See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Resources is an energy services company primarily engaged in the sale and distribution of natural gas. The condensed consolidated financial statements include the accounts of Resources and its wholly-owned subsidiaries: Roanoke Gas, Diversified Energy and Midstream.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present Resources' financial position as of March 31, 2023, cash flows for the six months ended March 31, 2023 and 2022, and the results of its operations, comprehensive income, and changes in stockholders' equity for the three and six months ended March 31, 2023 and 2022. The results of operations for the three and six months ended March 31, 2023 are not indicative of the results to be expected for the fiscal year ending September 30, 2023 as quarterly earnings are affected by the highly seasonal nature of the business and weather conditions generally result in greater earnings during the winter months.
The unaudited condensed consolidated financial statements and condensed notes are presented under the rules and regulations of the SEC. Pursuant to those rules, certain information and note disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted. Although the Company believes that the disclosures are adequate, the unaudited condensed consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes contained in the Company’s Form 10-K for the year ended September 30, 2022. The September 30, 2022 consolidated balance sheet was included in the Company’s audited financial statements included in Form 10-K.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements contained in the Company's Form 10-K for the year ended September 30, 2022.
Recently Issued or Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In combination with ASU 2021-01 and ASU 2022-06, the ASU provides temporary optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate change on financial reporting. The new guidance applies specifically to contracts and hedging relationships that reference LIBOR, or any other referenced rate that is expected to be discontinued due to reference rate reform. The new guidance is effective for the Company through December 31, 2024. The Intercontinental Exchange Benchmark Administration, the administrator for LIBOR and other inter-bank offered rates, announced that the LIBOR rates for one-day, one-month, six-month and one-year will cease publication in June 2023 and that no new financial contracts may use LIBOR after December 31, 2021. Currently, all of the Company's LIBOR based financial contracts are based on the one-month LIBOR rate. None of the holders of these financial contracts have indicated when a transition from LIBOR will occur. Accordingly, the Company does not anticipate adopting this guidance until later in fiscal 2023. The new guidance could result in a significant impact on the Company's financial position, results of operations, and cash flows when the reference rate is changed for related contracts.
Other accounting standards that have been issued by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
RGC RESOURCES, INC. AND SUBSIDIARIES
In March 2022, the Company issued 1,350,000 shares of common stock in an equity offering resulting in net proceeds of nearly $27,000,000. The Company issued the common stock to strengthen its balance sheet by increasing its cash position and lowering its outstanding debt. The net proceeds were invested in Roanoke Gas to supplement the funding of its infrastructure improvement and replacement program and in Midstream to reduce its outstanding debt. An additional 95,443 shares of common stock were issued during fiscal 2022 related to the DRIP, Restricted Stock, stock option exercises and ATM activity.
During fiscal 2023, 102,812 shares of common stock have been issued through March 31, 2023 related to the DRIP, Restricted Stock, stock option exercises and ATM activity.
The Company assesses new contracts and identifies related performance obligations for promises to transfer distinct goods or services to the customer. Revenue is recognized when performance obligations have been satisfied. In the case of Roanoke Gas, the Company contracts with its customers for the sale and/or delivery of natural gas.
The following tables summarize revenue by customer, product and income statement classification:
| | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | |
| | Gas utility | | | Non utility | | | Total operating revenues | | | Gas utility | | | Non utility | | | Total operating revenues | |
Natural Gas (Billed and Unbilled): | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | 21,376,436 | | | $ | — | | | $ | 21,376,436 | | | $ | 18,104,512 | | | $ | — | | | $ | 18,104,512 | |
Commercial | | | 12,025,056 | | | | — | | | | 12,025,056 | | | | 9,487,312 | | | | — | | | | 9,487,312 | |
Industrial and Transportation | | | 1,565,170 | | | | — | | | | 1,565,170 | | | | 1,352,161 | | | | — | | | | 1,352,161 | |
Other | | | 262,923 | | | | 28,680 | | | | 291,603 | | | | 138,035 | | | | 30,464 | | | | 168,499 | |
Total contracts with customers | | | 35,229,585 | | | | 28,680 | | | | 35,258,265 | | | | 29,082,020 | | | | 30,464 | | | | 29,112,484 | |
Alternative Revenue Programs | | | 2,771,392 | | | | — | | | | 2,771,392 | | | | 417,199 | | | | — | | | | 417,199 | |
Total operating revenues | | $ | 38,000,977 | | | $ | 28,680 | | | $ | 38,029,657 | | | $ | 29,499,219 | | | $ | 30,464 | | | $ | 29,529,683 | |
| | Six Months Ended March 31, 2023 | | | Six Months Ended March 31, 2022 | |
| | Gas utility | | | Non utility | | | Total operating revenues | | | Gas utility | | | Non utility | | | Total operating revenues | |
Natural Gas (Billed and Unbilled): | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | 40,742,276 | | | $ | — | | | $ | 40,742,276 | | | $ | 31,317,001 | | | $ | — | | | $ | 31,317,001 | |
Commercial | | | 24,044,169 | | | | — | | | | 24,044,169 | | | | 16,873,030 | | | | — | | | | 16,873,030 | |
Industrial and Transportation | | | 3,153,238 | | | | — | | | | 3,153,238 | | | | 2,665,252 | | | | — | | | | 2,665,252 | |
Other | | | 684,918 | | | | 58,248 | | | | 743,166 | | | | 361,863 | | | | 61,889 | | | | 423,752 | |
Total contracts with customers | | | 68,624,601 | | | | 58,248 | | | | 68,682,849 | | | | 51,217,146 | | | | 61,889 | | | | 51,279,035 | |
Alternative Revenue Programs | | | 2,629,143 | | | | — | | | | 2,629,143 | | | | 1,513,728 | | | | — | | | | 1,513,728 | |
Total operating revenues | | $ | 71,253,744 | | | $ | 58,248 | | | $ | 71,311,992 | | | $ | 52,730,874 | | | $ | 61,889 | | | $ | 52,792,763 | |
RGC RESOURCES, INC. AND SUBSIDIARIES
Gas utility revenues
Substantially all of Roanoke Gas' revenues are derived from rates authorized by the SCC through its tariffs. Based on its evaluation, the Company has concluded that these tariff-based revenues fall within the scope of ASC 606. Tariff rates represent the transaction price. Performance obligations created under these tariff-based sales include the cost of natural gas sold to customers (commodity) and the cost of transporting natural gas through the Company’s distribution system to customers (delivery). The delivery of natural gas to customers results in the satisfaction of the Company’s respective performance obligations over time.
All customers are billed monthly based on consumption as measured by metered usage with payments due 20 days from the rendering of the bill. Revenue is recognized as bills are issued for natural gas that has been delivered or transported. In addition, the Company utilizes the practical expedient that allows an entity to recognize the invoiced amount as revenue, if that amount corresponds to the value received by the customer. Since customers are billed tariff rates, there is no variable consideration in the transaction price.
Unbilled revenue is included in residential and commercial revenues in the preceding table. Natural gas consumption is estimated for the period subsequent to the last billed date and up through the last day of the month. Estimated volumes and approved tariff rates are utilized to calculate unbilled revenue. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The Company obtains metered usage for industrial customers at the end of each month, thereby eliminating any unbilled consideration for these rate classes.
Other revenues
Other revenues primarily consist of miscellaneous fees and charges, utility-related revenues not directly billed to utility customers and billings for non-utility activities. Customers are invoiced monthly based on services provided for these activities. The Company utilizes the practical expedient allowing revenue to be recognized based on invoiced amounts. The transaction price is based on a contractually predetermined rate schedule; therefore, the transaction price represents total value to the customer and no variable price consideration exists.
Alternative Revenue Program revenues
ARPs, which fall outside the scope of ASC 606, are SCC approved mechanisms that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets. The Company's ARPs include its WNA, which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average; the SAVE Plan over/under collection mechanism, which adjusts revenues for the differences between SAVE Plan revenues billed to customers and the revenue earned, as calculated based on the timing and extent of infrastructure replacement completed during the period; and the RNG over/under collection mechanism, which adjusts revenues similar to the SAVE Plan, but is calculated based on the timing and costs associated with owning, operating and maintaining the RNG facility. These amounts are ultimately collected from, or returned to, customers through future rate changes as approved by the SCC.
Customer accounts receivable and liabilities
Accounts receivable, as reflected in the condensed consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below:
| | Current Assets | | | Current Liabilities | |
| | Trade accounts receivable(1) | | | Unbilled revenue(1) | | | Customer credit balances | | | Customer deposits | |
Balance at September 30, 2022 | | $ | 3,697,431 | | | $ | 1,585,062 | | | $ | 1,400,770 | | | $ | 1,457,610 | |
Balance at March 31, 2023 | | | 7,166,424 | | | | 2,862,955 | | | | 743,376 | | | | 1,580,082 | |
Increase (decrease) | | $ | 3,468,993 | | | $ | 1,277,893 | | | $ | (657,394 | ) | | $ | 122,472 | |
(1) Included in accounts receivable in the condensed consolidated balance sheet. Amounts shown net of reserve for credit losses.
The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts.
RGC RESOURCES, INC. AND SUBSIDIARIES
The effective tax rates for the three and six month periods ended March 31, 2023 reflected in the table below are less than the corresponding periods in fiscal 2022 and the combined federal and state statutory rate of 25.74% due to additional tax deductions from the amortization of excess deferred taxes and amortization of R&D tax credits deferred as a regulatory liability.
Excluding the effect of the Midstream impairment, the effective tax rate for the three and six month periods ended March 31, 2022 would have been 24.0% and 23.7%, respectively, reflecting the impact of additional tax deductions from the amortization of R&D tax credits deferred as a regulatory liability and the exercise of stock options. The recognition of the impairment resulted in a net loss position for both periods in fiscal 2022, thereby generating a higher effective tax rate as compared to the effective tax rate for the corresponding periods in fiscal 2023.
| | Three Months Ended March 31, | | | Six Months Ended March 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Effective tax rate | | | 23.8 | % | | | 26.1 | % | | | 23.6 | % | | | 26.6 | % |
Effective tax rate - LLC impairment | | | — | | | | 25.7 | % | | | — | | | | 25.7 | % |
Effective tax rate excluding LLC impairment | | | 23.8 | % | | | 24.0 | % | | | 23.6 | % | | | 23.7 | % |
The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia, and thus subject to examinations by federal and state tax authorities. The IRS is currently examining the Company's 2018 and 2019 federal tax returns. The Company does not have any indication at this time of the outcome. The Company believes its income tax assets and liabilities are fairly stated as of March 31, 2023 and 2022; however, these assets and liabilities could be adjusted as a result of this examination. With the amendment of the federal returns for fiscal 2017, 2018 and 2019, these years will remain open for IRS examination for two more years. Aside from these exceptions, the federal returns and the state returns for Virginia for the tax years ended prior to September 30, 2017 are no longer subject to examination. The state returns for West Virginia prior to September 30, 2019 are no longer subject to examination.
5. | Rates and Regulatory Matters |
The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension and depreciation.
On December 2, 2022, Roanoke Gas filed an application with the SCC seeking an $8.55 million annual increase in non-gas base rates, of which $4.05 million was being recovered through the Company’s SAVE Rider. Since the Company is seeking recovery of the costs associated with its SAVE plan through its proposed base rates, the Company proposed discontinuing its SAVE Plan and SAVE Rider for the remainder of the current fiscal year, effective January 1, 2023.
On December 21, 2022, the SCC issued its Order for Notice and Hearing which authorized the Company to put the proposed rates into effect on January 1, 2023, on an interim basis. The SCC also established a procedural schedule and set the matter for hearing. The Company expects final resolution of the rate case to occur in late calendar 2023 or early 2024.
The Company has recorded a provision for refund, including interest, associated with customer billings under the new non-gas rates. As the SCC audit is still in progress, the Company based its estimate for refund in part based on the history of final awards in previous rate filings, as well as other factors. The amount of the accrued refund is an estimate, and the final order could result in a rate award that is either more or less than the amount currently reflected in the financial statements. Management will refine its estimates as more information becomes available.
The Company filed an application with the SCC for a new five-year SAVE Plan and Rider on March 31, 2023 for recovery of costs associated with SAVE eligible investments, beginning October 1, 2023. The application seeks recovery of costs associated with an estimated $8.5 million in SAVE eligible investment in fiscal 2024 and an estimated cumulative investment of $49.5 million over the five-year SAVE Plan ending September 30, 2028.
