What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-11 compared with 2020-08-05 · 185 added, 378 removed, 116 unchanged (83% of the section changed)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The three-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2021.

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

As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual Report on Form 10-K, while vaccines are becoming available, COVID-19 and the resulting pandemic continue to have a significant impact on our local, state, national and global economies.

The actions taken to limit the spread and overcome the virus have significantly disrupted normal activities throughout the Company's service territory.

Management continues to monitor current conditions to ensure the continuation of safe and reliable service to customers and to maintain the safety of the Company's employees.

Since the beginning of the pandemic, Resources has been deemed an essential entity by virtue of the utility services provided through Roanoke Gas.

The Company continues to experience a decline in natural gas consumption by commercial customers, excluding certain industrial customers that have increased gas consumption for use in their business processes.

The Company’s volume of gas delivered to residential customers, however, has remained relatively consistent year over year, excluding seasonal changes.

We expect the service moratorium, as discussed below under "Regulatory and Tax Reform," will continue at least into the summer of 2021.

Among other things, management has updated its provision for bad debts, is working with customers and the SCC to maximize use of CARES Act assistance, and is deferring incremental pandemic costs to file for relief with the SCC, as appropriate.

The full extent of these costs and the impact to the Company's results of operations and financial position remain unpredictable.

As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual Report on form 10-K, the ultimate impact to the Company will depend on future developments, including the duration, scope and severity of the pandemic, the increase or reduction in governmental restrictions to businesses and individuals, the continued resurgence of the virus or any variants thereof, as well as the timing, availability and efficacy of a vaccine.

The longer the pandemic continues, the greater the potential negative financial effect on the Company and its customers.

Management believes the economic impact of the pandemic will continue well into calendar year 2021.

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In addition, Resources is a more than 1% investor in the MVP through its Midstream subsidiary and provides certain unregulated services through its Roanoke Gas subsidiary.

The unregulated operations of Roanoke Gas represent less than 2% of total revenues of Resources on an annual basis.

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

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

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

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

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

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

Currently, the unregulated operations of Roanoke Gas represent less than 1% of total revenues of Resources on an annual basis.

The Company is also subject to federal regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines.

FERC regulates the prices for the transportation and delivery of natural gas to the Company’s distribution system and underground storage services.

FERC regulates the prices for the transportation and delivery of natural gas to the Company’s distribution system and underground storage.

The Company is also subject to other regulations which are not necessarily industry specific.

Over 98% of the Company’s annual revenues, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas to Roanoke Gas customers.

Nearly all of the Company’s annual revenues, excluding equity in earnings of MVP, are derived from the sale and delivery of natural gas to Roanoke Gas customers.

The SCC authorizes the rates and fees the Company charges its customers for these services.

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On October 10, 2018, Roanoke Gas filed a general rate application requesting an annual increase in customer non-gas base rates.

Roanoke Gas implemented the non-gas rates contained in its rate application for natural gas service rendered to customers on or after January 1, 2019.

On January 24, 2020, the SCC issued the final order on the general rate application, granting Roanoke Gas an annualized increase in non-gas base rates of $7.25 million.

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

Roanoke Gas implemented the non-gas rates contained in its rate application (or the "interim rates") for natural gas service rendered to customers on or after January 1, 2019.

On January 24, 2020, the SCC issued its final order on the general rate application, granting Roanoke Gas an annualized increase in non-gas base rates of $7.25 million.

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

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

Between the enactment of the new tax rates and the Company's implementation of new non-gas rates effective January 1, 2019, the Company was recovering revenues based on a 34% federal income tax rate rather than a 21% federal tax rate.

As a result, during this period, the Company recorded a provision for refund related to estimated excess revenues collected from customers for the difference in non-gas rates derived under the lower federal tax rate and the 34% rate in effect.

Beginning in January 2019, Roanoke Gas incorporated the effect of the 21% federal income tax rate with the implementation of new non-gas base rates, as filed in its general rate application, and began refunding the excess revenues associated with the change in the tax rate.

The refund of the excess revenues related to the reduction in the federal income tax rate was completed in December 2019.

The Company also recorded a regulatory liability related to the excess deferred income taxes on the regulated operations of Roanoke Gas.

These excess deferred income taxes are being refunded to customers over a 28-year period.

Additional information regarding the TCJA and non-gas base rate award is provided under the Regulatory and Tax Reform section below.

As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders.

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

Generally, investments related to extending

Generally, investments related to extending service to new customers are recovered through the non-gas base rates currently in place.

The investment in replacing and upgrading existing infrastructure is generally not recoverable until a formal rate application is filed to include the additional investment, and new non-gas base rates are approved.

The SAVE Plan and Rider provides the Company with the ability to recover costs related to these SAVE qualified infrastructure investments on a prospective basis.

The SAVE Plan provides a mechanism through which the Company may recover the related depreciation and expenses and provides a return on rate base of the additional capital investments related to improving the Company's infrastructure until such time a formal rate application is filed to incorporate these investments in the Company's non-gas base rates.

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

Accordingly, SAVE Plan revenues increased by $324,000 for the three month period ended December 31, 2020 compared to the same period last year, reflecting the reset of the SAVE Plan and the subsequent SAVE Plan investment.

The WNA model reduces earnings volatility related to weather variability in the heating season.

The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when the weather is colder than normal.

The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal and correspondingly requires the Company to refund the excess margin earned for weather that is colder than normal.

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

For the three-months ended December 31, 2020, the Company accrued approximately $947,000 in additional revenues under the WNA model for weather that was nearly 16% warmer than normal, compared to approximately $167,000 in additional revenue for weather that was 4% warmer than normal during the same period last year.

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

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

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

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

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

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

The WNA model reduces earnings volatility, related to weather variability in the heating season, by providing the Company a level of earnings protection when weather is warmer than normal and providing customers some price protection when the weather is colder than normal.

The WNA is based on a weather measurement band around the most recent 30-year temperature average.

Under the WNA, the Company recovers from its customers the lost margin (excluding gas costs) from the impact of weather that is warmer than normal or refunds the excess margin earned for weather that is colder than normal.

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

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

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

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

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

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

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

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

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

Under this rate structure, Roanoke Gas recognizes revenue for the financing costs, or “carrying costs,” of its investment in natural gas inventory.

Under this rate structure, Roanoke Gas recognizes revenue for the financing costs, or “carrying costs,” of its inventory.

This ICC factor applied to the cost of inventory is based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity.

During times of rising gas costs and rising inventory levels, the Company recognizes ICC revenues to offset higher financing costs associated with higher inventory balances.

Conversely, during times of decreasing gas costs and lower inventory balances, the Company recognizes less carrying cost revenue as financing costs are lower.

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

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

During times of rising gas costs and rising inventory levels, Roanoke Gas recognizes ICC revenues to offset higher financing costs associated with higher inventory balances.

Conversely, during times of decreasing gas costs and lower inventory balances, the Company recognizes less ICC revenue as financing costs are lower.

In addition, ICC revenues are impacted by the changes in the weighted-average cost of capital.

Total ICC revenues for the three month period ended December 31, 2020 declined by approximately 19% from the same period last year primarily due to lower average price of gas in storage balances and a reduction in the ICC factor used in calculating these revenues.

The Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers.

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

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

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

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

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At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as those amounts are reflected in customer billings.

Cyber attacks are a constant threat to businesses and individuals.

The Company remains focused on these threats and is committed to safeguarding its information technology systems.

These systems contain confidential customer, vendor and employee information as well as important operational financial data.

There is risk associated with unauthorized access of this information with a malicious intent to corrupt data, cause operational disruptions or compromise information.

Management continuously monitors access to these systems and believes it has security measures in place to protect these systems from cyber attacks and similar incidents;

however, there can be no guarantee that an incident will not occur.

In the event of a cyber

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

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

The Company has recognized significant income from equity in earnings of MVP in the past, as AFDUC has been added to income.

Effective January 1, 2021, the LLC determined to cease further recognition of AFUDC on the MVP.

The decision to temporarily suspend the accrual of AFUDC relates to the LLC’s change in its approach to seeking authorization to cross all remaining streams and wetlands on the project route.

The LLC will seek an individual permit for certain stream and wetland crossings and will apply to amend the MVP project's CPCN to seek FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods, resulting in limited growth construction activities during the process to obtain the requisite approvals.

Assuming the necessary approvals are received for the crossings and construction resumes, AFUDC would again be recognized until such time as the project is ready to be placed into service.

During the first quarter of fiscal 2021, the Company recognized $1,356,000 in AFUDC income from its investment in the LLC.

Therefore, effective January 1, 2021, the Company will no longer recognize AFUDC income from its investment in the LLC until the LLC resumes such construction activities.

As a result of the above, effective January 1, 2021, Roanoke Gas will suspend AFUDC on its two gate stations that will connect to MVP until such time as construction activities resume on MVP.

For the first quarter of fiscal 2021, Roanoke Gas recognized $55,981 of AFUDC income associated with these gate stations.

Results of Operations

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

cost of gas - utility.

The cost of natural gas is passed through to customers at cost, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA.

Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as utility revenues less cost of gas, is a more useful and relevant measure to analyze financial performance.

The analysis on the results of operations is based on the consolidated operations of the Company, which is primarily associated with the utility segment.

Additional segment analysis is provided in areas where the investment in affiliates segment (investment in MVP and Southgate) represent a significant component of the comparison.

Management believes that gross utility margin, a non-GAAP financial measure defined as the difference between condensed consolidated income statement line items gas utility revenues and cost of gas - utility, is a more useful and relevant measure to analyze financial performance.

The term gross utility margin is not intended to represent or replace operating income, the most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies.

The following results of operations analyses will reference gross utility margin.

Three Months Ended June 30, 2020:

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

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

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

Three Months Ended June 30,

2020 2019 Increase / (Decrease) Percentage

Operating Revenues

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

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

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

Delivered Volumes

Regulated Natural Gas (DTH)

Residential and Commercial 949,845 760,514 189,331 25 %

Transportation and Interruptible 1,244,246 667,711 576,535 86 %

Total Delivered Volumes 2,194,091 1,428,225 765,866 54 %

HDD (Unofficial) 460 185 275 149 %

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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gas rate increase.

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

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

Three Months Ended June 30,

2020 2019 Decrease Percentage

Gross Utility Margin

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

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

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

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

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

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

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

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

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

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

Three Months Ended June 30,

2020 2019 Increase / (Decrease)

Customer Base Charge $ 3,613,710 $ 2,616,903 $ 996,807

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

SAVE Plan 348,434 96,483 251,951

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three Months Ended December 31, 2020:

Net income increased by $716,327, or 18%, for the three months ended December 31, 2020, compared to the same period last year.

Quarterly performance improved due to a combination of SAVE Plan revenues, earnings on the MVP investment and reduction in operating and maintenance expenses.

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

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

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

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

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

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

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

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

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

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

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

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

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

Both periods included the amortization of excess deferred taxes.

Nine Months Ended June 30, 2020:

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

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

Nine Months Ended June 30,

2020 2019 Increase / (Decrease) Percentage

Three Months Ended December 31,

2020 2019 Decrease Percentage

Operating Revenues

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HDD (Unofficial) 1,248 1,440 (192) (13) %

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

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

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

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

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

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

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

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

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

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

Nine Months Ended June 30,

Total operating revenues for the three months ended December 31, 2020, compared to the same period last year, declined by 1% as reduced revenues from lower natural gas deliveries were mostly offset by higher WNA and SAVE revenues.

Total residential and commercial volumes declined by 9% due to a 13% decrease in heating degree days from the same period last year.

Transportation and interruptible volumes, which are excluded from the WNA calculations, decreased by 6%, in part as a result of the economic impact of COVID-19 on natural gas sales.

SAVE Plan revenues increased by $324,085 due to the ongoing investment in qualified SAVE infrastructure projects.

Non-utility revenues decreased due to the completion of a significant long-term contract in fiscal 2020, which accounted for more than 75% of total non-utility revenues.

Three Months Ended December 31,

2020 2019 Increase / (Decrease) Percentage

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Gross Utility Margin $ 11,782,801 $ 11,447,800 $ 335,001 3 %

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

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

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

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

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

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

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

Gross utility margins increased from the same period last year primarily as a result of the aforementioned higher SAVE revenues.

WNA-adjusted volumes remained relatively flat year-over-year.

The higher customer base charge revenues, associated with customer growth, nearly offset reductions in ICC and other revenues.

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

Nine Months Ended June 30,

Three Months Ended December 31,

2020 2019 Increase / (Decrease)

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Other Gas Revenues 34,319 60,091 (25,772)

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

Total $ 11,782,801 $ 11,447,800 $ 335,001

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

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

The Company recorded the valuation adjustment in December 2019.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The average interest rate decreased from 3.71% to 2.98% due to the decline in the variable interest rate on Midstream's credit facility and the entry into two separate notes with swap rates at 3.24% and 3.14%.

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

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

Operations and maintenance expenses decreased by $415,348 from the same period last year primarily due to the write-down and amortization of ESAC regulatory assets during the prior year.

In January 2020, the SCC issued their final order on Roanoke Gas' non-gas base rate application.

Included in the order approving the rate award on the non-gas base rate application was a requirement to write-down $317,000 in ESAC assets that were not subject to recovery.

In addition, the first quarter of fiscal 2020 also included $107,000 of ESAC asset amortization.

In September 2020, the Company wrote-off the remaining ESAC balance of $525,000 as a result of an earnings test required as part of the annual AIF filing with the SCC.

Accordingly, the Company did not reflect any ESAC asset amortization during the quarter ended December 31, 2020.

General taxes increased by $30,787, or 6%, due to higher property taxes related to ongoing investments in infrastructure replacement, system reinforcements and customer growth.

Depreciation expense increased by $164,893, or 8%, on a comparable increase in utility plant balances.

Equity in earnings of unconsolidated affiliate increased by $262,597, or 24%, as the investment in MVP increased.

Other income, net increased by $172,383 primarily due to a $112,000 decrease in the non-service cost components of net periodic benefit costs and $42,000 from the equity portion of AFUDC.

Under the requirements of ASC 715, the components of net periodic benefit costs other than service cost are to be classified outside of income from operations.

The reduction in these costs is attributable to reduced interest cost due to a lower discount rate applied to the benefit plans' liabilities and higher projected earnings on plan assets attributable to asset growth.

In the final order on the Company's non-gas rate application, the SCC allowed Roanoke Gas to defer financing costs related to the two natural gas transfer stations that will interconnect Roanoke Gas' distribution system with the MVP.

Beginning in the second quarter of fiscal 2020, the Company used the industry standard practice of AFUDC to defer these costs for potential recovery in future rate proceedings.

Interest expense decreased by $65,356, or 6%, as total average debt outstanding increased 18% between quarters.

The higher borrowing levels, derived from the ongoing investment in MVP and financing expenditures in support of Roanoke Gas' capital budget, were offset by a 16% reduction in the weighted average interest rate on the Company's variable rate debt.

Interest expense was also reduced by $14,000 for the capitalization of the interest component of AFUDC related to the two interconnect gate stations with the MVP and accrued interest in the prior year related to the rate refund.

Roanoke Gas' interest expense declined by $14,523 primarily due to the capitalization of $14,000 for the interest portion of AFUDC.

Midstream's interest expense decreased by $50,833.

The decline in the average variable interest rate of Midstream's credit facility from 3.17% to 2.28% more than offset the effect of the $7,768,000 increase in total average debt outstanding associated with cash investments in the MVP.

Income tax expense increased by $283,417 corresponding to an increase in taxable income.

The effective tax rate was 24.4% and 23.7% for the three month periods ended December 31, 2020 and 2019, respectively.

The effective tax rate for the prior year was low due to excess deductions related to the vesting of restricted stock and the exercise of stock options.

Critical Accounting Policies and Estimates

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Actual results may differ significantly from these estimates and assumptions.

The Company considers an estimate to be critical if it is either quantitatively or qualitatively material to the financial statements and requires assumptions to be made that were uncertain at the time the estimate was derived and changes in the estimate are reasonably likely to occur from period to period.

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

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

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

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

The Company adopted 2016-02, Leases , and subsequent guidance and amendments effective October 1, 2019.

The adoption of the ASU did not have a significant effect on the Company's results of operations, financial position or cash flows as the Company has only one lease, and management determined that the value of the lease obligation was de minimis.

The Company does have easements for rights-of-way for its distribution system;

however, all related costs associated with these have been paid in advance with no remaining obligation.

There have been no other changes to the critical accounting policies as reflected in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019.

There have been no changes to the critical accounting policies as reflected in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020.

Asset Management

Roanoke Gas uses a third-party asset manager to manage its pipeline transportation, storage rights and gas supply inventories and deliveries.

Roanoke Gas uses a third-party asset manager to oversee its pipeline transportation, storage rights and gas supply inventories and deliveries.

In return for being able to utilize the excess capacities of the transportation and storage rights, the asset manager pays Roanoke Gas a monthly utilization fee.

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Equity Investment in Mountain Valley Pipeline

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

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

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

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

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

In addition to Midstream's potential returns from its investment in the LLC, Roanoke Gas will benefit from this additional delivery source.

Currently, Roanoke Gas is served by two pipelines and an LNG peak-shaving facility.

Damage to or interruption in supply from any of these sources, especially during the winter heating season, could have a significant impact on the Company's ability to serve its customers.

This additional capacity would reduce the impact from such an event as well as allow the Company to better meet both current and future demands for natural gas.

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

Total MVP project work is approximately 92% complete.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The FERC issued the CPCN for Southgate in June 2020.

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

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

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

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While the total MVP project work is approximately 92% complete, recent construction activity has been limited based on legal and regulatory challenges.

Although certain permits and authorizations were received in the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021, there remain pending challenges and authorization requests impacting current progress.

Following a comprehensive review of all outstanding stream and wetland crossings across the approximately 300-mile MVP project route, on January 26, 2021, the LLC announced its intention to submit (i) a joint application package to each of the Huntington, Pittsburgh and Norfolk Districts of the U.S.

Army Corps of Engineers (Army Corps) that will request an individual permit from the Army Corps to cross certain streams and wetlands utilizing open cut techniques (the Army Corps Individual Permit) and (ii) an application to amend the MVP project’s CPCN that will seek FERC authority to cross certain streams and wetlands utilizing alternative trenchless construction methods.

The LLC believes that this modified approach to seeking authorization to cross all remaining streams and wetlands on the project route, in lieu of continuing to pursue authority under Nationwide Permit 12 and the formerly pending FERC request to amend the CPCN to utilize trenchless construction methods to cross all streams and wetlands for the first 77 miles of the project route, presents the most efficient and effective path to project completion.

The LLC continues to target a full in-service date for the MVP project in late 2021 at a total project cost of $5.8 billion to $6.0 billion (excluding AFUDC).

In order to complete the MVP project in accordance with the targeted full in-service date and cost, the LLC must, among other things:

(i) timely receive the Army Corps Individual Permit, which will require Section 401 water quality certification approvals or waivers from each of the West Virginia Department of Environmental Protection and the Virginia Department of Environmental Quality and certain other state-level approvals;

(ii) maintain and, as applicable, timely receive required authorizations, including authorization to proceed with construction, related to the Jefferson National Forest from the Bureau of Land Management, the U.S.

Forest Service and the FERC;

(iii) timely receive authorization from the FERC to utilize alternative trenchless construction methods for certain stream and wetland crossings;

(iv) continue to have available the orders previously issued by the FERC modifying its prior stop work orders and extending the LLC’s prescribed time to complete the MVP project;

(v) timely receive authorization from the FERC to complete construction work in the portion of the project route currently remaining subject to the FERC’s previous stop work order;

and (vi) continue to be authorized to work under the Biological Opinion and Incidental Take Statement issued by the United States Department of the Interior’s Fish and Wildlife Service for the MVP project, in each case including the continued effectiveness of any such foregoing or other authorizations notwithstanding any pending or future challenge thereto.

Failure to achieve any one of the above items could lead to additional delays and higher project costs.

Resources' current earnings from the MVP investment are attributable to AFUDC income generated by the LLC.

As a result of the above-described change in approach to seeking authorization to cross all remaining streams and wetlands on the project route, limited construction activities on the project are expected during the process to obtain the requisite approvals.

Accordingly, the LLC will suspend the accruing of AFUDC on the project subsequent to December 31, 2020 and until construction activities resume and, as a result, Resources will not recognize AFUDC income from MVP during this suspension.

Additionally, Roanoke Gas will also suspend accruing AFUDC for a similar period of time on its two gate stations that will interconnect with the MVP.

Midstream has borrowing capacity of $41 million under its current credit facility, which matures in December 2022.

As of December 31, 2020, $28.4 million had been utilized.

This credit facility will provide additional financing capacity for MVP funding;

however, due to ongoing delays, additional financing may be required.

If the legal and regulatory challenges, including any future challenges, are not resolved in a timely manner and/or restrictions are imposed by the government related to COVID-19 that impact future construction, the cost of the MVP and Midstream's capital contributions may increase above current projections, resulting in additional financing requirements.

Regulatory and Tax Reform

On October 10, 2018, Roanoke Gas filed a general rate case application requesting an annual increase in customer non-gas base rates.

This application incorporated into the non-gas base rates the impact of tax reform, non-SAVE utility plant investment, increased operating costs, recovery of regulatory assets, including all deferred ESAC related costs, and SAVE Plan investments and related costs previously recovered through the SAVE Rider.

Approximately $4.7 million of the rate increase was attributable to moving the SAVE Plan related revenues into non-gas base rates.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On March 16, 2020, in response to COVID-19, the SCC issued an order applicable to all utilities operating in Virginia to suspend disconnection of service to all customers until May 15, 2020, which was subsequently extended to August 31, 2020.

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

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

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

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

The Company has increased its provision for bad debts;

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

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

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

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

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

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

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

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

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

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

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

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

Roanoke Gas recorded two regulatory liabilities to account for this change in the federal tax rate.

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

On January 24, 2020, the SCC issued its final general rate case order awarding Roanoke Gas an annualized non-gas rate increase of $7.25 million and providing for a 9.44% return on equity.

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

As a result, in the first quarter of fiscal 2020 Roanoke Gas expensed an additional $317,000 of ESAC assets above the normal amortization amount.

Rates authorized by the SCC's final order required the Company to issue customers $3.8 million in rate refunds, which was completed in March 2020.

The final order also excluded from current rates a return on the investment of two interconnect stations with the MVP, but noted Roanoke Gas could defer the related financing costs of those investments for possible future recovery.

As a result, the Company

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

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

A majority of the regulatory liability for excess deferred taxes was attributable to accelerated tax depreciation related to utility property.

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

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

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

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

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

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

Starting with the implementation of the new non-gas base rates in January 2019, Roanoke Gas began returning the excess revenues to customers over a 12-month period.

The refund of the excess revenues was completed in December 2019.

The Company continues to recover the costs of its infrastructure replacement program through its SAVE Plan.

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

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

began recognizing AFUDC during the second quarter of fiscal 2020 to capitalize both the equity and debt financing costs incurred during the construction phases.

For the quarter ended December 31, 2020, Roanoke Gas recognized a total of $55,980 in AFUDC, $41,977 and $14,003 of equity and debt carrying costs, respectively.

As of January 1, 2021, the LLC will temporarily cease recording AFUDC while the MVP is temporarily inactive and awaiting the resolution of regulatory and permitting issues;

therefore, Roanoke Gas will temporarily cease recording AFUDC on its related MVP interconnect construction projects.

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

The Commission extended the moratorium on disconnections through October 5, 2020.

Subsequently, the Virginia General Assembly extended the moratorium for residential customers until the Governor determines that the economic and public health conditions have improved such that the prohibition does not need to remain in place, or until at least 60 days after such declared state of emergency ends, whichever is sooner.

Under the moratorium, utilities are prohibited from disconnecting residential customers for non-payment of their natural gas service and from assessing late payment fees;

therefore, residential customers that would normally be disconnected for non-payment will continue incurring costs for gas service until the moratorium is removed, resulting in higher potential bad debt write-offs.

Roanoke Gas continues to evaluate and adjust its provision for bad debts;

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

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

In April 2020, the SCC issued an order allowing regulated utilities in Virginia to defer certain incremental, prudently incurred costs associated with the COVID-19 pandemic and to apply for recovery at a future date.

Formal guidance has not been provided by the SCC at this time.

Roanoke Gas expects to defer certain COVID related costs during fiscal 2021 and plans to seek recovery of these deferrals at the appropriate time.

CARES Act funds have been provided to assist customers with past due balances.

In December 2020, Roanoke Gas received $403,000 in CARES Act funds and is currently working with the SCC to determine the amount of funding for each eligible customer.

Roanoke Gas continues to recover the costs of its infrastructure replacement program through its SAVE Plan.

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

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

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

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

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

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

The application is currently pending with the SCC.

In September 2020, the SCC issued its order approving the updated SAVE Plan and Rider effective with the October 2020 billing cycle.

The new SAVE Rider is designed to collect approximately $2.3 million in annual revenues, an increase from the approximate $1.2 million in annual revenues from the prior SAVE Rider rates.

Capital Resources and Liquidity

Due to the capital intensive nature of the utility business, as well as the related weather sensitivity, the Company’s primary capital needs are the funding of its utility plant capital projects, investment in the MVP, the seasonal funding of its natural gas inventories and accounts receivable and the payment of dividends.

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

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

To meet these needs, the Company relies on its operating cash flows and available financing under short-term and long-term credit agreements.

Cash and cash equivalents increased by $445,599 for the three-month period ended December 31, 2020, compared to a $619,001 decrease for the same period last year.

The following table summarizes the sources and uses of cash:

Nine Months Ended June 30,

Three Months Ended December 31,

Cash Flow Summary 2020 2019

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Increase (decrease) in cash and cash equivalents $ 445,599 $ (619,001)

The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year.

Factors, including weather, energy prices, natural gas storage levels and customer collections, contribute to working capital levels and related cash flows.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nine Months Ended June 30,

Cash Flows Provided by Operating Activities:

The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year.

Factors, including weather, energy prices, natural gas storage levels and customer collections, contribute to working capital levels and related cash flows.

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

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

Cash flows from operating activities for the three-months ended December 31, 2020 decreased by $665,053 from the same period last year.

The decrease in cash flow provided by operations was primarily driven by changes in regulatory assets and liabilities, partially offset by net income.

The table below summarizes the significant operating cash flow components:

Three Months Ended December 31,

Cash Flow From Operating Activities:

1 unchanged sentence

Net income $ 4,723,263 $ 4,006,936 $ 716,327

Non-cash adjustments:

Depreciation 2,215,525 2,047,695 167,830

1 unchanged sentence

AFUDC (55,980) — (55,980)

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

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

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

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

Increase (decrease) in rate refund - regulatory liabilities (3,827,588) 1,444,807 (5,272,395)

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

ESAC assets — 424,710 (424,710)

Changes in working capital and regulatory assets and liabilities:

Accounts receivable (6,513,338) (6,356,346) (156,992)

Gas in storage 639,751 432,679 207,072

WNA (935,993) (166,598) (769,395)

Accounts payable 1,320,516 1,080,138 240,378

Change in over (under) collection of gas costs 242,057 915,726 (673,669)

Rate refund — (209,192) 209,192

Other (126,208) (263,699) 137,491

Net Cash Provided by Operations $ 152,910 $ 817,963 $ (665,053)

Warmer weather during the fiscal first quarter ended December 31, 2020, as compared to the same prior year period, resulted in a WNA-related cash decline of approximately $770,000.

As natural gas commodity prices declined in calendar 2020, the Company’s gas cost recovery moved from an over-collected position at December 31, 2019 to an under-collected position in 2020, driving a $674,000 decrease in operating cash flow.

These significant quarter-over-quarter decreases were partially offset by increases in net income, net of AFUDC earnings, and depreciation.

Fiscal 2020 also had non-cash expense for the write-down and amortization of ESAC regulatory assets during the fiscal quarter ended December 31, 2019.

Cash Flows Used in by Investing Activities:

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

The Company is continuing its focus on SAVE infrastructure replacement projects

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

Total capital expenditures for the three months ended December 31, 2020 were $5.3 million, compared to $5.8 million during same period last year.

Capital expenditures for fiscal 2021 are expected to remain consistent with the prior year.

Investing cash flows also include the Company's continued funding of its participation in the MVP, with a total cash investment of $2.5 million for the quarter ended December 31, 2020, or about one-half the amount in the corresponding period last year.

RGC RESOURCES, INC.

AND SUBSIDIARIES

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

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

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

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

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

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

Cash Flows Provided by Financing Activities:

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

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

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

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

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

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

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 and an availability fee of 15 basis points and provides multi-tiered borrowing limits associated with the seasonal borrowing demands of the Company.

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

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

The amendment became effective on February 4, 2020.

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

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

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

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

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

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

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

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

On December 6, 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 will be used to provide longer-term financing of Roanoke Gas' capital budget.

Net cash flows provided by financing activities were $8.1 million, for the three months ended December 31, 2020, compared to $9.4 million for the same period last year.

The decrease in financing cash flows is primarily attributable to reduced borrowings, related to lower capital contribution requirements to fund Midstream's investment in the MVP and the December 2019 placement of unsecured notes providing Roanoke Gas' capital budget funding.

Management regularly evaluates the Company’s liquidity through a review of its available financing resources.

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

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

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

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

Furthermore, the Company can adjust Roanoke Gas’ capital spending to reduce funding requirements if necessary.

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

Furthermore, the Company can draw funds under one of its two private shelf facility credit agreements or adjust Roanoke Gas’ capital spending to reduce funding requirements if necessary.

Midstream has borrowing capacity of $41 million under its current credit facility, which matures in December 2022.

As of December 31, 2020, $28.4 million had been utilized.

This credit facility will provide additional financing capacity for MVP funding;

however, due to ongoing delays, additional financing may be required.

For further discussion regarding Midstream's borrowing capacity, see the "Equity Investment in Mountain Valley Pipeline" section above.

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

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

As of December 31, 2020, Resources' long-term capitalization ratio was 41% equity and 59% debt.

RGC RESOURCES, INC.

AND SUBSIDIARIES

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

RGC RESOURCES, INC.

AND SUBSIDIARIES

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis