What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-07 · 256 added, 231 removed, 238 unchanged (67% of the section changed)

6 unchanged sentences

In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements.

The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to those set forth in the following discussion and within Item 1A “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K.

All of these factors are difficult to predict and many are beyond the Company’s control.

3 unchanged sentences

The Company assumes no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations.

The three-month and six-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2020.

The total revenues and margins realized during the first six months reflect higher billings due to the weather sensitive nature of the natural gas business.

The three-month and nine-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2020.

The total revenues and margins realized during the first nine months reflect higher billings due to the weather sensitive nature of the natural gas business.

COVID-19 has had and continues to have a significant impact on local, state, national and global economies.

The actions taken by governments, as well as businesses and individuals, to limit the spread of the disease has significantly disrupted normal activities throughout the Company's service territory.

Numerous businesses have either shut down or are operating on a limited basis, employees have been furloughed or laid off and social distancing has been mandated through stay-in-place orders.

The Company expects these actions to have a significant impact on the Company.

Reductions in business operations will result in lower demand for the commercial use of natural gas for the next quarter and likely longer.

Historically, during the Company's fiscal third and fourth quarters, more than 75% of total natural gas usage is by industrial and larger commercial customers associated primarily with manufacturing activities.

The Company is seeing a decline in natural gas consumption as several businesses have temporarily closed or have significantly cut back operations.

Furthermore, the current economic environment will likely result in increased financial hardship for both businesses and individuals.

With increased levels of unemployment, or a reduction in hours for those still fortunate to continue working, the ability of these customers to remain current on their financial obligations and expenses will become increasingly difficult.

Furthermore, the SCC issued an order in March, which extends through June 14, 2020, that prohibits any utility operating in Virginia from disconnecting utility service to customers for non-payment or apply late payment fees to delinquent accounts.

As a result, the Company expects to see an increase in both customer delinquencies and bad debts.

Due to the nature of its operations, Resources has been deemed an essential entity due to the utility services provided through Roanoke Gas.

Management has updated and implemented its pandemic plan to ensure the continuation of safe and reliable service to customers and maintain the safety of the Company's employees during COVID-19.

The full extent of the impact to the Company's results of operations and financial position due to the impact of COVID-19 cannot be currently determined.

Management has increased its estimate of bad debt expense in anticipation of an increase in delinquencies.

Furthermore, management also expects its financial results over the remainder of the fiscal year to be below the same period last year due to the expected decline in natural gas deliveries, higher bad debt expense and other costs incurred to operate the Company in the current environment.

The extent to which COVID-19 will impact the Company will depend on future developments, which are highly uncertain and cannot be reasonably predicted, including the duration of the outbreak, the increase or reduction in governmental restrictions to businesses and individuals, the potential for a resurgence of the virus and other factors.

While Virginia is now in Phase 3 of its reopening plan, several of the Company’s commercial customers are still temporarily closed and/or have significantly reduced operations.

Accordingly, we believe the economic impact of actions taken to limit the spread of the virus will last at least through calendar year end 2020.

The Company has seen a decline in natural gas consumption in most categories of its commercial customers;

however, other commercial customers have increased gas consumption as a result of specialized business models, more than offsetting the other declines.

The Company’s volume of gas delivered to residential customers has remained relatively consistent with the prior year.

The SCC issued an order in March 2020, which has subsequently been extended to August 31, 2020, that prohibits any utility operating in Virginia from disconnecting utility service to customers for non-payment or applying late payment fees to delinquent accounts.

As a result, the Company expects an increase in both customer delinquencies and bad debts.

Additionally, in April 2020, the SCC issued an order granting potential relief from bad debts and other incremental expenses, directly related to the pandemic.

While the Company is tracking these costs and will file for relief with the SCC as appropriate, the full extent of these costs and the impact to the Company's results of operations and financial position remains unpredictable.

The full extent to which COVID-19 will impact the Company depends on future developments, which are highly uncertain and cannot be reasonably predicted, including the duration, scope and severity of the pandemic, the increase or reduction in governmental restrictions to businesses and individuals, or the potential for a resurgence of the virus among other factors.

The longer COVID-19 continues, the greater the potential negative financial effect on the Company.

Due to the nature of its operations, Resources has been deemed an essential entity by virtue of the utility services provided through Roanoke Gas.

Management has updated and implemented its pandemic plan to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees for the duration of this pandemic.

Additionally during this time, the Company regularly evaluates its pandemic plan for adherence to new rules and regulations issued by the Department of Labor and the Occupational Safety and Health Administration regarding workplace safety.

RGC RESOURCES, INC.

4 unchanged sentences

As a public company, Resources operates under the rules and regulations promulgated by the SEC in regards to financial reporting matters.

Under the prior rules of the SEC, Resources was considered a smaller reporting company and an accelerated filer under the definitions of Rule 12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended.

On March 12, 2020, the SEC adopted amendments to the Exchange Act that revised the definition of an accelerated filer to exclude entities that have a public float of less than $700 million and annual revenues under $100 million.

Under the revised definitions, Resources now qualifies as a smaller reporting company and non-accelerated filer.

Furthermore, the non-accelerated filing status extends the deadlines for SEC filings and removes the requirement of an auditor attestation report on the Company's internal control over financial reporting in the their Form 10-K.

The Company is currently assessing these changes to the reporting requirements and their potential application to Resources.

Historically, Resources was considered a smaller reporting company and an accelerated filer under the definitions of Rule 12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended.

On March 12, 2020, the SEC adopted amendments to the Exchange Act that revised the definition of an accelerated filer to exclude entities with a public float of less than $700 million and annual revenues under $100 million.

Under the revised definitions, Resources now qualifies as a smaller reporting company and a non-accelerated filer.

Furthermore, the non-accelerated filing status extends the deadlines for SEC filings and removes the annual requirement of an independent auditor attestation report on the effectiveness of the Company's internal control over financial reporting.

The Company’s utility operations are regulated by the SCC, which oversees the terms, conditions, and rates to be charged to customers for natural gas service, safety standards, extension of service, accounting and depreciation.

9 unchanged sentences

The order also directed the Company to write-down $317,000 of ESAC assets that were not subject to recovery under the final order.

In March 2020, the Company refunded to its customers the excess revenues collected plus interest for the difference between the final approved rates and the interim rates billed since January 1, 2019.

In March 2020, the Company refunded $3.8 million to its customers, representing the excess revenues collected plus interest for the difference between the final approved rates and the interim rates billed since January 1, 2019.

In fiscal 2019, the Company completed its transition to the 21% federal statutory income tax rate as a result of the TCJA that was signed into law in December 2017.

10 unchanged sentences

The Company’s non-gas base rates provide for the recovery of non-gas related expenses and a reasonable return to shareholders.

These rates are determined based on the filing of a formal non-gas rate application with the SCC utilizing

These rates are determined based on the filing of a formal non-gas rate application with the SCC utilizing historical and proforma information, including investment in natural gas facilities.

Generally, investments related to extending

RGC RESOURCES, INC.

AND SUBSIDIARIES

historical and proforma information, including investment in natural gas facilities.

Generally, investments related to extending service to new customers are recovered through the non-gas base rates currently in place, while the investment in replacing and upgrading existing infrastructure is not recoverable until a formal rate application is filed and approved.

service to new customers are recovered through the non-gas base rates currently in place, while the investment in replacing and upgrading existing infrastructure is not recoverable until a formal rate application is filed and approved.

The SAVE Plan and Rider provides a mechanism through which the Company recovers on a prospective basis the related depreciation and expenses and provides a return on related qualified capital investments until such time that a formal rate application is filed.

As the Company has made significant SAVE qualified expenditures since the last non-gas base rate increase in 2013, SAVE Plan revenues have continued to increase each year.

With the filing of the 2018 non-gas rate application, the SAVE Rider reset effective January 2019 as the prior revenues associated with the qualified SAVE Plan infrastructure investments were incorporated into the new non-gas rates.

Accordingly, SAVE Plan revenues declined by approximately $760,000 for the six-month period ended March 31, 2020 compared to the same period last year;

Upon filing the 2018 non-gas rate application the SAVE Rider reset, effective January 2019, as the prior revenues associated with the qualified SAVE Plan infrastructure investments were incorporated into the new non-gas rates.

Accordingly, SAVE Plan revenues declined by approximately $508,000 for the nine-month period ended June 30, 2020 compared to the same period last year;

however, SAVE Plan revenues increased by approximately $252,000 for the corresponding three-month periods.

3 unchanged sentences

The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day.

For the three months and six months ended March 31, 2020, the Company accrued $1,651,000 and $1,817,000 in additional revenues under the WNA model for weather that was approximately 20% and 13% warmer than normal, respectively.

For the corresponding periods last year, the Company accrued $46,000 in additional revenues and a $111,000 reduction in revenues for weather that was 1% warmer than normal and 1% colder than normal, respectively.

The current WNA year ended on March 31, 2020.

The SCC approved the Company's request to delay billing customers for the WNA until later in the year in order to reduce the current financial burdens on its customers as a result of the impact from COVID-19.

See Regulatory and Tax Reform section below for more information.

For the three-months ended June 30, 2020, a $504,000 reduction in revenues was recognized for the effect of weather that was approximately 39% colder than normal.

In contrast, during the same period last year, the Company accrued $461,000 in additional revenue related to 46% warmer weather.

For the nine-months ended June 30, 2020 and 2019, weather was 9% and 3% warmer than normal, respectively, resulting in $1.3 million and $350,000 in additional revenue for the corresponding periods.

The most recent WNA year ended on March 31, 2020.

The SCC approved the Company's request to delay billing customers for the WNA until later in the year in order to reduce the financial burdens on its customers during the early stages of the COVID-19 pandemic.

The Company has since received approval to bill customers over the three-month period of July to September 2020.

See the Regulatory and Tax Reform section below for more information.

The Company also has an approved rate structure in place that mitigates the impact of financing costs associated with its natural gas inventory.

4 unchanged sentences

In addition, ICC revenues are impacted by the changes in the weighting of the components that are used to determine the weighted-average cost of capital.

Total ICC revenues for the three and six month periods ended March 31, 2020 declined by approximately 8% and 12%, respectively, from the same periods last year due to a combination of lower average price of gas in storage balances and a reduction in the ICC factor used in calculating these revenues.

Total ICC revenues for the three and nine month periods ended June 30, 2020 declined by approximately 28% and 15%, respectively, from the same periods last year due to a combination of lower average price of gas in storage balances and a reduction in the ICC factor used in calculating these revenues.

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.

1 unchanged sentence

This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs incurred by its regulated operations.

On a quarterly basis, or more frequently if necessary, the Company files a PGA rate adjustment request with the SCC to adjust the gas cost component of its tariff rates depending on projected price and activity.

Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount.

4 unchanged sentences

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 financial data.

These systems contain confidential customer, vendor and employee information as well as important operational 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 believes it has taken reasonable security measures to protect these systems from cyber attacks and similar incidents;

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 exposure that may result from a cyber incident.

In the event of a cyber

RGC RESOURCES, INC.

AND SUBSIDIARIES

incident, the Company will execute its Security Incident Response Plan.

The Company maintains cyber insurance to mitigate financial exposure that may result from a cyber incident.

Results of Operations

Three Months Ended March 31, 2020 :

Net income increased by $1,010,226, or 22%, for the three months ended March 31, 2020 , compared to the same period last year.

Quarterly performance improved significantly due to the impact of the non-gas rate increase and the earnings on the MVP investment, offsetting increases in non-gas expenses.

The Company's operations are affected by the cost of natural gas, as reflected in the condensed consolidated income statements under the following line item:

cost of gas - utility.

The cost of natural gas is passed through to customers at cost, 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.

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.

Three Months Ended June 30, 2020:

Net income increased by $68,023, or 6%, for the three months ended June 30, 2020, compared to the same period last year.

Quarterly performance improved due to the earnings on the MVP investment, offset by reduced operating margin as a result of revisions to the estimated non-gas rate refund made during the same period last year.

The tables below reflect operating revenues, volume activity and heating degree-days.

Three Months Ended March 31,

Increase / (Decrease)

Three Months Ended June 30,

2020 2019 Increase / (Decrease) Percentage

Operating Revenues

Gas Utility $ 10,856,453 $ 11,534,948 $ (678,495) (6) %

Non utility 215,465 148,002 67,463 46 %

Total Operating Revenues $ 11,071,918 $ 11,682,950 $ (611,032) (5) %

5 unchanged sentences

HDD (Unofficial) 460 185 275 149 %

Total operating revenues for the three months ended March 31, 2020 , compared to the same period last year, declined due to a 12% reduction in total delivered volumes and a 25% reduction in the commodity price of natural gas more than offsetting the net non-gas rate increase.

The average commodity price of natural gas for the current quarter was $2.30 per decatherm compared to $3.06 per decatherm for the same period last year.

Natural gas prices are expected to remain at these lower prices due to abundant supplies and depressed demand as a result of the effects of COVID-19.

Furthermore, total residential and commercial volumes declined by 18% due to the current quarter having 19% fewer heating degree days than for the same period last year.

Transportation and interruptible volumes increased by 15% primarily related to one multi-fuel use industrial customer, which has significantly increased the use of natural gas during the current fiscal year.

Total operating revenues for the three months ended June 30, 2020, compared to the same period last year, declined by 5% as lower natural gas commodity prices and a revision to last year's estimated provision for refund for the non-gas rate increase more than offset a 25% increase in residential and commercial volumes and a 95% increase in transportation volumes.

The commodity price of natural gas decreased by 32%, more than offsetting the effect of higher non-transporting sales volumes.

The average commodity price of natural gas for the current quarter fell to $1.70 per decatherm for the quarter compared to $2.50 per decatherm for the same period last year.

Natural gas prices are expected to remain low due to abundant supplies and depressed demand as a result of the economic effects from COVID-19.

Total residential and commercial volumes increased by 25% due to a 149% increase in heating degree days over the same period last year.

After adjusting both periods for the WNA, the WNA adjusted volumes reflected a decline from the same period last year.

A portion of the decline is related to the nature of the linear regression model to calculate the WNA adjustment, as the model assumes each heating degree day has an equal natural gas volume impact regardless of when the heating degree day occurs.

The remainder of the difference reflects the economic effects that COVID-19 had on natural gas sales.

Transportation and interruptible volumes increased by 86% related to one multi-fuel use industrial customer that, motivated by low natural gas prices, transitioned to natural gas as its current primary fuel source.

Excluding this one customer, total deliveries in this category declined by 66,000 decatherms or 10%.

The Company placed new non-gas base rates into effect for natural gas service rendered on or after January 1, 2019, subject to refund.

The initial rates implemented in the prior year allocated approximately 80% of the rate increase to the customer base charge and approximately 20% to volumetric revenues.

Based on subsequent discussions with the SCC, and ultimately included in the final rate order, the approved increase in non-gas rates were allocated approximately 20% to the customer base charge and 80% to volumetric revenues.

As a result, the current quarter reflects a much larger volumetric revenue component and margin per decatherm as compared to the prior year, while customer base charge reflects an overall decrease in comparison.

SAVE Plan revenues increased by $266,974 as the rates for the SAVE plan reset effective January 1, 2019.

Non-utility revenue declined due to lower demand for services during the quarter.

The Company's operations are affected by the cost of natural gas, as reflected in the condensed consolidated income statements under the line item cost of gas - utility.

The cost of natural gas is passed through to customers at cost, 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.

The term gross utility margin is not intended to represent 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.

Therefore, the following discussion of financial performance will reference gross utility margin as part of the analysis of the results of operations.

The initial rates implemented in the prior year allocated approximately 80% of the non-gas rate increase to the customer base charge and approximately 20% to volumetric revenues.

Based on subsequent discussions with the SCC staff, the Company adjusted its estimated provision for refund of non-gas rates in June 2019 to reflect non-gas rates that allocated 20% of the rate increase to the customer base charge and 80% to volumetric revenues.

As a result, the 2019 fiscal third quarter reflected a larger volumetric revenue component and margin per decatherm when compared to the current quarter, while customer base charge reflects an overall increase over the same period last year due to the revision in the allocation of the non-

RGC RESOURCES, INC.

AND SUBSIDIARIES

Three Months Ended March 31,

Increase / (Decrease)

gas rate increase.

SAVE Plan revenues increased by $251,951 as the rates for the SAVE Plan reset effective January 1, 2019.

Non-utility revenue increased due to higher demand for services during the quarter.

Three Months Ended June 30,

2020 2019 Decrease Percentage

Gross Utility Margin

Gas Utilities Revenue

Gas Utility Revenue $ 10,856,453 $ 11,534,948 $ (678,495) (6) %

Cost of Gas - Utility 3,680,408 4,132,871 (452,463) (11) %

Gross Utility Margin $ 7,176,045 $ 7,402,077 $ (226,032) (3) %

Gross utility margins increased from the same period last year primarily as a result of the revised allocation of the non-gas rate increase, an adjustment to the WNA pricing model and increases in SAVE Plan revenues.

As discussed above, the rate design in the final order resulted in an even greater level of earnings during the weather sensitive heating season due to the increased allocation to the weather sensitive component of non-gas rates and lower earnings in the non-heating season due to lower fixed rate revenues.

The current quarter reflects the revenues and margin as approved in the final rate order;

however, the quarter ended March 31, 2019 reflected the higher allocation to customer base charge.

Furthermore, the WNA revenue model, which adjusts the Company's natural gas margin for the variance in weather from normal temperatures, was adjusted by approximately $204,000 during the quarter to reflect the higher allocation of the non-gas rates to the volumetric component for the current WNA year resulting in an increase in the corresponding WNA revenues.

Gross utility margins decreased from the same period last year primarily as a result of the revised allocation of the non-gas rate increase in the prior year third quarter, combined with lower WNA adjusted volumes and the economic impact of COVID-19 on natural gas deliveries, more than offsetting the increase in natural gas usage by the one transportation customer discussed above.

In June 2019, the non-gas rate increase was reallocated to be consistent with the SCC staff, resulting in an increase in volumetric revenues and a decrease in customer base charges during the prior year.

As this adjustment took into account the six-month billing period from January 2019 through June 2019, the allocation of 80% of the increase to volumetric sales resulted in a greater increase in volumetric margin for the quarter than the corresponding reduction in margin related to lower customer base charge rates.

The final order issued in January 2020, reflected an allocation consistent with the revisions made in June 2019.

The WNA resulted in a reduction in margin of $503,615 during the quarter compared to a $461,315 increase in WNA margin for the same period last year as the weather was 39% colder than normal and 46% warmer than normal, respectively.

SAVE Plan margin increased by $251,951 as the level of qualified SAVE infrastructure investment continues to increase since the reset of the SAVE Plan.

COVID-19 had only a minimal impact on the Company's natural gas deliveries during the 2020 second fiscal quarter;

however, reductions in sales volumes are expected in future periods.

The components of and the change in gas utility margin are summarized below:

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Increase / (Decrease)

1 unchanged sentence

Carrying Cost 50,671 70,485 (19,814)

SAVE Plan 348,434 96,483 251,951

Volumetric 3,660,793 4,140,562 (479,769)

WNA (503,615) 461,315 (964,930)

Other Gas Revenues 6,052 16,329 (10,277)

Operations and maintenance expenses increased by $396,065, or 11%, from the same period last year due to higher compensation costs, bad debt expense and professional services.

Compensation costs increased by $203,000 primarily due to the vesting of officer restricted stock awards during the quarter.

As discussed in the Regulatory and Tax Reform section below, the Company increased its provision for bad debt expense by $83,000 over last year even though gross billings for the quarter declined by 33% due to reductions in natural gas deliveries and the completion of the non-gas rate refund during March.

Estimated bad debt reserves increased in anticipation of rising delinquencies on current customer balances and ultimately higher bad debt expense due to customers inability to meet their financial obligations as a result of current economic conditions and government restrictions related to COVID-19.

Professional services increased by $64,000 due to a variety of factors including additional regulatory support regarding the non-gas rate increase, network systems support, consulting services on benefit plans and support on project evaluations.

The remaining $46,000 relates to a variety of other net increases in expense.

General taxes increased by $31,537, or 6%, associated with higher property and payroll taxes.

Total $ 7,176,045 $ 7,402,077 $ (226,032)

Operations and maintenance expenses were nearly unchanged from the same period last year as higher compensation costs, bad debt expense and professional services were offset by lower regulatory asset amortizations and corporate insurance related costs.

Compensation costs increased by $80,000 primarily due to the vesting of officer stock awards and general salary adjustments.

Bad debt expense increased by an additional $25,000 for the quarter even though gross billings declined by 20% for the quarter and 22% for the year.

The increase in bad debt is in response to management's assessment of the continuing impact of COVID-19 and the SCC's order to suspend disconnection of service to all customers through August 31, 2020.

Accounts receivable balances are continuing to age and past due amounts are currently at a higher level than for the same period last year.

With the continuation of the moratorium to disconnect customers for non-payment, bad debt reserve balances are expected to continue to increase and be compounded by the continuing effects of COVID-19 on businesses and individuals.

Professional services increased by $55,000 due to a variety of factors, including services related to union contract negotiations, consulting services on benefit plans and support on project evaluations.

Regulatory asset amortization decreased by $127,000 related to prior year valuation adjustments.

Corporate insurance costs declined $59,000 due to a smaller provision to related insurance deductibles.

General taxes increased by $32,460, or 7%, associated with higher property taxes.

Property taxes continue to increase corresponding to higher utility property balances related to ongoing infrastructure replacement, system reinforcements and customer growth.

Depreciation expense increased by $83,030, or 4%, on an increase in utility plant investment.

Equity in earnings of unconsolidated affiliate increased by $490,418, or 70%, as the investment in MVP continues to increase.

Other income, net increased by $196,183 primarily due to $163,000 in AFUDC related to two natural gas transfer stations that will interconnect with the MVP and a $25,000 increase in the non-service components of net periodic benefit costs.

In the final order on the Company's non-gas rate increase, the SCC allowed Roanoke Gas to defer financing costs of these infrastructure

RGC RESOURCES, INC.

AND SUBSIDIARIES

projects for potential recovery in future rate proceedings instead of providing a return on the investment under the non-gas rates approved in the final order.

The Company recorded the AFUDC based on activity retro-active to January 1, 2019, the effective date of the new non-gas rates.

Equity in earnings of unconsolidated affiliate increased by $428,381, or 55%, as the investment in MVP continues to increase.

Other income (expense), net increased by $58,523 primarily due to the $41,000 equity portion of AFUDC and the $25,000 decrease in the non-service components of net periodic benefit costs.

In the final order on the Company's non-gas rate increase, the SCC allowed Roanoke Gas to defer financing costs related to the two natural gas transfer stations that will interconnect Roanoke Gas' distribution system with MVP, for potential recovery in future rate proceedings rather than providing a return on the investment under the approved non-gas rates.

Interest expense increased by $60,505, or 6%, due to a 28% increase in total average debt outstanding between quarters.

The higher borrowing levels derived from the ongoing investment in MVP and financing expenditures in support of Roanoke Gas' capital budget, partially offset by a 12% reduction in the weighted average interest rate and capitalization of the interest component of AFUDC related to the two interconnect stations with the MVP.

Roanoke Gas interest expense increased by $76,487 as total average debt outstanding increased by $8,500,000 associated with the issuance of two separate debt issuances offset by reductions in the line-of-credit balances.

The average interest rate increased from 3.78% to 3.86% between periods.

The higher borrowing levels derived from the ongoing investment in MVP and financing expenditures in support of Roanoke Gas' capital budget are partially offset by a 14% reduction in the weighted average interest rate and capitalization of the interest component of AFUDC related to the two interconnect stations with the MVP.

Roanoke Gas' interest expense increased by $62,839 as total average debt outstanding increased by $10,300,000 associated with the issuance of a $10,000,000 unsecured note.

The average interest rate decreased from 3.90% to 3.84% between periods.

In addition, Roanoke Gas reduced interest expense related to the capitalization of $14,000 for the interest portion of AFUDC.

The equity component of AFUDC is included in other income, net.

Midstream interest expense increased by $69,157 as total average debt outstanding increased by $14,700,000 associated with cash investments in the MVP.

The average interest rate decreased from 3.80% to 3.09% due to the decline in the variable interest rate on Midstream's credit facility and the entry into two separate notes with swap rates at 3.24% and 3.14%.

The equity component of AFUDC is included in other income (expense), net.

Midstream's interest expense decreased by $2,334 as total average debt outstanding increased by $14,600,000 associated with cash investments in the MVP.

However, the decline in the average interest rate from 3.69% to 2.52% related to the reduction in the variable interest rate on Midstream's credit facility more than offset the effect of increased debt balances.

Income tax expense increased by $56,982 corresponding to an increase in taxable income.

The effective tax rate was 23.9% and 23.8% for the three month periods ended March 31, 2020 and 2019, respectively.

The effective tax rate was 24.9% and 23.2% for the three month periods ended June 30, 2020 and 2019, respectively.

Both periods included the amortization of excess deferred taxes.

Six Months Ended March 31, 2020 :

Net income increased by $2,583,000, or 36%, for the six months ended March 31, 2020 , compared to the same period last year due to the impact of the non-gas rate increase and the earnings on the MVP investment, more than offsetting increases in non-gas expenses.

Nine Months Ended June 30, 2020:

Net income increased by $2,651,023, or 32%, for the nine months ended June 30, 2020, compared to the same period last year due to the impact of the non-gas rate increase and the earnings on the MVP investment, more than offsetting increases in non-gas expenses.

The tables below reflect operating revenues, volume activity and heating degree-days.

Six Months Ended March 31,

Increase / (Decrease)

Nine Months Ended June 30,

2020 2019 Increase / (Decrease) Percentage

Operating Revenues

Gas Utilities

Gas Utility $ 52,757,778 $ 57,630,278 $ (4,872,500) (8) %

Non utility 537,324 544,378 (7,054) (1) %

Total Operating Revenues $ 53,295,102 $ 58,174,656 $ (4,879,554) (8) %

5 unchanged sentences

HDD (Unofficial) 3,561 3,790 (229) (6) %

Operating revenues for the six months ended March 31, 2020 declined from the same period last year due to a 7% reduction in total delivered volumes, lower natural gas commodity prices and reduced SAVE Plan revenue more than offsetting the increase in non-gas rates.

Operating revenues for the nine months ended June 30, 2020 declined from the same period last year due to a 8% reduction in residential and commercial volumes, lower natural gas commodity prices and reduced SAVE Plan revenue more than offsetting the increase in non-gas rates and higher transportation volumes.

The weather sensitive residential and commercial natural gas deliveries declined by 8%, corresponding to a 6% decline in the number of heating degree days during the period.

Transportation and industrial volumes increased 15% primarily related to one multi-fuel use industrial customer significantly increasing the use of natural gas in its production activities during the period.

The extent or expected duration of the increased natural gas consumption by this customer is not currently known and could revert to lower usage patterns in the future.

The average commodity price of natural gas delivered for the first six months of fiscal 2020 was approximately 30% per decatherm lower than the same period last year due to available supplies and higher storage levels from a mild winter.

SAVE Plan revenues declined by $760,000 as the SAVE Rider reset effective January 1, 2019, and all qualifying SAVE Plan investments were included in rate base used to derive the new non-gas base rates.

The fiscal 2019 SAVE Plan revenues represented an accumulation of 5 years of SAVE investment for the first three months of the period.

As noted above, the Company placed into effect new interim non-gas base rates on January 1, 2019.

Revenues for the current fiscal year reflect the non-gas rate increase for the entire period, while the estimated non-gas

The average commodity price of natural gas delivered for the first nine months of fiscal 2020 was 31% per decatherm lower than the same period last year due to available supplies and higher storage levels from a mild winter.

SAVE Plan revenues declined by $507,974 as the SAVE Rider reset effective January 1, 2019, and all qualifying SAVE Plan investments through December 31, 2018 were included in rate base and used to derive the new non-gas base rates.

For the first three months of fiscal 2019, SAVE Plan revenues represented a return on an accumulation of 5 years of SAVE investment.

Subsequent to January 1, 2019, the SAVE Plan investments reset and currently include only 1.5 years of qualifying investments on which to earn a return.

As the Company placed into effect new interim non-gas base rates on January 1, 2019, revenues for the current fiscal year reflect the

RGC RESOURCES, INC.

AND SUBSIDIARIES

rate increase was reflected in prior year revenues beginning January 1, 2019.

Furthermore, the current year non-gas revenues reflect the findings in the final order specifying that approximately 80% of the non-gas rate increase be reflected in the volumetric portion of rates, while the original rate application reflected non-gas rates that allocated approximately 80% of the non-gas rate increase to customer base charge revenues.

Non-utility revenue declined due to lower demand for services during the quarter.

Six Months Ended March 31,

Increase / (Decrease)

non-gas rate increase for the entire period, while the estimated non-gas rate increase was reflected in prior year revenues for the six month period beginning January 1, 2019.

Transportation and industrial volumes increased 37% due to one multi-fuel use industrial customer increasing the use of natural gas in its production activities during the period.

The extent and duration of the increased natural gas consumption by this customer is unknown.

Nine Months Ended June 30,

2020 2019 Increase / (Decrease) Percentage

Gross Utility Margin

Gas Utilities Revenue

Gas Utility Revenue $ 52,757,778 $ 57,630,278 $ (4,872,500) (8) %

Cost of Gas - Utility 20,531,211 28,810,668 (8,279,457) (29) %

Gross Utility Margin $ 32,226,567 $ 28,819,610 $ 3,406,957 12 %

Gross utility margins increased from the same period last year primarily as a result of the implementation of higher non-gas base rates and an adjustment to the WNA pricing model, partially offset by a reduction in SAVE revenues.

Customer base charge revenues declined by $258,334, while volumetric and WNA margin increased by $4,128,715 as a result of the non-gas base rate increase and the re-allocation of the increase from mostly customer base charge to volumetric margin.

Gross utility margins increased from the same period last year primarily as a result of the implementation of the non-gas base rate increase and higher WNA revenues, partially offset by a reduction in SAVE revenues.

The new non-gas base rates were in effect for the entire fiscal 2020 period, while only in place since January 1, 2019 for last year.

As a result, customer base charge revenues increased by $738,473, while volumetric margin increased by $1,720,869 attributable to 80% of the non-gas base rate increase being allocated to volumetric margin, net of the effect of lower residential and commercial volumes due to warmer weather and the effects from COVID-19.

WNA margin increased by $963,147 as weather was nearly 9% warmer than normal compared to 3% warmer than normal for the same period last year and a full year implementation of the non-gas base rate increase in the WNA calculation.

SAVE Plan revenues declined by $507,974 as all related SAVE investments were incorporated into the new non-gas base rates effective January 1, 2019.

WNA margin increased by $1,928,077 as weather moved from colder than normal in the prior year to 13% warmer than normal during the current period In addition, the WNA model was adjusted by $204,000 to reflect the revisions to the non-gas volumetric rates during the WNA year.

The prior year included a reserve for excess revenues attributable to the reduction in income tax rates.

The prior year also included a reserve for excess revenues attributable to the reduction in income tax rates, which were refunded to customers.

The current year has no such adjustment as the new non-gas rates incorporate the effect of lower federal income tax rates.

The components of and the change in gas utility margin are summarized below:

Six Months Ended March 31,

Nine Months Ended June 30,

2020 2019 Increase / (Decrease)

1 unchanged sentence

Carrying Cost 291,712 345,052 (53,340)

SAVE Plan 819,046 1,327,020 (507,974)

Volumetric 18,898,658 17,177,789 1,720,869

WNA 1,313,540 350,393 963,147

Other Gas Revenues 98,473 76,572 21,901

Excess Revenue Refund — (523,881) 523,881

Operations and maintenance expenses increased by $791,536, or 11%, from the same period last year related to the write-off of a portion of the ESAC regulatory assets, amortization of the remaining regulatory assets, and increases in compensation costs, cost of professional services, bad debt expense and corporate insurance, partially offset by higher capitalized overheads.

Beginning in January 2019, concurrent with the implementation of new non-gas rates, the Company began amortizing certain regulatory assets for which recovery was included in the rate application.

Total amortization of regulatory assets increased by $129,000.

Total $ 32,226,567 $ 28,819,610 $ 3,406,957

Operations and maintenance expenses increased by $791,050, or 7%, from the same period last year related to the write-off of a portion of the ESAC regulatory assets and increases in compensation costs, cost of professional services and bad debt expense, partially offset by higher capitalized overheads.

The final order on the Company's non-gas rate increase directed the Company to write-down $317,000 of ESAC assets that were not subject to recovery.

Compensation costs increased by $214,000 primarily related to the vesting of officer restricted stock awards.

Professional services increased by $123,000 due to a variety of factors including legal assistance in the non-gas rate application, network systems support, benefit plan consulting and project support activities.

The Company recorded the valuation adjustment in December 2019.

Compensation costs increased by $294,000 primarily related to the vesting of officer stock awards.

Professional services increased by $179,000 due to a variety of factors including legal assistance in the non-gas rate application, services related to union contract negotiations, network systems support, benefit plan consulting and project support activities.

Bad debt expense increased by $102,000 related to COVID-19.

Corporate insurance expense increased by $78,000 due to higher premiums related to increased liability limits.

Capitalized overheads increased by $113,000 primarily due to timing of LNG production related to facility upgrades at the plant during the summer.

The remaining difference relates to a variety of small increases and decreases in expenses.

With the continuation of the moratorium on terminating gas service on delinquent customers, delinquencies and corresponding bad debt expense are expected to continue in an upward trend.

Capitalized overheads increased by $110,000 primarily due to timing of LNG production related to facility upgrades at the plant.

General taxes increased by $99,345, or 6%, primarily associated with higher property taxes on corresponding increases in utility property balances related to ongoing investment in the natural gas distribution facilities.

Depreciation expense increased by $248,801, or 4%, on an increase in utility property balances.

RGC RESOURCES, INC.

AND SUBSIDIARIES

Depreciation expense increased by $165,771, or 4%, on an increase in utility property balances.

Equity in earnings of unconsolidated affiliate increased by $1,021,455, or 81%, as a result of AFUDC related to the increased construction activity in the MVP investment.

Other income, net increased by $227,940, or 92%, primarily due to the $163,000 in AFUDC income related to the two Roanoke Gas transfer stations that will interconnect with the MVP and the non-service components of net periodic benefit costs.

Equity in earnings of unconsolidated affiliate increased by $1,449,836, or 71%, as a result of AFUDC related to the increased investment in MVP.

Other income (expense), net increased by $286,463 primarily due to the $205,000 equity portion of AFUDC income, related to the two Roanoke Gas transfer stations that will interconnect with the MVP, and a $76,000 decrease in the non-service components of net periodic benefit costs.

The Company recorded AFUDC based on activity retro-active to January 1, 2019, the effective date of the new non-gas rates.

Interest expense increased by $474,552, or 18%, due to a 29% increase in total average debt outstanding for the periods related to the ongoing investment in MVP and Roanoke Gas' infrastructure, partially offset by a reduction in the weighted average interest rate during the period.

Roanoke Gas interest expense increased by $219,101 as total average debt outstanding increased by $9,000,000 associated with two separate debt issuances offset by reductions in the line-of-credit balances.

Roanoke Gas interest expense increased by $281,941 as total average debt outstanding increased by $9,400,000 associated with debt issuance in December 2019.

The average interest rate increased from 3.79% to 3.81% between periods.

The increase in interest expense was mitigated by the capitalization of $67,000 for the interest portion of AFUDC as authorized by the SCC in the final order on the non-gas rate increase.

Midstream interest expense increased by $192,611 as total average debt outstanding increased by $15,900,000 associated with its investment in the MVP.

1 unchanged sentence

Income tax expense increased by $923,220, or 37%, on a corresponding increase in taxable income.

The effective tax rate was 23.8% and 23.3% for the six month periods ended March 31, 2020 and 2019, respectively.

The effective tax rate was 23.9% and 23.3% for the nine months ended June 30, 2020 and 2019, respectively.

Critical Accounting Policies and Estimates

The consolidated financial statements of Resources are prepared in accordance with accounting principles generally accepted in the United States of America.

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 consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles.

3 unchanged sentences

The Company increased it provision for bad debts in anticipation of the economic fallout expected from COVID-19.

The anticipated impact on customers from the virus and governmental restrictions combined with the SCC orders prohibiting customer disconnection of utility service will likely result in rising customer delinquencies and higher bad debt expense in the future.

The Company's estimated reserve for bad debts is based on historical activity as well as evaluating the limited information currently available.

The anticipated impact on customers from the virus and governmental restrictions, combined with the SCC orders prohibiting customer disconnection of utility service, is expected to result in rising customer delinquencies and higher bad debt expense, that could continue through, at least, the remainder of the calendar year.

The Company's estimated reserve for bad debts is based on historical activity as well as the evaluation of information currently available, including any relevant trends.

Management will continue to evaluate collectability of its receivables and revise its estimate of bad debts as more information becomes available.

8 unchanged sentences

In accordance with an SCC order issued in 2018, a portion of the utilization fee is retained by the Company with the balance passed through to customers through reduced gas costs.

Equity Investment in Mountain Valley Pipeline

On October 1, 2015, Midstream entered into an agreement to become a 1% member in the LLC.

The purpose of the LLC is to construct and operate the MVP, a FERC-regulated natural gas pipeline connecting Equitran's gathering and transmission system in northern West Virginia to the Transco interstate pipeline in south central Virginia.

The current asset manager contract has been renewed through March 31, 2022.

RGC RESOURCES, INC.

AND SUBSIDIARIES

On November 19, 2019, the Company's Board of Directors approved a pro-rata increase in its participation in MVP, which will result in an estimated additional cash investment of $1.8 million above the current $53 to $55 million estimate.

As a result of this increased participation, Midstream's equity interest will increase to approximately 1.03% by the time the pipeline is placed in service.

Equity Investment in Mountain Valley Pipeline

On October 1, 2015, Midstream entered into an agreement to become a 1% member in the LLC.

The purpose of the LLC is to construct and operate the MVP.

On November 19, 2019, the Company's Board of Directors approved a pro-rata increase in its participation in MVP.

As a result, Midstream's equity interest will increase to approximately 1.03% by the time the pipeline is placed in service and the Company’s total estimated cash investment is expected to range from $57 to $59 million.

Management believes the investment in the LLC will be beneficial for the Company, its shareholders and southwest Virginia.

4 unchanged sentences

In addition, the proposed pipeline path would provide the Company with a more economically feasible opportunity to provide natural gas service to currently unserved areas within its certificated service territory.

The MVP project is currently 90% complete.

Total MVP project work is approximately 92% complete.

Activity on the MVP has been limited this year to maintaining the infrastructure currently in place and restoration activities.

The LLC is actively working with the respective regulatory bodies on the reissuance of water crossing permits that were rescinded by the Fourth Circuit as well as the permit to cross a section of the Jefferson National Forest.

The LLC is working to resolve pending legal and regulatory challenges to or otherwise affecting certain aspects of the project, including actively working with the respective regulatory bodies on the reissuance of water crossing permits that were vacated by the Fourth Circuit as well as the permit to cross a section of the Jefferson National Forest.

Until such time as approval is granted, activity on the pipeline will be limited as most of the pipeline work not encompassed in the revoked permits has been completed.

Assuming timely resolution of the permit issues above and no extended restrictions on construction activities due to COVID-19, the LLC projects an in-service date for the MVP in late calendar year 2020.

The delays in completing the project combined with the increased costs will reduce the corresponding return on investment, absent a regulatory action that could provide for the recovery of these higher costs by MVP.

On June 11, 2020, the LLC announced that it is targeting a full in-service date in early 2021 for the MVP project.

In connection with the adjusted targeted in-service date, it is expected that the total costs for the MVP project may potentially increase by approximately 5% over the project’s $5.4 billion budget (excluding AFUDC) primarily due to the need to adapt to complex judicial decisions and regulatory changes.

Completion of the project in accordance with these targets will require, among other things, timely issuance by the Department of the Interior’s Fish and Wildlife Service of a new Biological Opinion and Incidental Take Statement for the MVP project (and resolution of related litigation), receipt of authorizations from the Bureau of Land Management and U.S.

Forest Service and the lifting of the stop work order issued by the FERC, and timely approval of the LLC’s pending Nationwide Permit 12 permits or utilization of alternative permitting authority and/or construction methods to cross streams and wetlands in a manner not requiring a Nationwide Permit 12.

The delays in completing the project combined with the increased costs has reduced the expected return on investment.

Midstream entered into the Third Amendment to Credit Agreement and amended the corresponding associated notes to increase the borrowing capacity under the credit facility from $26 million to $41 million and extend the maturity date to December 29, 2022.

Under the amended agreement and notes, Midstream should have the needed financing to meet its funding requirements in the MVP.

If the rescinded permits are not re-issued and approved in a reasonable time period and/or restrictions imposed by the government related to COVID-19 continue for an extended period, both the cost of the MVP and Midstream's capital contributions will increase above current estimates and the in-service date will likely be extended beyond 2020.

Under the amended agreement and notes, Midstream will have the financing capacity to meet its MVP funding requirements.

If the legal and regulatory challenges are not resolved and/or restrictions are imposed by the government related to COVID-19 that impact future construction, the cost of the MVP and Midstream's capital contributions may increase above current estimates, additional financing may be required, and the in-service date may be extended beyond early 2021.

The current earnings from the MVP investment are attributable to AFUDC income generated by the deployment of capital in the design, engineering, materials procurement, project management and construction of the pipeline.

AFUDC is an accounting method whereby the costs of debt and equity funds used to finance facility infrastructure are credited to income and charged to the cost of the project.

AFUDC is an accounting method whereby the costs of debt and equity funds used to finance infrastructure construction are credited to income and charged to the cost of the project.

The level of investment in MVP, as well as the AFUDC, will continue to grow as construction activities continue.

When the pipeline is completed and placed into service, AFUDC will cease.

Once operational, earnings will be derived from capacity charges for utilizing the pipeline.

Continued delays in the project could ultimately result in future earnings from the operation of the pipeline to be below the level of AFUDC recognized.

Once operational, earnings will be derived from pipeline utilization capacity charges, per contract.

It is expected that these future earnings will be below the level of current AFUDC recognized.

In 2018, Midstream became a participant in Southgate, a project to construct a 75-mile pipeline extending from the MVP mainline at the Transco interconnect in Virginia to delivery points in North Carolina.

The FERC issued the CPCN for Southgate in June 2020.

Midstream is a less than 1% investor in the Southgate project and, based on current estimates, will invest approximately $2.1 million in Southgate.

Midstream's participation in the Southgate project is for investment purposes only.

The Southgate in-service date is currently targeted for 2021.

Subject to approval by the FERC and other regulatory agencies, the Southgate project is targeted to be placed in-service in 2021.

RGC RESOURCES, INC.

AND SUBSIDIARIES

Regulatory and Tax Reform

3 unchanged sentences

The new non-gas base rates were placed into effect for gas service rendered on or after January 1, 2019, subject to refund, pending audit by SCC staff, hearing and final order by the SCC.

Following the completion of the SCC staff audit and the issuance of the hearing examiner's report, the SCC issued their final order.

The SCC order awarded Roanoke Gas an annualized non-gas rate increase of $7.25 million with approximately 80% of

RGC RESOURCES, INC.

AND SUBSIDIARIES

the increase allocated to the volumetric component of rates.

The non-gas rate award provided for a 9.44% return on equity but excluded from recovery, at the current time, a return on the investment of two interconnect stations with the MVP.

Following the completion of the SCC staff audit and the issuance of the hearing examiner's report, the SCC issued its final order on January 24, 2020.

The SCC order awarded Roanoke Gas an annualized non-gas rate increase of $7.25 million with approximately 80% of the increase allocated to the volumetric component of rates.

The non-gas rate award provided for a 9.44% return on equity but excluded from rates, at the current time, a return on the investment of two interconnect stations with the MVP.

In addition, the final order directed the Company to write-off a portion of ESAC assets that were excluded from recovery under the rate award.

As a result, the Company expensed an additional $317,000 of ESAC assets above the normal amortization amount.

As a result, in the first quarter the Company expensed an additional $317,000 of ESAC assets above the normal amortization amount.

Management submitted its rate design to reflect the increase of $7.25 million in non-gas rates, which was approved by the SCC at the end of January 2020.

The Company completed the rate refund during March 2020 by applying a total of $3.8 million in refunds plus interest to the accounts of active customers and mailing checks to former customers.

As noted above, the SCC order excluded a return on investment of the two interconnect stations currently under construction that will link the MVP pipeline with the Company's distribution system.

However, the order did provide for the ability to defer financing costs of these investments for future recovery, which was done through the application of an AFUDC calculation to capitalize both the equity and debt financing costs during the construction phases.

Prior to recording the adjustment, the Company conferred with the SCC regarding the proposed treatment and the calculation of the AFUDC.

The Company completed the $3.8 million rate refund in March 2020.

As noted above, the SCC order excluded a return on investment of the two interconnect stations currently under construction that will connect the MVP pipeline into the Company's distribution system;

however, the order did provide for the ability to defer financing costs of these investments for future recovery.

After conferring with SCC staff regarding proper treatment, the Company now recognizes AFUDC to capitalize both the equity and debt financing costs incurred during the construction phases.

The specific time period allowed for the recovery of these costs has yet to be determined;

therefore, the Company has taken a conservative position and has reflected only the amount of AFUDC since January 1, 2019, the date in which the rate award was effective.

If the SCC concludes that the AFUDC applies to an earlier period, the Company will reflect any additional AFUDC at that time.

The condensed consolidated financial statements for the current quarter include $217,000 in AFUDC income with $163,000 reflected in other income and $54,000 as an offset to interest expense.

On March 16, 2020, in response to COVID-19, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service to all customers until May 15, 2020, which was subsequently extended to June 14, 2020.

This order was effective on issuance and also directed utilities to not assess late payment fees due to the coronavirus public health emergency.

therefore, the Company has taken a conservative position and reflected only the amount of AFUDC incurred since January 1, 2019, the rate award's effective date.

If the SCC concludes that the AFUDC applies to an earlier period, the Company will reflect it at that time.

The condensed consolidated financial statements for the nine-month period ending June 30, 2020 include $272,000 in AFUDC income, with $205,000 reflected in other income (expense), net and $67,000 as an offset to interest expense.

This order was effective on issuance and also prohibited utilities from assessing late payment fees.

Under this order, the Company is unable to disconnect any customer for non-payment of their natural gas service.

As a result of COVID-19, management expects to experience an increase in bad debts due to business closings and higher unemployment;

however, the prohibition to disconnect service to any customer for a period of 90 days will allow the level of bad debts to increase above the previously expected higher levels.

Customers that were not able to pay their bills will now have the potential to owe the Company for an additional three months of service.

The Company has increased its provision for bad debts as of March 31, 2020;

however, the potential magnitude of the combined impact from the economy and this order on bad debts is unknown at this time.

Therefore, customers that would normally be disconnected for non-payment will continue incurring costs for gas service during the moratorium, resulting in higher potential write-offs.

While management expects to experience an increase in bad debts, due to COVID-19-related business closings and higher unemployment, the temporary prohibition to disconnect service will cause bad debts to increase to even higher levels.

The Company has increased its provision for bad debts;

however, the potential magnitude of the combined impact from the economy and the SCC order on bad debts continues to be uncertain.

The Company supports the decision to suspend service disconnections in light of the current economic situation and will work with its customers in making arrangements to keep or bring their accounts current.

On April 29, 2020, the SCC issued an order permitting regulated utilities in Virginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic.

Management is currently evaluating this order and the potential application to the Company.

For the WNA year ended March 31, 2020, the Company accrued at total of $2,387,000 of which $1,817,000 was attributable to the current fiscal year.

Management is evaluating this order and the potential application to the Company.

For the WNA year ended March 31, 2020, the Company accrued a total of $2.4 million for additional revenues due to warmer weather, of which $1.8 million was attributable to the current fiscal year.

According to the provisions of the Company's WNA rate schedule, the Company submits its annual filing to the SCC for approval of rates to collect any revenue shortfall or refund any excess revenues, which must then be reflected in customers' bills between the months of May and August.

However, due to the current issues related to COVID-19, management submitted a request to the SCC to delay the customer billing related to the WNA revenues.

The Company believes that it is in the best interest of its customers to delay billing at this time for the additional revenues attributable to the warmer weather.

However, due to the uncertainty related to COVID-19, management submitted a request to the SCC to delay the customer billing related to the WNA revenues.

The Company believed that it was in the best interest of its customers to delay billing at that time.

On April 14, 2020, the SCC issued an order granting the Company a waiver of the terms under the WNA rate schedule.

The order did not specify when such customer billings will begin;

however, the manner and timing of such billings will be determined in consultation with the SCC staff.

As it became apparent that the pandemic would not end before the winter heating season, on June 15, 2020, the Company filed a motion with the SCC requesting that it be allowed to collect the WNA revenues beginning in July 2020 to ensure the WNA billing would be completed before the winter heating season.

On June 17, 2020, the Commission granted the Company’s request and the Company began billing the WNA revenues during the three-month period beginning July 2020 through September 2020.

The general rate case application incorporated the effects of tax reform, which reduced the federal tax rate for the Company from 34% to 21%.

1 unchanged sentence

The first regulatory liability related to the excess deferred taxes associated with the regulated operations of Roanoke Gas.

As Roanoke Gas had a net deferred tax liability, the reduction in the federal tax rate required the revaluation of these excess deferred income taxes to the 21% rate at which the deferred taxes are expected to reverse.

RGC RESOURCES, INC.

AND SUBSIDIARIES

Gas had a net deferred tax liability, the reduction in the federal tax rate required the revaluation of these excess deferred income taxes to the 21% rate at which the deferred taxes are expected to reverse.

The excess net deferred tax liability for Roanoke Gas' regulated operations was transferred to a regulatory liability, while the revaluation of excess deferred taxes on the unregulated operations of the Company were flowed into income tax expense in the first quarter of fiscal 2018.

1 unchanged sentence

In order to comply with the IRS normalization rules, these excess deferred income taxes must be flowed back to customers and through tax expense based on the average remaining life of the corresponding assets, which approximates 28 years.

The corresponding balances related to the excess deferred taxes are included in the regulatory liability schedule in Note 14 of the condensed consolidated financial statements.

The corresponding balances related to the excess deferred taxes are included in the regulatory liability schedule in Note 14 of the condensed consolidated financial statements in Item 1 of this filing.

The second regulatory liability relates to the excess revenues collected from customers.

The non-gas base rates used since the passage of the TCJA in December 2017 through December 2018 were derived from a 34% federal tax rate.

As a result, the

RGC RESOURCES, INC.

AND SUBSIDIARIES

Company over-recovered from its customers the difference between the federal tax rate at 34% and the 24.3% blended rate in fiscal 2018 and 21% in fiscal 2019.

As a result, the Company over-recovered from its customers the difference between the federal tax rate at 34% and the 24.3% blended rate in fiscal 2018 and 21% in fiscal 2019.

To comply with an SCC directive issued in January 2018, Roanoke Gas recorded a refund for the excess revenues collected in fiscal 2018 and the first quarter of fiscal 2019.

3 unchanged sentences

The original SAVE Plan was designed to facilitate the accelerated replacement of aging natural gas pipe by providing a mechanism for the Company to recover the related depreciation and expenses including a return on qualifying capital investment without the filing of a non-gas base rate application.

Since the implementation and approval of the original SAVE Plan in 2012, the Company has modified, amended or updated it each year to incorporate various qualifying projects.

In May 2019, the Company filed its most recent SAVE Plan and Rider, which continues the focus on the ongoing replacement of pre-1973 plastic pipe and the replacement of a natural gas transfer station.

In September 2019, the SCC approved the updated SAVE Plan and Rider effective with the October 2019 billing cycle.

The new SAVE Rider is designed to collect approximately $1.1 million in annual revenues, an increase from the approximate $500,000 in annual revenues under the prior SAVE rates.

With the inclusion of all previous SAVE investment through December 31, 2018 into the rate application, the current SAVE Plan Rider reflects only the recovery of qualifying SAVE Plan investments made since the beginning of January 2019.

In addition, the SAVE application includes a refund factor to return approximately $543,000 in SAVE revenue over-collections from 2018, primarily resulting from the effect of the reduction in the federal income tax rate.

Since the implementation and approval of the original SAVE Plan in 2012, the Company has modified, amended or updated its SAVE Plan each year to incorporate various qualifying projects.

In May 2020, the Company filed its most recent SAVE application with the SCC to further amend its SAVE Plan and for approval of a SAVE Rider for the period October 2020 through September 2021.

In its application, the Company requested to continue to recover the costs of the replacement of pre-1973 plastic pipe.

In addition, the Company requested to include the replacement of certain regulator stations and pre-1971 coated steel pipe as qualifying SAVE projects.

The 2021 SAVE Rider is designed to collect approximately $2.3 million, an increase of approximately $1.2 million in annual revenues above the existing SAVE Rider.

The Company’s SAVE Plan application also seeks to return approximately $73,000 to customers for the over-collection in revenues that occurred in fiscal 2019.

The application is currently pending with the SCC.

Capital Resources and Liquidity

1 unchanged sentence

To meet these needs, the Company relies on its operating cash flows, line-of-credit agreement, long-term debt and equity capital.

Cash and cash equivalents increased by $2,172,880 and $1,720,152 for the six-month periods ended March 31, 2020 and 2019, respectively.

Cash and cash equivalents decreased by $430,143 for the nine-month period ended June 30, 2020, compared to a $990,934 increase for the same period last year.

The following table summarizes the sources and uses of cash:

Six Months Ended March 31,

Nine Months Ended June 30,

Cash Flow Summary

2 unchanged sentences

Net cash provided by financing activities 10,249,820 17,700,520

Increase in cash and cash equivalents

Increase (decrease) in cash and cash equivalents $ (430,143) $ 990,934

The seasonal nature of the natural gas 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, contribute to working capital levels and related cash flows.

Generally, operating cash flows are positive during the second and third 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 quarters, operating cash flows generally decrease due to increases in natural gas storage levels, rising customer receivable balances and construction activity.

Cash flow from operating activities for the six months ended March 31, 2020 increased by $235,008 over the same period in the prior year.

The increase in cash flow provided by operations was primarily driven by higher net income, depreciation, reductions in natural gas storage inventory, and increases in accounts receivable, net changes in regulatory assets and liabilities.

Net income and accounts receivable primarily contributed to the increase in cash flows provided by operating activities.

Net income, net of equity in earnings and AFUDC, and depreciation contributed more than $1.3 million in cash as compared to the same period last year.

This increase was primarily driven by the January 2019 implementation of the increase in non-gas base rates, as adjusted in January 2020 per the SCC's final order.

Due to a much warmer heating season, delivered volumes for the six-month period ending March 31, 2020 were 7% lower than the same period last year.

Low commodity prices, combined with lower delivered volumes, resulted in a much smaller increase in accounts receivable balances in the first half of fiscal 2020 compared to the same six month period of fiscal 2019, thereby improving cash flows by $6.3 million.

Generally, operating cash flows are positive during the fiscal second and third quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels.

During the fiscal first and fourth quarters, operating cash flows generally decrease due to increases in natural gas storage levels, rising customer receivable balances and construction activity.

RGC RESOURCES, INC.

AND SUBSIDIARIES

The aforementioned contributions to cash flows provided by operating activities were offset by cash used primarily by Roanoke Gas' rate refund, and WNA and PGA mechanisms.

Though the SCC issued its final order in January 2020, Roanoke Gas implemented interim billing rates in January 2019;

therefore, the Company began accruing an estimated rate refund representing the amount due customers for the difference between total customer billings at interim rates versus total customer billings at final rates.

Upon SCC approval of final rates, Roanoke Gas issued refunds in March 2020 to all customers that were billed at interim rates since January 2019.

When compared to the six-month period ending March 31, 2019, the distribution of the rate refund to customers reduced cash available for operations by $4.9 million, which also resulted in a corresponding reduction in accounts receivable.

The WNA mechanism contributed to a decrease in cash of approximately $1.7 million when compared to the same six-month period in the prior year.

The related receivable increased significantly as the WNA year ended March 31, 2020 was 17% warmer than normal, compared to the 1% warmer weather experienced during the WNA year ended March 31, 2019.

Continued lower commodity prices combined with a decrease in delivered volumes, attributable to warmer weather, resulted in Roanoke Gas' PGA being in an over-collected position at both March 31, 2020 and 2019.

The cash provided by the over-collection for the six-months ended March 31, 2020 lagged the cash provided over the same period in the prior year, thereby reducing operating cash by approximately $1.5 million.

Cash flow from operating activities for the nine months ended June 30, 2020 decreased by $3,760,418 from the same period in the prior year.

The decrease in cash flow provided by operations was primarily driven by changes in regulatory assets and liabilities, net of the effects of net income, accounts receivable and accounts payable.

Changes in regulatory assets and regulatory liabilities, specifically the accrued WNA, PGA and rate refund balances, were the primary drivers of the period over period decrease in cash flows provided by operating activities.

Though the SCC issued its final order in January 2020, Roanoke Gas had been billing its customers using interim billing rates since January 2019;

therefore, during this time the Company accrued an estimated rate refund for the amount due to customers for the difference between total customer billings at interim rates versus total customer billings at projected final rates.

Following SCC approval of final non-gas rates, Roanoke Gas issued refunds in March 2020 to all customers that had been billed at interim rates since January 2019.

During the nine-month period ending June 30, 2019, the estimated rate refund increased by $1.5 million thereby providing cash for operations.

In contrast, the distribution of the rate refund to customers during the current nine-month period reduced cash available for operations by $3.8 million, resulting in a total net reduction of cash between periods of $5.3 million.

As noted in the Regulatory and Tax Reform section above, the Company petitioned the SCC to delay the billing of the $2.4 million WNA receivable at March 31, 2020.

The related increase in the WNA receivable balance resulted in a decrease in operating cash of approximately $1.0 million when compared to the same nine-month period in the prior year.

The year-over-year change in the PGA resulted in a $3.0 million decrease in cash provided by operations.

At September 30, 2018, the Company's PGA was in an under-collected, or receivable, position of approximately $0.9 million.

Commodity prices continued to decrease throughout the nine-month period ended June 30, 2019, outpacing the adjustments to the PGA factor and driving an over-collection, or payable, position of $2.2 million at period end, which resulted in a $3.1 million decrease in operating cash.

PGA activity was less volatile during the nine-month period ending June 30, 2020, providing an operating cash increase of $0.1 million and netting against the $3.1 million decrease of the prior year.

The aforementioned decreases in operating cash were partially offset by increases generated by net income, accounts receivable and accounts payable.

Net income, net of equity in earnings and AFUDC, and depreciation contributed more than $1.2 million in cash as compared to the same period last year.

This increase was primarily driven by the January 2019 increase in non-gas base rates, as adjusted in January 2020 per the SCC's final order.

The timing of when the non-gas base rate increase was implemented results in the current year being impacted for a full nine-months versus only six-months in the prior year.

Accounts receivable reflected a $0.1 million decrease during the current year related to lower gas commodity costs, a warmer heating season, the application of the rate refund to customer balances in March 2020 and the delay in WNA billings.

When compared to the $1.4 million increase in accounts receivable balances during the same period of fiscal 2019, it results in an increase in operating cash flows of $1.5 million.

Accounts payable reductions, driven by declining natural gas commodity prices, provided over $1.0 million in operating cash period over period.

A summary of the cash provided by operations is provided below:

Six Months Ended March 31,

Nine Months Ended June 30,

Cash Flow From Operating Activities:

2020 2019 Increase (Decrease)

Net income $ 10,893,830 $ 8,242,807 $ 2,651,023

Depreciation 6,143,085 5,821,417 321,668

Equity in earnings (3,488,253) (2,038,417) (1,449,836)

Increase in accounts receivable

Decrease in gas in storage

Decrease in WNA - regulatory assets

Increase (decrease) in customer credit balances

AFUDC (272,108) — (272,108)

(Increase) decrease in accounts receivable 122,005 (1,409,234) 1,531,239

Increase in WNA - regulatory assets (1,313,541) (297,459) (1,016,082)

Decrease in accounts payable (22,445) (1,057,932) 1,035,487

Increase in over-collections of gas cost - regulatory liabilities 102,546 3,079,834 (2,977,288)

1 unchanged sentence

Deferred taxes 1,121,176 (290,705) 1,411,881

Other 3,367,392 3,091,399 275,993

Net Cash Provided by Operations $ 12,826,099 $ 16,586,517 $ (3,760,418)

Investing activities are generally composed of expenditures related to investment in the Company's utility plant projects, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG peak shaving plant and distribution system facilities, expanding the natural gas system to meet the demands of customer growth, as well as the continued investment in the MVP.

The Company is continuing its focus on SAVE infrastructure replacement projects including the replacement of pre-1973 first generation plastic pipe and extending the natural gas distribution system to unserved developments within the existing service territory.

In addition, the Company is constructing two interconnect stations to access the MVP, which will provide additional gas supply to the Company's distribution system as well as provide access to currently unserved areas in Franklin County.

Total capital expenditures for the first six months were $10.4 million, compared to $11.0 million during same period last year.

Capital expenditures for fiscal 2020 are expected to be near last year's level of approximately $22 million.

Investing cash flows also include the Company's continued funding of its participation in the MVP, with a total cash investment of $5.9 million for the six months ended March 31, 2020, or $7.4 million less than the corresponding period last year.

Total cash investment is expected to be in excess of $55 million for both the MVP and Southgate projects by the time they are placed into service.

Financing activities generally consist of long-term notes payable and line-of-credit borrowings and repayments, issuance of stock and the payment of dividends.

Net cash flows provided by financing activities were $7.4 million for the current period compared to $15.1 million for the same period last year.

The decrease in financing cash flows is primarily attributable to a reduced level of capital contributions by Midstream for the MVP investment and reduced working capital needs associated with the decline in natural gas commodity prices.

Midstream borrowed $7.1 million during the six month period ended March 31, 2020 to finance its investment in MVP compared to $14.0 million for the same period last year.

Roanoke Gas also issued $10

The Company is continuing its focus on SAVE infrastructure replacement projects

RGC RESOURCES, INC.

AND SUBSIDIARIES

million in fixed rate notes in the first half of both fiscal 2020 and 2019, which served to provide longer-term funding for its capital expenditures.

including the replacement of pre-1973 first generation plastic pipe and extending the natural gas distribution system to unserved areas within the service territory.

In addition, the Company is constructing two interconnect stations to access the MVP, which will provide additional gas supply to the Company's distribution system as well as expand gas service into currently unserved areas of Franklin County, Virginia.

Total capital expenditures for the nine months ended June 30, 2020 were $17.0 million, compared to $16.6 million during same period last year.

Capital expenditures for fiscal 2020 are expected to be near last year's level of approximately $22 million.

Investing cash flows also include the Company's continued funding of its participation in the MVP, with a total cash investment of $6.6 million for the nine months ended June 30, 2020, or $10.1 million less than the corresponding period last year.

Total cash investment is expected to be in excess of $57 million for the MVP and $2 million for the Southgate project at the time they are placed into service.

Financing activities generally consist of long-term notes payable and line-of-credit borrowings and repayments, issuance of stock and the payment of dividends.

Net cash flows provided by financing activities were $10.2 million, for the nine months ended June 30, 2020, compared to $17.7 million in the same period last year.

The decrease in financing cash flows is primarily attributable to reduced capital contributions by Midstream for the MVP investment.

During the nine-month period ended June 30, 2020, Midstream borrowed $8.3 million to finance its investment in MVP, compared to $17.6 million for the same period last year.

Roanoke Gas also issued $10 million in fixed rate notes in the first half of both fiscal 2020 and 2019, which served to refinance a portion of the line-of-credit balance to provide longer-term funding for its capital expenditures.

On March 26, 2020, Roanoke Gas renewed its unsecured line-of-credit agreement, which was scheduled to expire March 31, 2021.

3 unchanged sentences

The Company's total available borrowing limits during the term of the agreement range from $3,000,000 to $28,000,000.

At its annual meeting, held on February 3, 2020, Resources shareholders approved an amendment to the Articles of Incorporation that increased the total number of authorized common shares from 10 million to 20 million.

At the Company's annual meeting, held on February 3, 2020, Resources shareholders approved an amendment to the Articles of Incorporation that increased the total number of authorized common shares from 10 million to 20 million.

The amendment became effective on February 4, 2020.

On February 14, 2020, Resources filed a prospectus with the SEC utilizing a shelf registration process where the Company may sell shares of common stock, in one or more offerings, of an aggregate amount up to $40,000,000.

furthermore, the prospectus was filed with a prospectus supplement that allows the Company to offer up to an aggregate of $15,000,000 in shares utilizing the at the market ("ATM") approach as defined in Rule 415 under the Securities Act.

The $15,000,000 is included in, rather than in addition to, the $40,000,000 authorized level outlined in the prospectus.

The prospectus was filed including a supplement allowing the Company to offer a portion of these shares, up to an aggregate of $15,000,000, utilizing the at the market ("ATM") approach as defined in Rule 415 under the Securities Act.

The ATM approach allows Resources flexibility in the frequency, timing and amount of share offerings in supplementing its capital funding needs.

As of March 31, 2020, no shares had been issued through the ATM.

As of June 30, 2020, no shares had been issued through the ATM.

On December 23, 2019, Midstream amended the credit agreement and corresponding notes that finance its MVP investment.

The amended agreement increased the total borrowing capacity under the credit facility to $41,000,000 from its previous limit of $26,000,000 and extended the maturity date to December 29, 2022.

The increased limits will allow Midstream to continue funding its investment in MVP as a result of the higher projected cost and continues current financing of the project until the pipeline is placed in service.

The increased limits will allow Midstream to continue funding its investment in MVP until the pipeline is currently projected to be in service.

The amendment retained all of the other provisions contained in the previous credit agreements and amendments including the interest rate on the Notes based on 30-day LIBOR plus 1.35%.

4 unchanged sentences

This evaluation has become even more critical due to the COVID-19 pandemic.

As discussed in more detail above, management expects to see reductions in its operating cash flows due to expected declines in natural gas consumption and a rise in customer delinquencies and bad debts.

The magnitude and duration of these issues, and other items that may occur as a result of the current environment, is unknown at this time;

however, management has positioned the Company with the financing resources to meet its cash requirements over the next year.

Management expects to see reductions in its operating cash flows due to expected declines in natural gas consumption and a rise in customer delinquencies and bad debts;

however, management believes it has positioned the Company with the financing resources to meet its cash requirements over the next year.

The new line-of-credit agreement will continue to provide the needed working capital and the ATM program will allow for supplemental equity funding as market conditions allow.

1 unchanged sentence

In combination, all of these factors should allow the Company to continue to operate effectively and meet its obligations as they occur.

As of March 31, 2020, Resources' long-term capitalization ratio was 45% equity and 55% debt.

As of June 30, 2020, Resources' long-term capitalization ratio was 44% equity and 56% debt.

RGC RESOURCES, INC.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis