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EX-32.2 - EXHIBIT 32.2 - RGC RESOURCES INCex322-20200331xq2.htm
EX-32.1 - EXHIBIT 32.1 - RGC RESOURCES INCex321-20200331xq2.htm
EX-31.2 - EXHIBIT 31.2 - RGC RESOURCES INCex312-20200331xq2.htm
EX-31.1 - EXHIBIT 31.1 - RGC RESOURCES INCex311-20190331xq2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2020
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)
 ____________________________________________________ 
Title of Each Class
Trading Symbol
Name of Each Exchange on
Which Registered
Common Stock, $5 Par Value
RGCO
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
ý
  
Smaller reporting company
 
ý
 
 
 
 
 
 
 
 
 
 
 
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  ý
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 April 30, 2020
Common Stock, $5 Par Value
 
8,138,246





GLOSSARY OF TERMS
AFUDC
Allowance for Funds Used During Construction
 
 
AOCI/AOCL
Accumulated Other Comprehensive Income (Loss)
 
 
ARO
Asset Retirement Obligation
 
 
ARP
Alternative Revenue Program, regulatory or rate recovery mechanisms approved by the SCC that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets.
 
 
ASC
Accounting Standards Codification
 
 
ASU
Accounting Standards Update as issued by the FASB
 
 
Company
RGC Resources, Inc. or Roanoke Gas Company
 
 
COVID-19 or Coronavirus
A pandemic disease that causes respiratory illness similar to the flu with symptoms such as coughing, fever, and in more sever cases, difficulty in breathing.
 
 
CPCN
Certificate of Public Convenience
 
 
Diversified Energy
Diversified Energy Company, a wholly-owned subsidiary of Resources
 
 
DRIP
Dividend Reinvestment and Stock Purchase Plan of RGC Resources, Inc.
 
 
DTH
Decatherm
 
 
EPS
Earnings Per Share
 
 
ERISA
Employee Retirement Income Security Act of 1974
 
 
ESAC
Eligible Safety Activity Costs, a Virginia natural gas utility’s operation and maintenance expenditures that are related to the development, implementation, or execution of the natural gas 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.
 
 
FASB
Financial Accounting Standards Board
 
 
FDIC
Federal Deposit Insurance Corporation
 
 
FERC
Federal Energy Regulatory Commission
 
 
Fourth Circuit
U.S. Fourth Circuit Court of Appeals
 
 
GAAP
U.S. Generally Accepted Accounting Principles
 
 
HDD
Heating degree day, a measurement designed to quantify the demand for energy. It is the number of degrees that a day’s average temperature falls below 65 degrees Fahrenheit.
 
 
ICC
Inventory carrying cost revenue, an SCC approved rate structure that mitigates the impact of financing costs on natural gas inventory.
 
 
IRS
Internal Revenue Service
 
 
KEYSOP
RGC Resources, Inc. Key Employee Stock Option Plan
 
 
LDI
Liability Driven Investment approach, a strategy which reduces the volatility in the pension and postretirement plans’ funded status and expense by matching the duration of the fixed income investments with the duration of the corresponding pension liabilities.
 
 
LIBOR
London Inter-Bank Offered Rate
 
 
LLC
Mountain Valley Pipeline, L.L.C., a joint venture established to design, construct and operate the Mountain Valley Pipeline and MVP Southgate.
 
 
LNG
Liquefied natural gas, the cryogenic liquid form of natural gas of which Roanoke Gas operates and maintains a plant capable of producing and storing up to 200,000 dth of natural gas in liquid form.
 
 
MGP
Manufactured gas plant
 
 
Midstream
RGC Midstream, L.L.C., a wholly-owned subsidiary of Resources created to invest in pipeline projects including MVP and Southgate.
 
 
MVP
Mountain Valley Pipeline, a 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.
 
 
Normal Weather
The average number of heating degree days over the most recent 30-year period
 
 
PBGC
Pension Benefit Guaranty Corporation
 
 
Pension Plan
Defined benefit plan that provides pension benefits to employees hired prior to January 1, 2017 who meet certain years of service criteria.
 
 
PGA
Purchased Gas Adjustment, a regulatory mechanism, which adjusts natural gas customer rates to reflect changes in the forecasted cost of gas and actual gas costs.
 
 
Postretirement Plan
Defined benefit plan that provides postretirement medical and life insurance benefits to eligible employees hired prior to January 1, 2000 who meet years of service and other criteria.
 
 
Resources
RGC Resources, Inc., parent company of Roanoke Gas, Midstream and Diversified Energy
 
 
RGCO
Trading symbol for RGC Resources, Inc. on the NASDAQ Global Stock Market
 
 
Roanoke Gas
Roanoke Gas Company, a wholly-owned subsidiary of Resources
 
 
RSPD
RGC Resources, Inc. Restricted Stock Plan for Outside Directors
 
 
RSPO
RGC Resources, Inc. Restricted Stock Plan
 
 
SAVE
Steps to Advance Virginia's Energy, a regulatory mechanism per Chapter 26 of Title 56 of the Code of Virginia that allows natural gas utilities to recover the investment in eligible infrastructure replacement projects without the filing of a formal base rate application.
 
 
SAVE Plan
Steps to Advance Virginia's Energy Plan, a regulatory mechanism to recover the related depreciation and expenses and return on rate base of eligible infrastructure replacement projects on a prospective basis without the filing of a formal application for increases in non-gas base rates.
 
 
SAVE Rider
Steps to Advance Virginia's Energy 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.
 
 
SBA
Small Business Administration
 
 
SCC
Virginia State Corporation Commission, the regulatory body with oversight responsibilities of the utility operations of Roanoke Gas.
 
