RGC Resources(RGCO) - 2022 Q4 - Annual Report

GLOSSARY OF TERMS The glossary defines key terms and acronyms crucial for understanding the company's operations and financial disclosures - The glossary defines key terms and acronyms used throughout the report, such as AFUDC (Allowance for Funds Used During Construction), MVP (Mountain Valley Pipeline), SCC (Virginia State Corporation Commission), and WNA (Weather Normalization Adjustment), which are crucial for understanding the company's operations and financial disclosures[12][13][15][16][17] Cautionary Note Regarding Forward Looking Statements This section advises on forward-looking statements, subject to risks detailed in 'Risk Factors', with no duty to update unless legally required - This section advises 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'[18] - The company explicitly states it assumes no duty to update these statements unless required by law[19] PART I Item 1. Business RGC Resources, Inc. is an energy services company primarily engaged in regulated natural gas distribution and sale, with an investment in the Mountain Valley Pipeline project - RGC Resources, Inc. was incorporated in Virginia on July 31, 1998, and its subsidiaries were reorganized into a holding company structure effective July 1, 1999[21] - The company is composed of three subsidiaries: Roanoke Gas (natural gas distribution), Midstream (investor in Mountain Valley Pipeline, LLC), and Diversified Energy (currently inactive)[21][22][23] - Roanoke Gas's principal service is the distribution and sale of natural gas to residential, commercial, and industrial customers in Roanoke, Virginia, and surrounding localities, accounting for over 99% of consolidated revenues[22][25] Customer, Volume, Revenue, and Margin Breakdown (2022 vs. 2021) | Category | 2022 Customers | 2022 Volume | 2022 Revenue | 2022 Margin | 2021 Customers | 2021 Volume | 2021 Revenue | 2021 Margin | | :--------- | :------------- | :---------- | :----------- | :---------- | :------------- | :---------- | :----------- | :---------- | | Residential | 91.3% | 35% | 57% | 63% | 91.3% | 37% | 58% | 63% | | Commercial | 8.6% | 29% | 35% | 24% | 8.6% | 31% | 34% | 25% | | Industrial | 0.1% | 36% | 7% | 11% | 0.1% | 32% | 7% | 11% | | Other Utility | 0.0% | 0% | 1% | 2% | 0.0% | 0% | 1% | 1% | | Other Non-Utility | 0.0% | 0% | 0% | 0% | 0.0% | 0% | 0% | 0% | | Total Percent | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | | Total Value | 62,001 | 10,325,336 DTH | $84,165,222 | $41,640,041 | 62,623 | 9,909,529 DTH | $75,174,779 | $39,969,380 | - The company operates in a regulated, monopolistic environment with exclusive franchises in its service areas, but faces competition from other energy sources like electricity, propane, coal, wind, and solar[33][36] - As of September 30, 2022, Resources had 96 full-time employees[41] - The collective bargaining agreement with the Union expired on August 1, 2022, and the Union disclaimed interest in serving as the exclusive representative[41] Item 1A. Risk Factors The company faces broad operational, regulatory, and financial risks, including pipeline reliance, cybersecurity, price volatility, and MVP project uncertainties - Operational risks include dependence on two interstate pipelines for 100% of natural gas supply, potential for service disruption from system failures or catastrophic events, and vulnerability to cyber-attacks[47][48][49] - Volatility in natural gas prices, supply disruptions due to disasters, inability to attract and retain skilled employees, and failure of technology systems are also significant operational risks[51][53][54][55] - Regulatory risks encompass new environmental laws (especially related to climate change and greenhouse gas emissions), increased compliance and pipeline safety requirements, and the potential for delayed or unfavorable rate relief from the SCC[61][62][63] - Financial risks are heavily influenced by the investment in Mountain Valley Pipeline, LLC, which incurred a total pre-tax impairment loss of $55.1 million in fiscal 2022 due to legal and regulatory setbacks and increased uncertainty[68][69] - Other financial risks include access to capital, compliance with debt covenants, rising costs of healthcare and post-retirement benefits, exposure to market risks (commodity price, interest rates), and the potential negative impacts of a pandemic outbreak or general economic downturn[77][78][79][83][84][90] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[93] Item 2. Properties The company's properties include 1,168 miles of natural gas pipelines, six metering stations, and a 200,000 DTH LNG storage facility - Utility property includes approximately 1,168 miles of transmission and distribution pipeline, representing 89% of total utility property investment[94] - Roanoke Gas owns and operates six metering stations and a liquefied natural gas (LNG) storage facility capable of storing up to 200,000 DTH[95] - The company's executive, accounting, business offices, and maintenance departments are located on Kimball Avenue in Roanoke, Virginia[96] Item 3. Legal Proceedings The company is not currently a party to any pending legal proceedings - The Company is not known to be a party to any pending legal proceedings[96] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable[97] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities RGC Resources common stock trades on NASDAQ, with dividends determined by the Board, and equity compensation plans in place for future issuance - Resources' common stock is listed on the NASDAQ Global Market under the trading symbol RGCO[100] - As of November 18, 2022, there were 992 holders of record of the Company's common stock[101] Common Stock Dividends Declared and Market Prices | Year Ending September 30, 2022 | High ($) | Low ($) | Cash Dividends Declared ($) | | :----------------------------- | :--- | :-- | :---------------------- | | First Quarter | $25.00 | $21.32 | $0.195 | | Second Quarter | $23.84 | $20.25 | $0.195 | | Third Quarter | $22.00 | $18.01 | $0.195 | | Fourth