RGC RESOURCES, INC. AND SUBSIDIARIES
On May 16, 2022, Roanoke Gas announced a cooperative agreement under which Roanoke Gas and the Western Virginia Water Authority will produce commercial quality RNG from biogas produced at the regional water pollution control plant. In August 2022, Roanoke Gas filed an application with the SCC seeking approval of a rate adjustment clause under which the Company will recover the costs associated with constructing, owning, operating and maintaining the renewable natural gas facility. The application was filed under Chapter 30 of Title 56 of the Code of Virginia. Chapter 30 allows the Company to accrue AFUDC on the RNG project. In connection with the RNG project, Roanoke Gas began accruing AFUDC in fiscal 2022 associated with construction of the facility. As of March 31, 2023, the Company has recognized approximately $273,000 of AFUDC revenue since inception of the RNG project. The Company received a final order from the SCC on January 23, 2023 approving the Company’s application. The RNG project became operational in March 2023. The Company began billing customers the RNG rate adjustment on March 1, 2023, at which time the Company ceased recording AFUDC.
On June 2, 2022, Roanoke Gas filed an application with the SCC to acquire certain natural gas delivery assets from a local housing authority. Under this application, the Company requested the approval to acquire such facilities at five separate apartment complexes, located in the Company’s service territory, that were under housing authority management. Under the proposed plan, the housing authority would renew existing natural gas distribution facilities to include mains, services, and meter installations and then transfer ownership of these facilities to Roanoke Gas. In turn, Roanoke Gas would assume responsibility for the operation and maintenance of these assets and recognize a gain related to the asset acquisition equal to the cost associated with the renewal.
On July 19, 2022, the SCC approved the application and on August 4, 2022, the housing authority transferred the assets from two apartment complexes to Roanoke Gas. Roanoke Gas recorded these assets and recognized a pre-tax gain of approximately $219,000 during the Company’s fourth quarter of fiscal 2022. The housing authority expects to complete the upgrade and subsequent asset transfer at one more apartment complex in fiscal 2023. The authority is awaiting future funding to complete the two remaining apartment complexes. The timing of funding and the completion of the asset renewals for these complexes is unknown at this time.
As of the date of the filing of this Quarterly Report on Form 10-Q, Midstream is an approximately 1% equity investment owner of the LLC constructing the MVP, a 303 mile natural gas inter-state pipeline that is designed to extend from northern West Virginia to southern Virginia. Since inception, the MVP has encountered various legal and regulatory issues that have delayed the completion of the project. While under construction, AFUDC has provided the majority of the income recognized by Midstream. However, due to limited growth construction activities, AFUDC accruals have been suspended by the LLC since November 2021. AFUDC accruals will resume when growth construction activities restart.
Roanoke Gas will continue to suspend accruing AFUDC on its two gate stations that will interconnect with the MVP until such time as construction activities resume on the respective gate stations.
Midstream is a less than 1% investor in Southgate, which is being accounted for under the cost method.
On May 4, 2023, Midstream agreed with the LLC’s managing partner and primary interest owner to make Midstream’s future capital contributions to the LLC up to the point of project in-service or cancellation, as a result of which Midstream's ownership interest percentage in the LLC as it relates to the MVP project will be proportionately adjusted.
In the second quarter of fiscal 2022, Midstream incurred an other-than-temporary decline in the fair value of its equity investment in the LLC, primarily due to unfavorable decisions by the Fourth Circuit that vacated and remanded key authorizations, which required a pre-tax impairment charge of approximately $39.8 million. During the fourth quarter of fiscal 2022, Midstream incurred an additional other-than-temporary decline in value in its equity investment in the LLC due to increased uncertainty in the permitting process for the MVP project as a result of legal developments and regulatory uncertainties, as well as macroeconomic pressures primarily due to increased interest rates impacting the discount rate. As a result of the impairment, the carrying value of Midstream’s equity investment in the LLC was further reduced by $15.3 million pre-tax.
RGC RESOURCES, INC. AND SUBSIDIARIES
Midstream estimated the fair value of its investment in the LLC, with the assistance of a valuation specialist, using an income-based approach that primarily considered probability-weighted scenarios of discounted future cash flows based on the estimated project costs at completion and projected revenues. These scenarios reflected assumptions and judgments regarding the ultimate outcome of further matters relating to, or resulting from the Fourth Circuit rulings, as well as various other ongoing legal and regulatory matters affecting MVP and Southgate. Such assumptions and judgments also included certain additional potential delays and related cost increases that could result from unfavorable decisions on these proceedings and matters. Midstream’s analysis considered probability weighted growth expectations from additional compression expansion opportunities, how ongoing or new legal and regulatory matters may further delay the completion and increase the total costs of the project and the potential of MVP and Southgate cancellation.
Midstream reassesses the value of its investment in the LLC on at least a quarterly basis. With the assistance of a valuation specialist, Midstream conducted the quarterly evaluation of its investment in the LLC as of March 31, 2023 and determined that its investment was fairly stated and no further impairment was required. The fair value of the investment in the LLC was determined under a Level 3 measurement considering the significant assumptions and judgments required in estimating the fair value of the Company's investment in the LLC.
There is risk that Midstream’s equity investment in the LLC may be impaired further in the future. There are continuing, and potential future, legal and regulatory matters related to MVP and Southgate, any of which could affect the ability to complete or operate the project, as well as potential macroeconomic factors, changes in interest rates, cost increases, other unanticipated events and legal and regulatory matters that must be resolved. While macroeconomic factors in and of themselves may not be a direct indicator of impairment, should an impairment indicator be identified in the future, macroeconomic factors such as changes in interest rates could ultimately impact the size and scope of any potential impairment. Assumptions and estimates utilized in assessing the fair value of Midstream’s investment in the LLC may change depending on the nature or timing of resolutions to the legal and regulatory matters or based on other relevant developments. Adverse changes in circumstances relevant to the likelihood of project or expansion completion could prompt Midstream, in future assessments, to apply lower probability of project or expansion completion. Such changes in assumptions or estimates, including discount rates, could have a material adverse effect on the fair value of Midstream’s investment in the LLC and potentially result in additional impairment, which could have a material adverse effect on the results of operations and financial position of Midstream and the Company as a whole.
Funding for Midstream's investments in the LLC for both MVP and Southgate has been provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement maturing in December 2023, and three additional notes as detailed in Note 9, as well as by equity contributions from Resources.
The Company will participate in the earnings generated from the transportation of natural gas through both pipelines proportionate to its level of investment once the pipelines are placed in service.