 
SEC
U.S. Securities and Exchange Commission
 
 
Southgate
Mountain 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 Index
Standard & Poor’s 500 Stock Index
 
 
TCJA
Tax Cuts and Jobs Act of 2017
 
 
WNA
Weather Normalization Adjustment, an ARP mechanism which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average.
 
 
Some of the terms above may not be included in this filing.


RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS



 
 
Unaudited
 
 
 
March 31,
2020
 
September 30,
2019
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,804,228

 
$
1,631,348

Accounts receivable (less allowance for uncollectibles of $493,823 and $110,743, respectively)
5,455,204

 
3,870,211

Materials and supplies
995,544

 
1,021,882

Gas in storage
1,809,889

 
6,448,307

Prepaid income taxes

 
1,157,980

Regulatory assets
2,953,173

 
1,521,939

Other
1,585,465

 
733,525

Total current assets
16,603,503

 
16,385,192

UTILITY PROPERTY:
 
 
 
In service
243,696,479

 
237,786,964

Accumulated depreciation and amortization
(69,959,037
)
 
(67,207,334
)
In service, net
173,737,442

 
170,579,630

Construction work in progress
15,929,769

 
11,423,326

Utility plant, net
189,667,211

 
182,002,956

OTHER ASSETS:
 
 
 
Regulatory assets
11,698,969

 
12,178,853

Investment in unconsolidated affiliates
52,291,160

 
47,375,459

Other
327,333

 
411,236

Total other assets
64,317,462

 
59,965,548

TOTAL ASSETS
$
270,588,176

 
$
258,353,696




1

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


 
Unaudited
 
 
 
March 31,
2020
 
September 30,
2019
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Dividends payable
$
1,424,193

 
$
1,339,522

Accounts payable
4,146,719

 
4,483,233

Capital contributions payable
1,726,786

 
5,024,824

Customer credit balances
1,361,720

 
880,295

Income taxes payable
722,979

 

Customer deposits
1,622,779

 
1,432,031

Accrued expenses
2,718,709

 
3,448,000

Interest rate swaps
461,519

 
147,556

Regulatory liabilities
2,986,791

 
4,877,603

Total current liabilities
17,172,195

 
21,633,064

LONG-TERM DEBT:
 
 
 
Notes payable
112,575,200

 
95,512,200

Line-of-credit

 
8,172,473

Less unamortized debt issuance costs
(343,551
)
 
(313,315
)
Long-term debt, net
112,231,649

 
103,371,358

DEFERRED CREDITS AND OTHER LIABILITIES:
 
 
 
Interest rate swaps
1,716,853

 
746,785

Asset retirement obligations
6,943,766

 
6,788,683

Regulatory cost of retirement obligations
12,303,970

 
11,892,352

Benefit plan liabilities
6,145,191

 
6,912,105

Deferred income taxes
12,990,199

 
12,978,523

Regulatory liabilities
10,767,006

 
10,934,434

Total deferred credits and other liabilities
50,866,985

 
50,252,882

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $5 par value; authorized 20,000,000 and 10,000,000 shares; issued and outstanding 8,136,945 and 8,073,264 shares, respectively
40,684,725

 
40,366,320

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

 

Capital in excess of par value
15,375,737

 
14,397,072

Retained earnings
37,665,741

 
30,821,917

Accumulated other comprehensive loss
(3,408,856
)
 
(2,488,917
)
Total stockholders’ equity
90,317,347

 
83,096,392

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
270,588,176

 
$
258,353,696

See notes to condensed consolidated financial statements.


2

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX-MONTH PERIODS ENDED MARCH 31, 2020 AND 2019
UNAUDITED

 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
OPERATING REVENUES:
 
 
 
 
 
 
 
Gas utilities
$
22,275,719

 
$
25,058,749

 
$
41,901,325

 
$
46,095,330

Other
162,012

 
216,210

 
321,859

 
396,376

Total operating revenues
22,437,731

 
25,274,959

 
42,223,184

 
46,491,706

OPERATING EXPENSES:
 
 
 
 
 
 
 
Cost of gas - utility
8,672,997

 
12,771,338

 
16,850,803

 
24,677,797

Cost of sales - non utility
78,880

 
124,243

 
155,336

 
234,946

Operations and maintenance
4,110,149

 
3,714,084

 
8,027,619

 
7,236,083

General taxes
587,873

 
556,336

 
1,131,110

 
1,064,225

Depreciation and amortization
1,988,216

 
1,905,475

 
3,976,721

 
3,810,950

Total operating expenses
15,438,115

 
19,071,476

 
30,141,589

 
37,024,001

OPERATING INCOME
6,999,616

 
6,203,483

 
12,081,595

 
9,467,705

Equity in earnings of unconsolidated affiliate
1,188,593

 
698,175

 
2,282,679

 
1,261,224

Other income, net
317,892

 
121,709

 
475,535

 
247,595

Interest expense
1,038,293

 
892,649

 
2,123,478

 
1,709,431

INCOME BEFORE INCOME TAXES
7,467,808

 
6,130,718

 
12,716,331

 
9,267,093

INCOME TAX EXPENSE
1,787,492

 
1,460,628

 
3,029,079

 
2,162,841

NET INCOME
$
5,680,316

 
$
4,670,090

 
$
9,687,252

 
$
7,104,252

BASIC EARNINGS PER COMMON SHARE
$
0.70

 
$
0.58

 
$
1.20

 
$
0.89

DILUTED EARNINGS PER COMMON SHARE
$
0.70

 
$
0.58

 
$
1.19

 
$
0.88

DIVIDENDS DECLARED PER COMMON SHARE
$
0.1750

 
$
0.1650

 
$
0.3500

 
$
0.3300

See notes to condensed consolidated financial statements.

