RGC RESOURCES INC (RGCO) FY 2023 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,200 residential, commercial and industrial customers in Roanoke, Virginia, and the surrounding localities, through its Roanoke Gas subsidiary.  Midstream, a wholly-owned subsidiary of Resources, is a less than 1% investor in the MVP and Southgate, respectively. More information regarding the investment in MVP is provided below and under the Equity Investment in Mountain Valley Pipeline section.

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Following extended periods of delay due to actions by the Fourth Circuit, Congress passed and the President signed into law legislation to expedite the completion of the MVP.  The Fourth Circuit continued to stay the necessary permits to complete the pipeline.  Following a petition filed by the LLC to request relief from the stays issued by the Fourth Circuit, on July 27, 2023, the SCOTUS granted the relief requested and vacated the stays.  Construction on the MVP resumed immediately and completion is currently expected during the first quarter of calendar 2024.

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

The Company is also subject to regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines, as well as the FERC, which regulates the prices for the transportation and delivery of natural gas to the Company's distribution system and underground storage services. In addition, Roanoke Gas is subject to other regulations which are not necessarily industry specific.

Beginning January 1, 2023, Roanoke Gas implemented new, non-gas base rates designed to provide $8.55 million in additional annual non-gas revenues in response to higher operating costs and to recover its investment in non-SAVE related projects since the last non-gas base rate increase in fiscal 2019.  Revenues from the SAVE Plan and Rider were incorporated into the new non-gas base rates.  In September 2023, Roanoke Gas and SCC staff reached a settlement agreement for $7.45 million in additional annual non-gas revenues pending final approval by the SCC.  Roanoke Gas placed the new non-gas base rates into effect on October 1, 2023 and has established a reserve for the difference between the rates implemented on January 1, 2023 and the new rates in the settlement agreement.  The excess revenues collected will be refunded to customers upon receipt of the final SCC order, which is expected to be received in late calendar 2023 or early 2024.

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

The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until such time a formal rate application is filed incorporating these investments in non-gas base rates.  The SAVE Plan and Rider reset effective January 1, 2023, when the recovery of all prior SAVE Plan investment was incorporated into the new non-gas base rates, and accordingly, SAVE Plan revenue decreased by approximately $2,182,000 from the prior year.  Roanoke Gas filed and received approval from the SCC for a new SAVE Plan and Rider with new rates placed into effect on October 1, 2023 that will result in approximately $366,000 in SAVE related revenues during fiscal 2024.  Additional information regarding the SAVE Plan and Rider is provided under the Regulatory section below.

The WNA mechanism reduces the volatility in earnings due to the variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with a level of price protection when the weather is colder than normal. The WNA allows the Company to recover from customers the lost margin, excluding gas costs, from the impact of warmer than normal weather and correspondingly requires the Company to refund to customers the excess margin earned for colder than normal weather.  The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal.  Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. The Company recorded approximately $3,005,000 and $1,973,000 in additional revenues under the WNA for weather that was approximately 16% and 13% warmer than normal for the fiscal years ended September 30, 2023 and 2022, respectively.  The number of heating degree days used to determine normal can change annually as a new year is added to the 30-year period and the oldest year is removed. As a result of adding warmer than normal years to replace colder years, the number of heating degree days that defines normal has trended downward over the last several years.

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The Company also has an approved rate structure that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity, to the average cost of natural gas inventory during the period.  Total ICC revenues increased from approximately $657,000 in fiscal 2022 to $967,000 in fiscal 2023 as a result of the higher cost of gas in storage at the beginning of the fiscal year.  Monthly average inventory balances, used to calculate ICC revenues, increased by 46%.  However, as natural gas commodity prices declined significantly during the summer storage injection period, the average price of gas in storage at September 30, 2023 declined by 37% compared to the same period last year.  Accordingly, fiscal 2024 ICC revenues are expected to decline from current year levels.

In March 2023, Roanoke Gas began the operation of the RNG facility to produce commercial quality RNG for delivery into its distribution system through a cooperative agreement with the Western Virginia Water Authority.  With SCC approval, Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and related operating costs through an RNG Rider added to customer bills.  The customer benefits from this program through the monetization of environmental credits generated through RNG production, in which these credits are returned to customers through the RNG Rider.  See the Regulatory section below for more information on RNG.

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

Cyber Risk

Cyber attacks are a constant threat to businesses and individuals. The Company remains focused on these threats and is committed to safeguarding its information technology systems. These systems contain confidential customer, vendor and employee information, as well as important operational and financial data. There is risk associated with unauthorized access of this information with a malicious intent to corrupt data, cause operational disruptions or compromise information. Management continuously monitors access to these systems and believes it has security measures in place to protect these systems from cyber attacks and similar incidents; however, there can be no guarantee that an incident will not occur. In the event of a cyber incident, the Company will execute its Security Incident Response Plan. The Company maintains cyber insurance to mitigate financial costs that may result from a cyber incident.