Investment balances of MVP and Southgate, as of March 31, 2023, are reflected in the table below:
Balance Sheet location: | | March 31, 2023 | | | September 30, 2022 | |
Other Assets: | | | | | | | | |
MVP | | $ | 15,008,995 | | | $ | 13,689,370 | |
Southgate | | | 88,080 | | | | 83,705 | |
Investment in unconsolidated affiliates | | $ | 15,097,075 | | | $ | 13,773,075 | |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
MVP | | $ | 624,580 | | | $ | 804,404 | |
Southgate | | | 490 | | | | 102 | |
Capital contributions payable | | $ | 625,070 | | | $ | 804,506 | |
| | Three Months Ended | | | Six Months Ended | |
Income Statement location: | | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
Equity in earnings (loss) of unconsolidated affiliate | | $ | 2,867 | | | $ | (445 | ) | | $ | 4,099 | | | $ | 71,682 | |
| | March 31, 2023 | | | September 30, 2022 | |
Undistributed earnings, net of income taxes, of MVP in retained earnings, excluding impairment | | $ | 8,138,526 | | | $ | 8,135,482 | |
The undistributed earnings does not include the impairment of the investment in the LLC.
RGC RESOURCES, INC. AND SUBSIDIARIES
The change in the investment in unconsolidated affiliates is provided below:
| | Six Months Ended | |
| | March 31, 2023 | | | March 31, 2022 | |
Cash investment | | $ | 1,499,337 | | | $ | 3,572,011 | |
Change in accrued capital calls | | | (179,436 | ) | | | (1,367,548 | ) |
Pre-tax impairment | | | — | | | | (39,822,213 | ) |
Equity in earnings of unconsolidated affiliate | | | 4,099 | | | | 71,682 | |
Change in investment in unconsolidated affiliates | | $ | 1,324,000 | | | $ | (37,546,068 | ) |
Summary unaudited financial statements of MVP are presented below. Southgate financial statements, which are accounted for under the cost method, are not included.
| | Income Statements | |
| | Three Months Ended | | | Six Months Ended | |
| | March 31, 2023 | | | March 31, 2022 | | | March 31, 2023 | | | March 31, 2022 | |
AFUDC | | $ | — | | | $ | — | | | $ | — | | | $ | 6,883,069 | |
Other income (expense), net | | | 259,240 | | | | 9,245 | | | | 419,712 | | | | (35,818 | ) |
Net income | | $ | 259,240 | | | $ | 9,245 | | | $ | 419,712 | | | $ | 6,847,251 | |
| | Balance Sheets | |
| | March 31, 2023 | | | September 30, 2022 | |
Assets: | | | | | | | | |
Current assets | | $ | 64,263,722 | | | $ | 76,474,981 | |
Construction work in progress | | | 6,792,163,524 | | | | 6,667,146,408 | |
Other assets | | | 9,392,970 | | | | 8,021,877 | |
Total assets | | $ | 6,865,820,216 | | | $ | 6,751,643,266 | |
| | | | | | | | |
Liabilities and Equity: | | | | | | | | |
Current liabilities | | $ | 115,481,349 | | | $ | 115,061,723 | |
Capital | | | 6,750,338,867 | | | | 6,636,581,543 | |
Total liabilities and equity | | $ | 6,865,820,216 | | | $ | 6,751,643,266 | |
7. | Derivatives and Hedging |
The Company’s hedging and derivative policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations, including the price of natural gas and the cost of borrowed funds. This policy specifically prohibits the use of derivatives for speculative purposes.
The Company has five interest rate swaps associated with its variable rate debt as of March 31, 2023. Roanoke Gas has two variable-rate term notes in the amounts of $15 million and $10 million, with corresponding swap agreements to convert the variable interest rates into fixed rates of 2.00% and 2.49%, respectively. Under the provisions of the $10 million note, Roanoke Gas received $5 million on April 1, 2022 and the remaining $5 million on September 30, 2022. Midstream has three swap agreements corresponding to the $14 million, $10 million, and $8 million variable rate term notes. The swap agreements convert these three notes into fixed rate instruments with effective interest rates of 3.24%, 3.14%, and 2.443%, respectively. The swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of the swaps were deemed ineffective during the periods presented.
On April 3, 2023, Roanoke Gas amended and restated its $10 million interest rate swap initially entered into on September 24, 2021. The amendment revised the interest rate swap's floating rate from LIBOR plus 100 basis points to Term SOFR plus 100 basis points, effective April 1, 2023, to align with the variable interest rate on the $10 million Term Note dated September 24, 2021, and subsequently amended and restated on March 24, 2023. All other terms and requirements of the original interest rate swap, including the fixed rate of 2.49%, were retained. See Note 9 for additional information.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company had no outstanding derivative instruments for the purchase of natural gas.
The fair value of the current and non-current portions of the interest rate swaps are reflected in the condensed consolidated balance sheets under the caption interest rate swaps. The table in Note 10 reflects the effect on income and other comprehensive income of the Company's cash flow hedges.
On March 31, 2022, Roanoke Gas entered into an unsecured line-of-credit agreement replacing the line-of-credit agreement dated March 25, 2021. The agreement provided for a variable interest rate based upon Daily Simple SOFR plus 110 basis points and multiple tier borrowing limits to accommodate seasonal borrowing demands. The Company's total available borrowing limits during the term of the line-of-credit agreement ranged from $21 million to $33 million. In connection with the line-of-credit, the Company also entered into the Seventh Amendment to Credit Agreement as of March 31, 2022, which amended the original Credit Agreement dated March 31, 2016 and all subsequent amendments. The Amendment aligned the termination date, maximum principal amount available under the line-of-credit, amended certain financial conditions required of Resources, and retained all other terms and requirements of prior credit agreements. The line-of-credit agreement expired on March 31, 2023.
On March 24, 2023, Roanoke Gas entered into an unsecured Revolving Note in the principal amount of $25 million. The Revolving Note replaces the unsecured line-of-credit agreement dated March 31, 2022 and will mature on March 31, 2024. The Revolving Note's variable interest is based upon Term SOFR plus 110 basis points and multiple tier borrowing limits to accommodate seasonal borrowing demands. The Company's total borrowing limits during the term of the Revolving Note range from $4 million to $25 million. As of March 31, 2023, the Company had no outstanding balance under the Revolving Note.
