additional information.

During the most recent quarter, the LLC completed and received all necessary approvals to initiate service.  The MVP went into service in June 2024, and the shipper agreements became active on July 1, 2024.  See the Equity Investment in Mountain Valley Pipeline section for additional information on the MVP.

As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders.  In order to mitigate the effect of weather variations and other factors not provided for in the Company's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability in earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment.  These mechanisms include the SAVE Rider, WNA, ICC, RNG Rider and PGA.

The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to qualified SAVE infrastructure investments on a prospective basis, until a rate application is filed incorporating these investments in non-gas base rates.  SAVE Plan revenues increased by approximately $127,000 for the three-month period ended June 30, 2024 and decreased by approximately $833,000 for the nine-month period ended June 30, 2024 compared to the same periods last year, reflecting the movement of the SAVE Plan revenues into the new non-gas base rates on January 1, 2023.  Roanoke Gas filed and received approval from the SCC for a new SAVE Plan and Rider with new rates placed into effect on October 1, 2023 that is expected to result in approximately $366,000 in SAVE-related revenues during fiscal 2024.  Additional information regarding the SAVE Plan and Rider is provided under the Regulatory section below.

RGC RESOURCES, INC. AND SUBSIDIARIES

The WNA mechanism reduces the volatility in earnings due to the variability in temperatures during the heating season.  The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when weather is colder than normal.  The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from warmer-than-normal weather and correspondingly requires the Company to refund the excess margin earned for colder-than-normal weather.  The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal.  Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March.  For the three and nine months ended June 30, 2024, the Company accrued approximately $821,000 and $3,689,000 in additional revenues under the WNA model for weather that was 48% and 19% warmer than normal, respectively, compared to approximately $290,000 and $2,902,000 in additional revenues for weather that was 18% and 15% warmer than normal for the corresponding periods last year.  The WNA balance for the 12-month period ended March 31, 2024 was approximately $3,282,000, and is being collected from customers over a three-month period that began in May 2024.

The Company has an approved rate structure to mitigate the impact of the financing costs of its natural gas inventory.  Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity, to the average cost of natural gas inventory during the period.  Total ICC revenues decreased by approximately $3,000 and $198,000 for the three-month and nine-month periods ended June 30, 2024, respectively, compared to the corresponding periods last year, due to lower natural gas commodity prices during the 2023 summer storage injection season resulting in a lower average cost of natural gas in storage.  Accordingly, fiscal 2024 and 2025 ICC revenues are expected to continue to remain below last year's levels.

In March 2023, Roanoke Gas began operating the RNG facility, through a cooperative agreement with the Western Virginia Water Authority, to produce commercial quality RNG for delivery into its distribution system.  With SCC approval, Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and the related operating costs through an RNG Rider.  Customers receive the benefit of the monetization of environmental credits generated through the production of RNG.  Roanoke Gas recognized approximately $394,000 and $1,211,000 in RNG revenue for the three and nine months ended June 30, 2024, respectively, compared to approximately $283,000 and $366,000 for the corresponding periods in the prior year.

The cost of natural gas, which is a pass-through cost, is independent of the Company's non-gas rates.  Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers.  This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs through a quarterly filing, or more frequent if necessary, with the SCC.  Once SCC approval is received, the Company adjusts the gas cost component of its rates.  As actual costs will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period.  The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability.  At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as amounts are reflected in customer billings.

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 segment analysis is provided when 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 condensed consolidated statements of income under cost of gas - utility.  The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost.  Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as utility revenues less cost of gas, is a more useful and relevant measure to analyze financial performance.  The term gross utility margin is not intended to represent or replace operating income, the most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies.  The following results of operations analyses will reference gross utility margin.

RGC RESOURCES, INC. AND SUBSIDIARIES

Three Months Ended June 30, 2024:

Net income decreased by $530,124 for the three months ended June 30, 2024, compared to the same period last year, primarily due to increased inflationary pressures on operating expenses, lower AFUDC from the MVP as the project transitioned from construction to in service and higher interest rates, partially offset by WNA and RNG revenues.

The tables below reflect operating revenues, volume activity and heating degree days.