Inflation and Rising Prices

Natural gas commodity, delivery and storage capacity costs constitute the single largest expense of the Company, representing 65% of fiscal 2023 total operating expenses.  After peaking in December 2022, natural gas commodity prices decreased significantly through the remainder of fiscal 2023.   The decline in prices was primarily due to improved supply availability resulting from a warm winter season.  Roanoke Gas recovers natural gas costs through the PGA mechanism as noted above; however, in times where commodity prices rapidly increase, the timing of recovery may lag.  Increasing natural gas prices, especially in relation to other energy options, may lead to reductions in energy consumption through customer conservation or fuel switching in addition to the potential for higher bad debts related to customers' inability to pay higher natural gas bills.

Inflation, due to supply chain delays, labor shortages and limited availability of critical supplies among other factors, affects the Company through increases in non-gas expenses such as labor, employee benefits, materials and supplies, contracted services, corporate insurance and other areas.  The Company recovers non-gas related costs through the non-gas portion of its tariff rates, which are adjusted through a non-gas base rate application. Unlike the rate adjustments for the gas portion of rates which are done administratively, the non-gas base rate application can result in an inherent lag in non-gas expense recovery.  Therefore, authorized non-gas base rates may not keep pace with rising costs during inflationary periods.  Management regularly evaluates the Company's operations, economic conditions and other factors to assess the need to apply for a non-gas base rate adjustment. Accordingly, management filed a non-gas rate application in early December 2022 to incorporate increased expense levels and additional rate base, including both SAVE and non SAVE related plant investment, since the last non-gas base rate application.  These new non-gas base rates were implemented effective January 1, 2023 subject to refund.  See the Regulatory section below for more information.

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Results of Operations

The analysis on the results of operations is based on the consolidated operations of the Company, which are primarily associated with the utility segment. Additional segment analysis is provided when Midstream's investment in affiliates represents a significant component of the comparison.  Net income increased by $43,031,884 from a net loss position of $31,732,602 to net income of $11,299,282 primarily due to the impairment of the Company's LLC investment in fiscal 2022 and the implementation of new non-gas base rates in January 2023.  Excluding the after-tax effect of the prior year's impairment, net income would have increased by approximately $2,120,000.

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

Fiscal Year 2023 Compared with Fiscal Year 2022

The table below reflects operating revenues, volume activity and heating degree days.

Total gas utility operating revenues for the year ended September 30, 2023 increased by 16% from the year ended September 30, 2022 primarily due to higher natural gas commodity prices during the first half of fiscal 2023, the implementation of a non-gas base rate increase, net of a reduction in SAVE revenues, higher ICC revenues and the implementation of the RNG Rider, slightly offset by lower deliveries due to warmer weather.  Natural gas commodity prices for fiscal 2023 purchases declined from the prior year by approximately 9% per DTH; however, the total commodity component of gas costs increased by 37% per DTH due to the withdrawal of higher priced storage gas during the winter heating season.  Total gas costs, which includes pipeline and storage fixed demand costs, increased by 26% compared to the same period last year, which corresponded to the 21% per DTH increase in the gas cost component of revenue.  The non-gas base rate increase implemented in January 2023 contributed to an approximate $3.0 million increase in non-gas volumetric revenues, net of lower delivered volumes, and $1.2 million increase in customer base charge revenue.  SAVE revenues declined due to the inclusion of the cumulative SAVE investment in the new non-gas base rates.  As discussed in the Overview section, the SAVE Plan and Rider were temporarily halted with the implementation of the new rates.  Corresponding to the higher average price of natural gas in storage during the first half of fiscal 2023, ICC revenues rose 47%.  Additionally, the operation of the new RNG facility has added a new revenue stream for the Company.  Residential and commercial deliveries decreased by 3% corresponding to a comparable decline in heating degree days, while transportation and interruptible volumes, primarily driven by business activity rather than weather, increased by 1%.

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Gross utility margin increased over the prior fiscal year primarily as a result of the implementation of higher non-gas base rates, net of the reduction in SAVE revenues, combined with higher ICC revenues and the addition of RNG revenues. The reduction in the higher margin residential and commercial volumes, due to a warmer heating season, was mitigated by the WNA mechanism that provided for the recovery of lost margin related to the warmer weather.

The changes in the components of the gross utility margin are summarized below:

Operations and Maintenance Expense - Operations and maintenance expense increased by $414,732, or 3%, over the prior year primarily due to increases in compensation costs, contracted services, corporate insurance premiums and RNG expenses, net of greater capitalized overheads and lower bad debt expense.  Compensation costs and contracted services increased by approximately $852,000 due to increased staffing and the effects of inflation on salaries and externally provided services.  Corporate insurance premiums increased by approximately $164,000 due to insurance market conditions and higher coverage limits.  The operation of the new RNG facility contributed approximately $151,000 in additional operating expense.  Total capitalized overheads increased by approximately $272,000 due to a combination of higher levels of constructed assets and a higher capitalization rate, as well as increased LNG production.  Bad debt expense decreased by approximately $445,000 as customer and payment activity returned to historical, pre-COVID patterns resulting in improved aging and lower write-offs.