3

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX-MONTH PERIODS ENDED MARCH 31, 2020 AND 2019
UNAUDITED

 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
NET INCOME
$
5,680,316

 
$
4,670,090

 
$
9,687,252

 
$
7,104,252

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Interest rate swaps
(1,216,574
)
 
(44,121
)
 
(953,521
)
 
(125,524
)
Defined benefit plans
16,791

 
(1,913
)
 
33,582

 
(3,826
)
OTHER COMPREHENSIVE LOSS, NET OF TAX
(1,199,783
)
 
(46,034
)
 
(919,939
)
 
(129,350
)
COMPREHENSIVE INCOME
$
4,480,533

 
$
4,624,056

 
$
8,767,313

 
$
6,974,902

See notes to condensed consolidated financial statements.

4

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE AND SIX-MONTH PERIODS ENDED MARCH 31, 2020 AND 2019
UNAUDITED


 
Six Months Ended March 31, 2020
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Accumulated 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

Net Income

 

 
5,680,316

 

 
5,680,316

Other comprehensive loss

 

 

 
(1,199,783
)
 
(1,199,783
)
Cash dividends declared ($0.175 per share)

 

 
(1,424,192
)
 

 
(1,424,192
)
Issuance of common stock (45,628 shares)
228,140

 
673,731

 

 

 
901,871

Balance - March 31, 2020
$
40,684,725

 
$
15,375,737

 
$
37,665,741

 
$
(3,408,856
)
 
$
90,317,347


 
Six Months Ended March 31, 2019
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
Balance - September 30, 2018
$
39,973,075

 
$
13,043,656

 
$
27,438,049

 
$
(871,668
)
 
$
79,583,112

Net Income

 

 
2,434,162

 

 
2,434,162

Other comprehensive loss

 

 

 
(83,316
)
 
(83,316
)
Cash dividends declared ($0.165 per share)

 

 
(1,322,335
)
 

 
(1,322,335
)
Issuance of common stock (17,035 shares)
85,175

 
262,942

 

 

 
348,117

Balance - December 31, 2018
$
40,058,250

 
$
13,306,598

 
$
28,549,876

 
$
(954,984
)
 
$
80,959,740

Net income

 

 
4,670,090

 

 
4,670,090

Other comprehensive loss

 

 

 
(46,034
)
 
(46,034
)
Cash dividends declared ($0.165 per share)

 

 
(1,329,178
)
 

 
(1,329,178
)
Issuance of common stock (31,622 shares)
158,110

 
561,789

 

 

 
719,899

Balance - March 31, 2019
$
40,216,360

 
$
13,868,387

 
$
31,890,788

 
$
(1,001,018
)
 
$
84,974,517


See notes to condensed consolidated financial statements.


5

RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2020 AND 2019
UNAUDITED

 
 
Six Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
9,687,252

 
$
7,104,252

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
4,095,390

 
3,880,945

Cost of retirement of utility plant, net
(286,237
)
 
(123,237
)
Equity in earnings of unconsolidated affiliate
(2,282,679
)
 
(1,261,224
)
Allowance for funds used during construction
(217,147
)
 

Changes in assets and liabilities which provided cash, exclusive of changes and noncash transactions shown separately
171,552

 
1,332,387

Net cash provided by operating activities
11,168,131

 
10,933,123

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for utility property
(10,435,947
)
 
(10,975,996
)
Investment in unconsolidated affiliates
(5,931,060
)
 
(13,304,263
)
Proceeds from disposal of utility property
13,666

 
1,219

Net cash used in investing activities
(16,353,341
)
 
(24,279,040
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of unsecured notes
17,063,000

 
23,979,000

Borrowings under line-of-credit
9,784,534

 
23,308,642

Repayments under line-of-credit
(17,957,007
)
 
(30,669,659
)
Debt issuance expenses
(70,750
)
 
(60,343
)
Proceeds from issuance of stock
1,297,070

 
1,068,016

Cash dividends paid
(2,758,757
)
 
(2,559,587
)
Net cash provided by financing activities
7,358,090

 
15,066,069

NET INCREASE IN CASH AND CASH EQUIVALENTS
2,172,880

 
1,720,152

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
1,631,348

 
247,411

CASH AND CASH EQUIVALENTS AT END OF YEAR
$
3,804,228

 
$
1,967,563

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,001,734

 
$
1,549,778

Income taxes
985,000

 
1,623,000

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 present fairly Resources' financial position as of March 31, 2020, cash flows for the six months ended March 31, 2020 and 2019, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three and six months ended March 31, 2020 and 2019. The results of operations for the three and six months ended March 31, 2020 are not indicative of the results to be expected for the fiscal year ending September 30, 2020 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 Securities and Exchange Commission. Pursuant to those rules, certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information not misleading. Therefore, the 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, 2019. The September 30, 2019 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 in Form 10-K for the year ended September 30, 2019.

On March 12, 2020, the SEC adopted amendments to the Exchange Act that, among other things, revised the definition of accelerated filers. As a result, Resources now qualifies as a smaller reporting company and a non-accelerated filer.
Recently Issued or Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU leaves the accounting for leases mostly unchanged for lessors, with the exception of targeted improvements for consistency; however, the new guidance requires lessees to recognize assets and liabilities for leases with terms of more than 12 months. The ASU also revises the definition of a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Under prior GAAP, the presentation and cash flows arising from a lease by a lessee primarily depended on its classification as a finance or operating lease. The new ASU requires both types of leases to be recognized on the balance sheet. In addition, the new guidance includes quantitative and qualitative disclosure requirements to aid financial statement users in better understanding the amount, timing and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01, which provides a practical expedient that allows entities the option of not evaluating existing land easements under the new lease standard for those easements that were entered into prior to adoption. New or modified land easements will require evaluation on a prospective basis. The new guidance is effective for the Company for the annual reporting period ending September 30, 2020 and interim periods within that annual period.