On March 24, 2023, Roanoke Gas amended and restated the $10 million Term Note originally entered into on September 24, 2021. The amendment revised the original Term Note's interest rate from LIBOR plus 100 basis points to Term SOFR plus 100 basis points. All other terms and requirements of the original Term Note were retained. The effective date of the Amended Term Note was April 1, 2023. In addition, on April 3, 2023, the interest rate swap was amended to align with the Amended Term Note and retained the fixed interest rate of 2.49%. In connection with the Revolving Note and Amended Term Note, Roanoke Gas also amended and restated the Loan Agreement dated September 24, 2021. The amendment provides for borrowing limits on the Revolving Note and amends certain financial conditions required of Roanoke Gas and Resources. All other terms and requirements of the original Loan Agreement were retained. See Note 7 for additional information regarding the interest rate swap and Note 8 for additional information regarding the Revolving Note.
On November 1, 2021, Midstream entered into an unsecured promissory note in the principal amount of $8 million with an interest rate based on 30-day LIBOR plus 115 basis points maturing January 1, 2028. Related to this note, Midstream also entered into an interest rate swap agreement that effectively converted the variable rate note into a fixed rate instrument with an effective annual interest rate of 2.443%. The loan converted into an installment loan with principal pay-down beginning on April 1, 2023. In addition, this note reduced the borrowing capacity defined by the Third Amendment to Credit Agreement and related Promissory Notes. The total borrowing capacity declined from $41 million to $33 million effective with the new promissory note.
On March 31, 2022, Midstream applied $10 million from a cash infusion received from Resources to pay down a corresponding amount on the non-revolving credit facility which in turn reduced the total borrowing capacity from $33 million to $23 million. On June 30, 2022, Midstream entered into the Fourth Amendment to Credit Agreement and related Promissory Notes. The Amendment modified the original Credit Agreement and prior amendments by replacing the 30-day LIBOR plus 1.35% interest on the Promissory Notes with Term SOFR plus 1.50%, as well as extended the maturity date to December 31, 2023. All other terms of the Fourth Amendment to Credit Agreement remain unchanged.
RGC RESOURCES, INC. AND SUBSIDIARIES
Long-term debt consists of the following:
| | March 31, 2023 | | | September 30, 2022 | |
| | Principal | | | Unamortized Debt Issuance Costs | | | Principal | | | Unamortized Debt Issuance Costs | |
Roanoke Gas: | | | | | | | | | | | | | | | | |
Unsecured senior notes payable, at 4.26%, due September 18, 2034 | | $ | 30,500,000 | | | $ | 111,022 | | | $ | 30,500,000 | | | $ | 115,849 | |
Unsecured term notes payable, at 3.58%, due October 2, 2027 | | | 8,000,000 | | | | 21,672 | | | | 8,000,000 | | | | 24,080 | |
Unsecured term notes payable, at 4.41%, due March 28, 2031 | | | 10,000,000 | | | | 25,061 | | | | 10,000,000 | | | | 26,627 | |
Unsecured term notes payable, at 3.60%, due December 6, 2029 | | | 10,000,000 | | | | 23,778 | | | | 10,000,000 | | | | 25,539 | |
Unsecured term note payable, at 30-day SOFR plus 1.20%, due August 20, 2026 | | | 15,000,000 | | | | — | | | | 15,000,000 | | | | — | |
Unsecured term note payable, at Term SOFR plus 1.00%, due October 1, 2028 | | | 10,000,000 | | | | 40,160 | | | | 10,000,000 | | | | 28,674 | |
Midstream: | | | | | | | | | | | | | | | | |
Unsecured term notes payable, at TERM SOFR plus 1.50%, due December 31, 2023 | | | 23,000,000 | | | | 9,344 | | | | 21,896,200 | | | | 18,553 | |
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due June 12, 2026 | | | 14,000,000 | | | | 7,825 | | | | 14,000,000 | | | | 9,029 | |
Unsecured term note payable, at 30-day LIBOR plus 1.20%, due June 1, 2024 | | | 9,625,000 | | | | 2,750 | | | | 9,875,000 | | | | 3,929 | |
Unsecured term note payable, at 30-day LIBOR plus 1.15%, due January 1, 2028 | | | 8,000,000 | | | | 21,343 | | | | 8,000,000 | | | | 23,631 | |
Total long-term debt | | | 138,125,000 | | | | 262,955 | | | | 137,271,200 | | | | 275,911 | |
Less: current maturities of long-term debt | | | (25,100,000 | ) | | | — | | | | (1,300,000 | ) | | | — | |
Total long-term debt, net current maturities | | $ | 113,025,000 | | | $ | 262,955 | | | $ | 135,971,200 | | | $ | 275,911 | |
All debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that limit consolidated long-term indebtedness to not more than 65% of total capitalization and priority indebtedness to not exceed 15% of consolidated total assets. The $15 million and $10 million notes have an interest coverage ratio requirement of 1.5, which excludes the effect of a non-cash impairment on the LLC investments. The Company was in compliance with all debt covenants as of March 31, 2023 and September 30, 2022.
RGC RESOURCES, INC. AND SUBSIDIARIES
10. | Other Comprehensive Income (Loss) |
A summary of other comprehensive income and loss is provided below:
| | | | | | Tax | | | | |
| | Before-Tax | | | (Expense) | | | Net-of-Tax | |
| | Amount | | | or Benefit | | | Amount | |
Three Months Ended March 31, 2023 | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
Unrealized losses | | $ | (260,544 | ) | | $ | 67,065 | | | $ | (193,479 | ) |
Transfer of realized gains to interest expense | | | (419,712 | ) | | | 108,034 | | | | (311,678 | ) |
Net interest rate swaps | | | (680,256 | ) | | | 175,099 | | | | (505,157 | ) |
Defined benefit plans: | | | | | | | | | | | | |
Amortization of actuarial losses | | | 19,703 | | | | (5,072 | ) | | | 14,631 | |
Other comprehensive loss | | $ | (660,553 | ) | | $ | 170,027 | | | $ | (490,526 | ) |
Three Months Ended March 31, 2022 | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
Unrealized gains | | $ | 1,903,875 | | | $ | (490,057 | ) | | $ | 1,413,818 | |
Transfer of realized losses to interest expense | | | 163,860 | | | | (42,179 | ) | | | 121,681 | |
Net interest rate swaps | | | 2,067,735 | | | | (532,236 | ) | | | 1,535,499 | |
Defined benefit plans: | | | | | | | | | | | | |
Amortization of actuarial gains | | | (15,070 | ) | | | 3,879 | | | | (11,191 | ) |
Other comprehensive income | | $ | 2,052,665 | | | $ | (528,357 | ) | | $ | 1,524,308 | |
| | | | | | Tax | | | | | |
| | Before-Tax | | | (Expense) | | | Net-of-Tax | |
| | Amount | | | or Benefit | | | Amount | |
Six Months Ended March 31, 2023 | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
Unrealized losses | | $ | (216,597 | ) | | $ | 55,754 | | | $ | (160,843 | ) |
Transfer of realized gains to interest expense | | | (710,491 | ) | | | 182,879 | | | | (527,612 | ) |
Net interest rate swaps | | | (927,088 | ) | | | 238,633 | | | | (688,455 | ) |
Defined benefit plans: | | | | | | | | | | | | |
Amortization of actuarial losses | | | 39,406 | | | | (10,144 | ) | | | 29,262 | |
Other comprehensive loss | | $ | (887,682 | ) | | $ | 228,489 | | | $ | (659,193 | ) |
Six Months Ended March 31, 2022 | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
Unrealized gains | | $ | 2,219,858 | | | $ | (571,390 | ) | | $ | 1,648,468 | |
Transfer of realized losses to interest expense | | | 335,723 | | | | (86,418 | ) | | | 249,305 | |
Net interest rate swaps | | | 2,555,581 | | | | (657,808 | ) | | | 1,897,773 | |
Defined benefit plans: | | | | | | | | | | | | |
Amortization of actuarial gains | | | (30,140 | ) | | | 7,758 | | | | (22,382 | ) |
Other comprehensive income | | $ | 2,525,441 | | | $ | (650,050 | ) | | $ | 1,875,391 | |
The amortization of actuarial gains and losses, reflected in the preceding table, relate to the unregulated operations of the Company. Actuarial gains and losses attributable to the regulated operations are included as a regulatory asset. See Note 16 for a schedule of regulatory assets. The amortization of actual gains and losses is recognized as a component of net periodic pension and postretirement benefit costs under other income, net.
RGC RESOURCES, INC. AND SUBSIDIARIES
Reconciliation of Accumulated Other Comprehensive Income (Loss)
| | | | | | | | | | Accumulated | |
| | | | | | | | | | Other | |
| | Interest Rate | | | Defined Benefit | | | Comprehensive | |
| | Swaps | | | Plans | | | Income (Loss) | |
Balance at September 30, 2022 | | $ | 3,563,341 | | | $ | (1,598,977 | ) | | $ | 1,964,364 | |
Other comprehensive income (loss) | | | (688,455 | ) | | | 29,262 | | | | (659,193 | ) |
Balance at March 31, 2023 | | $ | 2,874,886 | | | $ | (1,569,715 | ) | | $ | 1,305,171 | |
11. | Commitments and Contingencies |
Roanoke Gas currently holds the only franchises and CPCNs to distribute natural gas in its service area. The current franchise agreements expire December 31, 2035. The Company's CPCNs are exclusive and generally are intended for perpetual duration.
Due to the nature of the natural gas distribution business, the Company has entered into agreements with both suppliers and pipelines for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The Company utilizes an asset manager to assist in optimizing the use of its transportation, storage rights and gas supply in order to provide a secure and reliable source of natural gas to its customers. The Company also has storage and pipeline capacity contracts to store and deliver natural gas to the Company’s distribution system. Roanoke Gas is currently served directly by two primary pipelines that deliver all of the natural gas supplied to the Company’s distribution system. Depending on weather conditions and the level of customer demand, failure of one of these transmission pipelines could have a major adverse impact on the Company's ability to deliver natural gas to its customers and its results of operations. The MVP will provide Roanoke Gas with access to an additional delivery source to its distribution system, increasing system reliability and the Company's ability to meet future demands for natural gas.
Basic earnings per common share for the three and six months ended March 31, 2023 and 2022 were calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share were calculated by dividing net income by the weighted average common shares outstanding during the period plus potential dilutive common shares.
A reconciliation of basic and diluted earnings per share is presented below:
| | Three Months Ended March 31, | | | Six Months Ended March 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Net income (loss) | | $ | 6,341,886 | | | $ | (24,494,429 | ) | | $ | 9,598,291 | | | $ | (20,909,900 | ) |
Weighted average common shares | | | 9,911,202 | | | | 8,486,518 | | | | 9,870,259 | | | | 8,434,689 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Options to purchase common stock | | | 7,506 | | | | — | | | | 7,242 | | | | — | |
Diluted average common shares | | | 9,918,708 | | | | 8,486,518 | | | | 9,877,501 | | | | 8,434,689 | |
Earnings (loss) per share of common stock: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.64 | | | $ | (2.89 | ) | | $ | 0.97 | | | $ | (2.48 | ) |
Diluted | | $ | 0.64 | | | $ | (2.89 | ) | | $ | 0.97 | | | $ | (2.48 | ) |
RGC RESOURCES, INC. AND SUBSIDIARIES
13. | Employee Benefit Plans |
The Company has both a pension plan and a postretirement plan. The pension plan covers the Company’s employees hired before January 1, 2017 and provides a retirement benefit based on years of service and employee compensation. The postretirement plan, covering employees hired before January 1, 2000, provides certain health care and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense is detailed as follows:
| | Three Months Ended | | | Six Months Ended | |
| | March 31, | | | March 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Components of net periodic pension cost (benefit): | | | | | | | | | | | | | | | | |
Service cost | | $ | 91,635 | | | $ | 162,072 | | | $ | 183,270 | | | $ | 324,144 | |
Interest cost | | | 343,025 | | | | 253,279 | | | | 686,050 | | | | 506,558 | |
Expected return on plan assets | | | (308,149 | ) | | | (457,888 | ) | | | (616,298 | ) | | | (915,776 | ) |
Recognized loss | | | 79,181 | | | | 36,600 | | | | 158,362 | | | | 73,200 | |
Net periodic pension cost (benefit) | | $ | 205,692 | | | $ | (5,937 | ) | | $ | 411,384 | | | $ | (11,874 | ) |
| | Three Months Ended | | | Six Months Ended | |
| | March 31, | | | March 31, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Components of postretirement benefit cost (benefit): | | | | | | | | | | | | | | | | |
Service cost | | $ | 11,475 | | | $ | 24,450 | | | $ | 22,950 | | | $ | 48,900 | |
Interest cost | | | 155,156 | | | | 110,930 | | | | 310,312 | | | | 221,860 | |
Expected return on plan assets | | | (116,012 | ) | | | (166,541 | ) | | | (232,024 | ) | | | (333,082 | ) |
Net postretirement benefit cost (benefit) | | $ | 50,619 | | | $ | (31,161 | ) | | $ | 101,238 | | | $ | (62,322 | ) |
The components of net periodic benefit cost, excluding the service cost component, are included in other income, net in the condensed consolidated statements of income. Service cost is included in operations and maintenance expense in the condensed consolidated statements of income.
For the three and six month periods ended March 31, 2023, no funding contributions were made to the pension plan or postretirement plan. The Company is not planning any funding contributions to either plan for the remainder of fiscal 2023.
14. | Fair Value Measurements |
ASC 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
RGC RESOURCES, INC. AND SUBSIDIARIES
Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date.
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy:
| | Fair Value Measurements - March 31, 2023 | |
| | | | | | Quoted | | | Significant | | | | | |
| | | | | | Prices | | | Other | | | Significant | |
| | | | | | in Active | | | Observable | | | Unobservable | |
| | Fair | | | Markets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 3,871,379 | | | $ | — | | | $ | 3,871,379 | | | $ | — | |
Total | | $ | 3,871,379 | | | $ | — | | | $ | 3,871,379 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Natural gas purchases | | $ | 623,009 | | | $ | — | | | $ | 623,009 | | | $ | — | |
Total | | $ | 623,009 | | | $ | — | | | $ | 623,009 | | | $ | — | |
| | Fair Value Measurements - September 30, 2022 | |
| | | | | | Quoted | | | Significant | | | | | |
| | | | | | Prices | | | Other | | | Significant | |
| | | | | | in Active | | | Observable | | | Unobservable | |
| | Fair | | | Markets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 4,798,467 | | | $ | — | | | $ | 4,798,467 | | | $ | — | |
Total | | $ | 4,798,467 | | | $ | — | | | $ | 4,798,467 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Natural gas purchases | | $ | 1,295,225 | | | $ | — | | | $ | 1,295,225 | | | $ | — | |
Total | | $ | 1,295,225 | | | $ | — | | | $ | 1,295,225 | | | $ | — | |
The fair value of the interest rate swaps are determined by using the counterparty's proprietary models and certain assumptions regarding past, present and future market conditions.
See Note 6 for discussion on the fair value assumptions of the Company's investment in the LLC.
Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on weighted average first of the month index prices corresponding to the month of the scheduled payment. At March 31, 2023 and September 30, 2022, the Company had recorded in accounts payable the estimated fair value of the liability valued at the corresponding first of month index prices for which the liability is expected to be settled.
RGC RESOURCES, INC. AND SUBSIDIARIES
The Company’s nonfinancial assets and liabilities measured at fair value on a nonrecurring basis consist of its AROs. The AROs are measured at fair value at initial recognition based on expected future cash flows required to settle the obligation.
The carrying value of cash and cash equivalents, accounts receivable, borrowings under line-of-credit, accounts payable (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments. In addition, the carrying amount of the variable rate line-of-credit is a reasonable approximation of its fair value.
The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements:
| | Fair Value Measurements - March 31, 2023 | |
| | | | | | Quoted | | | Significant | | | | | |
| | | | | | Prices | | | Other | | | Significant | |
| | | | | | in Active | | | Observable | | | Unobservable | |
| | Carrying | | | Markets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 25,100,000 | | | $ | — | | | $ | — | | | $ | 25,075,314 | |
Notes payable | | | 113,025,000 | | | | — | | | | — | | | | 110,157,640 | |
Total | | $ | 138,125,000 | | | $ | — | | | $ | — | | | $ | 135,232,954 | |
| | Fair Value Measurements - September 30, 2022 | |
| | | | | | Quoted | | | Significant | | | | | |
| | | | | | Prices | | | Other | | | Significant | |
| | | | | | in Active | | | Observable | | | Unobservable | |
| | Carrying | | | Markets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 1,300,000 | | | $ | — | | | $ | — | | | $ | 1,300,000 | |
Notes payable | | | 135,971,200 | | | | — | | | | — | | | | 130,266,252 | |
Total | | $ | 137,271,200 | | | $ | — | | | $ | — | | | $ | 131,566,252 | |
The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt based on the underlying Treasury rate or other Treasury instruments with a corresponding maturity period and estimated credit spread extrapolated based on market conditions since the issuance of the debt.
ASC 825, Financial Instruments, requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. No individual customer amounted to more than 5% of total accounts receivable at March 31, 2023 and one customer amounted to approximately 5.1% of total receivables at September 30, 2022. The Company maintains certain credit standards with its customers and requires a customer deposit if warranted.
Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and assess performance. The Company uses operating income and equity in earnings to assess segment performance.
Intersegment transactions are recorded at cost.
RGC RESOURCES, INC. AND SUBSIDIARIES
The reportable segments disclosed herein are defined as follows:
Gas Utility - The natural gas segment of the Company generates revenue from its tariff rates and other regulatory mechanisms through which it provides the sale and distribution of natural gas to its residential, commercial and industrial customers.
Investment in Affiliates - The investment in affiliates segment reflects the activities of the Company's investment in the LLC.
Parent and Other - The category parent and other includes the unregulated activities of the Company as well as certain corporate eliminations.
Information related to the Company's segments are provided below:
| | Three Months Ended March 31, 2023 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Operating revenues | | $ | 38,000,977 | | | $ | — | | | $ | 28,680 | | | $ | 38,029,657 | |
Depreciation | | | 2,419,541 | | | | — | | | | — | | | | 2,419,541 | |
Operating income (loss) | | | 9,627,320 | | | | (58,747 | ) | | | 22,849 | | | | 9,591,422 | |
Equity in earnings | | | — | | | | 2,867 | | | | — | | | | 2,867 | |
Interest expense | | | 810,346 | | | | 585,516 | | | | — | | | | 1,395,862 | |
Income (loss) before income taxes | | | 8,939,360 | | | | (641,933 | ) | | | 22,824 | | | | 8,320,251 | |
| | Three Months Ended March 31, 2022 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Operating revenues | | $ | 29,499,219 | | | $ | — | | | $ | 30,464 | | | $ | 29,529,683 | |
Depreciation | | | 2,268,704 | | | | — | | | | — | | | | 2,268,704 | |
Operating income (loss) | | | 7,528,839 | | | | (108,987 | ) | | | 23,536 | | | | 7,443,388 | |
Equity in earnings (loss) | | | — | | | | (445 | ) | | | — | | | | (445 | ) |
Impairment of investments in affiliates | | | — | | | | (39,822,213 | ) | | | — | | | | (39,822,213 | ) |
Interest expense | | | 751,038 | | | | 352,806 | | | | — | | | | 1,103,844 | |
Income (loss) before income taxes | | | 7,117,202 | | | | (40,279,495 | ) | | | 23,689 | | | | (33,138,604 | ) |
RGC RESOURCES, INC. AND SUBSIDIARIES
| | Six Months Ended March 31, 2023 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Operating revenues | | $ | 71,253,744 | | | $ | — | | | $ | 58,248 | | | $ | 71,311,992 | |
Depreciation | | | 4,839,082 | | | | — | | | | — | | | | 4,839,082 | |
Operating income (loss) | | | 15,194,665 | | | | (105,451 | ) | | | 46,693 | | | | 15,135,907 | |
Equity in earnings | | | — | | | | 4,099 | | | | — | | | | 4,099 | |
Interest expense | | | 1,632,912 | | | | 1,132,114 | | | | — | | | | 2,765,026 | |
Income (loss) before income taxes | | | 13,759,315 | | | | (1,234,548 | ) | | | 46,643 | | | | 12,571,410 | |
| | Six Months Ended March 31, 2022 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Operating revenues | | $ | 52,730,874 | | | $ | — | | | $ | 61,889 | | | $ | 52,792,763 | |
Depreciation | | | 4,539,398 | | | | — | | | | — | | | | 4,539,398 | |
Operating income (loss) | | | 12,933,155 | | | | (160,547 | ) | | | 49,203 | | | | 12,821,811 | |
Equity in earnings | | | — | | | | 71,682 | | | | — | | | | 71,682 | |
Impairment of investments in affiliates | | | — | | | | (39,822,213 | ) | | | — | | | | (39,822,213 | ) |
Interest expense | | | 1,515,901 | | | | 692,799 | | | | — | | | | 2,208,700 | |
Income (loss) before income taxes | | | 12,076,384 | | | | (40,596,376 | ) | | | 49,521 | | | | (28,470,471 | ) |
| | March 31, 2023 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Total assets | | $ | 262,105,231 | | | $ | 16,022,382 | | | $ | 18,324,609 | | | $ | 296,452,222 | |
| | September 30, 2022 | |
| | Gas Utility | | | Investment in Affiliates | | | Parent and Other | | | Consolidated Total | |
Total assets | | $ | 258,519,230 | | | $ | 13,838,108 | | | $ | 17,951,905 | | | $ | 290,309,243 | |
RGC RESOURCES, INC. AND SUBSIDIARIES
16. | Regulatory Assets and Liabilities |
The Company’s regulated operations follow the accounting and reporting requirements of ASC 980, Regulated Operations. A regulated company may defer costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would ordinarily be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the condensed consolidated balance sheet (regulatory assets) and amortized into expense over periods when such amounts are reflected in customer rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in customer rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of ASC 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include the effects in the condensed consolidated statements of income and comprehensive income in the period which ASC 980 no longer applied.
Regulatory assets included in the Company’s accompanying balance sheets are as follows:
| | March 31, 2023 | | | September 30, 2022 | |
Assets: | | | | | | | | |
Current Assets: | | | | | | | | |
Regulatory assets: | | | | | | | | |
Accrued WNA revenues | | $ | 2,805,972 | | | $ | 193,518 | |
Under-recovery of gas costs | | | — | | | | 1,316,580 | |
Under-recovery of RNG revenues | | | 95,290 | | | | — | |
Accrued pension and postretirement medical | | | 118,955 | | | | 237,911 | |
Other deferred expenses | | | 129,459 | | | | 129,459 | |
Total current | | | 3,149,676 | | | | 1,877,468 | |
Utility Property: | | | | | | | | |
In service: | | | | | | | | |
Other | | | 11,945 | | | | 11,945 | |
Construction work in progress: | | | | | | | | |
AFUDC | | | 659,650 | | | | 461,342 | |
Other Non-Current Assets: | | | | | | | | |
Regulatory assets: | | | | | | | | |
Premium on early retirement of debt | | | 1,313,152 | | | | 1,370,246 | |
Accrued pension and postretirement medical | | | 3,894,561 | | | | 3,894,561 | |
Other deferred expenses | | | 150,224 | | | | 181,740 | |
Total non-current | | | 5,357,937 | | | | 5,446,547 | |
| | | | | | | | |
Total regulatory assets | | $ | 9,179,208 | | | $ | 7,797,302 | |
RGC RESOURCES, INC. AND SUBSIDIARIES
Regulatory liabilities included in the Company’s accompanying balance sheets are as follows:
| | March 31, 2023 | | | September 30, 2022 | |
Liabilities and Stockholders' Equity: | | | | | | | | |
Current Liabilities: | | | | | | | | |
Regulatory liabilities: | | | | | | | | |
Over-recovery of gas costs | | $ | 1,246,485 | | | $ | — | |
Over-recovery of SAVE Plan revenues | | | 157,766 | | | | 158,847 | |
Rate refund | | | 763,282 | | | | — | |
Deferred income taxes | | | 363,320 | | | | 363,297 | |
Supplier refunds | | | 695,474 | | | | 2,484,992 | |
Other deferred liabilities | | | 164,377 | | | | 160,930 | |
Total current | | | 3,390,704 | | | | 3,168,066 | |
Deferred Credits and Other Non-Current Liabilities: | | | | | | | | |
Asset retirement obligations | | | 10,468,057 | | | | 10,204,079 | |
Regulatory cost of retirement obligations | | | 12,649,167 | | | | 12,277,796 | |
Regulatory liabilities: | | | | | | | | |
Deferred income taxes | | | 12,946,583 | | | | 13,193,006 | |
Other | | | 30,118 | | | | 30,118 | |
Total non-current | | | 36,093,925 | | | | 35,704,999 | |
| | | | | | | | |
Total regulatory liabilities | | $ | 39,484,629 | | | $ | 38,873,065 | |
As of March 31, 2023 and September 30, 2022, the Company had regulatory assets in the amount of $9,167,263 and $7,785,357, respectively, on which the Company did not earn a return during the recovery period.
The Company has evaluated subsequent events through the date the financial statements were issued. There were no items not otherwise disclosed which would have materially impacted the Company’s condensed consolidated financial statements.
RGC RESOURCES, INC. AND SUBSIDIARIES