RGC Resources(RGCO) - 2020 Q4 - Annual Report

Glossary of Terms This section defines key terms and acronyms used throughout the report, including financial, regulatory, and company-specific terminology - The glossary defines key terms and acronyms used throughout the report, such as AFUDC (Allowance for Funds Used During Construction), ARO (Asset Retirement Obligation), ARP (Alternative Revenue Program), COVID-19, DTH (Decatherm), EPS (Earnings Per Share), FERC (Federal Energy Regulatory Commission), GAAP (Accounting Principles Generally Accepted in the United States), HDD (Heating Degree Day), LNG (Liquefied Natural Gas), MVP (Mountain Valley Pipeline), PGA (Purchased Gas Adjustment), SCC (Virginia State Corporation Commission), SAVE (Steps to Advance Virginia's Energy), and WNA (Weather Normalization Adjustment), along with company-specific entities like Roanoke Gas and Midstream[9][10] Cautionary Note Regarding Forward Looking Statements This section warns that the report contains forward-looking statements subject to risks and uncertainties, with no obligation to update them - This section warns readers that the report contains forward-looking statements based on management's current expectations, which are subject to various risks and uncertainties detailed in Item 1A 'Risk Factors'[11][12] - The company explicitly states it assumes no duty to update these statements unless required by applicable laws and regulations[11][12] PART I Item 1. Business RGC Resources, Inc. is a holding company primarily engaged in natural gas distribution through Roanoke Gas, with an investment in the Mountain Valley Pipeline project - RGC Resources, Inc. is a holding company composed of Roanoke Gas, Diversified Energy (inactive), and Midstream, with Roanoke Gas being the primary operating subsidiary, distributing and selling natural gas[15][16][18] - Roanoke Gas's regulated natural gas distribution business accounted for approximately 98% of Resources' total revenues for fiscal years 2020 and 2019[20] Customer Breakdown (Fiscal Year Ended September 30, 2020): | Category | Customers (%) | Volume (%) | Revenue (%) | Margin (%) | | :------- | :------------ | :--------- | :---------- | :--------- | | Residential | 91.3 % | 35 % | 60 % | 63 % | | Commercial | 8.6 % | 27 % | 30 % | 23 % | | Industrial | 0.1 % | 38 % | 8 % | 12 % | | Other Utility | 0.0 % | 0 % | 1 % | 1 % | | Other Non-Utility | 0.0 % | 0 % | 1 % | 1 % | - Total natural gas deliveries were approximately 10.4 million DTH in fiscal 2020 and 9.9 million DTH in fiscal 2019[23] - Roanoke Gas operates in a regulated, monopolistic environment with exclusive franchises and Certificates of Public Convenience and Necessity (CPCNs) in its service areas, subject to federal, state, and local regulations[28][32][33][34] - As of September 30, 2020, Resources had 101 full-time employees, with 18% belonging to a union under a collective bargaining agreement[35] Item 1A. Risk Factors This section details operational, regulatory, financial, and general risks that could adversely affect the company's business and financial performance - Operational risks include reliance on two interstate pipelines for 100% of natural gas supply, inherent risks in operating a natural gas distribution system and LNG storage facility, supply disruptions due to disasters, security incidents or cyber-attacks, volatility in natural gas prices, inability to attract and retain skilled employees, geographic concentration of business activities, and potential delays or cost overruns in pipeline expansion projects[41][42][43][44][45][46][47][48] - Regulatory risks encompass environmental laws related to global warming and climate change, increased compliance and pipeline safety requirements and fines, adverse regulatory actions or failure to obtain timely rate relief from the SCC, and changes in tax laws[54][55][56][57] - Financial risks include significant delays, cost overruns, and regulatory obstacles affecting the investment in Mountain Valley Pipeline, LLC, the potential negative impact of a pandemic outbreak (like COVID-19) on financial position and cash flows, challenges in accessing capital to maintain liquidity, failure to comply with debt covenant requirements, and increased costs related to post-retirement benefits[59][60][61][65][71][72][73] - General risks include a downturn in the economy or a prolonged period of slow economic recovery, which could lead to reduced sales volumes and increased bad debt expense, and the possibility of insufficient insurance coverage for various exposures and risks[75][76] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments Item 2. Properties This section details the company's utility properties, including pipelines, metering stations, an LNG storage facility, and offices - The company has approximately 1,144 miles of transmission and distribution pipeline, representing 88% of its total utility plant investment[78] - Roanoke Gas owns and operates nine metering stations for gas delivery and a liquefied natural gas (LNG) storage facility with a capacity of up to 200,000 DTH[79][80] Item 3. Legal Proceedings The company is not a party to any pending legal proceedings Item 4. Mine Safety Disclosures This item is not applicable to the company PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities RGC Resources, Inc. common stock is listed on NASDAQ, with dividends at Board discretion and equity compensation plans in place - RGC Resources' common stock is listed on the NASDAQ Global Market under the trading symbol RGCO[85] Cash Dividends Declared Per Share ($): | Year Ended September 30, | Q1 ($) | Q2 ($) | Q3 ($) | Q4 ($) | | :----------------------- | :----- | :----- | :----- | :----- | | 2020 | $0.1750 | $0.1750 | $0.1750 | $0.1750 | | 2019 | $0.1650 | $0.1650 | $0.1650 | $0.1650 | Equity Compensation Plans (as of September 30, 2020): | Metric | Value (shares/$) | | :---------------------------------------------------------------- | :--------------- | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | 51,500 | | Weighted-average exercise price of outstanding options, warrants and rights | $18.34 | | Number of securities remaining available for future issuance | 493,532 | Item 6. Selected Financial Data This item is not applicable to the company Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, condition, and outlook, covering COVID-19 impacts, regulatory actions, and strategic investments COVID-19 Impact & Cyber Risk The COVID-19 pandemic impacted natural gas consumption and bad debt, while the company maintains focus on cyber security - The COVID-19 pandemic led to a decline in natural gas consumption in most commercial categories, though certain industrial customers increased usage, offsetting commercial declines, while residential volumes remained consistent[90] - The SCC issued orders prohibiting utility service disconnections for non-payment and late payment fees from March to October 5, 2020, which was extended by HB5005 for residential customers, leading to an increased provision for bad debts[91] - The company remains focused on safeguarding its information technology systems from cyber-attacks and maintains cyber insurance to mitigate financial costs from such incidents[94] Business Overview and Regulatory Mechanisms Roanoke Gas operations are regulated by the SCC, DOT, and FERC, utilizing mechanisms like SAVE, WNA, ICC, and PGA to manage earnings volatility - Roanoke Gas's utility operations are regulated by the SCC (rates, safety, service extension, depreciation), Department of Transportation (pipeline safety), and FERC (natural gas transportation/storage prices)[98] - In January 2020, the SCC granted Roanoke Gas an annualized increase in non-gas base rates of $7.25 million and an authorized rate of return on equity of 9.44%, resulting in a $3.8 million customer refund in March 2020 and a $317,000 write-down of ESAC assets[100] - The company utilizes several regulatory mechanisms to mitigate earnings volatility: the SAVE Rider, Weather Normalization Adjustment (WNA), Inventory Carrying Cost (ICC), and Purchased Gas Adjustment (PGA)[102] - SAVE Plan revenues declined to $1,272,000 in fiscal 2020 from $1,599,000 in fiscal 2019 due to the SAVE Rider reset, incorporating prior investments into new non-gas base rates[104] - The WNA generated approximately $1,193,000 and $453,000 in additional revenue for fiscal years 2020 and 2019, respectively, due to warmer than normal weather[105] - ICC revenues declined by approximately $74,000 from fiscal 2019, driven by a 12% reduction in the average cost of gas in storage and a 6% reduction in the ICC factor[107] - Roanoke Gas accelerated the recovery of $525,000 in ESAC assets in fiscal 2020 because its earnings exceeded the mid-point of its authorized return on equity range, as determined by its annual earnings test[109] Results of Operations (Fiscal Year 2020 Compared with Fiscal Year 2019) This section compares the company's operating revenues, volumes, gross margin, expenses, and net income for fiscal years 2020 and 2019 Total Operating Revenues (Year Ended September 30): | Category | 2020 ($) | 2019 ($) | Decrease ($) | Percentage (%) | | :-------------------- | :----------- | :----------- | :----------- | :--------- | | Gas Utilities | $62,408,925 | $67,306,260 | $(4,897,335) | (7)% | | Other | $666,466 | $720,265 | $(53,799) | (7)% | | Total Operating Revenues | $63,075,391 | $68,026,525 | $(4,951,134) | (7)% | Delivered Volumes (Year Ended September 30): | Category | 2020 (DTH) | 2019 (DTH) | Increase / (Decrease) (DTH) | Percentage (%) | | :-------------------------- | :----------- | :----------- | :-------------------- | :--------- | | Residential and Commercial | 6,419,031 | 6,901,181 | (482,150) | (7)% | | Transportation and Interruptible | 3,938,143 | 2,975,312 | 962,831 | 32 % | | Total Delivered Volumes | 10,357,174 | 9,876,493 | 480,681 | 5 % | - Heating degree days declined by 4% in fiscal 2020 compared to fiscal 2019[113] Gross Utility Margin (Year Ended September 30): | Metric | 2020 ($) | 2019 ($) | Increase / (Decrease) ($) | Percentage (%) | | :---------------- | :----------- | :----------- | :-------------------- | :--------- | | Utility revenues | $62,408,925 | $67,306,260 | $(4,897,335) | (7)% | | Cost of gas | $23,949,481 | $32,401,123 | $(8,451,642) | (26)% | | Gross Utility Margin | $38,459,444 | $34,905,137 | $3,554,307 | 10 % | - Operations and maintenance expense increased by $2,091,210, or 15%, primarily due to accelerated recovery of ESAC regulatory assets, a $336,000 increase in bad debt expense (related to COVID-19), higher compensation costs, and increased professional services[116] - Equity in earnings of the unconsolidated MVP investment increased by $1,794,526 due to Allowance for Funds Used During Construction (AFUDC) related to increased project investment[118] Net Income and Earnings Per Share (Year Ended September 30): | Metric | 2020 ($) | 2019 ($) | Change ($) | | :-------------------- | :----------- | :----------- | :----------- | | Net Income | $10,564,534 | $8,698,412 | $1,866,122 | | Basic EPS | $1.30 | $1.08 | $0.22 | | Diluted EPS | $1.30 | $1.08 | $0.22 | | Dividends Declared per Share | $0.70 | $0.66 | $0.04 | Capital Resources and Liquidity This section reviews the company's cash flows, capitalization, and financing activities, including credit facilities and stock offerings Cash Flow Summary (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Net cash provided by operating activities | $12,823,903 | $14,697,704 | | Net cash used in investing activities | $(30,721,011) | $(42,830,005) | | Net cash provided by financing activities | $16,556,826 | $29,516,238 | | Increase (decrease) in cash and cash equivalents | $(1,340,282) | $1,383,937 | - Cash flow from operating activities decreased by nearly $1.9 million in fiscal 2020, primarily due to changes in regulatory assets and liabilities (rate refunds and gas cost under-recovery), partially offset by higher net income and changes in accounts payable[129][130] - Investing activities included $22.9 million for Roanoke Gas's utility plant expenditures and $7.9 million for Midstream's investment in the MVP in fiscal 2020[132][134] - As of September 30, 2020, the company's consolidated capitalization was 41.7% equity and 58.3% long-term debt, compared to 44.5% equity and 55.5% long-term debt in 2019[135] - Roanoke Gas renewed its unsecured line-of-credit for a two-year term expiring March 31, 2022, with a maximum borrowing limit of $28 million[136] - Midstream increased its credit facility to $41 million and extended its maturity date to December 29, 2022, to provide additional financing for its MVP investment[137] - Roanoke Gas issued $10 million in unsecured notes with a 10-year term at a fixed interest rate of 3.60% and amended its private shelf facility to pre-authorize an additional $40 million in notes, plus a second private shelf facility for $70 million[138][139][140] - Resources shareholders approved an amendment to increase the total number of authorized common shares from 10 million to 20 million, and the company filed a prospectus for a $40 million common stock offering, including a $15 million 'at the market' approach[141][142] Off-Balance Sheet Arrangements The company reports no off-balance sheet arrangements as defined by Regulation S-K - The Company has no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii)[143] Equity Investment in Mountain Valley Pipeline Midstream's equity interest in the MVP project increased, but the project faces delays and cost increases due to regulatory challenges - Midstream's equity interest in the Mountain Valley Pipeline (MVP) project increased to approximately 1.03%, with a total estimated cash investment ranging from $60 million to $62 million[144] - The MVP project is approximately 92% complete but faces significant legal and regulatory challenges, including a stay on Nationwide Permit 12 and pending FERC authorizations, extending the in-service date to the second half of calendar 2021[146][147][148] - The total projected cost for the MVP project has increased to $5.8 billion to $6.0 billion (excluding AFUDC) due to unanticipated delays[148] - Current earnings from the MVP investment are primarily attributable to AFUDC (Allowance for Funds Used During Construction), which will be reduced or cease once the pipeline is in service, with future earnings derived from pipeline utilization capacity charges[150] - Midstream also holds a less than 1% investment in the Southgate project, with an estimated investment of $2.1 million and a targeted in-service date of 2022, also subject to regulatory decisions and processes[151] Regulatory and Tax Reform Recent regulatory actions include a rate increase, customer refunds, AFUDC recognition, and accelerated ESAC recovery, alongside tax reform impacts - The SCC's final rate order in January 2020 granted Roanoke Gas an annualized non-gas rate increase of $7.25 million, required $3.8 million in customer refunds, and directed a $317,000 write-down of ESAC assets[153][155] - The company began recognizing $330,000 in AFUDC income (retroactive to January 1, 2019) to capitalize equity and debt financing costs for MVP interconnect stations, as authorized by the SCC[156] - Roanoke Gas accelerated the recovery of $525,000 in ESAC assets in fiscal 2020 due to its earnings exceeding the authorized return on equity mid-point[158] - The COVID-19 related moratorium on service disconnections, extended by HB5005 for residential customers, led to an increased provision for bad debts, with potential relief from CARES Act funds[157] - Tax reform (TCJA) reduced the federal tax rate to 21%, leading to two regulatory liabilities: excess deferred taxes (majority refunded over 28 years) and excess revenues collected (refunded over 12 months, completed December 2019)[159][160][161] - The updated SAVE Plan and Rider, approved in September 2020, is designed to collect approximately $2.3 million in annual revenues for fiscal 2021, an increase from $1.2 million under prior rates, and includes new qualifying projects[162] Critical Accounting Policies and Estimates This section outlines critical accounting policies for regulated operations, revenue recognition, doubtful accounts, and pension/postretirement plans - The company's regulated operations follow FASB ASC No. 980, Regulated Operations, which allows for deferring costs as regulatory assets or liabilities based on expected recovery from customers[166] - Revenue recognition is based on SCC-approved tariff rates, including Alternative Revenue Programs (ARPs) like the WNA and SAVE Rider, and accrual for unbilled natural gas delivered to customers[168][170][171][172] - The estimation of the allowance for doubtful accounts has become more subjective due to the COVID-19 pandemic and the moratorium on disconnections, leading to increased bad debt reserves[173] Pension and Postretirement Plans Funded Status (September 30, 2020): | Plan | Benefit Obligation ($) | Fair Value of Assets ($) | Funded Status ($) | | :---------- | :--------------------- | :----------------------- | :---------------- | | Pension | $39,998,002 | $37,657,631 | $(2,340,371) | | Postretirement | $17,925,409 | $14,116,253 | $(3,809,156) | | Total | $57,923,411 | $51,773,884 | $(6,149,527) | - The pension plan was 94% funded as of September 30, 2020, and the company rebalanced its pension plan investment allocation from 40% equity/60% fixed income to 30% equity/70% fixed income to reduce volatility and match liability duration[179] - The company expects to contribute approximately $500,000 to its pension plan and $400,000 to its postretirement plan in fiscal 2021[181] - The company uses interest rate swaps to hedge variable rate debt, which qualify as cash flow hedges, with changes in fair value reported in other comprehensive income[184] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including the auditor's report, balance sheets, income statements, cash flows, and detailed notes Report of Independent Registered Public Accounting Firm Brown, Edwards & Company, LLP issued an unqualified opinion on the consolidated financial statements for fiscal years 2020 and 2019 - Brown, Edwards & Company, LLP, the independent registered public accounting firm, issued an unqualified opinion on the consolidated financial statements for the years ended September 30, 2020 and 2019, stating they present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[190] Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, as of September 30, 2020 and 2019 Consolidated Balance Sheet Highlights (as of September 30): | Metric | 2020 ($) | 2019 ($) | Change ($) | % Change (%) | | :------------------------------------ | :----------- | :----------- | :----------- | :--------- | | Total Assets | $281,679,507 | $258,353,696 | $23,325,811 | 9.0% | | Utility plant, net | $198,445,093 | $182,002,956 | $16,442,137 | 9.0% | | Investment in unconsolidated affiliates | $57,542,805 | $47,375,459 | $10,167,346 | 21.5% | | Total Liabilities | $192,791,530 | $175,256,904 | $17,534,626 | 10.0% | | Total Stockholders' Equity | $88,887,977 | $83,096,392 | $5,791,585 | 7.0% | Consolidated Statements of Income This section details the company's revenues, operating income, equity in earnings, and net income for fiscal years 2020 and 2019 Consolidated Statements of Income Highlights (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | Change ($) | % Change (%) | | :------------------------------------ | :----------- | :----------- | :----------- | :--------- | | Total Operating Revenues | $63,075,391 | $68,026,525 | $(4,951,134) | (7.3)% | | Operating Income | $12,518,182 | $11,595,464 | $922,718 | 7.9% | | Equity in earnings of unconsolidated affiliate | $4,814,874 | $3,020,348 | $1,794,526 | 59.4% | | Net Income | $10,564,534 | $8,698,412 | $1,866,122 | 21.5% | | Basic Earnings Per Common Share | $1.30 | $1.08 | $0.22 | 20.4% | | Diluted Earnings Per Common Share | $1.30 | $1.08 | $0.22 | 20.4% | Consolidated Statements of Comprehensive Income This section presents the company's net income and other comprehensive loss, resulting in total comprehensive income for fiscal years 2020 and 2019 Consolidated Statements of Comprehensive Income (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Net Income | $10,564,534 | $8,698,412 | | Other comprehensive loss, net of tax | $(959,027) | $(1,617,249) | | Comprehensive Income | $9,605,507 | $7,081,163 | Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including net income, comprehensive loss, stock options, dividends, and stock issuance Changes in Stockholders' Equity (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Balance - Beginning of Year | $83,096,392 | $79,583,112 | | Net income | $10,564,534 | $8,698,412 | | Other comprehensive loss | $(959,027) | $(1,617,249) | | Exercise of stock options | $439,508 | $412,179 | | Cash dividends declared | $(5,697,941) | $(5,314,544) | | Issuance of common stock | $1,510,648 | $1,334,482 | | Balance - End of Year | $88,887,977 | $83,096,392 | Consolidated Statements of Cash Flows This section details the company's cash flows from operating, investing, and financing activities for fiscal years 2020 and 2019 Consolidated Statements of Cash Flows (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Net cash provided by operating activities | $12,823,903 | $14,697,704 | | Net cash used in investing activities | $(30,721,011) | $(42,830,005) | | Net cash provided by financing activities | $16,556,826 | $29,516,238 | | Net increase (decrease) in cash and cash equivalents | $(1,340,282) | $1,383,937 | | Cash paid for interest | $3,845,382 | $3,328,130 | | Cash paid for income taxes | $1,673,000 | $2,287,000 | Notes to Consolidated Financial Statements This section provides detailed disclosures on accounting policies, revenue, regulatory matters, investments, debt, taxes, and employee benefits Summary of Significant Accounting Policies This section outlines the company's key accounting policies, including regulated operations, utility plant, AFUDC, and allowance for doubtful accounts - The company's regulated operations follow FASB ASC No. 980, Regulated Operations, which allows for deferring costs as regulatory assets or liabilities based on expected recovery from customers[208] Regulatory Assets and Liabilities (as of September 30): | Category | 2020 ($) | 2019 ($) | | :----------------------- | :----------- | :----------- | | Total regulatory assets | $13,815,561 | $13,712,737 | | Total regulatory liabilities | $31,478,420 | $34,493,072 | - Utility plant in service increased to $258,342,372 in 2020 from $237,786,964 in 2019, with the composite weighted-average depreciation rate at 3.30% in fiscal 2020[213] - In fiscal 2020, Roanoke Gas capitalized $81,629 of debt financing costs and $248,579 of equity financing costs as AFUDC related to MVP interconnect infrastructure investments[216] Allowance for Doubtful Accounts (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :-------------------------- | :----------- | :----------- | | Beginning balance | $110,743 | $103,573 | | Provision for doubtful accounts | $556,112 | $220,039 | | Recoveries of accounts written off | $139,113 | $96,614 | | Accounts written off | $(102,828) | $(309,483) | | Ending balance | $703,140 | $110,743 | - Unbilled revenue included in accounts receivable was $1,041,518 as of September 30, 2020, down from $1,236,384 in 2019[224] - The company had three interest rate swaps outstanding at September 30, 2020, associated with its variable rate debt, which qualify as cash flow hedges[237] - Other comprehensive loss, net of tax, was $(959,027) in fiscal 2020, primarily due to interest rate swaps[240] - The company adopted ASU 2016-02 (Leases), ASU 2017-12 (Derivatives and Hedging), and ASU 2018-15 (Cloud Computing Implementation Costs) effective October 1, 2019, none of which had a material effect on its financial statements[244][245][246] - ASU 2020-04 (Reference Rate Reform) could impact the company's financial position, results of operations, or cash flows due to contracts and hedging relationships referencing LIBOR[248] Revenue This section details total operating revenues by category, including natural gas sales and alternative revenue programs Total Operating Revenues by Category (Year Ended September 30, 2020): | Category | Gas utility ($) | Non-utility ($) | Total operating revenues ($) | | :-------------------------- | :-------------- | :-------------- | :--------------------------- | | Natural Gas (Billed and Unbilled): | | | | | Residential | $37,022,219 | $0 | $37,022,219 | | Commercial | $18,387,674 | $0 | $18,387,674 | | Industrial and Transportation | $5,188,069 | $0 | $5,188,069 | | Other | $489,943 | $666,466 | $1,156,409 | | Total contracts with customers | $61,087,905 | $666,466 | $61,754,371 | | Alternative Revenue Programs | $1,321,020 | $0 | $1,321,020 | | Total operating revenues | $62,408,925 | $666,466 | $63,075,391 | - Customer receivables, net of bad debt reserve, were $2,343,492 for trade accounts and $1,041,518 for unbilled revenue as of September 30, 2020[257] Regulatory Matters This section covers recent regulatory actions, including rate increases, customer refunds, AFUDC, ESAC amortization, and tax reform impacts - The SCC's final order in January 2020 granted Roanoke Gas a $7.25 million annualized non-gas rate increase, a 9.44% return on equity, and directed a $317,000 write-down of ESAC assets, with the company refunding $3.8 million to customers in March 2020[260][261] - Roanoke Gas applied AFUDC treatment retroactively to January 1, 2019, to defer financing costs for MVP interconnect stations, as affirmed by the SCC[262] - The company accelerated amortization of the $525,000 remaining balance of its ESAC assets in 2020 due to its earnings test results[263] - The COVID-19 related moratorium on service disconnections, extended by HB5005, led to an increased provision for uncollectible accounts[264] - Tax reform (TCJA) resulted in a regulatory liability of approximately $11 million for excess deferred income taxes, with the majority to be refunded over a 28-year period[265] - The SCC approved an updated SAVE Plan and Rider in September 2020, authorizing $2.3 million in annual revenues for fiscal 2021 and including a refund factor for $73,000 in 2019 over-collections[268] Segment Information The company operates in three reportable segments: Gas Utility, Investment in Affiliates, and Parent and Other, with detailed performance metrics - The company operates in three reportable segments: Gas Utility, Investment in Affiliates (Mountain Valley Pipeline and Southgate projects), and Parent and Other (unregulated activities and corporate eliminations)[271] Segment Performance (Year Ended September 30, 2020): | Metric | Gas Utility ($) | Investment in Affiliates ($) | Parent and Other ($) | Consolidated Total ($) | | :----------------------- | :-------------- | :--------------------------- | :------------------- | :--------------------- | | Operating revenues | $62,408,925 | $0 | $666,466 | $63,075,391 | | Operating income (loss) | $12,429,613 | $(220,194) | $308,763 | $12,518,182 | | Equity in earnings | $0 | $4,814,874 | $0 | $4,814,874 | | Income before income taxes | $10,350,946 | $3,233,233 | $286,015 | $13,870,194 | | Total assets | $211,994,364 | $57,660,105 | $12,025,038 | $281,679,507 | Other Investments Midstream's equity interest in the MVP project increased, facing cost overruns and delays, while also holding a minor investment in Southgate - Midstream's equity interest in the MVP project increased to approximately 1.03%, with total estimated cash contributions expected to range from $60 million to $62 million[275] - The MVP project's projected cost is $5.8 billion to $6.0 billion, with the in-service date extended to the second half of calendar 2021 due to regulatory and legal challenges[276] - Midstream has a less than 1% investment in the Southgate project, with an estimated cost of $2.1 million and a targeted in-service date of 2022[277] Investment in Unconsolidated Affiliates (as of September 30): | Project | 2020 ($) | 2019 ($) | | :---------- | :----------- | :----------- | | MVP | $57,183,063 | $47,055,426 | | Southgate | $359,742 | $320,033 | | Total | $57,542,805 | $47,375,459 | - Equity in earnings of unconsolidated affiliate was $4,814,874 in 2020, up from $3,020,348 in 2019[280] Line-of-Credit Roanoke Gas renewed its unsecured line-of-credit with a $28 million limit, and the company remains compliant with all debt covenants - Roanoke Gas renewed its unsecured line-of-credit agreement for a two-year term expiring March 31, 2022, with a maximum borrowing limit of $28,000,000[281] Line-of-Credit Summary (as of September 30): | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Available line-of-credit at year-end | $19,000,000 | $22,000,000 | | Outstanding balance at year-end | $9,143,606 | $8,172,473 | | Average rate of interest during year on outstanding balances | 2.16 % | 3.40 % | | Interest rate at year-end | 1.15 % | 3.02 % | - The company was in compliance with all debt covenants, including maintaining an interest coverage ratio of not less than 1.5 to 1 and a long-term debt to long-term capitalization ratio of less than 65%[282] Long-Term Debt Midstream increased its credit facility to $41 million, Roanoke Gas issued $10 million in notes, and the company remains compliant with debt covenants - Midstream amended its Credit Agreement, increasing total borrowing capacity to $41,000,000 and extending the maturity date to December 29, 2022, to finance its MVP investment[283] - Roanoke Gas entered into $10,000,000 in unsecured notes with a 10-year term at a fixed interest rate of 3.60% to fund its capital budget[284] Total Notes Payable (as of September 30): | Metric | 2020 ($) | 2019 ($) | | :---------------- | :----------- | :----------- | | Total notes payable | $114,975,200 | $95,512,200 | | Line-of-credit | $9,143,606 | $8,172,473 | | Total long-term debt | $124,118,806 | $103,684,673 | Aggregate Annual Maturities of Long-Term Debt (after September 30, 2020): | Year Ending September 30 | Maturities ($) | | :----------------------- | :------------- | | 2021 | $0 | | 2022 | $16,268,606 | | 2023 | $25,975,200 | | 2024 | $9,375,000 | | 2025 | $0 | | Thereafter | $72,500,000 | | Total | $124,118,806 | - The company was in compliance with all debt covenants as of September 30, 2020 and 2019[289] Income Taxes This section details income tax expense, deferred tax liabilities, and the impact of tax reform on the company's tax position - The company's statutory federal income tax rate was 21% in fiscal 2020 and 2019[291] - The revaluation of deferred tax assets and liabilities due to the TCJA resulted in a reduction of approximately $9 million in net deferred tax liability, with approximately $11.8 million reclassified to regulatory liability[292] Total Income Tax Expense (Years Ended September 30): | Metric | 2020 ($) | 2019 ($) | | :-------------------- | :----------- | :----------- | | Total current income taxes | $2,183,357 | $1,966,703 | | Total deferred income taxes | $1,122,303 | $684,028 | | Total income tax expense | $3,305,660 | $2,650,731 | | Effective tax rate | 23.8 % | 23.4 % | Net Deferred Tax Liability (as of September 30): | Metric | 2020 ($) | 2019 ($) | | :-------------------- | :----------- | :----------- | | Total gross deferred tax assets | $6,054,976 | $5,869,205 | | Total gross deferred tax liabilities | $20,028,738 | $18,847,728 | | Net deferred tax liability | $13,973,762 | $12,978,523 | Employee Benefit Plans The company sponsors pension and postretirement plans, with details on funded status, actuarial assumptions, investment allocation, and contributions - The company sponsors a noncontributory pension plan (soft-frozen for new hires since January 2017) and a postretirement medical and life insurance plan (for employees hired prior to January 1, 2000)[296][297] Funded Status of Benefit Plans (as of September 30, 2020): | Plan | Benefit Obligation ($) | Fair Value of Assets ($) | Funded Status ($) | | :---------------- | :----------- | :----------- | :----------- | | Pension Plan | $39,998,002 | $37,657,631 | $(2,340,371) | | Postretirement Plan | $17,925,409 | $14,116,253 | $(3,809,156) | | Total | $57,923,411 | $51,773,884 | $(6,149,527) | - The pension plan was 94% funded as of September 30, 2020[179] Actuarial Assumptions - Discount Rate (as of September 30): | Plan | 2020 (%) | 2019 (%) | | :---------------- | :------- | :------- | | Pension Plan | 2.47 % | 3.03 % | | Postretirement Plan | 2.44 % | 3.00 % | Expected Long-Term Rate of Return on Plan Assets (for benefit costs): | Plan | 2020 (%) | 2019 (%) | | :---------------- | :------- | :------- | | Pension Plan | 5.50 % | 5.50 % | | Postretirement Plan | 4.26 % | 4.30 % | - The company revised its targeted pension plan investment allocation in 2020 from 40% equity/60% fixed income to 30% equity/70% fixed income to reduce investment risk and volatility[304] - The company expects to contribute $500,000 to its pension plan and $400,000 to its postretirement plan in fiscal 2021[307] 401(k) Plan Contributions (Years Ended September 30): | Contribution Type | 2020 ($) | 2019 ($) | | :-------------------- | :----------- | :----------- | | Matching contribution | $364,773 | $348,369 | | Discretionary contribution | $18,313 | $21,829 | Common Stock Options This section details common stock option activity, including shares available for grants, outstanding options, and stock option expense - As of September 30, 2020, there were 23,000 shares available for future grants under the Key Employee Stock Option Plan (KESOP)[308] Stock Option Activity (as of September 30, 2020): | Metric | Number of Shares | Weighted Average Exercise Price ($) | | :------------------------------------ | :--------------- | :-------------------------------- | | Options outstanding, Sep 30, 2019 | 68,492 | $14.91 | | Options granted | 13,000 | $27.87 | | Options exercised | (29,992) | $14.65 | | Options outstanding, Sep 30, 2020 | 51,500 | $18.34 | | Vested and exercisable, Sep 30, 2020 | 51,500 | $18.34 | - Stock option expense was $81,380 in fiscal 2020[313] Other Stock Plans This section outlines activity under the Dividend Reinvestment and Stock Purchase Plan, Restricted Stock Plan for Outside Directors, and Restricted Stock Plan for Officers - Under the Dividend Reinvestment and Stock Purchase Plan (DRIP), the company issued 28,191 shares in 2020 and 26,716 shares in 2019, with 362,322 shares available for issuance as of September 30, 2020[314] - Under the Restricted Stock Plan for Outside Directors (RSPD), 9,193 shares were granted in 2020, with a fair market value of $241,617 included as compensation, and 52,029 shares were available as of September 30, 2020[317][318] - Under the RGC Resources, Inc. Restricted Stock Plan for Officers (RSPO), 14,951 shares were granted in 2020, with a fair market value of $450,677 included as compensation, and 413,718 shares were available as of September 30, 2020[320] Commitments and Contingencies This section details natural gas volumetric obligations, pipeline capacity commitments, franchise agreements, and potential environmental costs Natural Gas Volumetric Obligations (as of September 30, 2020): | Year | In DTHs | | :--------- | :-------- | | 2020-2021 | 2,090,972 | | 2021-2022 | 295,866 | | Total | 2,386,838 | - The company has a fixed price agreement to purchase approximately 1.3 million DTH from October 2020 to March 2021 at prices ranging from $2.17 to $2.62 per DTH[323] Pipeline and Storage Capacity Commitments (as of September 30, 2020): | Year | Amount ($) | | :--------- | :----------- | | 2020-2021 | $11,048,798 | | 2021-2022 | $10,284,092 | | 2022-2023 | $7,403,271 | | 2023-2024 | $5,743,826 | | 2024-2025 | $3,167,937 | | Thereafter | $888,426 | | Total | $38,536,350 | - Franchise agreements with the City of Roanoke, City of Salem, and Town of Vinton were renewed in 2016 for 20-year terms expiring in December 2035, with $2,294,588 in future obligations[325] - The company is not a party to any legal proceedings expected to have a materially adverse impact on its financial position, results of operations, or cash flows[327] - There is a potential for environmental costs related to coal tar contaminants at a former manufactured gas plant site, for which the company would pursue recovery through insurance and regulatory approval[328] Fair Value Measurements This section provides fair value measurements for financial liabilities, including natural gas purchases and interest rate swaps, and notes payable Fair Value Liabilities (as of September 30, 2020): | Liability | Fair Value ($) | Level | | :------------------ | :------------- | :------ | | Natural gas purchases | $470,755 | Level 2 | | Interest rate swaps | $2,223,556 | Level 2 | | Total | $2,694,311 | | Fair Value of Notes Payable (as of September 30, 2020): | Metric | Carrying Amount ($) | Fair Value ($) | Level | | :----------- | :------------------ | :------------- | :------ | | Notes payable | $114,975,200 | $124,740,970 | Level 3 | Quarterly Financial Information (Unaudited) This section provides unaudited quarterly operating revenues, net income, and basic earnings per share for fiscal year 2020 Quarterly Operating Revenues (2020): | Quarter | Amount ($) | | :------ | :----------- | | First | $19,785,453 | | Second | $22,437,731 | | Third | $11,071,918 | | Fourth | $9,780,289 | Quarterly Net Income (2020): | Quarter | Amount ($) | | :------ | :----------- | | First | $4,006,936 | | Second | $5,680,316 | | Third | $1,206,578 | | Fourth | $(329,296) | Quarterly Basic Earnings Per Share (2020): | Quarter | EPS ($) | | :------ | :------ | | First | $0.50 | | Second | $0.70 | | Third | $0.15 | | Fourth | $(0.04) | Subsequent Events The company evaluated subsequent events through the financial statement issuance date and reported no other material items - The company evaluated subsequent events through the financial statement issuance date and reported no other material items not already disclosed[335] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with accountants on accounting and financial disclosures Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2020 - The company's disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of September 30, 2020[338] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2020, based on the COSO framework[342] - There were no changes in internal controls over financial reporting during the fourth quarter of the fiscal year that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[339] Item 9B. Other Information The company reports no other information to disclose under this item PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, corporate governance, and ethics is incorporated by reference from the 2021 Proxy Statement - Abney S. Boxley, III and Jacqueline L. Archer are identified as audit committee financial experts[345] - The company has adopted a Code of Ethics applicable to all officers, directors, and employees, and Board Committee charters, all available on its website[348] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2021 Proxy Statement Item 13. Certain Relationships and Related Transactions, and Director Independence Information on director independence and related party transactions is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the report, including corporate documents and agreements Item 16. Form 10-K Summary This item is not applicable to the company Signatures The Annual Report on Form 10-K was signed by the President, CEO, Principal Financial Officer, and Board members on December 3, 2020 - The Annual Report on Form 10-K was signed on behalf of RGC Resources, Inc. by its President and Chief Executive Officer, Principal Financial Officer, and members of the Board of Directors on December 3, 2020[367][369]