The Company adopted ASU 2016-02 and related guidance effective October 1, 2019. At the time of adoption, the Company had one operating lease. This lease calls for quarterly payments in the amount of $3,240 and is set to expire in September 2021. As the value of this lease obligation was determined to be de minimus and the Company has not entered into any additional lease obligations, this new guidance does not have a material effect on the Company's financial position, results of operations or cash flows.


7

RGC RESOURCES, INC. AND SUBSIDIARIES


In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting For Hedging Activities. The ASU is meant to simplify recognition and presentation guidance in an effort to improve financial reporting of cash flow and fair value hedging relationships to better portray the economic results of an entity's risk management activities. This is achieved through changes to both the designation and measurement guidance for qualifying hedging relationships, as well as changes to the presentation of hedge results. The Company adopted the new guidance effective October 1, 2019. As the Company currently has only cash flow hedges and no portion of these hedges were deemed ineffective during the periods presented, this new guidance does not have a material effect on the Company's financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU reduces the complexity of accounting for costs of implementing a cloud computing service arrangement and aligns the following requirements to capitalize implementation costs: 1) those incurred in a hosting arrangement that is a service contract, and 2) those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal software license. The Company adopted the new guidance effective October 1, 2019. The adoption of this new guidance does not currently have a material effect on the Company's consolidated financial statements. However, as the ASU changes the treatment of certain contracts by allowing related implementation costs to be capitalized and amortized over time, rather than directly expensed; there could be a significant impact on the Company's financial position, results of operations and cash flow in the future.

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. Early adoption is permitted. Management has not completed its evaluation of the new guidance; however, the ASU only modifies disclosure requirements and will not effect 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. This 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; however, as the Company has several contracts and hedging relationships that currently reference LIBOR, this new guidance could result in a significant impact on the Company's financial position, results of operations, and cash flows for the period through which the ASU is effective.

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.

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:


8

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
 
Gas utility
Non utility
Total operating revenues
 
Gas utility
Non utility
Total operating revenues
Natural Gas (Billed and Unbilled):
 
 
 
 
 
 
 
Residential
$
12,892,659

$

$
12,892,659

 
$
15,397,504

$

$
15,397,504

Commercial
6,368,939


6,368,939

 
8,357,598


8,357,598

Industrial and Transportation
1,243,426


1,243,426

 
1,249,316


1,249,316

Other
117,466

162,012

279,478

 
108,418

216,210

324,628

Total contracts with customers
20,622,490

162,012

20,784,502

 
25,112,836

216,210

25,329,046

Alternative Revenue Programs
1,653,229


1,653,229

 
(54,087
)

(54,087
)
Total operating revenues
$
22,275,719

$
162,012

$
22,437,731

 
$
25,058,749

$
216,210

$
25,274,959

 
 
 
 
 
 
 
 
 
Six months ended March 31, 2020
 
Six months ended March 31, 2019
 
Gas utility
Non utility
Total operating revenues
 
Gas utility
Non utility
Total operating revenues
Natural Gas (Billed and Unbilled):
 
 
 
 
 
 
 
Residential
$
25,177,242

$

$
25,177,242

 
$
28,410,332

$

$
28,410,332

Commercial
12,102,779


12,102,779

 
15,700,155


15,700,155

Industrial and Transportation
2,570,669


2,570,669

 
2,475,364


2,475,364

Revenue reductions (TCJA) (1)



 
(523,881
)

(523,881
)
Other
333,461

321,859

655,320

 
334,908

396,376

731,284

Total contracts with customers
40,184,151

321,859

40,506,010

 
46,396,878

396,376

46,793,254

Alternative Revenue Programs
1,717,174


1,717,174

 
(301,548
)

(301,548
)
Total operating revenues
$
41,901,325

$
321,859

$
42,223,184

 
$
46,095,330

$
396,376

$
46,491,706

 
 
 
 
 
 
 
 
(1) Accrued refund associated with excess revenue collected in tariff rates associated with the reduction in federal income tax rates. See Note 4 for more information.

Gas utility revenues

Substantially all of Roanoke Gas’ revenues are derived from rates authorized by the SCC as reflected in 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 performance obligation 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 above. 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.





9

RGC RESOURCES, INC. AND SUBSIDIARIES


Other revenues

Other revenues primarily consist of miscellaneous fees and charges, utility-related revenues not directly billed to utility customers and billings for non-utility activities. Non-utility (unregulated) activities provided by the Company include contract paving and other 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 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 Assets
 
Current Liabilities
 
Trade accounts receivable
(1)
Unbilled revenue
(1)
 
Customer credit balances
Customer deposits
Balance at September 30, 2019
$
2,590,702

$
1,236,384

 
$
880,295

$
1,432,031

Balance at March 31, 2020
3,776,033

1,539,460

 
1,361,720

1,622,779

Increase
$
1,185,331

$
303,076

 
$
481,425

$
190,748

 
 
 
 
 
 
(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

On December 22, 2017, the TCJA became law. Its most significant impact was the reduction of the maximum corporate federal income tax rate from 35% to 21% beginning January 1, 2018.

Under the provisions of ASC 740 - Income Taxes, the deferred tax assets and liabilities of the Company were revalued to reflect the reduction in the federal tax rate. For unregulated entities, the revaluation of excess deferred income taxes flowed through income tax expense in the period of change. For rate regulated entities such as Roanoke Gas, these excess deferred taxes were originally recovered from its customers based on billing rates derived using a federal income tax rate of 34%. As a result, these net excess deferred taxes must be returned to customers. The Company began refunding these excess deferred taxes in fiscal 2018. As the refunds should have no effect on the income of the Company, the consolidated income statements reflect both a reduction in revenues and a corresponding reduction in income taxes associated with the flow back of these net excess deferred taxes. The result is a lowering of the effective tax rate for the Company.

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:


10



 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
Income before income taxes
$
7,467,808

 
$
6,130,718

 
$
12,716,331

 
$
9,267,093

Corporate federal tax rate
21.00
%
 
21.00
%
 
21.00
%
 
21.00
%
 
 
 
 
 
 
 
 
Income tax expense computed at the federal statutory rate
$
1,568,240

 
$
1,287,451

 
$
2,670,430

 
$
1,946,090

State income taxes, net of federal tax benefit
338,631

 
290,481

 
588,668

 
441,070

Net amortization of excess deferred taxes on regulated operations
(86,208
)
 
(86,208
)
 
(124,332
)
 
(172,417
)
Other, net
(33,171
)
 
(31,096
)
 
(105,687
)
 
(51,902
)
Total income tax expense
$
1,787,492

 
$
1,460,628

 
$
3,029,079

 
$
2,162,841

 
 
 
 
 
 
 
 
Effective tax rate
23.9
%
 
23.8
%
 
23.8
%
 
23.3
%

4.
Rates and Regulatory Matters

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

On January 24, 2020, the SCC issued its final order on the general rate application filed by Roanoke Gas on October 10, 2018. Under the provisions of this order, Roanoke Gas was granted an annualized non-gas rate increase of $7.25 million and was required to write-down a portion of the ESAC assets deemed not eligible for recovery in the final order. As a result, management revised its rate refund accrual to reflect the award authorized in the final order. Management also wrote down $317,191 in ESAC regulatory assets in the first quarter to comply with the order. On January 30, 2020, the SCC approved the non-gas rates that would generate the approved non-gas rate award. In March 2020, the Company completed the refund of $3.8 million for revenues collected from interim rates in excess of the final approved rates including interest.

Certain provisions within the order were not reflected in the condensed consolidated financial statements for the period ended December 31, 2019, pending additional clarification from the SCC. Specifically, the rate order did not provide for a return on certain Roanoke Gas infrastructure investments that will interconnect with the MVP. However, the order did provide for the ability to defer financing costs related to these investments for consideration of future recovery. The Company is deferring these costs through the application of AFUDC, which capitalizes both the equity and debt financing costs during the construction phases. The specific time period allowed for the recovery of these costs has yet to be determined; therefore, the Company has taken a conservative position and has only reflected AFUDC that would have been recognized since January 1, 2019, the date in which the rate award was effective. If the SCC concludes that the AFUDC applies to an earlier period, the Company will reflect any additional AFUDC at that time.

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 for non-payment by any customer until May 15, 2020, which was subsequently extended to June 14, 2020. This order, effective on the date issued, also directed utilities to not assess late payment fees due to the coronavirus public health emergency. As a result, the amount of current receivables and future billings that will ultimately become uncollectible will likely increase. Therefore, the Company has increased its provision for bad debts as of March 31, 2020, based on the limited information currently available. These estimates are subject to revision as the financial impact of COVID-19 is unknown at this time.

As referenced in Note 3, the TCJA reduced the federal corporate tax rate to 21%. As a result, the Company revalued its deferred tax assets and liabilities to reflect the new federal tax rate. Under the provisions of ASC 740, the corresponding adjustment to deferred income taxes generally flows to income tax expense for unregulated entities. For rate regulated entities such as Roanoke Gas, these excess deferred taxes were originally recovered from its customers based on billing rates derived using a federal income tax rate of 34%. Therefore, the adjustment to the net deferred tax liabilities of Roanoke Gas, to the extent such net deferred tax liabilities are attributable to rate base or cost of service for customers, are refundable to customers. Roanoke Gas began accounting for the refund of these excess deferred taxes in fiscal 2018 along

11

RGC RESOURCES, INC. AND SUBSIDIARIES


with reflecting a corresponding reduction in income tax expense. A majority of the net regulatory liability will be refunded over a 28 year period per IRS normalization requirements. See Note 14 for the remaining balances related to excess deferred taxes.

5.
Other Investments

In October 2015, Midstream, acquired an initial 1% equity interest in the MVP, LLC. In November 2019, the Company's Board of Directors approved a pro-rata increase in Midstream's participation that increases its equity interest to approximately 1.03% at the project's completion. Once completed, the MVP will have the capacity to transport approximately 2 million decatherms of natural gas per day.

Pipeline construction has been delayed due to Fourth Circuit and FERC actions that suspended previously approved permits. Current activity on the pipeline is restricted to maintenance and restoration activities. As a result, the projected cost of the MVP project has grown to between $5.3 and $5.5 billion with the managing partner still estimating the in-service date as late calendar 2020. Midstream's current estimated total cash contribution is between $55 and $57 million. The Company is utilizing the equity method to account for the transactions and activity of the investment in MVP and is participating in the earnings in proportion to its level of investment.

In April 2018, the LLC announced the Southgate project, which is an approximately 74 mile pipeline extending from the MVP in Virginia to delivery points in North Carolina. Midstream is a less than 1% investor in the project, which is being accounted for under the cost method. Total project cost is estimated to be nearly $500 million, of which Midstream's portion is estimated to be approximately $2.5 million. The Southgate in-service date is currently targeted for calendar year 2021, subject to any further delays in the completion of the MVP.