Total operating revenues for the three months ended June 30, 2024, compared to the same period last year, increased by approximately 6% primarily due to increases in WNA, SAVE and RNG revenues more than offsetting the decrease in delivered natural gas volumes.  Total heating degree days decreased by 39% from the same period last year, and were substantially less than the 30-year normal, resulting in an increase of approximately $531,000 in WNA revenues.  SAVE Plan revenues continued their upward trend as Roanoke Gas continues to invest in qualified SAVE infrastructure projects, resulting in an increase of approximately $127,000 from the same period in the prior year.  The decline in volumetric revenues slightly offset the overall increase in operating revenues.  Natural gas commodity prices during the quarter declined by 25% from the corresponding period last year.  Total gas costs increased by 7% compared to the same period last year, which corresponds to a 13% increase in the gas cost component included in total customer billing rate, offset by a decrease in delivered volumes.  The decrease in heating degree days as previously discussed resulted in a 14% decline in the weather-sensitive residential and commercial sales.  

Gross utility margin increased over the same period last year primarily as a result of increased SAVE, RNG and WNA revenue, offset by the reduction in delivered volumes.  The WNA increased approximately $531,000 due to a decrease of 39% in heating degree days as compared to the same period last year.  The RNG Rider and SAVE Plan contributed an additional $111,000 and $127,000, respectively, to margin, while volumetric margin decreased by approximately $260,000 due to a 6% decrease in total delivered volumes. 

RGC RESOURCES, INC. AND SUBSIDIARIES

The components of and the change in gas utility margin are summarized below:

Operations and maintenance expenses increased by $376,284, or 10%, from the same period last year primarily due to increased personnel costs and increased professional services. Personnel costs grew by approximately $223,000 due to increased staffing and the inflationary impact on salaries and benefits as well as amortization of restricted stock awards. During fiscal 2023, no restricted stock awards were made and were reinstated in fiscal 2024. Further, professional services expenses increased approximately $90,000 primarily due to increased external audit fees, actuarial services and IT support. Lower capitalized overheads and increased contracted services accounted for much of the remaining cost increase.

General taxes increased by $43,223, or 7%, primarily due to higher property taxes associated with growth in utility property and increases in payroll taxes related to increased staffing and compensation.

Depreciation expense increased by $278,166, or 11%, on a commensurate increase in utility property balances.

Equity in earnings of unconsolidated affiliate decreased by $236,878, or 46%, primarily due to completion of construction activities during the quarter resulting in lower AFUDC that was not fully replaced by the Company's portion of operational earnings once the pipeline went into service in mid-June 2024.

Other income, net decreased by $76,074 from an approximate $7,000 income position to an approximate $69,000 expense position primarily due to less interest income and increased postretirement costs.

Interest expense increased by $143,527, or 10%, as the weighted-average interest rate on total debt increased from 3.98% during the third quarter of fiscal 2023 to 4.42% during the third quarter of fiscal 2024. The increase in the weighted-average interest rate was primarily associated with Roanoke Gas' variable rate line-of-credit and Midstream's credit facilities. Roanoke Gas' borrowing levels also increased from the same period last year, contributing to higher interest expense, while Midstream's total average outstanding debt decreased due to amortization payments under one of Midstream's promissory notes.

Income tax expense decreased by $167,227, or 78%, primarily due to a corresponding decrease in pre-tax income, coupled with the recognition of tax credits associated with the RNG facility that had not been utilized in the prior year due to timing of the RNG facility becoming operational. The effective tax rate was 23.1% and 23.8% for the three-month periods ended June 30, 2024 and 2023, respectively. The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and tax credits.

RGC RESOURCES, INC. AND SUBSIDIARIES

Nine Months Ended June 30, 2024:

Net income increased by $1,334,967 for the nine months ended June 30, 2024, compared to the same period last year, primarily due to AFUDC from the MVP and the implementation of new non-gas base rates effective January 1, 2023, partially offset by increased inflationary pressures on operating expenses and higher interest rates.

The tables below reflect operating revenues, volume activity and heating degree days.

Total operating revenues for the nine months ended June 30, 2024, compared to the same period last year, decreased by approximately 16% primarily due to significantly lower natural gas commodity prices and lower SAVE revenues more than offsetting the implementation of a non-gas base rate increase and increases in WNA and RNG revenues.  Natural gas commodity prices during the period declined by 46% from the corresponding period last year.  Total gas costs decreased by 35% compared to the same period last year, which corresponds to a 33% decline in the gas cost component included in total customer billing rate.  In addition, total heating degree days decreased by 6% from the same period last year, resulting in a 1% decline in the weather sensitive residential and commercial sales.  With the reset of the SAVE Rider due to the implementation of new non-gas base rates in January 2023, as discussed above, SAVE Plan revenues declined by approximately $833,000.

Gross utility margin increased over the same period last year primarily as a result of the implementation of new non-gas base rates, WNA and RNG revenue, offset by the reductions in SAVE and ICC revenues.  When adjusted for WNA, the volumetric margin increased by approximately $2,701,000 and base charge revenues increased by approximately $410,000 due to the non-gas base rate increase.  However, SAVE revenues decreased by approximately $833,000 as these revenues are reflected in the increased volumetric and base charge rates.  The RNG Rider contributed an additional $846,000 to margin, as it was operational for all nine months of fiscal 2024 compared to four months during fiscal 2023, and ICC revenue declined by $198,000 due to lower cost of gas in storage. 

RGC RESOURCES, INC. AND SUBSIDIARIES

The components of and the change in gas utility margin are summarized below:

Operations and maintenance expenses increased by $2,022,895, or 17%, from the same period last year primarily due to increased personnel costs, professional services, costs associated to operate and maintain the RNG facility and lower capitalized overheads.  Personnel costs increased by approximately $1,084,000 due to increased staffing and the inflationary impact on salaries and benefits as well as amortization of restricted stock awards.  During fiscal 2023, no restricted stock awards were made and were reinstated in fiscal 2024.  Professional services expenses increased approximately $259,000 primarily due to increased external audit fees, actuarial services, recruiting costs and IT support.  Further, costs associated with the RNG facility increased approximately $340,000, as the facility was only operational during four months of the prior period as compared to all nine months in the current period.  Total capitalized construction overheads declined by approximately $293,000 compared to the same period last year primarily due to a reduction in direct construction expenditures related to the RNG project, which was completed in fiscal 2023.  Corporate insurance premiums accounted for much of the remaining cost increase. 

General taxes increased by $151,400, or 8%, primarily due to higher property taxes associated with growth in utility property and increases in payroll taxes related to increased staffing and compensation.

Depreciation expense increased by $834,498, or 11%, on a commensurate increase in utility property balances. 

Equity in earnings of unconsolidated affiliate increased by $2,456,242 associated with the recognition of AFUDC as a result of MVP construction activities resuming through May 2024.  With the MVP in service, the Company now recognizes its share of operational earnings from the MVP, favorably adjusted for the amortization of a basis difference that arose when the Company recorded an other-than-temporary impairment of its investment in 2022.  See footnote 5 for additional information related to the MVP.

Other income, net decreased by $62,231, or 31%, primarily due to an approximate $146,000 decrease in AFUDC related to the RNG facility, which was placed in service in March 2023, and approximately $59,000 less interest income, offset by an increase of approximately $138,000 in revenue sharing related to the asset management agreement.

Interest expense increased by $581,387, or 14%, as the weighted-average interest rate on total debt increased from 3.90% during the first nine months of fiscal 2023 to 4.34% during the first nine months of fiscal 2024, while total daily average debt outstanding increased by 1%.  The increase in the weighted-average interest rate was primarily associated with Roanoke Gas' variable rate line-of-credit and Midstream's credit facilities. Roanoke Gas' borrowing levels also increased from the same period last year, contributing to higher interest expense, while Midstream's total average outstanding debt decreased due to amortization payments under two of Midstream's promissory notes.

Income tax expense increased by $382,624, or 12%, due to a corresponding increase in pre-tax income.  The effective tax rate was 23.5% and 23.7% for the nine-month periods ended June 30, 2024 and 2023, respectively.  The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and tax credits. 

Critical Accounting Policies and Estimates

The consolidated financial statements of Resources are prepared in accordance with GAAP.  The amounts of assets, liabilities, revenues and expenses reported in the Company’s consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles.  Estimates used in the financial statements are derived from prior experience, statistical analysis and management judgments.  Actual results may differ significantly from these estimates and assumptions.

RGC RESOURCES, INC. AND SUBSIDIARIES

There have been no significant changes to the critical accounting policies as reflected in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023.

Asset Management

Roanoke Gas uses third-party asset managers to oversee its pipeline transportation, storage rights and gas supply inventories and deliveries in order to provide a secure and reliable source of natural gas to its customers.  In return for utilizing the excess capacities of the transportation and storage rights, the asset managers pay Roanoke Gas a monthly utilization fee.  In accordance with an SCC order issued in 2018, a portion of the utilization fee is retained by the Company with the balance passed through to customers through reduced gas costs.  Prior to the MVP being placed in service, Roanoke Gas utilized one asset manager.  With the MVP now in service, Roanoke Gas entered into a second asset management agreement for the utilization of its MVP capacity.  Both asset management agreements end March 31, 2025. 

Equity Investment in Mountain Valley Pipeline

Midstream owns a less than 1% equity investment in the LLC that owns the MVP, which went into service in June 2024.  Midstream is also a less than 1% investor, accounted for under the cost method, in Southgate, which is in the design and permitting phase.

From inception through May 2024, earnings from the MVP were primarily attributable to AFUDC income.  With the MVP in operation, the Company now recognizes its share of earnings from the MVP, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022.  This basis difference will be amortized over the operational life of the MVP.  Through the first nine months of fiscal 2024 and 2023, the Company recorded equity in earnings of consolidated affiliates of $2,979,823 and $523,581, respectively, which included $2,950,054 and $516,675 from AFUDC.  Resources expects cash distributions from the LLC to begin before the end of calendar 2024.

Earlier in 2024, the Company refinanced two promissory notes related to Midstream.  Midstream is considering its long-term capital structure as the MVP has entered its operating phase.  See Note 7 for a full discussion of all borrowings related to Midstream.

Regulatory

In response to continued inflationary pressures, Roanoke Gas filed a general rate application on February 2, 2024 with the SCC seeking to increase its non-gas base rates by $4.33 million and its permitted return on equity from 9.44% to 10.35% reflecting its higher cost of capital, including higher interest expense.  The SCC permitted the Company to implement its new rates on an interim basis for customer billings on or after July 1, 2024, subject to refund.  The SCC’s review of Roanoke Gas’ filing is underway and a hearing has been set for November 7, 2024. 

The SCC requires regulated utilities within the state to perform a depreciation study every five years and to submit the study for SCC approval.  The Company's current depreciation rates are based on the last depreciation study approved by the SCC in 2019.  As part of the general rate application filed in February 2024, the Company submitted its requisite depreciation study and proposed new depreciation rates.  In July 2024, the Company received administrative approval from the SCC staff that authorized the new depreciation rates.  The new depreciation rates will result in a small decrease in depreciation expense for fiscal 2024, as the new depreciation rates are effective retroactive to October 1, 2023.  This adjustment to depreciation expense will be reflected in the fourth quarter of fiscal 2024. 

On December 2, 2022, Roanoke Gas filed an expedited rate application with the SCC seeking an $8.55 million annual increase in its non-gas base rates, of which $4.05 million was being recovered through the SAVE Rider.  The proposed interim rates went into effect January 1, 2023, subject to refund.  In the fourth quarter of fiscal 2023, the Company reached a settlement with the SCC staff on all outstanding issues in the case.  Under the terms of the settlement, the Company agreed to an annual incremental revenue requirement of $7.45 million. The Company began billing the approved rates effective October 1, 2023.  The SCC issued its Final Order in the matter on December 19, 2023 in which it approved the settlement agreement in its entirety.  Refunds, which had previously been accrued, were made to customers in February 2024.

RGC RESOURCES, INC. AND SUBSIDIARIES

On August 31, 2023, the SCC approved the Company's new SAVE Plan and Rider with rates effective October 1, 2023.  Under this plan, Roanoke Gas can recover costs associated with an estimated $8.5 million in SAVE eligible investment in fiscal 2024 and an estimated cumulative investment of $49.5 million over the proposed five-year plan period ending September 30, 2028.  The plan was approved with a revenue requirement of approximately $366,000 for fiscal 2024.  On June 28, 2024, Roanoke Gas filed for approval of an updated annual SAVE Rider rate to become effective October 1, 2024.   The proposed SAVE rate is based on an estimated $9.13 million of SAVE eligible investment during fiscal 2025 which results in a revenue requirement of $1.53 million.  The Company expects a Final Order from the SCC in September 2024.

By Order dated September 1, 2023, the SCC approved the Company’s RNG Rider effective for the period October 1, 2023 through September 30, 2024.  In its Order, the SCC directed the Company to file an application to update the RNG Rider by May 30, 2024.  In compliance with the SCC’s directive, on May 30, 2024, Roanoke Gas filed for an update to its annual RNG Rider to become effective October 1, 2024.  The revenue requirement associated with the proposed RNG Rider is $1.56 million, offset by the sale of environmental credits in the amount of $1.11 million as well as credits for the over-recovery of costs during the prior year of approximately $35,000, resulting in a net revenue requirement of approximately $415,000.  The Company expects a Final Order from the SCC in September 2024.    

Roanoke Gas is authorized by the SCC to acquire certain natural gas distribution assets from a local housing authority at five separate apartment complexes, located in the Company’s service territory.  The housing authority renews existing natural gas distribution facilities to include mains and services then transfers ownership of these facilities to Roanoke Gas.  In turn, Roanoke Gas assumes responsibility for the operation and maintenance of these assets and recognizes a gain related to the asset acquisition equal to the cost associated with the renewal.

The assets of two complexes were transferred to Roanoke Gas in fiscal 2022.  On September 29, 2023, the housing authority transferred the assets from one additional apartment complex to Roanoke Gas and the Company recorded a pre-tax gain of approximately $311,000 during the fourth quarter of fiscal 2023.  The authority is substantially complete with renewing the fourth complex, which may be transferred to Roanoke Gas before the end of this fiscal year.  The timing of funding and the completion of the asset renewals for the final complex is uncertain at this time.

Capital Resources and Liquidity

Due to the capital-intensive nature of the utility business, as well as the impact of weather variability, the Company’s primary capital needs are the funding of its capital projects, the seasonal funding of its natural gas inventories and accounts receivables, debt service and payments of dividends to shareholders.  The Company anticipates funding these items through its operating cash flows, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.

Cash and cash equivalents increased by $1,028,662 for the nine-month period ended June 30, 2024 compared to an increase of $282,192 for the nine-month period ended June 30, 2023. The following table summarizes the sources and uses of cash:

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, 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 contribute to higher cash levels.  During the first and fourth fiscal quarters, operating cash flows generally decrease due to increases in natural gas storage levels and rising customer receivable balances.

RGC RESOURCES, INC. AND SUBSIDIARIES

Cash flows from operating activities for the nine months ended June 30, 2024 decreased by $6,578,093 compared to the same period last year. The table below summarizes the significant components of operating cash flows:

The decline in operating cash flows is primarily due to the reduction in the value of gas withdrawn from storage.  The average price of gas in storage during the first nine months of fiscal 2023 was more than $6.50 per DTH compared to approximately $4.25 per DTH during the current fiscal year.  The decrease in the unit cost of gas in storage was attributable to much lower commodity prices during last year's summer storage injections.  Accordingly, as lower-priced gas was withdrawn from storage during the first half of fiscal 2024, cash flow levels were reduced when compared to the same period in fiscal 2023.  Additionally, though the SCC issued its final order in December 2023, Roanoke Gas implemented interim billing rates in January 2023; therefore, the Company began accruing an estimated rate refund representing the amount due customers for the difference between total customer billings at interim rates versus total customer billings at final rates.  Upon SCC approval of final rates, Roanoke Gas issued refunds in February 2024 to all customers that were billed at interim rates since January 2023.  When compared to the nine-month period ending June 30, 2023, the distribution of the rate refund to customers reduced cash available for operations by $1.6 million.  

Cash Flows Used in Investing Activities:

Investing activities primarily consist of expenditures related to Roanoke Gas' utility property, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet the demands of customer growth.  With the recent approval of its new SAVE Plan and Rider, the Company is continuing its focus on SAVE infrastructure replacement projects, including the replacement of pre-1973 first generation plastic pipe.  New customer demand for natural gas continues to be strong and therefore extending the natural gas distribution system within its service territory is also a priority.  Roanoke Gas' total capital expenditures for the nine-month period ended June 30, 2024 were approximately $16.6 million compared to $19.4 million during the same period last year.  The $2.8 million decrease in expenditures is primarily due to higher investment a year ago related to the completion of the RNG project, which was placed in service in March 2023.  Total fiscal 2024 capital expenditures are expected to exceed $21 million.  Midstream's investment in the LLC was approximately $2.1 million in the first nine months of fiscal 2023.  However, Midstream ceased future participation in capital calls following its May 2023 funding payment based on an agreement with the LLC's managing partner.  Midstream continues to be invested in the LLC; however, its participation percentage is declining with no additional investment.  Now that the MVP is in service, Midstream may incur periodic, future capital investment related to ongoing MVP operations requirements and system improvements.  Midstream has and will continue to make capital investments in Southgate.  The targeted timing for completion of the Southgate project is 2028.

RGC RESOURCES, INC. AND SUBSIDIARIES

Cash Flows Provided by Financing Activities:

Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends.  Net cash flows provided by financing activities were approximately $517,000 for the nine months ended June 30, 2024, compared to $1.9 million in net cash flows used in financing activities for the same period last year.  The $2.4 million increase in financing cash flows is primarily attributable to net borrowings of $3.3 million under Roanoke Gas' line-of-credit during the first nine months of fiscal 2024 compared to no net borrowings in the same period last year.  Roanoke Gas' increased borrowings were slightly offset by a net decrease in cash of approximately $389,000 associated with Midstream's debt.  Notes 6 and 7 provide details on the Company's line-of-credit and borrowing activity.

In addition, Resources issued a total of 177,906 shares of common stock resulting in net proceeds of $3.5 million, including 85,501 shares through the ATM program in which Resources received $1.7 million, net of fees.  During the same period last year, Resources issued 177,900 shares for $3.6 million, including 127,852 shares through the ATM program for $2.7 million, net of fees.

The current interest rate environment is expected to continue to result in higher year-over-year interest expense associated with the Company's variable-rate debt.

Management regularly evaluates the Company’s liquidity through a review of its available financing resources and its cash flows.  Resources maintains the ability to raise equity capital through its ATM program, private placement or other public offerings.  Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including the line of credit and the two private shelf facilities.  Roanoke Gas may also adjust capital spending, as necessary, if such a need would arise.

With the MVP now in service, Midstream's future cash requirements will relate to regular monthly operating expenses, debt service and capital contributions.  On March 6, 2024, Midstream consolidated the Promissory Notes to one Promissory Note with one lender, increased the capacity of its $23 million credit facility to $25 million and extended the maturity date to December 31, 2025.  Further, on May 2, 2024, Midstream established a new $9 million line of credit facility that matures on May 2, 2026.  With these proceeds, Midstream paid in full the $9 million balance on its note payable that matured on June 1, 2024.  With the extension of its original credit facility and the establishment of the new credit facility, Midstream's total debt service over the succeeding 12 months includes $400,000 to retire maturing debt.  Management believes that it will be able to meet Midstream's cash requirements over the ensuing 12-month period.

As of June 30, 2024, Resources' long-term capitalization ratio was 44% equity and 56% debt.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – 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 identified, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

Through June 30, 2024, the Company has evaluated, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, 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 June 30, 2024.

Management routinely reviews the Company’s internal control over financial reporting and makes changes, as necessary, to enhance the effectiveness of the internal controls. There were no control changes during the fiscal quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

RGC RESOURCES, INC. AND SUBSIDIARIES

Part II – Other Information

ITEM 1 – LEGAL PROCEEDINGS

No material proceedings.

ITEM 1A – RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2023; the MVP received regulatory approval and went in service in June 2024.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 6 – EXHIBITS

RGC RESOURCES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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