RGC RESOURCES INC 10-K

Item 8. Financial Statements and Supplementary Data . 31 RGC Resources, Inc. and Subsidiaries Consolidated Financial Statements for the Years Ended September 30, 2020 and 2019 and Report of Independent Registered Public Accounting Firm 32 RGC RESOURCES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page Report of Independent Registered Public Accounting Firm 34 Consolidated Financial Statements for the Years Ended September 30, 2020 and 2019: Consolidated Balance Sheets 35 Consolidated Statements of Income 37 Consolidated Statements of Comprehensive Income 38 Consolidated Statements of Stockholders’ Equity 39 Consolidated Statements of Cash Flows 40 Notes to Consolidated Financial Statements 41 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders RGC Resources, Inc. Roanoke, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of RGC Resources, Inc. and Subsidiaries (“the Company”) as of September 30, 2020 and 2019, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended September 30, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. CERTIFIED PUBLIC ACCOUNTANTS We have served as the Company's auditor since 2006. Blacksburg, Virginia December 3, 2020 34 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 AND 2019 2020 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 291,066 $ 1,631,348 Accounts receivable, net 3,404,044 3,870,211 Materials and supplies 1,027,191 1,021,882 Gas in storage 5,708,761 6,448,307 Prepaid income taxes 647,623 1,157,980 Regulatory assets 2,503,314 1,521,939 Other 854,562 733,525 Total current assets 14,436,561 16,385,192 UTILITY PROPERTY: In service 258,342,372 237,786,964 Accumulated depreciation and amortization ( 71,386,537 ) ( 67,207,334 ) In service, net 186,955,835 170,579,630 Construction work in progress 11,489,258 11,423,326 Utility plant, net 198,445,093 182,002,956 OTHER ASSETS: Regulatory assets 10,970,094 12,178,853 Investment in unconsolidated affiliates 57,542,805 47,375,459 Other 284,954 411,236 Total other assets 68,797,853 59,965,548 TOTAL ASSETS $ 281,679,507 $ 258,353,696 (Continued) 35 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 AND 2019 2020 2019 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Dividends payable $ 1,428,268 $ 1,339,522 Accounts payable 4,442,182 4,483,233 Capital contributions payable 2,512,437 5,024,824 Customer credit balances 1,587,061 880,295 Customer deposits 1,611,476 1,432,031 Accrued expenses 3,565,210 3,448,000 Interest rate swaps 533,795 147,556 Regulatory liabilities 890,313 4,877,603 Total current liabilities 16,570,742 21,633,064 LONG-TERM DEBT: Notes payable 114,975,200 95,512,200 Line-of-credit 9,143,606 8,172,473 Less unamortized debt issuance costs ( 299,175 ) ( 313,315 ) Long-term debt net of unamortized debt issuance costs 123,819,631 103,371,358 DEFERRED CREDITS AND OTHER LIABILITIES: Interest rate swaps 1,689,761 746,785 Asset retirement obligations 7,180,982 6,788,683 Regulatory cost of retirement obligations 12,678,043 11,892,352 Benefit plan liabilities 6,149,527 6,912,105 Deferred income taxes 13,973,762 12,978,523 Regulatory liabilities 10,729,082 10,934,434 Total deferred credits and other liabilities 52,401,157 50,252,882 COMMITMENTS AND CONTINGENCIES (Note 12) CAPITALIZATION: Stockholders’ Equity: Common Stock, $ 5 par value; authorized 20,000,000 and 10,000,000 shares; issued and outstanding 8,160,058 and 8,073,264 shares in 2020 and 2019, respectively 40,800,290 40,366,320 Preferred stock, no par; authorized 5,000,000 shares; no shares issued and outstanding in 2020 and 2019 — — Capital in excess of par value 15,847,121 14,397,072 Retained earnings 35,688,510 30,821,917 Accumulated other comprehensive loss ( 3,447,944 ) ( 2,488,917 ) Total stockholders’ equity 88,887,977 83,096,392 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 281,679,507 $ 258,353,696 See notes to consolidated financial statements. 36 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2020 AND 2019 2020 2019 OPERATING REVENUES: Gas utilities $ 62,408,925 $ 67,306,260 Other 666,466 720,265 Total operating revenues 63,075,391 68,026,525 OPERATING EXPENSES: Cost of gas - utility 23,949,481 32,401,123 Cost of sales - non utility 341,985 419,851 Operations and maintenance 16,180,229 14,089,019 General taxes 2,194,789 2,066,794 Depreciation and amortization 7,890,725 7,454,274 Total operating expenses 50,557,209 56,431,061 OPERATING INCOME 12,518,182 11,595,464 Equity in earnings of unconsolidated affiliate 4,814,874 3,020,348 Other income, net 636,296 351,882 Interest expense 4,099,158 3,618,551 INCOME BEFORE INCOME TAXES 13,870,194 11,349,143 INCOME TAX EXPENSE 3,305,660 2,650,731 NET INCOME $ 10,564,534 $ 8,698,412 EARNINGS PER COMMON SHARE: Basic $ 1.30 $ 1.08 Diluted $ 1.30 $ 1.08 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 8,125,938 8,039,484 Diluted 8,146,666 8,078,950 See notes to consolidated financial statements. 37 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2020 AND 2019 2020 2019 NET INCOME $ 10,564,534 $ 8,698,412 Other comprehensive loss, net of tax: Interest rate swaps ( 987,076 ) ( 894,761 ) Defined benefit plans 28,049 ( 722,488 ) OTHER COMPREHENSIVE LOSS, NET OF TAX ( 959,027 ) ( 1,617,249 ) COMPREHENSIVE INCOME $ 9,605,507 $ 7,081,163 See notes to consolidated financial statements. 38 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED SEPTEMBER 30, 2020 AND 2019 Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Balance - September 30, 2018 $ 39,973,075 $ 13,043,656 $ 27,438,049 $ ( 871,668 ) $ 79,583,112 Net income — — 8,698,412 — 8,698,412 Other comprehensive loss — — — ( 1,617,249 ) ( 1,617,249 ) Exercise of stock options ( 31,508 shares) 157,540 254,639 — — 412,179 Cash dividends declared ($ 0.66 per share) — — ( 5,314,544 ) — ( 5,314,544 ) Issuance of common stock ( 47,141 shares) 235,705 1,098,777 — — 1,334,482 Balance - September 30, 2019 $ 40,366,320 $ 14,397,072 $ 30,821,917 $ ( 2,488,917 ) $ 83,096,392 Net income — — 10,564,534 — 10,564,534 Other comprehensive loss — — — ( 959,027 ) ( 959,027 ) Exercise of stock options ( 29,992 shares) 149,960 289,548 — — 439,508 Stock option grants — 81,380 — — 81,380 Cash dividends declared ($ 0.70 per share) — — ( 5,697,941 ) — ( 5,697,941 ) Issuance costs — ( 147,517 ) — — ( 147,517 ) Issuance of common stock ( 56,802 shares) 284,010 1,226,638 — — 1,510,648 Balance - September 30, 2020 $ 40,800,290 $ 15,847,121 $ 35,688,510 $ ( 3,447,944 ) $ 88,887,977 See notes to consolidated financial statements. 39 RGC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2020 AND 2019 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,564,534 $ 8,698,412 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 8,126,427 7,600,852 Cost of retirement of utility plant, net ( 544,696 ) ( 443,586 ) Stock option grants 81,380 — Equity in earnings of unconsolidated affiliate ( 4,814,874 ) ( 3,020,348 ) Allowance for funds used during construction ( 330,208 ) — Deferred income taxes 1,122,303 684,028 Other noncash items, net 1,837,089 488,202 Changes in assets and liabilities which provided (used) cash: Accounts receivable and customer deposits, net 53,213 ( 122,165 ) Inventories and gas in storage 734,237 1,070,896 Regulatory and other assets ( 677,488 ) ( 156,799 ) Accounts payable, customer credit balances and accrued expenses, net 659,276 ( 2,745,377 ) Regulatory liabilities ( 3,987,290 ) 2,643,589 Total adjustments 2,259,369 5,999,292 Net cash provided by operating activities 12,823,903 14,697,704 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for utility property ( 22,916,339 ) ( 21,884,317 ) Investment in unconsolidated affiliate ( 7,864,859 ) ( 20,965,907 ) Proceeds from disposal of utility property 60,187 20,219 Net cash used in investing activities ( 30,721,011 ) ( 42,830,005 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line-of-credit 24,341,134 33,735,144 Repayments under line-of-credit ( 23,370,002 ) ( 32,923,688 ) Proceeds from issuance of unsecured notes 19,463,000 56,269,000 Retirement of notes payable — ( 24,000,000 ) Debt issuance expenses ( 70,750 ) ( 93,104 ) Proceeds from issuance of stock 1,802,639 1,746,661 Cash dividends paid ( 5,609,195 ) ( 5,217,775 ) Net cash provided by financing activities 16,556,826 29,516,238 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1,340,282 ) 1,383,937 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,631,348 247,411 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 291,066 $ 1,631,348 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 3,845,382 $ 3,328,130 Income taxes 1,673,000 2,287,000 See notes to consolidated financial statements. 40 RGC RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2020 AND 2019 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation —RGC Resources, Inc. is an energy services company primarily engaged in the sale and distribution of natural gas. The consolidated financial statements include the accounts of Resources and its wholly owned subsidiaries: Roanoke Gas, Diversified Energy and Midstream. Roanoke Gas is a natural gas utility, which distributes and sells natural gas to approximately 62,000 residential, commercial and industrial customers within its service areas in Roanoke, Virginia and the surrounding localities. The Company’s business is seasonal in nature as a majority of natural gas sales are for space heating during the winter season. Roanoke Gas is regulated by the SCC. Midstream is a wholly-owned subsidiary created primarily to invest in the Mountain Valley Pipeline project. Diversified Energy is inactive. The Company follows accounting and reporting standards established by the FASB and the SEC. Under the rules for smaller reporting companies, certain disclosures previously required are reduced or eliminated. As it has met the qualifications under the definition of smaller reporting company, the Company has used the smaller reporting company exceptions. Rate Regulated Basis of Accounting —The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No. 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 situation occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose 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 (regulatory liabilities). In the event the provisions of FASB ASC No. 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the consolidated statements of income and comprehensive income in the period which FASB ASC No. 980 no longer applied. 41 Regulatory assets and liabilities included in the Company’s consolidated balance sheets as of September 30, 2020 and 2019 are as follows: September 30 2020 2019 Assets: Current Assets: Regulatory assets: Accrued WNA revenues $ — $ 569,558 Under-recovery of gas costs 1,733,718 — Under-recovery of SAVE Plan revenues 108,550 — ESAC assets — 265,392 Accrued pension and postretirement medical 576,731 602,674 Other deferred expenses 84,315 84,315 Total current 2,503,314 1,521,939 Utility Property: In service: Other 11,945 11,945 Construction work in progress: AFUDC 330,208 — Other Assets: Regulatory assets: Premium on early retirement of debt 1,598,620 1,712,808 Accrued pension and postretirement medical 9,156,546 9,414,695 ESAC assets — 756,803 Other deferred expenses 214,928 294,547 Total non-current 10,970,094 12,178,853 Total regulatory assets $ 13,815,561 $ 13,712,737 Liabilities and Stockholders' Equity: Current Liabilities: Regulatory liabilities: Over-recovery of gas costs $ — $ 161,837 WNA 601,784 — Over-recovery of SAVE Plan revenues — 574,181 Rate refund — 3,827,588 Excess deferred income taxes 205,353 205,353 Other deferred liabilities 83,176 108,644 Total current 890,313 4,877,603 Deferred Credits and Other Liabilities: Asset retirement obligations 7,180,982 6,788,683 Regulatory cost of retirement obligations 12,678,043 11,892,352 Regulatory liabilities: Excess deferred income taxes 10,729,082 10,934,434 Total non-current $ 30,588,107 $ 29,615,469 Total regulatory liabilities $ 31,478,420 $ 34,493,072 Amortization of regulatory assets of $ 1,106,511 and $ 368,011 for the years ended September 30, 2020 and 2019, respectively, is included in operations and maintenance expense on the consolidated statements of income. See Note 3 for information on accelerated ESAC amortization. As of September 30, 2020, the Company had regulatory assets in the amount of $ 13,803,616 on which the Company did not earn a return during the recovery period. 42 Utility Plant and Depreciation —Utility plant is stated at original cost and includes direct labor and materials, contractor costs, and all allocable overhead charges. The Company applies the group method of accounting, where the costs of like assets are aggregated and depreciated by applying a rate based on the average expected useful life of the assets. In accordance with Company policy, expenditures for depreciable assets with a life greater than one year are capitalized, along with any upgrades or improvements to existing assets, when they significantly improve or extend the original expected useful life of an asset. Expenditures for maintenance, repairs, and minor renewals and betterments are expensed as incurred. The original cost of depreciable property retired is removed from utility plant and charged to accumulated depreciation. The cost of asset removals, less salvage, is charged to “regulatory cost of retirement obligations” or “asset retirement obligations” as explained under Asset Retirement Obligations below. Utility plant is composed of the following major classes of assets: September 30 2020 2019 Distribution and transmission $ 227,753,620 $ 209,171,339 LNG storage 14,798,453 13,417,077 General and miscellaneous 15,790,299 15,198,548 Total utility plant in service $ 258,342,372 $ 237,786,964 Provisions for depreciation are computed principally at composite straight-line rates over a range of periods. Rates are determined by depreciation studies which are required to be performed at least every 5 years on the regulated utility assets of Roanoke Gas. In September 2019, the SCC staff approved the Company's most recent depreciation study. The SCC directed the Company to implement the new rates retroactive to October 1, 2018. As a result of the new rates, the composite weighted-average depreciation rate was 3.30 % and 3.31 % for the years ended September 30, 2020 and 2019, respectively. The implementation of the new depreciation rates reduced total depreciation expense by $ 32,570 for fiscal 2019 and increased net income by $ 24,187 or less than $ 0.01 per share. The composite rates are composed of two components, one based on average service life and one based on cost of retirement. As a result, the Company accrues the estimated cost of retirement of long-lived assets through depreciation expense. These retirement costs are not a legal obligation but rather the result of cost-based regulation and are accounted for under the provisions of FASB ASC No. 980. Such amounts are classified as a regulatory liability. The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These reviews have not identified any impairments which would have a material effect on the results of operations or financial condition. In fiscal 2020, Roanoke Gas implemented the application of AFUDC related to infrastructure investments associated with two gate stations that will interconnect with the MVP. This treatment allows capitalizing both the equity and debt financing costs during the construction phases. For the year ended September 30, 2020, the Company capitalized $ 81,629 of debt financing costs and $ 248,579 of equity financing costs, thereby affecting the interest expense and other income, net lines, respectively, of the related consolidated statements of income. See Note 3 for further information. Asset Retirement Obligations —FASB ASC No. 410, Asset Retirement and Environmental Obligations , requires entities to record the fair value of a liability for an ARO when there exists a legal obligation for the retirement of the asset. When the liability is initially recorded, the entity capitalizes the cost, thereby increasing the carrying amount of the underlying asset. In subsequent periods, the liability is accreted, and the capitalized cost is depreciated over the useful life of the underlying asset. The Company has recorded AROs for its future legal obligations related to purging and capping its distribution mains and services upon retirement, although the timing of such retirements is uncertain. The Company’s composite depreciation rates include a component to provide for the cost of retirement of assets. As a result, the Company accrues the estimated cost of retirement of its utility plant through depreciation expense and creates a corresponding regulatory liability. The costs of retirement considered in the development of the depreciation component include those costs associated with the legal liability. Therefore, the ARO is reclassified from the regulatory cost of retirement obligation. If the legal obligations were to exceed the regulatory liability provided for in the depreciation rates, the Company would establish a regulatory asset for such difference with the anticipation of future recovery through rates charged to customers. 43 The following is a summary of the AROs: Years Ended September 30 2020 2019 Beginning balance $ 6,788,683 $ 6,417,948 Liabilities incurred 165,524 177,646 Liabilities settled ( 150,345 ) ( 177,755 ) Accretion 377,120 370,844 Ending balance $ 7,180,982 $ 6,788,683 Cash, Cash Equivalents and Short-Term Investments —From time to time, the Company will have balances on deposit at banks in excess of the amount insured by the FDIC. The Company has not experienced any losses on these accounts and does not consider these amounts to be at credit risk. As of September 30, 2020, the Company did not have any bank deposits in excess of the FDIC insurance limits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Customer Receivables and Allowance for Doubtful Accounts —Accounts receivable include amounts billed to customers for natural gas sales and related services and gas sales occurring subsequent to normal billing cycles but before the end of the period. The Company provides an estimate for losses on these receivables by utilizing historical information, current account balances, account aging and current economic conditions. Customer accounts are charged off annually when deemed uncollectible or when turned over to a collection agency for action. A reconciliation of changes in the allowance for doubtful accounts is as follows: Years Ended September 30 2020 2019 Beginning balance $ 110,743 $ 103,573 Provision for doubtful accounts 556,112 220,039 Recoveries of accounts written off 139,113 96,614 Accounts written off ( 102,828 ) ( 309,483 ) Ending balance $ 703,140 $ 110,743 Due to the impact of COVID-19 on businesses and individuals, both bad debt expense and associated allowance for doubtful accounts increased significantly over prior years. See Note 3 for additional information, including regulatory restrictions, that contributed to the increase. Financing Receivables —Financing receivables represent a contractual right to receive money either on demand, or on fixed or determinable dates, and are recognized as assets on the entity’s balance sheet. Trade receivables, resulting from the sale of natural gas and other services to customers, are the Company's primary type of financing receivables. These receivables are short-term in nature with a provision for uncollectible balances included in the consolidated financial statements. Inventories —Natural gas in storage and materials and supplies inventories are recorded at average cost. Natural gas storage injections are priced at the purchase cost at the time of injection and storage withdrawals are priced at the weighted average cost of gas in storage. Materials and supplies are removed from inventory at average cost. Unbilled Revenues —The Company bills its natural gas customers on a monthly cycle; however, the billing cycle period for most customers does not coincide with the accounting periods used for financial reporting. As the Company recognizes revenue when gas is delivered, an accrual is made to estimate revenues for natural gas delivered to customers but not billed during the accounting period. The amounts of unbilled revenue receivable included in accounts receivable on the consolidated balance sheets at September 30, 2020 and 2019 were $ 1,041,518 and $ 1,236,384 , respectively. 44 Income Taxes —Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. A valuation allowance against deferred tax assets is provided if it is more likely than not the deferred tax asset will not be realized. The Company and its subsidiaries file state and federal consolidated income tax returns. Debt Expenses —Debt issuance expenses are deferred and amortized over the lives of the debt instruments. The unamortized balances are offset against the carrying value of long-term debt. Over/Under-Recovery of Natural Gas Costs —Pursuant to the provisions of the Company’s PGA clause, the SCC provides the Company with a method of passing along to its customers increases or decreases in natural gas costs incurred by its regulated operations, including gains and losses on natural gas derivative hedging instruments. On at least a quarterly basis, the Company files a PGA rate adjustment request with the SCC to increase or decrease the gas cost component of its rates, based 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. As actual costs will differ from the projections used in establishing the PGA rate, the Company may either over-recover or under-recover its actual gas costs during the period. Any 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 deferral period, the balance of the net deferred charge or credit is amortized over an ensuing 12 -month period as amounts are reflected in customer bills. Fair Value —Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The Company determines fair value based on the following fair value hierarchy which prioritizes each input to the valuation methods into one of the following three broad levels: • Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. • Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity which require the Company to develop its own assumptions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). All fair value disclosures are categorized within one of the three categories in the hierarchy. See fair value disclosures below and in Notes 9 and 13. Use of Estimates —The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Excise and Sales Taxes —Certain excise and sales taxes imposed by the state and local governments in the Company’s service territory are collected by the Company from its customers. These taxes are accounted for on a net basis and therefore are not included as revenues in the Company’s consolidated income statements. 45 Earnings Per Share —Basic EPS and diluted EPS are calculated by dividing net income by the weighted-average common shares outstanding during the period and the weighted-average common shares outstanding during the period plus dilutive potential common shares, respectively. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. A reconciliation of basic and diluted EPS is presented below: Years Ended September 30 2020 2019 Net Income $ 10,564,534 $ 8,698,412 Weighted-average common shares 8,125,938 8,039,484 Effect of dilutive securities: Options to purchase common stock 20,728 39,466 Diluted average common shares 8,146,666 8,078,950 Earnings Per Share of Common Stock: Basic $ 1.30 $ 1.08 Diluted $ 1.30 $ 1.08 Business and Credit Concentrations — The primary business of the Company is the distribution of natural gas to residential, commercial and industrial customers in its service territories. No sales to individual customers accounted for more than 5% of total revenue in any period or amounted to more than 5% of total accounts receivable. Roanoke Gas currently holds the only franchises and CPCNs to distribute natural gas in its service area. These franchises are effective through January 1, 2036. The Company's current CPCNs in Virginia are exclusive and are intended for perpetual duration. Roanoke Gas is served directly by two primary pipelines that provide all of the natural gas supplied to the Company’s customers. Depending upon weather conditions and the level of customer demand, failure of one or both of these transmission pipelines could have a major adverse impact on the Company. Derivative and Hedging Activities —FASB ASC No. 815, Derivatives and Hedging , requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheet and measurement of those instruments at fair value. The Company’s hedging and derivatives policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations. The Company’s hedging and derivatives policy specifically prohibits the use of derivatives for speculative purposes. The key market risks that the Company may hedge against include the price of natural gas and the cost of borrowed funds. The Company historically has entered into collars, swaps and caps for the purpose of hedging the price of natural gas in order to provide price stability during the winter months. The fair value of these instruments is recorded in the consolidated balance sheets with the offsetting entry to either under- or over-recovery of gas costs. Net income and other comprehensive income are not affected by the change in market value as any cost incurred or benefit received from these instruments is recoverable or refunded through the PGA as the SCC allows for full recovery of prudent costs associated with natural gas purchases. At September 30, 2020 and 2019, the Company had no outstanding derivative instruments for the purchase of natural gas. The Company has three interest rate swaps associated with its variable rate debt. Roanoke Gas has a swap on its $ 7,000,000 term note that effectively converts the variable interest rate into a 2.30 % fixed interest rate. In June 2019, Midstream entered into two variable-rate term notes in the amount of $ 14,000,000 and $ 10,000,000 with corresponding swap agreements to convert the variable interest rates into fixed rates of 3.24 % and 3.14 %, respectively. All swaps qualify as a cash flow hedge with changes in fair value reported in other comprehensive income. Any cash flows from interest rate swaps are classified as interest expense. No portion of the swaps were deemed ineffective during the period. See Notes 7 and 13 for additional information on the swaps and fair value. 46 Non-Cash Activity — A non-cash decrease in unconsolidated affiliate and corresponding decrease in capital contributions payable of $ 2,512,387 and $ 5,117,942 occurred for the fiscal years ended September 30, 2020 and 2019, respectively. Other Comprehensive Income (Loss) — A summary of other comprehensive income is provided below: Before Tax Amount Tax (Expense) or Benefit Net of Tax Amount Year Ended September 30, 2020: Interest rate swaps: Unrealized losses $ ( 1,594,126 ) $ 410,328 $ ( 1,183,798 ) Transfer of realized losses to interest expense 264,911 ( 68,189 ) 196,722 Net interest rate swaps ( 1,329,215 ) 342,139 ( 987,076 ) Defined benefit plans: Net loss arising during period $ ( 52,669 ) $ 13,557 $ ( 39,112 ) Amortization of actuarial losses 90,441 ( 23,280 ) 67,161 Net defined benefit plans 37,772 ( 9,723 ) 28,049 Other comprehensive loss $ ( 1,291,443 ) $ 332,416 $ ( 959,027 ) Year Ended September 30, 2019: Interest rate swaps: Unrealized losses $ ( 1,117,595 ) $ 287,669 $ ( 829,926 ) Transfer of realized gains to interest expense ( 87,309 ) 22,474 ( 64,835 ) Net interest rate swaps ( 1,204,904 ) 310,143 ( 894,761 ) Defined benefit plans: Net loss arising during period $ ( 962,612 ) $ 247,777 $ ( 714,835 ) Amortization of actuarial gains ( 10,305 ) 2,652 ( 7,653 ) Net defined benefit plans ( 972,917 ) 250,429 ( 722,488 ) Other comprehensive loss $ ( 2,177,821 ) $ 560,572 $ ( 1,617,249 ) The amortization of actuarial gains or losses are included as a component of net periodic pension and postretirement benefit costs under other income, net. Composition of AOCI: Interest Rate Swaps Defined Benefit Plans Accumulated Other Comprehensive Income (Loss) Balance September 30, 2018 230,624 ( 1,102,292 ) ( 871,668 ) Other comprehensive loss ( 894,761 ) ( 722,488 ) ( 1,617,249 ) Balance September 30, 2019 ( 664,137 ) ( 1,824,780 ) ( 2,488,917 ) Other comprehensive income (loss) ( 987,076 ) 28,049 ( 959,027 ) Balance September 30, 2020 $ ( 1,651,213 ) $ ( 1,796,731 ) $ ( 3,447,944 ) The reclassification related to the interest rate swap was charged to regulatory liability to offset the adjustment made when revaluing the deferred tax liability of the interest rate swap for the reduction in corporate income tax rates. 47 Recently Adopted Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases. This ASU leaves the accounting for leases mostly unchanged for lessors, with the exception of targeted improvements for consistency; however, the new guidance requires lessees to recognize assets and liabilities for leases with terms of more than 12 months. The ASU also revises the definition of a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Under prior GAAP, the presentation and cash flows arising from a lease by a lessee primarily depended on its classification as a finance or operating lease. The new ASU requires both types of leases to be recognized on the balance sheet. In addition, the new guidance includes quantitative and qualitative disclosure requirements to aid financial statement users in better understanding the amount, timing and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01, which provides a practical expedient that allows entities the option of not evaluating existing land easements under the new lease standard for those easements that were entered into prior to adoption. New or modified land easements will require evaluation on a prospective basis. The new guidance is effective for the Company for the annual reporting period ending September 30, 2020 and interim periods within that annual period. The Company adopted ASU 2016-02 and related guidance effective October 1, 2019. At the time of adoption, the Company had one operating lease. This lease calls for quarterly payments in the amount of $ 3,240 and is set to expire in September 2021. As the value of this lease obligation was determined to be de minimis and the Company has not entered into any additional lease obligations, this new guidance does not have a material effect on the Company's financial position, results of operations or cash flows. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting For Hedging Activities . The ASU is meant to simplify recognition and presentation guidance in an effort to improve financial reporting of cash flow and fair value hedging relationships to better portray the economic results of an entity's risk management activities. This is achieved through changes to both the designation and measurement guidance for qualifying hedging relationships, as well as changes to the presentation of hedge results. The Company adopted the new guidance effective October 1, 2019. As the Company currently has only cash flow hedges and no portion of these hedges were deemed ineffective during the periods presented, this new guidance does not have a material effect on the Company's financial position, results of operations or cash flows. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs incurred in a Cloud Computing Arrangement that is a Service Contract . This ASU reduces the complexity of accounting for costs of implementing a cloud computing service arrangement and aligns the following requirements to capitalize implementation costs: 1) those incurred in a hosting arrangement that is a service contract, and 2) those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal software license. The Company adopted the new guidance effective October 1, 2019. The new guidance did not have a material effect on the Company's consolidated financial statements. Recently Issued Accounting Standards In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans . This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The new guidance is effective for the Company for the annual reporting period ending September 30, 2021. Early adoption is permitted. Management has not completed its evaluation of the new guidance; however, the ASU only modifies disclosure requirements and will not affect financial position, results of operations or cash flows. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate change on financial reporting. The new guidance applies specifically to contracts and hedging relationships that reference LIBOR, or any other referenced rate that is expected to be discontinued due to reference rate reform. The new guidance is effective for the Company through December 31, 2022. Management has not yet completed its evaluation of the new guidance; however, as the Company has several contracts and hedging relationships that currently reference LIBOR, this new guidance could impact the Company's financial position, results of operations, or cash flows for the period through which the ASU is effective. 48 Other accounting standards that have been issued or proposed by the FASB or other standard–setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows. 2. REVENUE The Company assesses new contracts and identifies related performance obligations for promises to transfer distinct goods or services to the customer. Revenue is recognized when performance obligations have been satisfied. In the case of Roanoke Gas, the Company contracts with its customers for the sale and/or delivery of natural gas. The following tables summarize revenue by customer, product and income statement classification for the years ended September 30: 2020 Gas utility Non-utility Total operating revenues Natural Gas (Billed and Unbilled): Residential $ 37,022,219 $ — $ 37,022,219 Commercial 18,387,674 — 18,387,674 Industrial and Transportation 5,188,069 — 5,188,069 Other 489,943 666,466 1,156,409 Total contracts with customers 61,087,905 666,466 61,754,371 Alternative Revenue Programs 1,321,020 — 1,321,020 Total operating revenues $ 62,408,925 $ 666,466 $ 63,075,391 2019 Gas utility Non-utility Total operating revenues Natural Gas (Billed and Unbilled): Residential $ 39,519,618 $ — $ 39,519,618 Commercial 22,562,265 — 22,562,265 Industrial and Transportation 4,770,657 — 4,770,657 Revenue reductions (TCJA) (1) ( 523,881 ) — ( 523,881 ) Other 592,156 720,265 1,312,421 Total contracts with customers 66,920,815 720,265 67,641,080 Alternative Revenue Programs 385,445 — 385,445 Total operating revenues $ 67,306,260 $ 720,265 $ 68,026,525 (1) Accrued refund associated with excess revenue collected in tariff rates associated with the reduction in federal income tax rates. Gas utility revenues Substantially all of Roanoke Gas’ revenues are derived from rates authorized by the SCC through its tariffs. Based on its evaluation, the Company has concluded that these tariff-based revenues fall within the scope of ASC 606. Tariff rates represent the transaction price. Performance obligations created under these tariff-based sales include commodity (the cost of natural gas sold to customers) and delivery (transporting natural gas through the Company’s distribution system to customers). The delivery of natural gas to customers results in the satisfaction of the Company’s respective performance obligations over time. All customers are billed monthly based on consumption as measured by metered usage. Revenue is recognized as bills are issued for natural gas that has been delivered or transported. In addition, the Company utilizes the practical expedient that allows an entity to recognize the invoiced amount as revenue, if that amount corresponds to the value received by the customer. Since customers are billed tariff rates, there is no variable consideration in the transaction price. Unbilled revenue is included in residential and commercial revenues above. Natural gas consumption is estimated for the period subsequent to the last billed date and up through the last day of the month. Estimated volumes and approved 49 tariff rates are utilized to calculate unbilled revenue. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The Company obtains metered usage for industrial customers at the end of each month, thereby eliminating any unbilled consideration for these rate classes. Other revenues Other revenues primarily consist of miscellaneous fees and charges, utility-related revenues not directly billed to utility customers and billings for non-utility activities. Non-utility (unregulated) activities provided by the Company include contract paving and other similar services. Regarding these activities, the customer is invoiced monthly based on services provided. The Company utilizes the practical expedient allowing revenue to be recognized based on invoiced amounts. The transaction price is based on a contractually predetermined rate schedule; therefore, the transaction price represents total value to the customer and no variable price consideration exists. Alternative Revenue Program revenues ARPs, which fall outside the scope of ASC 606, are SCC approved mechanisms that allow for the adjustment of revenues for certain broad, external factors, or for additional billings if the entity achieves certain performance targets. The Company's ARPs include its WNA, which adjusts revenues for the effects of weather temperature variations as compared to the 30-year average, and the SAVE Plan over/under collection mechanism, which adjusts revenues for the differences between SAVE Plan revenues billed to customers and the revenues earned, as calculated based on the timing and extent of infrastructure replacement completed during the period. These amounts are ultimately collected from, or returned to, customers through future rate changes approved by the SCC. Customer Accounts Receivable Accounts receivable, as reflected in the consolidated balance sheets, includes both billed and unbilled customer revenues, as well as amounts that are not related to customers. The balances of customer receivables are provided below: Current Assets Current Liabilities Trade accounts receivable (1) Unbilled revenue (1) Customer credit balances Customer deposits September 30, 2019 $ 2,590,702 $ 1,236,384 $ 880,295 $ 1,432,031 September 30, 2020 2,343,492 1,041,518 1,587,061 1,611,476 Increase (decrease) $ ( 247,210 ) $ ( 194,866 ) $ 706,766 $ 179,445 (1) Included in "Accounts receivable, net" in the consolidated balance sheet. Amounts shown net of reserve for bad debts. The Company had no significant contract assets or liabilities during the period. Furthermore, the Company did not incur any significant costs to obtain contracts. 3. REGULATORY MATTERS The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension, and depreciation. On October 10, 2018, Roanoke Gas filed a general rate case application requesting an increase in annual customer non-gas base rates. This application incorporated into the non-gas rate the impact of tax reform, non-SAVE utility plant investment, increased operating costs, recovery of regulatory assets associated with eligible safety activity costs and SAVE Plan investments and related costs previously recovered through the SAVE Rider. The new non-gas rates were placed in effect on an interim basis for service rendered on or after January 1, 2019, subject to refund pending audit and final order by the SCC. On January 24, 2020, the SCC issued its final order on the general rate application. Under the provisions of this order, Roanoke Gas was granted an annualized non-gas rate increase of $ 7.25 million and provided for a 9.44 % return on equity. In addition, the final order directed the Company to write-down a portion of the ESAC assets deemed not eligible for recovery. As a result, ESAC regulatory assets were written down approximately $ 317,000 in the first 50 quarter of fiscal 2020. In March 2020, the Company completed the refund of $ 3.8 million for revenues collected from the interim rates in excess of the final approved rates, including interest. The final order did not provide for a return on Roanoke Gas infrastructure investments associated with two gate stations that will interconnect with the MVP; however, the order did provide for the ability to defer financing costs related to these investments for consideration of future recovery. The Company is deferring these costs through the application of AFUDC, which capitalizes both the equity and debt financing costs during the construction phases. Roanoke Gas applied AFUDC treatment retroactively to January 1, 2019, the date new non-gas rates became effective. The January 1, 2019 date was affirmed by the Commission in its October 1, 2020 order in the Company’s 2019 annual informational filing docket. Amounts capitalized are disclosed in the Utility Plant and Depreciation section of Note 1. In 2020, Roanoke Gas accelerated amortization of the $ 525,000 remaining balance of its ESAC assets. This acceleration was the result of the Company's earnings test for fiscal 2020. The SCC requires regulated utilities with certain regulatory assets to perform and submit an annual earnings test. The Company's earnings test is required for its fiscal year ended September 30, 2020 and must be filed with the SCC in January 2021. Specific to ESAC assets, if the results indicate that earnings exceed the mid-point of its authorized return on equity range, the Company must write-down certain regulatory assets to the point where the actual return for the period falls to the mid-point. As Roanoke Gas' fiscal 2020 unadjusted earnings exceeded the mid-point, the Company accelerated amortization of the related ESAC assets. On March 16, 2020, in response to the COVID-19 pandemic, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service for non-payment by any customer until May 15, 2020, which was subsequently extended to October 5, 2020. These moratorium orders prohibited utilities from disconnecting any customer for non-payment of natural gas service and also prohibited utilities from assessing late payment fees. As a result, the amount of current receivables and future billings that may ultimately become uncollectible will likely increase. In October 2020, during the special session of the Virginia General Assembly, HB5005 was enacted and extended the moratorium until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to be in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner. Therefore, the Company has increased its provision for uncollectible accounts, based on information currently available and the expected continued aging of its accounts receivable at September 30, 2020. These estimates are subject to revision as the financial impact of COVID-19 continues to ripple through the economy. As referenced in Note 8, the TCJA reduced the federal corporate tax rate to 21%. The Company revalued its deferred tax assets and liabilities to reflect the new federal tax rate. Under the provisions of ASC 740, the corresponding adjustment to deferred income taxes generally flows directly to income tax expense. For rate regulated entities such as Roanoke Gas, these excess deferred taxes were originally recovered from its customers based on billing rates derived using a federal income tax rate of 34%. Therefore, the adjustment to the net deferred tax liabilities of Roanoke Gas, to the extent such net deferred tax liabilities are attributable to rate base or cost of service, are refundable to customers. Roanoke Gas began accounting for the refund of these excess deferred taxes in fiscal 2018 along with reflecting a corresponding reduction in income tax expense. As of September 30, 2020, Roanoke Gas had approximately $ 11,000,000 remaining in the net regulatory liability related to these excess deferred income taxes, the majority of which will be refunded over a 28 year period per IRS normalization requirements. The Company transitioned to a corporate federal income tax rate of 21% and a combined 25.74% state and federal tax rate in fiscal 2019. In January 2018, the SCC issued a directive requiring the accrual of a regulatory liability for excess revenues collected from customers attributable to the higher federal income tax rate, included as a component of customer billing rates, until such time as the SCC approved revised billing rates incorporating the lower tax rate. The Company refunded the excess revenues associated with the change in the tax rate over a 12-month period ended December 2019. In June 2019, the Company submitted its updated depreciation study with the SCC staff. The depreciation study, which is based on average remaining service life, resulted in an overall composite weighted-average depreciation rate of 3.31 % for fiscal 2019. In September 2019, the SCC staff approved the depreciation study filing and instructed the Company to implement the new rates retroactive to October 1, 2018. As a result, the Company recorded a $ 32,570 reduction in annual depreciation expense for the fiscal year ended September 30, 2019. See Note 1 for more information. 51 In May 2020, the Company filed with the SCC its most recent SAVE Plan and Rider update. The SAVE Plan provides a mechanism for the Company to recover the related depreciation and expenses and return on rate base of its infrastructure replacement program. In addition to the continued renewal of first generation plastic mains and related services, coated steel tubing services and specifically identified gate stations, the application proposes that the SAVE Plan be amended to include the renewal or removal of certain regulator stations and the renewal of pre-1971 coated steel mains and coated steel services. In September 2020, the SCC issued a final order on the SAVE Plan authorizing a SAVE Rider that provides up to $ 2.3 million in revenue in fiscal 2021 for SAVE Plan investment since January 1, 2019 and proposed fiscal 2021 SAVE investment. The SCC also approved the true-up factor to provide for the refund of approximately $ 73,000 in over-collected balance from the 2019 SAVE Plan. 4. SEGMENT INFORMATION Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and assess performance. The Company uses operating income and equity in earnings to assess segment performance. Intersegment transactions are recorded at cost. The reportable segments disclosed herein are defined as follows: Gas Utility - The natural gas segment of the Company generates revenue from its tariff rates and other regulatory mechanisms through which it provides the sale and distribution of natural gas to its residential, commercial and industrial customers. Investment in Affiliates - The investment in affiliates segment reflects the income generated through the activities of the Company's investment in MVP and Southgate projects. Parent and Other - Parent and other include the unregulated activities of the Company as well as certain corporate eliminations. Information related to the segments of the Company are provided below: Gas Utility Investment in Affiliates Parent and Other Consolidated Total For the Year Ended September 30, 2020: Operating revenues $ 62,408,925 $ — $ 666,466 $ 63,075,391 Depreciation 7,890,725 — — 7,890,725 Operating income (loss) 12,429,613 ( 220,194 ) 308,763 12,518,182 Equity in earnings — 4,814,874 — 4,814,874 Interest expense 2,730,822 1,368,336 — 4,099,158 Income before income taxes 10,350,946 3,233,233 286,015 13,870,194 As of September 30, 2020: Total assets $ 211,994,364 $ 57,660,105 $ 12,025,038 $ 281,679,507 Gross additions to utility property 22,916,339 — — 22,916,339 Gross investment in MVP and Southgate — 7,864,859 — 7,864,859 52 Gas Utility Investment in Affiliates Parent and Other Consolidated Total For the Year Ended September 30, 2019: Operating revenues $ 67,306,260 $ — $ 720,265 $ 68,026,525 Depreciation 7,454,274 — — 7,454,274 Operating income (loss) 11,458,679 ( 153,149 ) 289,934 11,595,464 Equity in earnings — 3,020,348 — 3,020,348 Interest expense 2,404,518 1,214,033 — 3,618,551 Income before income taxes 9,400,869 1,657,988 290,286 11,349,143 As of September 30, 2019: Total assets $ 195,969,019 $ 47,429,368 $ 14,955,309 $ 258,353,696 Gross additions to utility property 21,884,317 — — 21,884,317 Gross investment in MVP and Southgate — 20,965,907 — 20,965,907 5. OTHER INVESTMENTS In October 2015, Midstream, acquired a 1 % equity interest in the LLC. In November 2019, the Company's Board of Directors approved a pro-rata increase in Midstream's participation that will increase its equity interest to approximately 1.03 % at the MVP's completion. Once in service, the MVP will transport approximately 2 million dth of natural gas per day. Pipeline construction has been delayed due to regulatory and legal challenges that have restricted the recent focus to maintenance and restoration activities. As a result, the projected cost is expected to range from $ 5.8 to $ 6.0 billion, with Midstream's total cash contributions expected to range from $ 60 and $ 62 million. The managing partner extended the estimated in-service date to the second half of calendar 2021. The Company is utilizing the equity method to account for the transactions related to the MVP investment and recognizes earnings in proportion to its investment. In April 2018, the LLC announced the MVP Southgate project, which is an approximately 75 mile pipeline extending from the MVP mainline in Virginia to delivery points in North Carolina. Midstream is a less than 1 % investor in the project, which is being accounted for under the cost method. Total project cost is estimated to be nearly $ 500 million, of which Midstream's portion is estimated to be approximately $ 2.1 million. The Southgate in-service date is currently targeted for calendar year 2022. Funding for Midstream's investments in the LLC for both the MVP and Southgate projects is being provided through two variable rate unsecured promissory notes, under a non-revolving credit agreement maturing in December 2022, and two additional notes issued in June 2019. See Note 7 for a schedule of debt instruments. The Company will participate in the earnings generated from the transportation of natural gas through both pipelines proportionate to its level of investment once the pipelines are placed in service. The investments in the LLC are included in the consolidated financial statements as follows: September 30 Balance Sheet location: 2020 2019 Other Assets: MVP $ 57,183,063 $ 47,055,426 Southgate 359,742 320,033 Investment in unconsolidated affiliates $ 57,542,805 $ 47,375,459 Current Liabilities: MVP $ 2,501,883 $ 4,958,260 Southgate 10,554 66,564 Capital contributions payable $ 2,512,437 $ 5,024,824 53 Years ended September 30 Income Statement location: 2020 2019 Equity in earnings of unconsolidated affiliate $ 4,814,874 $ 3,020,348 September 30 2020 2019 Undistributed earnings, net of income taxes, of MVP in retained earnings $ 6,842,702 $ 3,267,176 The change in the investment in unconsolidated affiliates is provided below: September 30 2020 2019 Cash investment $ 7,864,859 $ 20,965,907 Change in accrued capital calls ( 2,512,387 ) ( 5,117,942 ) Equity in earnings of unconsolidated affiliate 4,814,874 3,020,348 Change in investment in unconsolidated affiliates $ 10,167,346 $ 18,868,313 Summary unaudited financial statements of MVP are presented below. Southgate financial statements, which are accounted for under the cost method, are not included: Income Statements Years Ended September 30, 2020 2019 AFUDC $ 479,586,911 $ 295,430,776 Net Other Income 714,128 5,655,644 Net Income $ 480,301,039 $ 301,086,420 Balance Sheets September 30 2020 2019 Assets: Current Assets $ 513,713,429 $ 485,323,892 Construction Work in Progress 5,536,248,668 4,675,267,389 Other Assets 4,597,441 13,190,816 Total Assets $ 6,054,559,538 $ 5,173,782,097 Liabilities and Equity: Current Liabilities $ 187,581,804 $ 466,776,233 Noncurrent Liabilities 245,000 — Capital 5,866,732,734 4,707,005,864 Total Liabilities and Equity $ 6,054,559,538 $ 5,173,782,097 6. LINE-OF-CREDIT In March 2020, Roanoke Gas renewed its unsecured line-of-credit agreement, which was scheduled to expire March 31, 2021. The new agreement is for a two-year term expiring March 31, 2022 with a maximum borrowing limit of $ 28,000,000 . Amounts drawn against the agreement are considered to be non-current, as the balance under the line-of-credit is not subject to repayment within the next 12-month period. The agreement has a variable interest rate based on 30-day LIBOR plus 100 basis points, an availability fee of 15 basis points and provides multi-tiered borrowing limits associated with the seasonal borrowing demands of the Company. 54 The Company's total available borrowing limits for the remaining term are as follows: As of Available Line-of-Credit September 30, 2020 $ 19,000,000 March 1, 2021 15,000,000 July 20, 2021 20,000,000 September 20, 2021 28,000,000 A summary of the line-of-credit follows: September 30 2020 2019 Available line-of-credit at year-end $ 19,000,000 $ 22,000,000 Outstanding balance at year-end 9,143,606 8,172,473 Highest month-end balance outstanding 12,983,210 15,801,798 Average daily balance 3,286,033 6,049,527 Average rate of interest during year on outstanding balances 2.16 % 3.40 % Interest rate at year-end 1.15 % 3.02 % Interest rate on unused line-of-credit 0.15 % 0.15 % Associated with the line-of-credit is a credit agreement that contains various representations, warranties and covenants including a requirement that the Company maintain an interest coverage ratio of not less than 1.5 to 1 and a long-term debt to long-term capitalization ratio of less than 65 %. 7. LONG-TERM DEBT In December 2019, Midstream entered into the Third Amendment to its Credit Agreement ("Amendment") and amendments to the related Promissory Notes ("Notes") with the corresponding banks. The Amendment modified the original Credit Agreement and prior amendments between Midstream and the banks by increasing the total borrowing capacity to $ 41,000,000 from its previous limit of $ 26,000,000 and extending the maturity date to December 29, 2022. 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 %. The additional limits under the Amendment provide additional financing for the investment in the MVP. In December 2019, Roanoke Gas entered into unsecured notes in the aggregate principal amount of $ 10,000,000 . These notes have a 10-year term with a fixed interest rate of 3.60 %. Proceeds from these notes provided funding for Roanoke Gas' capital budget. Roanoke Gas also has other unsecured notes at varying fixed interest rates as well as a variable-rate note with interest based on 30-day LIBOR plus 90 basis points. The variable rate note is hedged by a swap agreement, which converts the debt into a fixed-rate instrument with an annual interest rate of 2.30 %. Midstream has two other variable rate notes in the amounts of $ 14,000,000 and $ 10,000,000 that are hedged by swap agreements, which effectively convert the interest rates to 3.24 % and 3.14 %, respectively. 55 Long-term debt consists of the following: September 30 2020 2019 Principal Unamortized Debt Issuance Costs Principal Unamortized Debt Issuance Costs Roanoke Gas: Unsecured senior notes payable, at 4.26 %, due on September 18, 2034 $ 30,500,000 $ 135,157 $ 30,500,000 $ 144,811 Unsecured term note payable, at 30-day LIBOR plus 0.90 %, November 1, 2021 7,000,000 3,613 7,000,000 6,948 Unsecured term notes payable, at 3.58 % due on October 2, 2027 8,000,000 33,712 8,000,000 38,528 Unsecured term notes payable at 4.41 %, due on March 28, 2031 10,000,000 32,892 10,000,000 36,272 Unsecured term notes payable at 3.60 %, due on December 6, 2029 10,000,000 32,585 — — Midstream: Unsecured term notes payable, at 30-day LIBOR plus 1.35 % due December 29, 2022 25,475,200 38,728 16,012,200 59,504 Unsecured term note payable, at 30-day LIBOR plus 1.15 %, due June 12, 2026 14,000,000 13,844 14,000,000 16,252 Unsecured term note payable, at 30-day LIBOR plus 1.20 %, due June 1, 2024 10,000,000 8,644 10,000,000 11,000 Total notes payable $ 114,975,200 $ 299,175 $ 95,512,200 $ 313,315 Line-of-credit, at 30-day LIBOR plus 1.00 %, due March 31, 2022 9,143,606 — 8,172,473 — Total long-term debt $ 124,118,806 $ 299,175 $ 103,684,673 $ 313,315 Debt issuance costs are amortized over the life of the related debt. As of September 30, 2020 and 2019, the Company also had an unamortized loss on the early retirement of debt of $ 1,598,620 and $ 1,712,808 , respectively, which has been deferred as a regulatory asset and is being amortized over a 20 year period. All of the debt agreements set forth certain representations, warranties and covenants to which the Company is subject, including financial covenants that require the ratio of long-term debt to long-term capitalization to not exceed 65 %. All of the debt agreements except for the line-of-credit provide for priority indebtedness to not exceed 15 % of consolidated total assets. The Company was in compliance with all debt covenants as of September 30, 2020 and September 30, 2019. The aggregate annual maturities of long-term debt for the next five years ending after September 30, 2020 are as follows: Year Ending September 30 Maturities 2021 $ — 2022 16,268,606 2023 25,975,200 2024 9,375,000 2025 — Thereafter 72,500,000 Total $ 124,118,806 56 8. INCOME TAXES As a result of the TCJA enacted in January 2018, the Company's statutory federal income tax rate is 21 % in fiscal 2020 and 2019, respectively. Under the provisions of ASC 740 - Income Taxes , the deferred tax assets and liabilities of the Company were revalued in fiscal 2018 to reflect the reduction in the corporate federal income tax rate. The result of this revaluation was a reduction in the net deferred tax liability of approximately $ 9 million, including approximately $ 11.8 million reclassified to regulatory liability, a $ 3 million gross up to reflect pre-tax basis, and $ 0.26 million increase in income tax expense related to unregulated operations for fiscal 2018. The excess deferred income taxes are reflected on a pretax basis to appropriately contemplate future tax consequences in the periods when the regulatory liability is settled. The excess deferred taxes related to the depreciable property is being returned to customers through reduced billings over the remaining weighted average useful life of the property with a corresponding reduction in income tax expense. The excess deferred taxes related to the other regulatory basis differences are being collected from customers over a five year period. The details of income tax expense are as follows: Years Ended September 30 2020 2019 Current income taxes: Federal $ 1,841,124 $ 1,698,215 State 342,233 268,488 Total current income taxes 2,183,357 1,966,703 Deferred income taxes: Federal 644,682 272,079 State 477,621 411,949 Total deferred income taxes 1,122,303 684,028 Total income tax expense $ 3,305,660 $ 2,650,731 Income tax expense for the years ended September 30, 2020 and 2019 differed from amounts computed by applying the U.S. federal income tax rate to earnings before income taxes due to the following: Years Ended September 30 2020 2019 Income before income taxes $ 13,870,194 $ 11,349,143 Corporate federal income tax rate 21.0 % 21.0 % Income tax expense computed at the federal statutory rate $ 2,912,741 $ 2,383,320 State income taxes, net of federal income tax benefit 647,685 537,545 Net amortization of excess deferred taxes on regulated operations ( 162,228 ) ( 212,896 ) Tax benefit recognized on stock compensation ( 114,984 ) ( 96,499 ) Other, net 22,446 39,261 Total income tax expense $ 3,305,660 $ 2,650,731 57 The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows: September 30 2020 2019 Deferred tax assets: Allowance for uncollectibles $ 180,986 $ 28,503 Accrued pension and postretirement medical benefits 651,356 782,592 Regulatory effect of change in federal income tax rate 2,814,525 2,867,383 Accrued vacation 140,635 150,882 Over-recovery of gas costs — 23,979 Cost of gas held in storage 604,962 590,495 Deferred compensation 992,605 803,979 Interest rate swaps 572,343 230,204 Rate refund — 130,063 Other 97,564 261,125 Total gross deferred tax assets 6,054,976 5,869,205 Deferred tax liabilities: Utility plant 18,310,474 18,132,022 MVP investment 1,693,075 705,193 Other 25,189 10,513 Total gross deferred tax liabilities 20,028,738 18,847,728 Net deferred tax liability $ 13,973,762 $ 12,978,523 FASB ASC No. 740 - Income Taxes provides for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recognized in the financial statements. The Company has evaluated its tax positions and accordingly has not identified any significant uncertain tax positions. The Company’s policy is to classify interest associated with uncertain tax positions as interest expense in the financial statements. Penalties are netted against other income. The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia. The federal returns and the state returns for both Virginia and West Virginia for the tax years ended prior to September 30, 2017 are no longer subject to examination. 9. EMPLOYEE BENEFIT PLANS The Company sponsors both a noncontributory pension plan and a postretirement plan. The pension plan covers all employees hired prior to January 2017 and benefits fully vest after 5 years of credited service. Benefits paid to retirees are based on age at retirement, years of service and average compensation. Effective January 1, 2017, a "soft freeze" to the pension plan was implemented, and employees hired on or after that date are no longer eligible to participate. Commensurate with the "soft freeze" in the pension plan, the Company amended its 401(k) Plan, allowing management to authorize a discretionary contribution to the 401(k) account for those employees hired on or after January 1, 2017. The amount, if any, of this discretionary contribution would be determined each year and would be applied to the eligible employees at the end of the calendar year. This Company contribution would be in addition to any employee elected deferrals and employer match as provided for under the 401(k) Plan. The postretirement plan provides certain health care, supplemental retirement and life insurance benefits to retired employees who meet specific age and service requirements. Employees hired prior to January 1, 2000 are eligible to participate in the postretirement plan. Employees must have a minimum of 10 years of service and retire after attaining the age of 55 in order to vest in the postretirement plan. Retiree contributions to the plan are based on the number of years of service to the Company as determined under the pension plan. 58 Employers who sponsor defined benefit plans must recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in their statements of financial position and recognize changes in that funded status in the year in which the changes occur through comprehensive income. For pension plans, the benefit obligation is the projected benefit obligation, and for other postretirement plans, the benefit obligation is the accumulated benefit obligation. The Company established a regulatory asset for the portion of the obligation expected to be recovered in rates in future periods. The regulatory asset is adjusted for the recognition of actuarial gains and losses. The portion of the obligation attributable to the unregulated operations of the holding company is recognized in other comprehensive income. The following tables set forth the benefit obligation, fair value of plan assets, the funded status of the plans, amounts recognized in the Company’s consolidated financial statements and the assumptions used: Pension Plan Postretirement Plan 2020 2019 2020 2019 Accumulated benefit obligation $ 34,821,069 $ 30,927,973 $ 17,925,409 $ 18,030,399 Change in benefit obligation: Benefit obligation at beginning of year $ 35,550,987 $ 28,850,299 $ 18,030,399 $ 16,207,322 Service cost 691,602 537,268 167,879 132,882 Interest cost 1,062,227 1,166,728 531,480 648,944 Actuarial loss (gain) 3,620,400 5,901,915 ( 325,269 ) 1,530,522 Benefit payments, net of retiree contributions ( 927,214 ) ( 905,223 ) ( 479,080 ) ( 489,271 ) Benefit obligation at end of year $ 39,998,002 $ 35,550,987 $ 17,925,409 $ 18,030,399 Change in fair value of plan assets: Fair value of plan assets at beginning of year $ 33,586,671 $ 28,184,697 $ 13,082,610 $ 12,924,957 Actual return on plan assets, net of taxes 4,198,174 3,907,197 1,112,723 346,924 Employer contributions 800,000 2,400,000 400,000 300,000 Benefit payments, net of retiree contributions ( 927,214 ) ( 905,223 ) ( 479,080 ) ( 489,271 ) Fair value of plan assets at end of year $ 37,657,631 $ 33,586,671 $ 14,116,253 $ 13,082,610 Funded status $ ( 2,340,371 ) $ ( 1,964,316 ) $ ( 3,809,156 ) $ ( 4,947,789 ) Amounts recognized in the consolidated balance sheet consist of: Noncurrent liabilities $ ( 2,340,371 ) $ ( 1,964,316 ) $ ( 3,809,156 ) $ ( 4,947,789 ) Amounts recognized in accumulated other comprehensive loss: Net actuarial loss, net of tax $ 1,181,744 $ 1,047,063 $ 614,987 $ 777,717 Total amounts included in other comprehensive loss, net of tax $ 1,181,744 $ 1,047,063 $ 614,987 $ 777,717 Amounts deferred to a regulatory asset: Net actuarial loss $ 6,977,944 $ 6,356,201 $ 2,755,333 $ 3,661,168 Amounts recognized as regulatory assets $ 6,977,944 $ 6,356,201 $ 2,755,333 $ 3,661,168 The Company expects that approximately $ 80,000 before tax, of AOCI will be recognized in net periodic benefit costs in fiscal 2021 and approximately $ 577,000 of amounts deferred as regulatory assets will be amortized and recognized in net periodic benefit costs in fiscal 2021. 59 The following table details the actuarial assumptions used in determining the projected benefit obligations and net benefit cost of the pension and the accumulated benefit obligations and net benefit cost of the postretirement plan: Pension Plan Postretirement Plan 2020 2019 2020 2019 Assumptions used to determine benefit obligations: Discount rate 2.47 % 3.03 % 2.44 % 3.00 % Expected rate of compensation increase 4.00 % 4.00 % N/A N/A Assumptions used to determine benefit costs: Discount rate 3.03 % 4.11 % 3.00 % 4.09 % Expected long-term rate of return on plan assets 5.50 % 5.50 % 4.26 % 4.30 % Expected rate of compensation increase 4.00 % 4.00 % N/A N/A To develop the expected long-term rate of return on assets assumption, the Company, with input from the Plans' actuaries and investment advisors, considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of each plan’s portfolio. Components of net periodic benefit cost are as follows: Pension Plan Postretirement Plan 2020 2019 2020 2019 Service cost $ 691,602 $ 537,268 $ 167,879 $ 132,882 Interest cost 1,062,227 1,166,728 531,480 648,944 Expected return on plan assets ( 1,836,623 ) ( 1,549,437 ) ( 550,394 ) ( 547,218 ) Recognized loss 455,744 158,599 237,371 123,805 Net periodic benefit cost $ 372,950 $ 313,158 $ 386,336 $ 358,413 Service cost is included in operation and maintenance expense of the consolidated income statement. All other components of net periodic benefit costs are included in the other income, net line. The assumed health care cost trend rates used in measuring the accumulated benefit obligation for the postretirement plan are presented below: Pre 65 Post 65 2020 2019 2020 2019 Health care cost trend rate assumed for next year 7.00 % 7.00 % 5.20 % 5.20 % Rate to which the cost trend is assumed to decline (the ultimate trend rate) 5.50 % 5.50 % 5.20 % 5.20 % Year that the rate reaches the ultimate trend rate 2023 2022 2020 2019 The health care cost trend rate assumptions could have a significant effect on the amounts reported. A change of 1% would have the following effects: 1% Increase 1% Decrease Effect on total service and interest cost components $ 132,000 $ ( 105,000 ) Effect on accumulated postretirement benefit obligation 3,042,000 ( 2,454,000 ) The primary objectives of both plans' investment policies are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the corresponding actuarial assumptions, achieve asset returns that are competitive with like institutions employing similar investment strategies and meet expected future benefits in both the short-term and long-term. In 2020, the Company revised its targeted pension plan investment allocation by rebalancing the assets from a 40 % equity allocation to a 30 % equity allocation. This change in investment allocation corresponds with the Company's strategy to continue to match the duration of the pension plan's assets with its liabilities. This change in investment allocation will continue to reduce investment risk and volatility in asset performance while providing for some asset growth. As a result, the Company's assumed long- 60 term rate of return on pension assets for fiscal 2021 was adjusted down to 5.4 %. The investment policy continues to provide for a range of investment allocations to allow for continued flexibility in responding to market conditions. The Company’s target and actual asset allocation in the pension and postretirement plans as of September 30, 2020 and 2019 were: Pension Plan Postretirement Plan Target 2020 2019 Target 2020 2019 Asset category: Equity securities 30 % 30 % 40 % 50 % 51 % 49 % Debt securities 70 % 69 % 59 % 50 % 48 % 50 % Cash — % 1 % 1 % — % 1 % 1 % Other — % — % — % — % — % — % The assets of the plans are invested in mutual funds. The Company uses the fair value hierarchy described in Note 1 to classify these assets. The mutual funds are included under Level 1 in the fair value hierarchy as their fair values are determined based on individual prices for each security that comprises the mutual funds. The common and collective trust funds are included under Level 2. The following tables contains the fair value classifications of the plans' assets: Pension Plan Fair Value Measurements - September 30, 2020 Fair Value Level 1 Level 2 Level 3 Asset Class: Cash $ 339,287 $ 339,287 $ — $ — Common and Collective Trust and Pooled Funds: Bonds Liability Driven Investment 26,038,966 — 26,038,966 — Equities Domestic Large Cap Growth 3,462,841 — 3,462,841 — Domestic Large Cap Value 3,351,694 — 3,351,694 — Domestic Small/Mid Cap Core 1,665,005 — 1,665,005 — Foreign Large Cap Value 1,473,427 — 1,473,427 — Mutual Funds: Equities Foreign Large Cap Growth 1,047,274 1,047,274 — — Foreign Large Cap Value 279,137 279,137 — — Total $ 37,657,631 $ 1,665,698 $ 35,991,933 $ — 61 Pension Plan Fair Value Measurements - September 30, 2019 Fair Value Level 1 Level 2 Level 3 Asset Class: Cash $ 371,780 $ 371,780 $ — $ — Common and Collective Trust and Pooled Funds: Bonds Liability Driven Investment 19,702,561 — 19,702,561 — Equities Domestic Large Cap Growth 4,069,197 — 4,069,197 — Domestic Large Cap Value 4,055,518 — 4,055,518 — Domestic Small/Mid Cap Core 2,032,084 — 2,032,084 — Foreign Large Cap Value 1,783,990 — 1,783,990 — Mutual Funds: Equities Foreign Large Cap Growth 1,227,981 1,227,981 — — Foreign Large Cap Value 343,560 343,560 — — Total $ 33,586,671 $ 1,943,321 $ 31,643,350 $ — Postretirement Plan Fair Value Measurements - September 30, 2020 Fair Value Level 1 Level 2 Level 3 Asset Class: Cash $ 73,908 $ 73,908 $ — $ — Mutual Funds Bonds Domestic Fixed Income 6,163,808 6,163,808 — — Foreign Fixed Income 638,709 638,709 — — Equities Domestic Large Cap Growth 2,197,839 2,197,839 — — Domestic Large Cap Value 2,119,433 2,119,433 — — Domestic Small/Mid Cap Growth 262,726 262,726 — — Domestic Small/Mid Cap Value 235,216 235,216 — — Domestic Small/Mid Cap Core 552,607 552,607 — — Foreign Large Cap Growth 548,967 548,967 — — Foreign Large Cap Value 1,224,420 1,224,420 — — Foreign Large Cap Core 77,471 77,471 — — Other 21,149 — 21,149 — Total $ 14,116,253 $ 14,095,104 $ 21,149 $ — 62 Postretirement Plan Fair Value Measurements - September 30, 2019 Fair Value Level 1 Level 2 Level 3 Asset Class: Cash $ 66,860 $ 66,860 $ — $ — Mutual Funds Bonds Domestic Fixed Income 5,987,248 5,987,248 — — Foreign Fixed Income 611,196 611,196 — — Equities Domestic Large Cap Growth 1,909,836 1,909,836 — — Domestic Large Cap Value 1,931,615 1,931,615 — — Domestic Small/Mid Cap Growth 210,251 210,251 — — Domestic Small/Mid Cap Value 214,034 214,034 — — Domestic Small/Mid Cap Core 464,526 464,526 — — Foreign Large Cap Growth 489,286 489,286 — — Foreign Large Cap Value 1,098,992 1,098,992 — — Foreign Large Cap Core 70,782 70,782 — — Other 27,984 — 27,984 — Total $ 13,082,610 $ 13,054,626 $ 27,984 $ — Each mutual fund or common collective trust fund has been categorized based on its primary investment strategy. The Company expects to contribute $ 500,000 to its pension plan and $ 400,000 to its postretirement plan in fiscal 2021. The following table reflects expected future benefit payments: Fiscal year ending September 30 Pension Plan Postretirement Plan 2021 $ 1,043,787 $ 568,170 2022 1,133,470 605,966 2023 1,221,341 666,049 2024 1,320,157 678,659 2025 1,416,485 684,989 2026-2030 8,355,472 3,637,984 The Company sponsors a 401k Plan covering all employees who elect to participate. Employees may contribute from 1 % to 50 % of their annual compensation to the 401k Plan, limited to a maximum annual amount as set periodically by the IRS. The Company matches 100 % of the participant’s first 4 % of contributions and 50 % on the next 2 % of contributions. The Company also provided discretionary contributions for those employees hired on or after January 1, 2017. The following table reflects the Company's contributions: Years Ended September 30, 2020 2019 Matching contribution $ 364,773 $ 348,369 Discretionary contribution 18,313 21,829 63 10. COMMON STOCK OPTIONS The KESOP provides for the issuance of common stock options to officers and certain other full-time salaried employees to acquire shares of the Company’s common stock. As of September 30, 2020, the number of shares available for future grants was 23,000 . FASB ASC No. 718 - Compensation - Stock Compensation requires that compensation expense be recognized for the issuance of equity instruments to employees. During the fiscal year ended 2020, the Board approved stock option grants to certain officers. As required by the KESOP, each option's exercise price per share equaled the fair value of the Company's common stock on the grant date. Pursuant to the plan, the options vest over a six-month period and are exercisable over a ten-year period from the date of issuance. As the Company's stock options are not traded on the open market, the fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model including the following assumptions: Years Ended September 30, 2020 2019 Expected volatility 31.53 % N/A Expected dividends 2.74 % N/A Expected exercise term (years) 7.00 N/A Risk-free interest rate 0.51 % N/A The underlying methods regarding each assumption are as follows: Expected volatility is based on the historical volatility of the daily closing price of the Company's common stock. Expected dividend rate is based on historical dividend payout trends. Expected exercise term is based on the average time historical option grants were outstanding before being exercised. Risk-free interest rate is based on the 7 -year Treasury rate on the date of option grant. Forfeitures are recognized when they occur. Stock option transactions under the Company's plans are summarized below. 64 Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (years) Aggregate Intrinsic Value 1 Options outstanding, September 30, 2018 100,000 14.34 6.6 1,237,286 Options granted — — Options exercised ( 31,508 ) 13.08 Options expired — — Options forfeited — — Options outstanding, September 30, 2019 68,492 14.91 6.2 981,170 Options granted 13,000 27.87 Options exercised ( 29,992 ) 14.65 Options expired — — Options forfeited — — Options outstanding, September 30, 2020 51,500 $ 18.34 6.4 $ 320,797 Vested and exercisable at September 30, 2020 51,500 $ 18.34 6.4 $ 320,797 1 Aggregate intrinsic value includes only those options where the exercise price is below the market price. Years Ended September 30, 2020 2019 Weighted-average grant date option fair value $ 6.26 $ — Stock option expense 81,380 — Intrinsic value of options exercised 411,638 456,002 Proceeds from exercise of stock options 439,509 412,179 11. OTHER STOCK PLANS Dividend Reinvestment and Stock Purchase Plan The Company offers a DRIP Plan to shareholders of record for the reinvestment of dividends and the purchase of up to $ 100,000 per year in additional shares of common stock of the Company. Under the DRIP, the Company issued 28,191 and 26,716 shares in 2020 and 2019, respectively. As of September 30, 2020, the Company had 362,322 shares of stock available for issuance under the DRIP. Restricted Stock Plan for Outside Directors The Board of Directors of the Company implemented the RSPD in 1997. Under the RSPD, each director may elect annually to have up to 100 % of his or her fees paid in shares of common stock ("Director Restricted Stock"); however, a minimum of 40 % of the monthly retainer fee must be paid to each non-employee director of Resources in shares of Director Restricted Stock until such time as the director has accumulated at least 10,000 shares. The number of shares of Director Restricted Stock awarded each month is determined based on the closing sales price of Resources' common stock on the NASDAQ Global Market on the first business day of the month. The Director Restricted Stock issued under the Plan vests only in the case of a participant's death, disability, retirement, or in the event of a change in control of Resources. The Director Restricted Stock may not be sold, transferred, assigned or pledged by the participant until the shares have vested under the terms of the Plan. The shares of Director Restricted Stock will be forfeited to Resources by a participant's voluntary resignation during his or her term on the Board or removal for cause as a director. The Company assumes all directors will complete their term and there will be no forfeiture of the Director Restricted Stock. Since the inception of the RSPD, no director has forfeited any shares of Director Restricted Stock. The Company recognizes as compensation the market value of the Director Restricted Stock in the period it is issued. 65 The following table reflects the director compensation activity pursuant to the Plan: 2020 2019 Shares Weighted-Average Fair Value on Date of Grant Shares Weighted-Average Fair Value on Date of Grant Beginning of year balance 104,680 $ 12.51 98,302 $ 11.51 Granted 9,193 26.28 6,378 27.93 Vested ( 14,803 ) 10.68 — — Forfeited — — — — End of year balance 99,070 $ 14.06 104,680 $ 12.51 The fair market value of the Director Restricted Stock included in compensation during fiscal 2020 and 2019 was $ 241,617 and $ 178,100 , respectively. No Director Restricted Stock was forfeited during fiscal 2020 or 2019. As of September 30, 2020, the Company had 52,029 shares available for issuance under the RSPD. RGC Resources, Inc. Restricted Stock Plan The Board of Directors of the Company implemented the RSPO in 2017 following approval by the shareholders at the Company's annual meeting held in February 2017. Under the RSPO, the Compensation Committee of the Board of Directors may grant shares of common stock ("Officer Restricted Stock") that vest over time to key employees and officers for the purpose of attracting and retaining those individuals essential to the operation and growth of the Company. The RSPO provides for certain restrictions and non-transferability requirements until minimum levels of ownership are obtained. Such restrictions may continue beyond the vesting period. The Company assumes all officers will complete their requirements and there will be no forfeiture of the Officer Restricted Stock. The following table reflects the officer compensation activity pursuant to the RSPO: 2020 2019 Shares Weighted-Average Fair Value on Date of Grant Shares Weighted-Average Fair Value on Date of Grant Beginning of year balance 10,185 $ 28.65 6,734 $ 26.33 Granted 14,951 28.17 10,227 29.80 Vested ( 18,321 ) 28.30 ( 6,776 ) 28.08 Forfeited — — — — End of year balance 6,815 $ 28.55 10,185 $ 28.65 The fair market value of the Officer Restricted Stock included as compensation during fiscal 2020 and 2019 was $ 450,677 and $ 282,365 , respectively. As of September 30, 2020, the Company had 413,718 shares available for issuance under the RSPO. Stock Bonus Plan Shares from the Stock Bonus Plan may be issued to certain employees and management personnel in recognition of their performance and service. Under the Stock Bonus Plan, the Company issued no shares in 2020 and 2019. As of September 30, 2020 the Company had 4,785 shares of stock available for issuance under the Stock Bonus Plan. The Stock Bonus Plan is currently inactive. 66 12. COMMITMENTS AND CONTINGENCIES Long-Term Contracts Due to the nature of the natural gas distribution business, Roanoke Gas enters into agreements with both suppliers and pipelines to contract for natural gas commodity purchases, storage capacity and pipeline delivery capacity. Roanoke Gas obtains most of its regulated natural gas supply through an asset management contract with a third party asset manager. Roanoke Gas utilizes an asset manager to optimize the use of its transportation, storage rights, and gas supply inventories which helps to ensure a secure and reliable source of natural gas. Under the current asset management contract, Roanoke Gas has designated the asset manager to act as agent for its storage capacity and all gas balances in storage. Roanoke Gas retains ownership of gas in storage. Under provisions of this contract, Roanoke Gas is obligated to purchase its winter storage requirements from the asset manager during the spring and summer injection periods at market price. The table below details the volumetric obligations as of September 30, 2020 for the remainder of the contract period. The current asset management contract was renewed in July 2020 for a one year period which will expire in March 2022. The contract was renewed at essentially the same terms and conditions as the prior agreement, except the utilization fee retained by Roanoke Gas was reduced. Year Natural Gas Contracts (In DTHs) 2020-2021 2,090,972 2021-2022 295,866 Total 2,386,838 In addition to the volumetric commitment above, the Company also has a fixed price agreement to purchase approximately 1.3 million dth, from October 2020 to March 2021, at prices ranging from $ 2.17 to $ 2.62 per dth. Roanoke Gas also has contracts for pipeline and storage capacity which extend for various periods. These capacity costs and related fees are valued at tariff rates in place as of September 30, 2020. These rates may increase or decrease in the future based upon rate filings and rate orders granting a rate change to the pipeline or storage operator. Roanoke Gas expended approximately $ 21,881,000 and $ 30,317,000 under the asset management, pipeline and storage contracts in fiscal years 2020 and 2019, respectively. The table below details the pipeline and storage capacity commitments as of September 30, 2020 for the remainder of the contract period. Year Pipeline and Storage Capacity 2020-2021 $ 11,048,798 2021-2022 10,284,092 2022-2023 7,403,271 2023-2024 5,743,826 2024-2025 3,167,937 Thereafter 888,426 Total $ 38,536,350 Roanoke Gas maintains franchise agreements granted by the local cities and towns served by the Company. Roanoke Gas renewed its franchise agreements with the City of Roanoke, the City of Salem and the Town of Vinton in 2016 for 20 -year terms to expire in December 2035. Per these agreements, franchise fees increase at a rate of 3 % annually throughout the term of the agreements. As of September 30, 2020, $ 2,294,588 in future obligations remain under the franchise agreements. Other Contracts The Company maintains other agreements in the ordinary course of business covering various lease, maintenance, equipment and service contracts. These agreements currently extend through December 2031 and are not material to the Company. 67 Legal From time to time, the Company may become involved in litigation or claims arising out of its operations in the normal course of business. At the current time, the Company is not known to be a party to any legal proceedings that would be expected to have a materially adverse impact on its financial position, results of operations or cash flows. Environmental Matters Roanoke Gas operated an MGP as a source of fuel for lighting and heating until the early 1950’s. A by-product of operating the MGP was coal tar, and the potential exists for tar waste contaminants at the former plant site. While the Company does not currently recognize any commitments or contingencies related to environmental costs, should the Company ever be required to remediate the site, it will pursue all prudent and reasonable means to recover any related costs, including the use of insurance claims and regulatory approval for rate case recognition of expenses associated with any work required. 13. FAIR VALUE MEASUREMENTS The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements by level within the fair value hierarchy as defined in Note 1 as of September 30, 2020 and 2019, respectively: Fair Value Measurements - September 30, 2020 Fair Value Quoted Prices in Active Markets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Liabilities: Natural gas purchases $ 470,755 $ — $ 470,755 $ — Interest rate swaps 2,223,556 — 2,223,556 — Total $ 2,694,311 $ — $ 2,694,311 $ — Fair Value Measurements - September 30, 2019 Fair Value Quoted Prices in Active Markets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Liabilities: Natural gas purchases $ 397,757 $ — $ 397,757 $ — Interest rate swaps 894,341 — 894,341 — Total $ 1,292,098 $ — $ 1,292,098 $ — Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on the weighted average first of the month index prices corresponding to the month of the scheduled payment. At September 30, 2020 and 2019, the Company had recorded in accounts payable the estimated fair value of the liability determined on the corresponding first of month index prices for which the liability was expected to be settled. The Company’s non-financial assets and liabilities that are measured at fair value on a nonrecurring basis consist of its asset retirement obligations. The asset retirement obligations are measured at fair value at initial recognition based on expected future cash flows to settle the obligation. The carrying value of cash and cash equivalents, accounts receivable, borrowings under line-of-credit, accounts payable (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the shorter-term nature of these financial instruments. The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the consolidated financial statements as of September 30, 2020 and 2019. 68 Fair Value Measurements - September 30, 2020 Carrying Amount Quoted Prices in Active Markets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Liabilities: Notes payable $ 114,975,200 $ — $ — $ 124,740,970 Total $ 114,975,200 $ — $ — $ 124,740,970 Fair Value Measurements - September 30, 2019 Carrying Amount Quoted Prices in Active Markets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Liabilities: Notes payable $ 95,512,200 $ — $ — $ 100,900,952 Total $ 95,512,200 $ — $ — $ 100,900,952 The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt based on the underlying 20 -year Treasury rate or other Treasury instrument with a corresponding maturity period and estimated credit spread extrapolated based on market conditions since the issuance of the debt. FASB ASC 825 – Financial Instruments requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants. 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial data for the years ended September 30, 2020 and 2019 is summarized as follows: 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Operating revenues $ 19,785,453 $ 22,437,731 $ 11,071,918 $ 9,780,289 Operating income (loss) $ 5,081,979 $ 6,999,616 $ 1,335,663 $ ( 899,076 ) Net income (loss) $ 4,006,936 $ 5,680,316 $ 1,206,578 $ ( 329,296 ) Earnings (loss) per share of common stock: Basic $ 0.50 $ 0.70 $ 0.15 $ ( 0.04 ) Diluted $ 0.49 $ 0.70 $ 0.15 $ ( 0.04 ) 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Operating revenues $ 21,216,747 $ 25,274,959 $ 11,682,950 $ 9,851,869 Operating income $ 3,264,222 $ 6,203,483 $ 1,637,057 $ 490,702 Net income $ 2,434,162 $ 4,670,090 $ 1,138,555 $ 455,605 Earnings per share of common stock: Basic $ 0.30 $ 0.58 $ 0.14 $ 0.06 Diluted $ 0.30 $ 0.58 $ 0.14 $ 0.06 15. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the financial statements were issued. There were no other items not otherwise disclosed which would have materially impacted the Company’s consolidated financial statements. 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . None.