General Taxes - General taxes increased by $39,111, or 2%, due to increases in property taxes on greater utility plant investment and higher payroll taxes on increased employee count and compensation.

Depreciation - Depreciation expense increased by $815,755, or 9%, corresponding to a similar increase in net additions to depreciable utility property.

Equity in Earnings of Unconsolidated Affiliate - The equity in earnings of the MVP investment increased by $2,011,663 related to the recognition of AFUDC as construction activities on the MVP resumed in June 2023.  See the Equity Investment in Mountain Valley Pipeline section below for additional information.

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Impairment of Unconsolidated Affiliates - The $55,092,303 impairment was due to two other-than-temporary write-downs of the Company's investment in the LLC that were made during the second and fourth quarters of fiscal 2022 as a result of the Company's valuation assessment during the prior year.  See Equity Investment in Mountain Valley Pipeline and Critical Accounting Policies and Estimates sections below for more information.

Other Income, Net - Other income decreased by $810,455, or 56%, primarily due to an approximate $1,502,000 increase in the non-service cost components of net periodic benefit costs arising from the effect of much higher interest rates on the actuarial expense calculation.  This was partially offset by an approximate $227,000 increase in AFUDC recognized on the RNG project, $169,000 in additional interest income due to higher interest rates on available cash and $231,000 in additional revenue sharing based on the revised agreement with the Company's asset manager.

Interest Expense - Total interest expense increased by $1,120,876, or 25%, primarily due to higher interest rates on the Company's variable rate debt and, to a lesser extent, higher borrowing levels.  The weighted-average interest rate on the Company's total debt increased from 3.06% during fiscal 2022 to 3.83% during fiscal 2023, representing a 25% increase in the average rate.  Total average debt outstanding during fiscal 2023 increased by less than 1% from fiscal 2022.  Total borrowing levels were mitigated by the residual proceeds from the fiscal 2022 equity offering and the subsequent equity issues through the ATM in fiscal 2023.

Roanoke Gas' interest expense increased by $214,294, or 7%, as total average debt outstanding increased by approximately $2,500,000 associated with net borrowings under the Company's line-of-credit.  The average interest rate increased slightly from 3.38% in fiscal 2022 to 3.51% in fiscal 2023.  All of Roanoke Gas' long-term debt carry fixed rates either due to fixed rate notes or with variable rate debt that has a corresponding swap agreement.  See Note 6 and 7 for more information on the Company's debt.

Midstream's interest expense increased by $906,582, or 61%, as the average interest rate on Midstream's total debt increased from 2.59% to 4.32% related to rising interest rates on the variable rate credit facility, net of an approximate $1,900,000 decrease in total average debt outstanding during the period.

Income Taxes - Income tax expense increased by $14,902,556, moving from a tax benefit of $11,410,645 in fiscal 2022 to tax expense of $3,491,911 in fiscal 2023.  The net tax benefit in fiscal 2022 was attributable to a net deferred tax benefit of $14,180,759 corresponding to the recognition of the impairment of the Company's investment in the LLC. The effective tax rate was 23.6% for fiscal 2023 compared to 26.5% for fiscal 2022. The effective tax rate for the prior fiscal year exceeded the combined federal and state statutory rate of 25.74% due to the combination of moving to a taxable loss position combined with deductions related to the amortization of the R&D tax credits. Excluding the impairment, the effective tax rate for fiscal 2022 would have been 23.2%.  See Note 8 for the impact of tax credits on the effective tax rate.

Earnings Per Share and Dividends - Basic and diluted earnings per share were $1.14 in fiscal 2023 compared to $3.48 loss per share in fiscal 2022. Dividends declared per share of common stock were $0.79 in fiscal 2023 compared to $0.78 in fiscal 2022.

Capital Resources and Liquidity

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

Cash and cash equivalents decreased by approximately $3.4 million in fiscal 2023 compared to a $3.4 million increase in fiscal 2022. The following table summarizes the categories of sources and uses of cash:

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Cash Flows Provided by Operating Activities:

The seasonal nature of the natural gas distribution business causes operating cash flows to fluctuate significantly during the year, as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, all contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to the combination of increasing natural gas storage levels and rising customer receivable balances.

Cash flows from operating activities increased by $8.2 million from the prior year. The table below summarizes the significant components operating cash flow:

The primary driver for the increase in operating cash flows was the change in gas storage balance.  During the fiscal 2022 summer storage refill period, which generally extends from March through October, natural gas commodity prices rose significantly with the average price of gas in storage increasing from $3.15 per DTH at September 30, 2021 to $7.02 per DTH at September 30, 2022, resulting in a $9 million use of operating cash.  Subsequently, in fiscal 2023, much of the higher priced gas was withdrawn from storage to meet the energy demands of the winter heating season. When the fiscal 2023 summer storage refill period began, natural gas commodity prices were much lower than the prior fiscal period resulting in a decline in the average price of gas in storage to $4.40 per DTH at September 30, 2023, thereby generating $5.7 million in operating cash in fiscal 2023.  This improvement in operating cash flow was mitigated by changes in supplier refunds and under-collection of gas costs.  In March 2022, the Company received a $2.3 million supplier refund, resulting from a FERC rate case settlement, from one of the interstate pipelines that provides the Company with natural gas.  In July 2022, the Company began refunding this balance, along with other smaller refunds, to customers over a 12-month period.  The transition from collecting supplier refunds in fiscal 2022 to refunding them during fiscal 2023 resulted in a $4.7 million net reduction in operating cash between years.   At September 30, 2021, Roanoke Gas was in a net under-collected gas cost position of more than $5 million due to timing in adjusting the PGA factor for rising gas costs.  During fiscal 2022, Roanoke Gas collected from customers, through the ACA mechanism, nearly $3.6 million of the prior year under-collection.  In fiscal 2023, Roanoke Gas collected the remaining $1.4 million through the ACA mechanism; however, Roanoke Gas also generated a $1.5 million under-collection associated with current year gas costs.  As a result of the aforementioned lower gas costs and the application of the supplier refunds to customers' accounts, as well as reduced delinquent balances, accounts receivable moved from a $500,000 use of cash in fiscal 2022 to a $1.4 million source of operating cash in fiscal 2023.  The impairments on the Company's investment in the LLC resulted in significant swings in net income, deferred taxes and the recognition of impairment charges; however, the net effect of the impairments did not have an impact to operating cash flow.

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Cash Flows Used in Investing Activities:

Investing activities primarily consist of expenditures related to investment in Roanoke Gas' utility property, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet the demands of customer growth, as well as Midstream's investment in the LLC.  Roanoke Gas' expenditures were approximately $25.3 million and $25.5 million in fiscal 2023 and 2022, respectively. Roanoke Gas renewed 5.7 miles of main and 452 service lines and 8.3 miles of main and 605 service lines in fiscal years 2023 and 2022, respectively. The current SAVE Plan is focused on the replacement of pre-1973 first generation plastic pipe in addition to other SAVE related infrastructure. Furthermore, Roanoke Gas’ capital expenditures included costs to extend natural gas distribution mains and services to 430 customers in fiscal 2023, compared to 544 customers in fiscal 2022.  The RNG project, which went into service in March 2023, also accounted for $3.9 million and $3.1 million in expenditures for fiscal 2023 and 2022, respectively.  Depreciation covered approximately 39% and 36% of the current and prior year's capital expenditures, respectively, with the balance provided from other operating cash flows and financing activities.

Capital expenditures are expected to be at least $20 million annually over the next few years as Roanoke Gas continues to focus on its SAVE Plan, as well as system improvements and customer growth. The Company expects to utilize its operating cash flows and credit facilities, as well as consider additional equity capital, to meet the funding requirements of these planned expenditures.

Investing cash flows also reflects the fiscal 2023 funding of $2.1 million for Midstream's participation in the LLC, down from the $5.3 million in fiscal 2022.  Effective in May 2023, under agreement with the LLC's managing partner and primary interest owner, Midstream's future capital contributions to the LLC have been assumed by the primary interest owner.  Accordingly, Midstream has no further capital contributions during the remaining construction period of the MVP.  Midstream has and will remain responsible for its portion of the capital requirements of the Southgate project.  The LLC's managing partner is currently targeting completion of the MVP during the first quarter of calendar 2024. More information is provided under the Equity Investment in Mountain Valley Pipeline section below.

Cash Flows Provided by Financing Activities:

Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends. Net cash flows provided by financing activities were $200,000 and $18.4 million in fiscal 2023 and 2022, respectively.  The decrease in financing cash flows was primarily attributable to Resources' $27 million equity offering in March 2022 of which $12 million was invested in Roanoke Gas and $10 million in Midstream.  The remaining $5 million in equity was invested in Midstream in fiscal 2023.  Due to these cash infusions from the equity issue and the issuance of Roanoke Gas' $15 million and $10 million unsecured notes and Midstream's $8 million note, Roanoke Gas was able to pay down its line-of-credit balance and maturing $7 million note and Midstream applied $18 million against its non-revolving credit facility during fiscal 2022.  During fiscal 2023, the Company realized $3.9 million from the issuance of stock through the ATM program, DRIP activity and the exercise of stock options compared to the $2.0 million received from those same activities during the prior year, in addition to the $27 million from the equity offering.  Cash out flows for dividend payments reached $7.8 million as the annualized dividend rate increased from $0.78 to $0.79 per share and total outstanding shares increased as a result of the stock activity. The Company’s consolidated capitalization was 44.4% equity and 55.6% long-term debt at September 30, 2023, exclusive of unamortized debt expense. This compares to 40.4% equity and 59.6% long-term debt at September 30, 2022.

The current interest rate environment is expected to continue to result in higher interest costs associated with the Company's variable rate debt or on the issuance of any new debt.

Management regularly evaluates the Company's liquidity through a review of its available financing resources and its operating cash flows.  Resources maintains the ability to raise equity capital through its ATM program, private placement or other public offerings.  Management believes Roanoke Gas has sufficient financing resources to meet its cash requirements for the next year, including the line-of-credit and the two private shelf facilities.  The first shelf facility provides for the issuance of up to $40 million in unsecured notes in addition to the $28 million previously issued.  This shelf agreement was extended in December 2022 and is scheduled to expire on December 6, 2025.  The second facility provides for the issuance of up to $70 million in unsecured notes during its current term, which expires September 30, 2025.  Roanoke Gas may also adjust capital spending as necessary if such a need would arise.

Based on the agreement with the LLC's managing partner to assume future capital contributions related to the MVP, Midstream's future cash requirements are reduced to regular monthly operating expenses, debt service and capital contributions to Southgate.   Midstream's total debt service over the succeeding 12 months includes $11 million to retire maturing debt and approximately $2.7 million in interest expense based on current rates.  With current projections by the LLC's managing partner of MVP completion date during the first quarter of calendar 2024 and the subsequent operation of the pipeline, management believes that they will be able to negotiate extensions or refinancing options on the maturing debt and Midstream will meet its cash requirements over the ensuing 12 month period.

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Notes 6 and 7 provide details on the Company's line-of-credit and borrowing activities.

ATM Program

Resources issued 127,852 shares of common stock for $2,713,020, net of $69,565 in fees, under the ATM program for the year ended September 30, 2023.  For the year ended September 30, 2022, Resources issued 4,872 shares of common stock for $112,500, net of $2,813 in fees, under the ATM program.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).

Equity Investment in Mountain Valley Pipeline

The Company has a less than 1% interest in the MVP, which is accounted for as an equity investment, and a less than 1% interest in the Southgate pipeline, which is contemplated to interconnect with the MVP.  As discussed more fully in Note 5, since inception, the MVP has encountered various legal and regulatory issues that have substantially delayed the completion of the project, including a period in 2022 where work on the project had been halted.

As required by GAAP, management assesses the fair value of its investment on a quarterly basis.  As a result of the halt in construction in 2022, management conducted an assessment of its investment in MVP in accordance with the provisions of ASC 323, Investments - Equity Method and Joint Ventures. This assessment included a third-party valuation.  As a result of its evaluations, management concluded that the investment in the LLC sustained other-than-temporary declines in fair value and recorded pre-tax impairment losses of $39.8 million and $15.3 million in its second and fourth quarters of 2022, respectively. This is described more fully in Note 5.

Developments in 2023 on the legislative and legal fronts were favorable.  Most notably, in June 2023, the FRA declared the completion of the MVP to be in the national interest and cleared the permitting and regulatory impediments.  It also divested courts of jurisdiction to review agency actions on approvals necessary for MVP construction and initial operation.  In July 2023, SCOTUS lifted certain stays and cleared the judicial impediments.  Construction work restarted and the current target is that the MVP will be completed in the first quarter of calendar 2024.  Combined, these actions have significantly increased the Company’s assessment of the probability of a successful project with a concomitant increase to fair value.  GAAP does not permit the Company to reverse previously recorded impairment charges.

To date, Resources' earnings from MVP are primarily attributable to AFUDC income generated by the LLC.  Once the pipeline is commercially operational, AFUDC will cease and the Company will begin to receive its share of LLC earnings from long-term contracts to provide gas that were previously executed by the LLC.  Resources expects cash distributions from the LLC to begin three to six months after commercial operations begin.

Although the outlook for the MVP project is more positive than a year ago, management will monitor the status of MVP and Southgate for circumstances that could lead to future impairments. The amount and timing of further impairment, if any, would be dependent on the specific circumstances, including changes to probabilities of completion, changes in the assumed future cash flows and discount rate at the time of evaluation.

Midstream fully borrowed $23 million under its non-revolving credit facility, which matures in December 2024.  It has begun amortization of $400,000 per quarter on an additional variable rate note, as well as a note that comes fully due in June 2024.  The Company is actively discussing and anticipates refinancing those obligations in 2024.  With the expected completion of MVP in the first quarter of calendar 2024, Midstream is considering the long-term structure of its debt as it evolves from a project phase to an operating phase.  See Note 7 for more information on all borrowings related to Midstream.

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Regulatory

On December 2, 2022, Roanoke Gas filed an application with the SCC seeking an $8.55 million annual increase in its non-gas base rates, of which $4.05 million was being recovered through the SAVE Rider.  Since the Company was seeking to recover the costs associated with its SAVE Plan through interim non-gas base rates effective January 1, 2023, the Company discontinued its SAVE Plan and Rider for the remainder of the current fiscal year.  In the fourth quarter of fiscal 2023, the Company reached a settlement with the SCC staff on all outstanding issues in the case.  Under the terms of the settlement, the Company agreed to an incremental revenue requirement of $7.45 million. The Company agreed to begin billing the new rates effective October 1, 2023.  The Company expects to receive the final order on the rate application in late calendar 2023 or early 2024.

The Company has recorded a provision for refund, including interest, associated with customer billings for the difference between the interim rates and the settlement rates.

Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Rider. The Company filed an application with the SCC for a new, five-year SAVE Plan and Rider on March 31, 2023, seeking 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 proposed five-year plan period ending September 30, 2028.  On August 31, 2023, the SCC approved the new SAVE Plan and Rider with rates effective October 1, 2023.

On May 16, 2022, Roanoke Gas announced a cooperative agreement under which Roanoke Gas and the Western Virginia Water Authority would 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 to 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.  The Company has recognized approximately $468,000 of AFUDC 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 facility 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 May 30, 2023, the Company filed an application with the SCC to update the RNG Rider with an effective date of October 1, 2023.  On September 1, 2023, the SCC approved the updated RNG Rider with rates effective October 1, 2023.

On June 2, 2022, Roanoke Gas filed an application with the SCC to acquire certain natural gas distribution 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 fourth quarter of fiscal 2022.  On September 29, 2023, the housing authority transferred the assets from one additional apartment complex to Roanoke Gas and the Company recorded a pre-tax gain of approximately $311,000 during the fourth quarter of fiscal 2023.  The authority is 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.

Critical Accounting Policies and Estimates

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

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The Company considers an estimate to be critical if it is material to the financial statements and requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. The Company considers the following accounting policies and estimates to be critical.

Investments - Under the provisions of ASC 323, Investments - Equity Method and Joint Ventures, the Company is required to evaluate its investment in the LLC to determine if the fair value of the investments are below the carrying amount and if this decline in fair value is considered other-than-temporary.  If the results of the evaluation indicate that the decline in fair value is other-than-temporary, then the recognition of an impairment is required. The following events or circumstances would indicate the potential of an other-than-temporary decline in the fair value of the investment in the LLC:

• a prolonged period of time that the fair value is below the investor’s carrying value;

• the current expected financial performance is significantly worse than anticipated when the investor originally invested in the investee;

• adverse regulatory action is expected to substantially reduce the investee’s product demand or profitability;

• the investee has lost significant customers or suppliers with no immediate prospects for replacement;

• the investee’s discounted or undiscounted cash flows are below the investor’s carrying amount; and

• the investee’s industry is declining and significantly lags the performance of the economy as a whole.

The determination of fair value of the Company's investment in the LLC is a significant estimate.  Management has conducted quarterly evaluations of its investment in the LLC, with the assistance of a valuation specialist as needed, to determine the fair value utilizing an income approach and probability scenarios of discounted cash flows.  In conducting these evaluations, management made a variety of assumptions that it believes to be reasonable.  Variations in many of these assumptions could have a significant impact on the calculation of the fair value and the resulting level of impairment recorded.  Furthermore, these assumptions are based on the facts and circumstances at the date of the evaluations and are subject to change.  See the Equity Investment in Mountain Valley Pipeline section for additional information regarding the LLC valuation.

Regulatory accounting - The Company’s regulated operations follow the accounting and reporting requirements of ASC 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as regulatory assets on the consolidated balance sheet and recorded as expenses in the consolidated statements of income and comprehensive income when such amounts are reflected in rates. Additionally, regulators can impose regulatory liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future.

If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the Company would remove the applicable regulatory assets or liabilities from the consolidated balance sheet and include them in the consolidated statements of income and comprehensive income for the period in which the discontinuance occurred.

Revenue recognition - Regulated utility sales and transportation revenues are based upon rates approved by the SCC. The non-gas cost component of rates may not be changed without a formal rate application and corresponding authorization by the SCC in the form of a Commission order; however, the gas cost component of rates is adjusted quarterly, or more frequently if necessary, through the PGA mechanism. When the Company files a request for a non-gas rate increase, the SCC may allow the Company to place such rates into effect subject to refund pending a final order. Under these circumstances, the Company estimates the amount of increase it anticipates will be approved based on the best available information.  The Company has established a reserve for rate refund related for the difference in the settlement rates approved by the SCC staff and the interim rates implemented effective January 1, 2023.  Once a final order is issued by the SCC, the Company will refund the excess billings to its customers.

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The Company also bills customers through a SAVE Rider that provides a mechanism to recover on a prospective basis the costs associated with the Company’s expected investment related to the replacement of natural gas distribution pipe and other qualifying projects. As authorized by the SCC, the Company adjusts billed revenues monthly through the application of the WNA model. As the Company's non-gas rates are established based on the 30-year temperature average, monthly fluctuations in temperature from the 30-year average could result in the recognition of more or less revenue than for what the non-gas rates were designed. The WNA authorizes the Company to adjust monthly revenues for the effects of variation in weather from the 30-year average with a corresponding entry to a WNA receivable or payable. At the end of each WNA year, the Company refunds excess revenue collected for weather that was colder than the 30-year average or bills customers for revenue short-fall resulting from weather that was warmer than normal.  In a manner similar to the SAVE Rider, the Company also has an SCC approved mechanism to recover the investment and expenses for the operation of the RNG facility.  As required under the provisions of ASC 980, the Company recognizes billed revenue related to SAVE projects, RNG and from the WNA to the extent such revenues have been earned under the provisions approved by the SCC.

The Company bills its regulated natural gas customers on a monthly cycle. The billing cycle for most customers does not coincide with the accounting periods used for financial reporting. The Company accrues revenue for estimated natural gas delivered to customers but not yet billed during the accounting period. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The consolidated financial statements include unbilled revenue of $1,240,097 and $1,585,062 as of September 30, 2023 and 2022, respectively.

Under the provisions of ASU 2014-09, Revenue from Contracts with Customers, the Company recognizes revenues when natural gas is delivered to customers (the performance obligation) based on SCC approved tariff rates (the transaction price). The Company recognizes revenue through both billed and unbilled customer usage. The Company also recognizes revenue through ARPs, including the WNA.

Allowance for Credit Losses - The Company evaluates the collectability of its accounts receivable balances based upon a variety of factors including loss history, level of delinquent account balances, collections on previously written off accounts and general economic conditions. The historical model used in valuing reserve for bad debts has been consistently applied prior to COVID-19 and has produced reasonable estimates for valuing the potential credit losses on customer accounts receivable. With the arrival of COVID-19 and the unprecedented widespread impact deriving from the pandemic, including the 17-month disconnection moratorium which ended August 30, 2021, the estimation of the Company's allowance for credit losses was more subjective with greater reliance on qualitative assessments and judgment rather than historical patterns.  This greater focus on qualitative assessments continued into fiscal 2022 as the residual impact of COVID and the availability of federal financial assistance through the CARES Act and ARPA that were incorporated into fiscal 2021 credit loss estimates continued to have an effect on customer payment patterns.  In fiscal 2023, customer account activity returned to pre-COVID levels where customer payment patterns and account aging were more predictable and prior valuation techniques were again applicable.  Based on management's evaluation and assessments, the total allowance for credit losses were estimated at $155,164 and $371,271 as of September 30, 2023 and 2022, respectively.

Pension and Postretirement Benefits - The Company offers a pension plan and a postretirement plan to eligible employees. The expenses and liabilities associated with these plans, as disclosed in Note 9 to the consolidated financial statements, are based on numerous assumptions and factors, including provisions of the plans, employee demographics, contributions made to the plan, return on plan assets and various actuarial calculations, assumptions and accounting requirements. In regard to the pension plan, specific factors include assumptions regarding the discount rate used in determining future benefit obligations, expected long-term rate of return on plan assets, compensation increases and life expectancies. Similarly, the postretirement medical plan also requires the estimation of many of the same factors as the pension plan in addition to assumptions regarding the rate of medical inflation and Medicare availability. Actual results may differ materially from the results expected from the actuarial assumptions due to changing economic conditions, differences in actual returns on plan assets, different rates of medical inflation, volatility in interest rates and changes in life expectancy. Such differences may result in a material impact on the amount of expense recorded in future periods or the value of the obligations on the consolidated balance sheet.

In selecting the discount rate to be used in determining the benefit liability, the Company utilized the FTSE Pension Discount Curve, which incorporates the rates of return on high-quality, fixed-income investments that corresponded to the length and timing of benefit streams expected under both the pension plan and postretirement plan. The Company used a discount rate of 5.63% for valuing both its pension plan and postretirement plan liabilities at September 30, 2023. These discount rates represent an increase from the 5.15% for the pension plan and 5.16% for the postretirement plan used for valuing the corresponding liabilities at September 30, 2022. The increase in discount rates corresponds to the market reactions to the continuing inflationary pressures on the financial markets and economy.  The yield on the 30-year Treasury increased from 2.08% at September 30, 2021 to 3.79% at September 30, 2022 and to 4.73% at September 30, 2023. Corporate bond rates experienced a smaller increase as credit spreads have narrowed. The rise in the discount rates was the primary factor in the reduction of the benefit obligations for both the pension and the postretirement plan. Mortality assumptions were based on the PRI-2012 Mortality Table with improvements projected generational using Projection Scale MP-2021 for the current year valuation.

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Management has focused on reducing risk in the Company's defined benefit plans through different means including offering lump sum payouts to vested terminated participants and implementing a "soft freeze" on the plans.  In 2017, the Company implemented a soft freeze to the pension plan whereby employees hired on or after January 1, 2017 would not be eligible to participate. Employees hired prior to that date continue to accrue benefits based on compensation and years of service. This soft freeze mirrored the strategy in 2000 when the Company implemented a similar freeze in its postretirement plan.  Each of these strategies have served to limit liability growth and reduce volatility.

The Company also has focused on its asset investment strategy. With the soft freeze of both the pension and postretirement plans, future liability growth associated with participant service and compensation has been limited.  Under the pension plan, the portion of the liability attributable to active eligible employees continuing to accrue benefits has declined from 56% of the liability as of the date of the soft freeze to 38% in fiscal 2023.  The remaining 62% of the 2023 liability is set, subject to variability in the discount rate and mortality adjustments.  Since January 2017, when the pension plan froze access to new employees, the asset allocation has transitioned from 60% equity and 40% fixed income to 25% equity and 75% fixed.  During the same period, the fixed income portion of the plan was transitioned to an LDI approach, with the fixed income assets invested in securities with a duration that corresponds to the duration of the corresponding liability.  This synchronization of the pension assets with the pension liabilities has reduced volatility in the funded status of the plan.  This is evidenced by the relative stability of the funded status of the pension plan at September 30, 2023 and 2022 with a funded ratio of 100% and 103%, respectively.  The 25% allocation to equity investments provides asset growth potential to offset increases in the pension liability related to those employees continuing to accrue benefits. Management will continue to evaluate the investment allocation as the liabilities mature and make adjustments as necessary.

The Company has initiated a transition of the postretirement plan assets from a 50% equity and 50% fixed income allocation to a 30% equity and 70% fixed income allocation.  This revision to the investment targets is in response to a greater proportion of participants that have transitioned to retirement.  As the postretirement plan implemented the soft freeze in 2000, only 25% of the plan's liability is currently attributable to active employees with the remaining liability associated with retired participants. Similar to the pension plan, the revision to the asset allocation will seek to reduce the volatility in funded status while still providing the opportunity for asset growth through the equity portion of the portfolio.  The funded status for the postretirement plan was 116% and 98% as of September 30, 2023 and 2022, respectively.  The improvement in the funded status was due to the higher equity allocation and shorter duration of the fixed income portion of the portfolio compared to the duration of the corresponding plan liabilities.  Management will continue to monitor and evaluate the asset allocation and adjust as warranted.

A summary of the funded status of both the pension and postretirement plans is provided below:

The Company annually evaluates the long-term rate of return on its targeted investment allocation model, as well as the overall asset allocation of its benefit plans, and reviews both plans' potential long-term rate of return with its investment advisors to determine the rates used in each plan's actuarial assumptions.  Management maintained the long-term rate of return assumption at 4.50% for fiscal 2023 based on evaluation by the Company's investment advisor and management's assessment of the current market environment. The long-term rate of return for the postretirement plan increased slightly from 3.95% in fiscal 2023 to 4.24% for fiscal 2024. Management will continue to re-evaluate the return assumptions and asset allocation and adjust both as market conditions warrant.

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Management estimates that the Company will have no minimum funding requirements next year.  The Company currently does not expect to make contributions to its pension plan and postretirement plan in fiscal 2024 due to other financing considerations and the funded position of the plans. The Company will continue to evaluate its benefit plan funding levels in light of funding requirements and ongoing investment returns and make adjustments, as necessary, to avoid benefit restrictions and minimize PBGC premiums.

The following schedule reflects the sensitivity of pension costs to changes in certain actuarial assumptions, assuming that the other components of the calculation remain constant.

The following schedule reflects the sensitivity of postretirement benefit costs from changes in certain actuarial assumptions, while the other components of the calculation remain constant.

Derivatives - The Company may hedge certain risks incurred in its operation through the use of derivative instruments. The Company applies the requirements of ASC 815, Derivatives and Hedging, which requires the recognition of derivative instruments as assets or liabilities in the Company’s consolidated balance sheet at fair value. In most instances, fair value is based upon quoted futures prices for natural gas commodities and interest rate futures for interest rate swaps. Changes in the commodity and futures markets will impact the estimates of fair value in the future. Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the values used in determining fair value in prior financial statements. The Company had five interest-rate swaps outstanding at September 30, 2023 related to its variable rate notes. See Notes 1 and 7 to the consolidated financial statements for additional information regarding the swaps.