Quarter | $23.35 | $19.18 | $0.195 | | Year Ending September 30, 2021 | | | | | First Quarter | $27.40 | $22.82 | $0.185 | | Second Quarter | $25.60 | $22.08 | $0.185 | | Third Quarter | $25.60 | $21.32 | $0.185 | | Fourth Quarter | $26.02 | $22.33 | $0.185 | Equity Compensation Plan Summary (September 30, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance | | :--------------------------------------------- | :---------------------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 34,500 | $18.69 | 411,547 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 34,500 | $18.69 | 411,547 | Item 6. [Reserved] This item is reserved and contains no information - Item 6 is reserved[102] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company reported a significant net loss in fiscal 2022 due to a $55.1 million MVP impairment, while utility operations saw increased gross margin and regulatory activity - Resources is primarily engaged in the regulated sale and distribution of natural gas to approximately 62,000 customers through its Roanoke Gas subsidiary[103] - Midstream, a wholly-owned subsidiary, is a more than 1% investor in the MVP and a less than 1% investor in Southgate[103] - The company recorded a total pre-tax impairment of $55.1 million on its investment in the Mountain Valley Pipeline (MVP) in fiscal 2022 due to increased uncertainty regarding its completion and commercial operation, following unfavorable Fourth Circuit decisions[104] - Roanoke Gas's utility operations are regulated by the SCC, with rates designed to recover costs and provide a reasonable return, utilizing mechanisms like SAVE Rider, WNA, ICC, and PGA to mitigate weather volatility and gas price fluctuations[105][107][108] Overview The company recorded a $55.1 million MVP impairment in fiscal 2022, while Roanoke Gas utility operations are regulated by the SCC with various rate mechanisms - The company recorded a total pre-tax impairment of $55.1 million on its investment in the Mountain Valley Pipeline (MVP) in fiscal 2022 due to increased uncertainty regarding its completion and commercial operation, following unfavorable Fourth Circuit decisions[104] - Roanoke Gas's utility operations are regulated by the SCC, with rates designed to recover costs and provide a reasonable return, utilizing mechanisms like SAVE Rider, WNA, ICC, and PGA to mitigate weather volatility and gas price fluctuations[105][107][108] Alternative Revenue Program (ARP) Revenues (2022 vs. 2021) | ARP Mechanism | Fiscal Year 2022 Revenue ($) | Fiscal Year 2021 Revenue ($) | Change ($) | | :-------------- | :----------------------- | :----------------------- | :----- | | SAVE Rider | $3,286,000 | $2,487,000 | +$799,000 | | WNA | $1,973,000 | $1,196,000 | +$777,000 | | ICC | $657,000 | $396,000 | +$261,000 | COVID-19 COVID-19 impacts shifted to supply chain disruptions and inflation, with most restrictions eased and commercial natural gas consumption returning to pre-pandemic levels - COVID-19 impacts shifted from quarantines to supply chain disruptions, labor shortages, and inflation, though most restrictions have eased, allowing a return to mostly normal operating conditions[115] - Natural gas consumption by commercial customers has largely returned to pre-pandemic levels[115] - Roanoke Gas expensed $57,000 and $217,000 in COVID-19 related deferred costs in fiscal 2022 and 2021, respectively, as earnings exceeded the authorized return on equity[114][170] Cyber Risk The company actively monitors and safeguards its IT systems against constant cyber threats, with security measures and cyber insurance in place - The company faces constant cyber threats and is committed to safeguarding its information technology systems, which contain confidential customer, vendor, and employee information[117] - Management continuously monitors system access and has security measures in place, including a Security Incident Response Plan and cyber insurance, to mitigate financial impacts from potential cyber incidents[117] Inflation and Rising Prices Rising natural gas and non-gas expenses are managed through regulatory mechanisms, with a non-gas rate application planned to address cost recovery lags - Natural gas commodity, delivery, and storage capacity costs represent 61% of fiscal 2022 total operating expenses, with prices increasing sharply in the fiscal third and fourth quarters[118] - Roanoke Gas can recover rising natural gas costs through the PGA mechanism, but the timing of recovery may lag during periods of rapid increases[118] - Inflation also affects non-gas expenses (labor, benefits, materials), which are recovered through non-gas tariff rates, leading to an inherent lag in recovery[119] - Management plans to file a non-gas rate application in early December 2022 to incorporate increased expense levels and additional rate base[120] Results of Operations Net income decreased significantly to a $31.7 million net loss in fiscal 2022, primarily due to the MVP impairment, despite increased gross utility margin - Net income decreased by $41,834,664 to a net loss of $31,732,602 for the year ended September 30, 2022, primarily due to the impairment of the LLC investment and lower equity in earnings[121] - Gross utility margin, defined as utility revenues less cost of gas, is considered a more useful measure of financial performance by management[122] Operating Revenues and Volumes (2022 vs. 2021) | Metric | 2022 ($) | 2021 ($) | Change ($) | Percentage Change (%) | | :------------------------- | :------------ | :------------ | :------------ | :---------------- | | Gas Utility Revenues | $84,035,644 | $75,045,103 | $8,990,541 | 12% | | Non Utility Revenues | $129,578 | $129,676 | $(98) | (0)% | | Total Operating Revenues | $84,165,222 | $75,174,779 | $8,990,443 | 12% | | Residential and Commercial Volumes (DTH) | 6,577,369 | 6,773,819 | (196,450) | (3)% | | Transportation and Interruptible Volumes (DTH) | 3,747,967 | 3,135,710 | 612,257 | 20% | | Total Delivered Volumes (DTH) | 10,325,336 | 9,909,529 | 415,807 | 4% | | Heating Degree Days (HDD) | 3,398 | 3,610 | (212) | (6)% | - Total gas utility operating revenues increased by 12% in 2022, driven by higher natural gas commodity prices, increases in SAVE and ICC revenues, and higher transportation and interruptible volumes[126] Gross Utility Margin Components (2022 vs. 2021) | Component | 2022 ($) | 2021 ($) | Increase (Decrease) ($) | | :-------------------- | :------------ | :------------ | :------------------ | | Customer Base Charge | $14,557,492 | $14,563,274 | $(5,782) | | SAVE Plan | $3,285,518 | $2,487,299 | $798,219 | | Volumetric | $20,901,637 | $21,188,794 | $(287,157) | | WNA | $1,972,801 | $1,196,499 | $776,302 | | ICC | $657,042 | $395,626 | $261,416 | | Other Revenues | $165,099 | $33,769 | $131,330 | | Total Gross Utility Margin | $41,539,589 | $39,865,261 | $1,674,328 | - Operations and maintenance expense increased by $1,012,885 (7%) due to higher bad debt expense, corporate insurance premiums, professional and contracted services, and accelerated amortization of regulatory assets[130] - Equity in earnings of unconsolidated affiliate (MVP investment) decreased by $1,594,227 as limited growth construction activities and AFUDC accruals ceased in October 2021[132] - The $55,092,303 impairment is due to two other-than-temporary write-downs of the Company's investment in the LLC during the second and fourth quarters of fiscal 2022[133] - Interest expense increased by $446,044 (11%) due to higher total debt levels and increasing interest rates on variable rate debt[135] - Income tax expense decreased by $14,614,707, resulting in a net tax benefit of $11,410,645 in fiscal 2022, primarily due to a deferred tax benefit from the MVP impairment[138] Earnings Per Share and Dividends (2022 vs. 2021) | Metric | 2022 ($) | 2021 ($) | | :---------------------- | :------ | :------ | | Basic EPS | $(3.48) | $1.22 | | Diluted EPS | $(3.48) | $1.22 | | Dividends Declared per Share | $0.78 | $0.74 | Capital Resources and Liquidity Capital needs for projects and MVP investment are funded by operating cash flows, credit facilities, and common stock sales, with Midstream requiring $15-17 million for MVP - The company's primary capital needs include funding capital projects, investment in the LLC, seasonal natural gas inventories, accounts receivables, and dividend payments[140] - Funding is anticipated through operating cash flows, credit availability (short-term and long-term debt), and common stock sales[140] Cash Flow Summary (2022 vs. 2021) | Cash Flow Category | 2022 ($) | 2021 ($) | | :----------------------------- | :------------ | :------------ | | Net cash provided by operating activities | $15,551,676 | $11,568,108 | | Net cash used in investing activities | $(30,615,878) | $(25,849,237) | | Net cash provided by financing activities | $18,444,799 | $15,508,380 | | Net increase in cash and cash equivalents | $3,380,597 | $1,227,251 | - Operating cash flows increased by nearly $4 million, largely due to the recovery of prior year under-collected gas costs and receipt of supplier refunds, offset by higher natural gas storage costs[144] - Investing activities primarily involved $25.5 million in utility property expenditures for Roanoke Gas and $5.3 million for Midstream's investment in the LLC in fiscal 2022[146][148] - Financing activities increased due to a $27 million equity offering in March 2022, with $12 million invested in Roanoke Gas and $10 million in Midstream, alongside new debt issuances[149] - Midstream expects to need $15 million to $17 million in additional capital over the next 12-24 months for MVP funding, with its $21.9 million credit facility maturing in December 2023[150] - Roanoke Gas has $28 million available under its line-of-credit and private shelf agreements for up to $40 million (expiring Dec 2022) and $70 million (expiring Sep 2025) in unsecured notes[151] ATM Program Resources issued 4,872 shares for $112,500 under the ATM program in fiscal 2022, a significant decrease from the prior year - Resources issued 4,872 shares of common stock for $112,500 (net of fees) under the ATM program in fiscal 2022, a significant decrease from 142,726 shares for $3,400,443 in fiscal 2021[153] Off-Balance Sheet Arrangements The company has 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)[154] Equity Investment in Mountain Valley Pipeline The MVP project faces significant delays and cost increases due to legal and regulatory setbacks, leading to a $55.1 million impairment in fiscal 2022 - The MVP project has faced repeated, significant delays and cost increases due to legal and regulatory setbacks, particularly Fourth Circuit rulings in January and February 2022 vacating key permits[155][158] - The LLC is pursuing new authorizations and an updated Biological Opinion, and FERC granted an extension to complete the project through October 13, 2026[158][159] - Management believes federal energy infrastructure permitting reform legislation specifically requiring MVP completion is the best path forward for the project[161] - AFUDC accruals on the MVP project and Roanoke Gas's interconnecting gate stations have been suspended due to construction delays[163][164] - The Southgate project, an extension of MVP, also faces litigation and regulatory delays, with its Clean Water Act Section 401 certification denied and a compressor station permit denied[165] - Midstream recognized a total pre-tax impairment loss of $55.1 million on its MVP investment in fiscal 2022 due to an other-than-temporary decline in fair value, with further impairments possible[167] - Midstream's $23 million non-revolving credit facility matures in December 2023, and additional financing will be required for MVP funding[168] Regulatory Roanoke Gas received SCC approval for an updated SAVE Rider and asset acquisition, plans a non-gas rate case, and managed COVID-19 deferred costs - Roanoke Gas expensed $57,000 and $217,000 in COVID-19 related deferred costs in fiscal 2022 and 2021, respectively, as its earnings exceeded the authorized return on equity[170] - The SCC approved Roanoke Gas's SAVE application in August 2022, updating the SAVE Rider to collect approximately $4.1 million in annual revenues, effective October 2022[171] - Roanoke Gas filed an application with the SCC in August 2022 for a rate adjustment clause to recover costs associated with constructing, owning, operating, and maintaining a renewable natural gas (RNG) facility[172] - The SCC approved Roanoke Gas's application to acquire natural gas distribution assets from a local housing authority, resulting in a pre-tax gain of approximately $219,000 in fiscal Q4 2022[173][174] - The company filed notice with the SCC on September 30, 2022, to file a non-gas base rate case in early December, with rates expected to be effective January 1, 2023, on an interim basis[175] - AFUDC accruals on MVP interconnect construction projects ceased in January 2021 but resumed in fiscal 2022 for the RNG project, totaling $75,154[176] - The service disconnection moratorium expired on August 30, 2021, leading to historically high arrearage balances, though CARES Act and ARPA funds ($403,000 and $859,000, respectively) were applied to assist customers[177][178] Critical Accounting Policies and Estimates Fair value determination for the MVP investment, regulatory accounting, revenue recognition, credit loss allowances, and pension assumptions are critical estimates - The determination of fair value for the investment in Mountain Valley Pipeline, LLC is a critical estimate, requiring significant judgment and assumptions regarding discounted cash flows and probability scenarios, which led to a $55.1 million impairment in fiscal 2022[181][182] - Regulatory accounting (ASC 980) allows the company to defer costs and liabilities based on expected recovery or collection through rates, with a write-off if criteria are no longer met[183][185][186] - Revenue recognition for regulated utility sales and transportation is based on SCC-approved tariff rates, with ARPs (WNA, SAVE Plan) adjusting revenues for external factors[188][189][191] - The allowance for credit losses became more subjective post-COVID-19 due to the disconnection moratorium and federal financial assistance, with estimates at $371,271 and $242,010 as of September 30, 2022 and 2021, respectively[192] - Pension and postretirement benefit expenses and liabilities are based on numerous actuarial assumptions (discount rate, return on assets, compensation increases, life expectancies), with significant changes in discount rates impacting obligations[193][196] - The company has implemented strategies to reduce pension plan risk, including a 'soft freeze' for new employees and transitioning asset allocation to a Liability Driven Investment (LDI) approach for 70% of assets[197][198] Funded Status of Pension and Postretirement Plans (September 30, 2022 vs. 2021) | Metric | Pension Plan 2022 ($) | Postretirement Plan 2022 ($) | Total 2022 ($) | Pension Plan 2021 ($) | Postretirement Plan 2021 ($) | Total 2021 ($) | | :---------------------- | :---------------- | :----------------------- | :------------ | :---------------- | :----------------------- | :------------ | | Benefit Obligation | $27,268,456 | $12,416,546 | $39,685,002 | $37,654,468 | $16,796,849 | $54,451,317 | | Fair value of assets | $28,017,797 | $12,138,119 | $40,155,916 | $38,914,107 | $15,882,342 | $54,796,449 | | Funded status | $749,341 | $(278,427) | $470,914 | $1,259,639 | $(914,507) | $345,132 | - The company uses derivative instruments, such as interest rate swaps, to hedge commodity and financial market risks, with changes in fair value reported in other comprehensive income for cash flow hedges[205][206] Recently Adopted Accounting Standards The company adopted ASU 2018-01 and ASU 2018-14, neither of which had a material effect on its financial statements - The company adopted ASU 2018-01 (Leases: Land Easement Practical Expedient) and ASU 2018-14 (Defined Benefit Plans Disclosure Framework), neither of which had a material effect on its consolidated financial statements[274][276] Recently Issued Accounting Standards The FASB issued ASU 2020-04 (Reference Rate Reform) to ease accounting for LIBOR changes, with adoption anticipated in fiscal 2023 - The FASB issued ASU 2020-04 (Reference Rate Reform) to ease the burden of accounting for reference rate changes like LIBOR, which is expected to cease publication in June 2023[277] - The company anticipates adopting this guidance in fiscal 2023, and it could significantly impact its financial position, results of operations, and cash flows when the reference rate changes for related contracts[277] Reclassification Certain prior year amounts have been reclassified to conform to current year presentations - Certain prior year amounts have been reclassified to conform to current year presentations[279] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - This item is not applicable[207] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes, with an unqualified audit opinion - The independent registered public accounting firm issued an unqualified opinion on the consolidated financial statements for the years ended September 30, 2022 and 2021[211] - A critical audit matter identified was the valuation of the equity method investment in Mountain Valley Pipeline, LLC, due to the significant judgment and sensitivity of fair value estimates to assumptions like discounted cash flows and probability estimates[215][216][217] Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the financial statements, highlighting the MVP investment valuation as a critical audit matter - The independent registered public accounting firm provided an unqualified opinion on the consolidated financial statements for the years ended September 30, 2022 and 2021[211] - The valuation of the equity method investment in Mountain Valley Pipeline, LLC was identified as a critical audit matter due to the significant judgment required for fair value determination, particularly regarding discounted cash flows and probability estimates[215][216][217] Consolidated Balance Sheets The consolidated balance sheets show total assets decreased by $19.8 million in 2022, primarily due to a $51.1 million reduction in the MVP investment Consolidated Balance Sheet Highlights (September 30, 2022 vs. 2021) | Asset/Liability Category | 2022 ($) | 2021 ($) | Change ($) | | :----------------------- | :------------ | :------------ | :------------ | | Total Current Assets | $35,548,319 | $25,143,855 | +$10,404,464 | | Utility Property, net | $229,861,074 | $211,649,684 | +$18,211,390 | | Investment in unconsolidated affiliates | $13,773,075 | $64,867,319 | $(51,094,244) | | Total Assets | $290,309,243 | $310,109,193 | $(19,799,950) | | Total Current Liabilities | $22,315,310 | $26,013,532 | $(3,698,222) | | Long-Term Debt, net | $135,695,289 | $133,471,427 | +$2,223,862 | | Total Stockholders' Equity | $93,090,656 | $99,701,709 | $(6,611,053) | Consolidated Statements of Income The consolidated statements of income reflect a $31.7 million net loss in 2022, driven by a $55.1 million impairment of unconsolidated affiliates Consolidated Statements of Income Highlights (2022 vs. 2021) | Income Statement Item | 2022 ($) | 2021 ($) | Change ($) | | :------------------------- | :-------------- | :-------------- | :-------------- | | Total Operating Revenues | $84,165,222 | $75,174,779 | +$8,990,443 | | Total Operating Expenses | $69,248,547 | $60,396,470 | +$8,852,077 | | Operating Income | $14,916,675 | $14,778,309 | +$138,366 | | Equity in earnings of unconsolidated affiliate | $73,327 | $1,667,554 | $(1,594,227) | | Impairment of unconsolidated affiliates | $(55,092,303) | — | $(55,092,303) | | Income (Loss) Before Income Taxes | $(43,143,247) | $13,306,124 | $(56,449,371) | | Income Tax Expense (Benefit) | $(11,410,645) | $3,204,062 | $(14,614,707) | | Net Income (Loss) | $(31,732,602) | $10,102,062 | $(41,834,664) | | Basic EPS | $(3.48) | $1.22 | $(4.70) | | Diluted EPS | $(3.48) | $1.22 | $(4.70) | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income shows a $28.2 million loss in 2022, primarily due to the net loss, partially offset by gains from interest rate swaps Consolidated Statements of Comprehensive Income (Loss) Highlights (2022 vs. 2021) | Comprehensive Income Item | 2022 ($) | 2021 ($) | Change ($) | | :------------------------ | :-------------- | :-------------- | :-------------- | | Net Income (Loss) | $(31,732,602) | $10,102,062 | $(41,834,664) | | Other comprehensive income (loss), net of tax: | | | | | Interest rate swaps | $4,451,551 | $763,003 | +$3,688,548 | | Defined benefit plans | $(951,753) | $1,149,507 | $(2,101,260) | | Total Other Comprehensive Income, Net of Tax | $3,499,798 | $1,912,510 | +$1,587,288 | | Comprehensive Income (Loss) | $(28,232,804) | $12,014,572 | $(40,247,376) | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by $6.6 million in 2022, mainly due to the net loss and dividends, partially offset by common stock issuance Consolidated Statements of Stockholders' Equity Highlights (2022 vs. 2021) | Equity Component | September 30, 2022 ($) | September 30, 2021 ($) | | :--------------------------- | :----------------- | :----------------- | | Common Stock | $49,102,675 | $41,875,460 | | Capital in Excess of Par Value | $41,479,459 | $19,705,387 | | Retained Earnings | $544,158 | $39,656,296 | | Accumulated Other Comprehensive Income (Loss) | $1,964,364 | $(1,535,434) | | Total Stockholders' Equity | $93,090,656 | $99,701,709 | - Total stockholders' equity decreased by $6,611,053 from $99,701,709 in 2021 to $93,090,656 in 2022, primarily due to the net loss of $31,732,602 and cash dividends declared of $7,379,536, partially offset by issuance of common stock totaling $28,912,318[229] Consolidated Statements of Cash Flows Operating cash flows increased by nearly $4 million in 2022, while investing activities saw higher utility property and affiliate investments, and financing was boosted by stock issuance Consolidated Statements of Cash Flows Highlights (2022 vs. 2021) | Cash Flow Category | 2022 ($) | 2021 ($) | Change ($) | | :----------------------------- | :------------ | :------------ | :------------ | | Net cash provided by operating activities | $15,551,676 | $11,568,108 | +$3,983,568 | | Net cash used in investing activities | $(30,615,878) | $(25,849,237) | $(4,766,641) | | Net cash provided by financing activities | $18,444,799 | $15,508,380 | +$2,936,419 | | Net increase in cash and cash equivalents | $3,380,597 | $1,227,251 | +$2,153,346 | | Ending Cash and Cash Equivalents | $4,898,914 | $1,518,317 | +$3,380,597 | - Cash flows from operating activities increased by nearly $4 million, primarily due to the recovery of prior year under-collected gas costs and supplier refunds, partially offset by higher gas in storage costs[144] - Investing activities saw increased expenditures for utility property ($25.5 million in 2022) and investment in unconsolidated affiliates ($5.3 million in 2022)[146][148] - Financing activities were significantly boosted by $28.9 million in proceeds from stock issuance in 2022, enabling debt repayments and capital infusions[149][231] Notes to Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, regulatory matters, segment information, and other financial disclosures 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines key accounting policies including consolidation, rate-regulated accounting, depreciation, AROs, fair value, and revenue recognition - The consolidated financial statements include RGC Resources, Inc. and its wholly-owned subsidiaries: Roanoke Gas (natural gas utility), Midstream (MVP investor), and Diversified Energy (inactive)[232] - The company's regulated operations follow ASC 980, Regulated Operations, allowing deferral of costs and liabilities based on expected recovery or collection through rates[234] Regulatory Assets and Liabilities (September 30, 2022 vs. 2021) | Category | 2022 ($) | 2021 ($) | | :----------------------- | :------------ | :------------ | | Total Regulatory Assets | $7,797,302 | $12,824,346 | | Total Regulatory Liabilities | $38,873,065 | $34,490,726 | - Utility property is stated at original cost and depreciated using composite straight-line rates, with the estimated cost of asset retirement accrued through depreciation expense as a regulatory liability[238][240] - The company capitalizes Allowance for Funds Used During Construction (AFUDC) for equity and debt financing costs during construction phases of infrastructure projects, including the RNG project[242] - Asset Retirement Obligations (AROs) are recorded for legal obligations related to purging and capping distribution mains and services upon retirement, with revisions to estimated cash flows increasing the ARO by $2,072,266 in 2022[243][245][247] - The allowance for credit losses was estimated at $371,271 in 2022, up from $242,010 in 2021, reflecting the impact of COVID-19, the disconnection moratorium, and federal financial assistance[249][250] - The company uses the asset and liability method for income taxes, recognizing deferred tax assets and liabilities for temporary differences, and revalued them in fiscal 2018 due to the corporate federal income tax rate reduction[254][331][332] - The company uses interest rate swaps to hedge variable rate debt, which qualify as cash flow hedges, with changes in fair value reported in other comprehensive income[269] 2. REVENUE This note details the company's revenue recognition policies, primarily from tariff-based natural gas sales and delivery, which fall under ASC 606 Revenue by Customer, Product, and Income Statement Classification (2022 vs. 2021) | Revenue Category (2022) | Gas Utility ($) | Non Utility ($) | Total Operating Revenues ($) | | :---------------------- | :------------ | :---------- | :----------------------- | | Residential | $46,915,892 | — | $46,915,892 | | Commercial | $28,874,522 | — | $28,874,522 | | Industrial & Transportation | $5,671,884 | — | $5,671,884 | | Other | $822,140 | $129,578 | $951,718 | | Total contracts with customers | $82,284,438 | $129,578 | $82,414,016 | | Alternative Revenue Programs | $1,751,206 | — | $1,751,206 | | Total Operating Revenues | $84,035,644 | $129,578 | $84,165,222 | | Revenue Category (2021) | Gas Utility ($) | Non Utility ($) | Total Operating Revenues ($) | | :---------------------- | :------------ | :---------- | :----------------------- | | Residential | $43,108,790 | — | $43,108,790 | | Commercial | $25,217,030 | — | $25,217,030 | | Industrial & Transportation | $4,973,885 | — | $4,973,885 | | Other | $429,397 | $129,676 | $559,073 | | Total contracts with customers | $73,729,102 | $129,676 | $73,858,778 | | Alternative Revenue Programs | $1,316,001 | — | $1,316,001 | | Total Operating Revenues | $75,045,103 | $129,676 | $75,174,779 | - Gas utility revenues are derived from SCC-authorized tariff rates, with performance obligations satisfied over time as natural gas is delivered or transported[282][283] - Unbilled revenue, included in residential and commercial revenues, was $1,585,062 in 2022 and $1,191,227 in 2021[284][287] - Alternative Revenue Programs (ARPs), such as the WNA and SAVE Plan, are SCC-approved mechanisms that adjust revenues for external factors or performance targets and fall outside the scope of ASC 606[286] 3. REGULATORY MATTERS This note details recent regulatory activities and approvals impacting Roanoke Gas - Roanoke Gas expensed $57,000 and $217,000 in COVID-19 related deferred costs in fiscal 2022 and 2021, respectively, as earnings exceeded the authorized return on equity[290] - The SCC approved an updated SAVE Rider in August 2022, designed to collect approximately $4.1 million in annual revenues for infrastructure replacement, effective October 2022[291] - Roanoke Gas filed applications with the SCC for a rate adjustment clause for a Renewable Natural Gas (RNG) facility and to acquire natural gas distribution assets from a local housing authority, the latter resulting in a $219,000 pre-tax gain[292][293][294] - The company filed notice on September 30, 2022, to file a non-gas base rate case in early December, with rates expected to be effective January 1, 2023, on an interim basis[295] - AFUDC accruals on MVP interconnect projects were temporarily ceased in January 2021 but resumed in fiscal 2022 for the RNG project, totaling $75,154[296][297] - The service disconnection moratorium expired on August 30, 2021, leading to high arrearage balances, with ARPA funds ($859,000) applied to customer accounts in early fiscal 2022[178][290] 4. SEGMENT INFORMATION This note provides financial data segmented by Gas Utility, Investment in Affiliates, and Parent and Other, highlighting the $55.1 million MVP impairment - Operating segments are defined as Gas Utility, Investment in Affiliates, and Parent and Other, with performance assessed using operating income and equity in earnings[298][300][301] Segment Information (2022 vs. 2021) | Metric (2022) | Gas Utility ($) | Investment in Affiliates ($) | Parent and Other ($) | Consolidated Total ($) | | :------------------------ | :------------ | :----------------------- | :--------------- | :----------------- | | Operating revenues | $84,035,644 | — | $129,578 | $84,165,222 | | Operating income (loss) | $15,104,946 | $(281,843) | $93,572 | $14,916,675 | | Equity in earnings | — | $73,327 | — | $73,327 | | Impairment of investments | — | $(55,092,303) | — | $(55,092,303) | | Income (loss) before taxes | $13,547,601 | $(56,784,957) | $94,109 | $(43,143,247) | | Total assets | $258,519,230 | $13,838,108 | $17,951,905 | $290,309,243 | | Gross additions to utility property | $25,461,000 | — | — | $25,461,000 | | Gross investment in affiliates | — | $5,260,863 | — | $5,260,863 | | Metric (2021) | Gas Utility ($) | Investment in Affiliates ($) | Parent and Other ($) | Consolidated Total ($) | | :------------------------ | :------------ | :----------------------- | :--------------- | :----------------- | | Operating revenues | $75,045,103 | — | $129,676 | $75,174,779 | | Operating income (loss) | $14,955,375 | $(267,391) | $90,325 | $14,778,309 | | Equity in earnings | — | $1,667,554 | — | $1,667,554 | | Income before taxes | $13,043,470 | $171,861 | $90,793 | $13,306,124 | | Total assets | $231,737,427 | $65,686,376 | $12,685,390 | $310,109,193 | | Gross additions to utility property | $19,967,567 | — | — | $19,967,567 | | Gross investment in affiliates | — | $6,028,760 | — | $6,028,760 | - The Investment in Affiliates segment recorded a significant impairment of $(55,092,303) in 2022, leading to a substantial loss before income taxes for that segment[302] 5. OTHER INVESTMENTS This note details Midstream's equity investment in MVP and Southgate, highlighting $55.1 million in impairment losses due to ongoing legal and regulatory challenges - Midstream holds an approximately 1% equity investment in the Mountain Valley Pipeline (MVP) and a less than 1% investment in Southgate[304][306] - The MVP project has faced repeated legal and regulatory issues, including Fourth Circuit decisions vacating key permits in January and February 2022[304][307] - Midstream recognized a total pre-tax impairment loss of $55.1 million on its MVP investment in fiscal 2022 due to an other-than-temporary decline in fair value, based on probability-weighted discounted future cash flows[308][309] - AFUDC accruals on the MVP project were temporarily suspended from January 1, 2021, through March 31, 2021, and again from November 2021, resuming when growth construction activities restart[305] - There is a risk of further impairment due to continuing legal and regulatory matters, macroeconomic factors, changes in interest rates, and cost increases[311] Investment in Unconsolidated Affiliates (September 30, 2022 vs. 2021) | Investment Category | 2022 ($) | 2021 ($) | | :------------------ | :------------ | :------------ | | MVP | $13,689,370 | $64,462,194 | | Southgate | $83,705 | $405,125 | | Total Investment | $13,773,075 | $64,867,319 | MVP Summary Unaudited Financial Statements (2022 vs. 2021) | Income Statement Item | 2022 ($) | 2021 ($) | | :-------------------- | :------------ | :------------ | | AFUDC | $6,883,069 | $165,048,237 | | Net income | $7,030,223 | $164,659,801 | | Balance Sheet Item | 2022 ($) | 2021 ($) | | :-------------------- | :-------------- | :-------------- | | Total assets | $6,751,643,266 | $6,491,932,558 | | Capital | $6,636,581,543 | $6,291,478,531 | 6. LINE-OF-CREDIT Roanoke Gas entered a new unsecured line-of-credit for $21-33 million in March 2022, with no outstanding balance and compliance with all covenants - Roanoke Gas entered into a new unsecured line-of-credit agreement on March 31, 2022, with a variable interest rate based on Daily Simple SOFR plus 1.10%[316] - The total available borrowing limits range from $21 million to $33 million, with the agreement expiring on March 31, 2023[316][318] - As of September 30, 2022, the company had no outstanding balance under its line-of-credit agreement[316][319] - The credit agreement includes covenants requiring 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%[319] - The company was in compliance with all debt covenants as of September 30, 2022[329] 7. LONG-TERM DEBT This note details the company's long-term debt, including new unsecured promissory notes, many hedged with interest rate swaps, and confirms covenant compliance - Midstream entered into an $8 million unsecured promissory note on November 1, 2021, with an interest rate based on 30-day LIBOR plus 115 basis points, maturing January 1, 2028, and hedged with an interest rate swap to a fixed rate of 2.443%[320] - Roanoke Gas entered into a $10 million unsecured Delayed Draw Promissory Note on September 24, 2021, with a variable interest rate (30-day LIBOR plus 100 basis points) converted to a fixed 2.49% via an interest rate swap, maturing October 1, 2028[321] - Roanoke Gas also entered into a $15 million unsecured Delayed Draw Term Note on August 20, 2021, with a variable interest rate (30-day SOFR Average plus 1.20%) converted to a fixed 2.00% via an interest rate swap, maturing August 20, 2026[322][323] Long-Term Debt Summary (September 30, 2022 vs. 2021) | Debt Type (Roanoke Gas) | Principal 2022 ($) | Unamortized Debt Issuance Costs 2022 ($) | Principal 2021 ($) | Unamortized Debt Issuance Costs 2021 ($) | | :---------------------- | :------------- | :----------------------------------- | :------------- | :----------------------------------- | | 4.26% Senior Notes (2034) | $30,500,000 | $115,849 | $30,500,000 | $125,502 | | 3.58% Term Notes (2027) | $8,000,000 | $24,080 | $8,000,000 | $28,896 | | 4.41% Term Notes (2031) | $10,000,000 | $26,627 | $10,000,000 | $29,760 | | 3.60% Term Notes (2029) | $10,000,000 | $25,539 | $10,000,000 | $29,062 | | SOFR + 1.20% Term Note (2026) | $15,000,000 | — | — | — | | LIBOR + 1.00% Term Note (2028) | $10,000,000 | $28,674 | — | $21,545 | | Debt Type (Midstream) | | | | | | TERM SOFR + 1.50% Notes (2023) | $21,896,200 | $18,553 | $33,610,200 | $14,904 | | LIBOR + 1.15% Term Note (2026) | $14,000,000 | $9,029 | $14,000,000 | $11,437 | | LIBOR + 1.20% Term Note (2024) | $9,875,000 | $3,929 | $10,000,000 | $6,286 | | LIBOR + 1.15% Term Note (2028) | $8,000,000 | $23,631 | — | — | | Total Notes Payable | $137,271,200 | $275,911 | $123,110,200 | $267,670 | | Line-of-credit | — | — | $17,628,897 | — | | Total Long-Term Debt | $137,271,200 | $275,911 | $140,739,097 | $267,670 | - The company was in compliance with all debt covenants as of September 30, 2022 and 2021, including limits on consolidated long-term indebtedness and priority indebtedness, and an interest coverage ratio requirement[329] Aggregate Annual Maturities of Long-Term Debt (Years Ending September 30) | Year Ending September 30 | Maturities ($) | | :----------------------- | :------------ | | 2023 | $1,300,000 | | 2024 | $32,871,200 | | 2025 | $1,600,000 | | 2026 | $30,600,000 | | 2027 | $1,600,000 | | Thereafter | $69,300,000 | | Total | $137,271,200 | 8. INCOME TAXES This note details income tax accounting, including deferred taxes, R&D tax credits, and an ongoing IRS examination of 2018 and 2019 federal tax returns - The company accounts for income taxes using the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences[331] - Deferred tax assets and liabilities were revalued in fiscal 2018 due to the reduction in the corporate federal income tax rate, with excess deferred income taxes reclassified to a regulatory liability[332] - The company claimed federal R&D tax credits totaling $3,169,656 for fiscal years 2017-2020 and $659,920 for fiscal 2021, deferring them as regulatory liabilities and amortizing them over 20 years[333] Income Tax Expense (Benefit) (2022 vs. 2021) | Income Tax Component | 2022 ($) | 2021 ($) | | :------------------- | :-------------- | :------------ | | Current income taxes | $3,018,513 | $3,097,874 | | Deferred income taxes | $(14,258,294) | $106,188 | | Amortization of R&D tax credits | $(170,864) | — | | Total Income Tax Expense (Benefit) | $(11,410,645) | $3,204,062 | - The effective tax rate for fiscal 2022 was 26.5%, exceeding the combined federal and state statutory rate of 25.74% due to moving to a taxable loss position and R&D tax credit amortization[138] Deferred Tax Assets and Liabilities (September 30, 2022 vs. 2021) | Deferred Tax Item | 2022 ($) | 2021 ($) | | :---------------------------- | :-------------- | :------------ | | Total Gross Deferred Tax Assets | $19,566,993 | $5,521,587 | | Total Gross Deferred Tax Liabilities | $21,675,368 | $20,469,800 | | Net Deferred Tax Asset | $1,057,079 | — | | Net Deferred Tax Liability | $3,165,454 | $14,948,213 | - The IRS is currently examining the company's 2018 and 2019 federal tax returns[338] 9. EMPLOYEE BENEFIT PLANS This note details pension and postretirement plans, their funded status, actuarial assumptions, and strategies to manage risk, including an LDI approach - The company sponsors a noncontributory pension plan for employees hired before January 2017 and a postretirement plan for employees hired before January 2000[339][341] - The funded status of defined benefit plans is recognized as an asset or liability, with changes recognized through comprehensive income and a regulatory asset established for the portion expected to be recovered through rates[342] Benefit Obligation, Fair Value of Plan Assets, and Funded Status (September 30, 2022 vs. 2021) | Metric | Pension Plan 2022 ($) | Postretirement Plan 2022 ($) | Pension Plan 2021 ($) | Postretirement Plan 2021 ($) | | :---------------------- | :---------------- | :----------------------- | :---------------- | :----------------------- | | Benefit obligation at end of year | $27,268,456 | $12,416,546 | $37,654,468 | $16,796,849 | | Fair value of plan assets at end of year | $28,017,797 | $12,138,119 | $38,914,107 | $15,882,342 | | Funded status | $749,341 | $(278,427) | $1,259,639 | $(914,507) | - The reduction in benefit obligations for both plans was primarily due to actuarial gains from increased discount rates (5.15% for pension, 5.16% for postretirement in 2022, up from ~2.7% in 2021)[196][347] - The company implemented a 'soft freeze' for the pension plan in 2017 and transitioned its asset allocation to a Liability Driven Investment (LDI) approach for 70% of pension assets to reduce volatility[197][198] Net Periodic Benefit Cost Components (2022 vs. 2021) | Component | Pension Plan 2022 ($) | Pension Plan 2021 ($) | Postretirement Plan 2022 ($) | Postretirement Plan 2021 ($) | | :---------------------- | :---------------- | :---------------- | :----------------------- | :----------------------- | | Service cost | $648,289 | $734,282 | $97,802 | $140,691 | | Interest cost | $1,013,115 | $975,139 | $443,721 | $430,490 | | Expected return on plan assets | $(1,831,550) | $(2,015,743) | $(666,167) | $(596,488) | | Recognized loss | $146,402 | $502,141 | — | $154,659 | | Net periodic benefit cost | $(23,744) | $195,819 | $(124,644) | $129,352 | - The company expects no minimum funding requirements and no contributions to its pension and postretirement plans in fiscal 2023[202] - The Nonqualified Deferred Compensation (NQDC) Plan is an unfunded plan for senior management, with a balance of $59,108 in 2022[358][360] - The 401(k) Plan includes matching contributions (100% on first 4%, 50% on next 2%) and discretionary contributions for employees hired after January 1, 2017, totaling $404,722 in 2022[361] 10. COMMON STOCK OPTIONS This note describes the KESOP, granting common stock options to employees, with 34,500 outstanding options and 22,000 shares available for future grants - The KESOP provides common stock options to officers and certain full-time salaried employees, with 22,000 shares available for future grants as of September 30, 2022[362] - Options vest over a six-month period and are exercisable over a ten-year period from the date of issuance[363] - The fair value of each grant is estimated using the Black-Scholes option pricing model, with assumptions for expected volatility, dividends, exercise term, and risk-free interest rate[364] Stock Option Activity (September 30, 2022 vs. 2021) | Metric | 2022 | 2021 | | :----------------------------------- | :------ | :------ | | Options outstanding, September 30 | 34,500 | 45,250 | | Weighted Average Exercise Price ($) | $18.69 | $19.34 | | Weighted-average grant date option fair value ($) | $5.39 | $5.55 | | Stock option expense ($) | $16,330 | $11,100 | 11. OTHER STOCK PLANS This note outlines DRIP, RSPD, and RSPO plans, detailing shares issued, vesting conditions, and compensation recognized for restricted stock grants - The Dividend Reinvestment and Stock Purchase Plan (DRIP) allows shareholders to reinvest dividends and purchase additional common stock, with 34,290 shares issued in 2022 and 29,604 in 2021[371] - The Restricted Stock Plan for Outside Directors (RSPD) allows directors to elect to receive fees in Director Restricted Stock, which vests upon death, disability, retirement, or change in control[372] Director Restricted Stock Activity (2022 vs. 2021) | Metric | 2022 | 2021 | | :---------------------- | :------ | :------ | | Granted Shares | 13,538 | 11,374 | | Vested Shares | (15,855) | — | | End of year balance | 108,127 | 110,444 | | Fair market value included in compensation ($) | $291,767 | $269,200 | - The **RGC