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 condensed consolidated financial statements as follows:

Balance Sheet location of Other Investments:
March 31, 2020
 
September 30, 2019
Other Assets:
 
 
 
     MVP
$
51,971,127

 
$
47,055,426

     Southgate
320,033

 
320,033

     Investment in unconsolidated affiliates
$
52,291,160

 
$
47,375,459

Current Liabilities:
 
 
 
     MVP
$
1,726,786

 
$
4,958,260

     Southgate

 
66,564

     Capital contributions payable
$
1,726,786

 
$
5,024,824


 
Three Months Ended
 
Six Months Ended
Income Statement location of Other Investments:
March 31, 2020
 
March 31, 2019
 
March 31, 2020
 
March 31, 2019
    Equity in earnings of unconsolidated affiliate
$
1,188,593

 
$
698,175

 
$
2,282,679

 
$
1,261,224


 
March 31, 2020
 
September 30, 2019
Undistributed earnings, net of income taxes, of MVP in retained earnings
$
4,962,293

 
$
3,267,176


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

12

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Six Months Ended
 
March 31, 2020
 
March 31, 2019
Cash investment
$
5,931,060

 
$
13,304,263

Change in accrued capital calls
(3,298,038
)
 
(6,796,085
)
Equity in earnings of unconsolidated affiliates
2,282,679

 
1,261,224

Change in investment in unconsolidated affiliates
$
4,915,701

 
$
7,769,402


Summary of unaudited financial statements of Mountain Valley Pipeline are presented below. Southgate financial statements, which are accounted for under the cost method, are not included:
 
Income Statements
 
Three Months Ended
 
Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
March 31, 2020
 
March 31, 2019
AFUDC
$
117,754,887

 
$
66,953,609

 
$
227,780,361

 
$
121,138,125

Other Income (Expense), net
(34,575
)
 
720,935

 
699,607

 
3,283,727

Net Income
$
117,720,312

 
$
67,674,544

 
$
228,479,968

 
$
124,421,852


 
Balance Sheets
 
March 31, 2020
 
September 30, 2019
Assets:
 
 
 
Current Assets
$
218,072,899

 
$
485,323,892

Construction Work in Progress
5,132,263,805

 
4,675,267,389

Other Assets
5,752,436

 
13,190,816

Total Assets
$
5,356,089,140

 
$
5,173,782,097

 
 
 
 
Liabilities and Equity:
 
 
 
Current Liabilities
$
194,839,985

 
$
466,776,233

Noncurrent Liabilities
265,000

 

Capital
5,160,984,155

 
4,707,005,864

Total Liabilities and Equity
$
5,356,089,140

 
$
5,173,782,097


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 variable rate term note issued on June 12, 2019 and the $10,000,000 variable rate term note issued on June 13, 2019. 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.


13



7.
Long-Term Debt

On March 26, 2020, Roanoke Gas renewed its unsecured line-of-credit agreement, which was scheduled to expire March 31, 2021. The new agreement is for a two-year term expiring March 31, 2022 with a maximum borrowing limit of $28,000,000. Amounts drawn against the agreement are considered to be non-current as the balance under the line-of-credit is not subject to repayment within the next 12-month period. The agreement has a variable-interest rate based on 30-day LIBOR plus 100 basis points and an availability fee of 15 basis points and provides multi-tiered borrowing limits associated with the seasonal borrowing demands of the Company. The Company's total available borrowing limits during the term of the agreement range from $3,000,000 to $28,000,000.

On December 23, 2019, Midstream entered into the Third Amendment to Credit Agreement ("Amendment") and amendments to the related Promissory Notes ("Notes") with the corresponding banks. The Amendment modified the original Credit Agreement and prior amendments between Midstream and the banks by increasing the total borrowing capacity to $41,000,000 from its previous limit of $26,000,000 and extending the maturity date to December 29, 2022. The Amendment retained all of the other provisions contained in the previous credit agreements and amendments including the interest rate on the Notes based on 30-day LIBOR plus 1.35%. The additional limits under the Amendment provide additional financing for the investment in the MVP.

On December 6, 2019, Roanoke Gas entered into unsecured notes in the aggregate principal amount of $10,000,000. These notes have a 10-year term with a fixed interest rate of 3.60%. Proceeds from these notes will provide funding for Roanoke Gas' capital budget.

Roanoke Gas has other unsecured notes at varying fixed interest rates as well as a variable-rate note with interest based on 30-day LIBOR plus 90 basis points. The variable rate note is hedged by a swap agreement, which converts the debt into a fixed-rate instrument with an annual interest rate of 2.30%. Midstream has two other variable rate notes in the amounts of $14,000,000 and $10,000,000 that are hedged by swap agreements that effectively convert the interest rates to 3.24% and 3.14%, respectively.

All of the debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that limit consolidated long-term indebtedness to not more than 65% of total capitalization. All of the debt agreements, except for the line-of-credit, provide for priority indebtedness to not exceed 15% of consolidated total assets. The Company was in compliance with all debt covenants as of March 31, 2020 and September 30, 2019.


14



Long-term debt consists of the following:
 
March 31, 2020
 
September 30, 2019
 
Principal
 
Unamortized Debt Issuance Costs
 
Principal
 
Unamortized Debt Issuance Costs
Roanoke Gas Company:
 
 
 
 
 
 
 
Unsecured senior notes payable, at 4.26% due on September 18, 2034
$
30,500,000

 
$
139,984

 
$
30,500,000

 
$
144,811

Unsecured term note payable, at 30-day LIBOR plus 0.90%, due November 1, 2021
7,000,000

 
5,280

 
7,000,000

 
6,948

Unsecured term notes payable, at 3.58% due on October 2, 2027
8,000,000

 
36,120

 
8,000,000

 
38,528

Unsecured term notes payable, at 4.41% due on March 28, 2031
10,000,000

 
34,459

 
10,000,000

 
36,272

Unsecured term notes payable, at 3.60% due on December 6, 2029
10,000,000

 
34,346

 

 

RGC Midstream, LLC:
 
 
 
 
 
 
 
Unsecured term notes payable, at 30-day LIBOR plus 1.35%, due December 29, 2022
23,075,200

 
68,492

 
16,012,200

 
59,504

Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026
14,000,000

 
15,048

 
14,000,000

 
16,252

Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024
10,000,000

 
9,822

 
10,000,000

 
11,000

Total notes payable
$
112,575,200

 
$
343,551

 
$
95,512,200

 
$
313,315

Line-of-credit, at 30-day LIBOR plus 1.00%, due March 31, 2022
$

 
$

 
$
8,172,473

 
$

Total long-term debt
$
112,575,200

 
$
343,551

 
$
103,684,673

 
$
313,315



8.
Other Comprehensive Income (Loss)
A summary of other comprehensive income and loss is provided below:
 
 
Before-Tax
Amount
 
Tax
(Expense)
or Benefit
 
Net-of-Tax
Amount
Three Months Ended March 31, 2020
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
Unrealized losses
$
(1,654,962
)
 
$
425,987

 
$
(1,228,975
)
Transfer of realized losses to interest expense
16,698

 
(4,297
)
 
12,401

Net interest rate swaps
(1,638,264
)
 
421,690

 
(1,216,574
)
Defined benefit plans:
 
 
 
 
 
Amortization of actuarial losses
22,610

 
(5,819
)
 
16,791

Other comprehensive loss
$
(1,615,654
)
 
$
415,871

 
$
(1,199,783
)
Three Months Ended March 31, 2019
 
 
 
 
 
Interest rate swap:
 
 
 
 
 
Unrealized losses
$
(40,059
)
 
$
10,311

 
$
(29,748
)
Transfer of realized gains to interest expense
(19,355
)
 
4,982

 
(14,373
)
Net interest rate swap
(59,414
)
 
15,293

 
(44,121
)
Defined benefit plans:
 
 
 
 
 
Amortization of actuarial gains
(2,576
)
 
663

 
(1,913
)
Other comprehensive loss
$
(61,990
)
 
$
15,956

 
$
(46,034
)

15

RGC RESOURCES, INC. AND SUBSIDIARIES


 
 
 
 
 
 
 
Before-Tax
Amount
 
Tax
(Expense)
or Benefit
 
Net-of-Tax
Amount
Six Months Ended March 31, 2020
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
Unrealized losses
$
(1,304,269
)
 
$
335,718

 
$
(968,551
)
Transfer of realized losses to interest expense
20,238

 
(5,208
)
 
15,030

Net interest rate swaps
(1,284,031
)
 
330,510

 
(953,521
)
Defined benefit plans:
 
 
 
 
 
Amortization of actuarial losses
45,220

 
(11,638
)
 
33,582

Other comprehensive loss
$
(1,238,811
)
 
$
318,872

 
$
(919,939
)
Six Months Ended March 31, 2019
 
 
 
 
 
Interest rate swap:
 
 
 
 
 
Unrealized losses
$
(134,015
)
 
$
34,495

 
$
(99,520
)
Transfer of realized gains to interest expense
(35,017
)
 
9,013

 
(26,004
)
Net interest rate swap
(169,032
)
 
43,508

 
(125,524
)
Defined benefit plans:
 
 
 
 
 
Amortization of actuarial gains
(5,152
)
 
1,326

 
(3,826
)
Other comprehensive loss
$
(174,184
)
 
$
44,834

 
$
(129,350
)

The amortization of actuarial gains and losses is included as a component of net periodic pension and postretirement benefit costs under other income, net.

Reconciliation of Accumulated Other Comprehensive Income (Loss)
 
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at September 30, 2019
$
(2,488,917
)
Other comprehensive loss
(919,939
)
Balance at March 31, 2020
$
(3,408,856
)

9.
Commitments and Contingencies

Roanoke Gas currently holds the only franchises and CPCNs to distribute natural gas in its service area. The current franchise agreements expire December 31, 2035. The Company's CPCNs are exclusive and generally are intended for perpetual duration. 

Due to the nature of the natural gas distribution business, the Company has entered into agreements with both suppliers and pipelines for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The Company utilizes an asset manager to assist in optimizing the use of its transportation, storage rights and gas supply in order to provide a secure and reliable source of natural gas to its customers. The Company also has storage and pipeline capacity contracts to store and deliver natural gas to the Company’s distribution system. Roanoke Gas is currently served directly by two primary pipelines that deliver all of the natural gas supplied to the Company’s distribution system. Depending on weather conditions and the level of customer demand, failure of one of these transmission pipelines could have a major adverse impact on the Company's ability to deliver natural gas to its customers and its results of operations. The MVP will provide Roanoke Gas with access to an additional delivery source to its distribution system, increasing system reliability and the Company's ability to meet future demands for natural gas.
 
The outbreak of COVID-19 is having a dramatic 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 in normal activities as businesses have either shut down or are operating on a limited basis resulting in higher unemployment and government imposed social distancing mandates. As the virus and the corresponding efforts to combat its spread did not reach the level where significant

16



disruptions in activity occurred until mid March, the impact to the condensed consolidated financial statements for the quarter ended March 31, 2020 was not material. 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, as well as a variety of 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 and six months ended March 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 March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
Net Income
$
5,680,316

 
$
4,670,090

 
$
9,687,252

 
$
7,104,252

Weighted average common shares
8,122,157

 
8,032,218

 
8,101,887

 
8,017,820

Effect of dilutive securities:
 
 
 
 
 
 
 
Options to purchase common stock
22,806

 
40,931

 
27,331

 
44,600

Diluted average common shares
8,144,963

 
8,073,149

 
8,129,218

 
8,062,420

Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.58

 
$
1.20

 
$
0.89

Diluted
$
0.70

 
$
0.58

 
$
1.19

 
$
0.88

 
11.
Employee Benefit Plans

The Company has both a pension plan and a postretirement plan. The pension plan covers substantially all of 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
 
Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
172,902

 
$
134,317

 
$
345,804

 
$
268,634

Interest cost
265,557

 
291,682

 
531,114

 
583,364

Expected return on plan assets
(459,156
)
 
(387,359
)
 
(918,312
)
 
(774,718
)
Recognized loss
113,936

 
39,650

 
227,872

 
79,300

Net periodic pension cost
$
93,239

 
$
78,290

 
$
186,478

 
$
156,580

 

17

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Components of postretirement benefit cost:
 
 
 
 
 
 
 
Service cost
$
41,970

 
$
33,221

 
$
83,940

 
$
66,442

Interest cost
132,869

 
162,236

 
265,738

 
324,472

Expected return on plan assets
(137,599
)
 
(136,805
)
 
(275,198
)
 
(273,610
)
Recognized loss
59,343

 
30,951

 
118,686

 
61,902

Net postretirement benefit cost
$
96,583

 
$
89,603

 
$
193,166

 
$
179,206


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 Contributions
 
Remaining Fiscal Year Contributions
 
Defined benefit pension plan
$
400,000

 
$
400,000

 
Postretirement medical plan
400,000

 

 
Total
$
800,000

 
$
400,000


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.

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 as of March 31, 2020 and September 30, 2019:
 

18

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Fair Value Measurements - March 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
$
316,120

 
$

 
$
316,120

 
$

Interest rate swaps
2,178,372

 

 
2,178,372

 

Total
$
2,494,492

 
$

 
$
2,494,492

 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements - September 30, 2019
 
Fair
Value
 
Quoted
Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Natural gas purchases
$
397,757

 
$

 
$
397,757

 
$

Interest rate swaps
894,341

 

 
894,341

 

Total
$
1,292,098

 
$

 
$
1,292,098

 
$


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 March 31, 2020 and September 30, 2019, 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, 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. 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 as of March 31, 2020 and September 30, 2019:
 

19

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Fair Value Measurements - March 31, 2020
 
Carrying
Value
 
Quoted
Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Notes payable
$
112,575,200

 
$

 
$

 
$
117,181,480

Total
$
112,575,200

 
$

 
$

 
$
117,181,480

 
 
 
 
 
 
 
 
 
Fair Value Measurements - September 30, 2019
 
Carrying
Value
 
Quoted
Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Notes payable
$
95,512,200

 
$

 
$

 
$
100,900,952

Total
$
95,512,200

 
$

 
$

 
$
100,900,952

 
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 March 31, 2020 and September 30, 2019, 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.

Information related to the segments of the Company are provided below:


20

RGC RESOURCES, INC. AND SUBSIDIARIES


 
Three Months Ended March 31, 2020
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Operating revenues
$
22,275,719

 
$

 
$
162,012

 
$
22,437,731

Depreciation
1,988,216

 

 

 
1,988,216

Operating income (loss)
6,988,528

 
(69,526
)
 
80,614

 
6,999,616

Equity in earnings

 
1,188,593

 

 
1,188,593

Interest expense
661,997

 
376,296

 

 
1,038,293

Income before income taxes
6,642,411

 
744,698

 
80,699

 
7,467,808


 
Three Months Ended March 31, 2019
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Operating revenues
$
25,058,749

 
$

 
$
216,210

 
$
25,274,959

Depreciation
1,905,475

 

 

 
1,905,475

Operating income (loss)
6,154,052

 
(39,394
)
 
88,825

 
6,203,483

Equity in earnings

 
698,175

 

 
698,175

Interest expense
585,509

 
307,140

 

 
892,649

Income before income taxes
5,689,205

 
352,581

 
88,932

 
6,130,718

 
Six Months Ended March 31, 2020
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Operating revenues
$
41,901,325

 
$

 
$
321,859

 
$
42,223,184

Depreciation
3,976,721

 

 

 
3,976,721

Operating income (loss)
12,030,013

 
(108,117
)
 
159,699

 
12,081,595

Equity in earnings

 
2,282,679

 

 
2,282,679

Interest expense
1,380,850

 
742,628

 

 
2,123,478

Income before income taxes
11,121,293

 
1,435,052

 
159,986

 
12,716,331

 
Six Months Ended March 31, 2019
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Operating revenues
$
46,095,330

 
$

 
$
396,376

 
$
46,491,706

Depreciation
3,810,950

 

 

 
3,810,950

Operating income (loss)
9,384,877

 
(73,281
)
 
156,109

 
9,467,705

Equity in earnings

 
1,261,224

 

 
1,261,224

Interest expense
1,161,748

 
547,683

 

 
1,709,431

Income before income taxes
8,468,126

 
642,676

 
156,291

 
9,267,093


21

RGC RESOURCES, INC. AND SUBSIDIARIES


 
March 31, 2020
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Total assets
$
201,148,338

 
$
52,637,208

 
$
16,802,630

 
$
270,588,176

 
 
 
 
 
 
 
 
 
September 30, 2019
 
Gas Utility
 
Investment in Affiliates
 
Parent and Other
 
Consolidated Total
Total assets
$
195,969,019

 
$
47,429,368

 
$
14,955,309

 
$
258,353,696


14. Regulatory Assets and Liabilities
The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No. 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the condensed consolidated balance sheet (regulatory assets) and amortized into expense over periods when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of FASB ASC No. 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the condensed consolidated statements of income and comprehensive income in the period which FASB ASC No. 980 no longer applied.
Regulatory assets included in the Company’s condensed consolidated balance sheets are as follows: 
 
March 31, 2020
 
September 30, 2019
Assets:
 
 
 
Current Assets:
 
 
 
Regulatory assets:
 
 
 
WNA
$
2,386,713

 
$
569,558

ESAC assets
180,809

 
265,392

Accrued pension and postretirement medical
301,336

 
602,674

Other deferred expenses
84,315

 
84,315

Total current
2,953,173

 
1,521,939

Utility Property: