Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .
Overview
Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 62,500 residential, commercial and industrial customers in Roanoke, Virginia, and the surrounding localities, through its Roanoke Gas subsidiary. Midstream, a wholly owned subsidiary of Resources, is a less than 1% investor in both the MVP and Southgate. More information regarding the investment in MVP is provided below and under the Equity Investment in Mountain Valley Pipeline section.
The utility operations of Roanoke Gas are regulated by the SCC, which oversees the terms, conditions and rates charged to customers for natural gas service, safety standards, extension of service and depreciation. Nearly all of the Company’s revenues are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates and fees authorized by the SCC. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather. These rates are determined based on various rate applications filed with the SCC. Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates in place at that time. The investment in replacing and upgrading existing infrastructure, as well as recovering increases in non-gas expenses due to inflationary pressures, regulatory requirements or operation needs, are generally not recoverable until a formal rate application is filed to include additional investment and higher costs, and new non-gas base rates are approved.
The Company is also subject to regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines, as well as the FERC, which regulates the prices for the transportation and delivery of natural gas to the Company's distribution system and underground storage services. In addition, Roanoke Gas is subject to other regulations which are not necessarily industry specific.
Beginning January 1, 2023, Roanoke Gas implemented interim, non-gas base rates designed to provide $8.55 million in additional annual revenues in response to higher operating costs and to recover its investment in non-SAVE related projects since the prior non-gas base rate increase in fiscal 2019. Revenues from the SAVE Plan and Rider were incorporated into the interim, non-gas base rates. On December 19, 2023, the SCC issued a final order approving a non-gas base rate increase of $7.45 million. The order also directed Roanoke Gas to refund the excess revenues collected during the time the interim rates were in effect with interest. Refunds to customers, which were accrued in fiscal 2023 and reflected in regulatory liabilities, were made in February 2024. On February 2, 2024, primarily in response to continued inflationary pressures, Roanoke Gas filed for a non-gas base rate increase of $4.33 million. The filing also reflected an increase in the Company's authorized return on equity from 9.44% to 10.35%. The new interim non-gas base rates went into effect for customer billings on or after July 1, 2024, subject to refund. On October 16, 2024, the Company reached a settlement with the SCC staff on all outstanding issues in the case. Under the terms of the settlement, the Company agreed to an annual incremental revenue requirement increase of $4.08 million based on a return on equity of 9.90%.
Following extended periods of regulatory and judicial delays, as well as receipt of authorization from the FERC, the MVP entered into service on June 14, 2024 and became available for interruptible or short-term firm transportation service. On July 1, 2024, the MVP commenced long-term firm capacity obligations. See the Equity Investment in Mountain Valley Pipeline section for additional information on the MVP.
As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders. In order to mitigate the effect of weather variations and other factors not provided for in the Company's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability to customer bills and earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment. These mechanisms include the SAVE Rider, WNA, ICC, RNG and PGA.
The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to SAVE qualified infrastructure investments on a prospective basis, until such time a formal rate application is filed incorporating these investments in non-gas base rates. The SAVE Plan and Rider were reset effective January 1, 2023, when the recovery of all prior SAVE Plan investment was incorporated into the new non-gas base rates. Roanoke Gas filed and received approval from the SCC for a new SAVE Plan and Rider with new rates placed into effect on October 1, 2023, and as a result, SAVE Plan revenues declined to approximately $461,000 in fiscal 2024 from approximately $1,104,000 in fiscal 2023. Roanoke Gas filed and received approval from the SCC for an updated annual SAVE Rider rate to become effective October 1, 2024 that will result in approximately $1,389,000 of SAVE-related revenues during fiscal 2025. See Note 4 of the consolidated financial statements for additional information regarding the SAVE Plan and Rider.
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The WNA mechanism reduces the volatility in earnings due to the variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with a level of price protection when the weather is colder than normal. The WNA allows the Company to recover from customers the lost margin, excluding gas costs, from the impact of warmer-than-normal weather and correspondingly requires the Company to refund to customers the excess margin earned for colder-than-normal weather. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal. Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. The Company recorded approximately $3,761,000 and $3,005,000 in additional revenues under the WNA for weather that was approximately 20% and 16% warmer than normal for the fiscal years ended September 30, 2024 and 2023, respectively. The number of heating degree days used to determine normal can change annually as a new year is added to the 30-year period and the oldest year is removed. As a result of adding warmer than normal years to replace colder years, the number of heating degree days that defines normal has trended downward over the last several years.
The Company also has an approved rate structure that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity, to the average cost of natural gas inventory during the period. Total ICC revenues decreased from approximately $967,000 in fiscal 2023 to $728,000 in fiscal 2024 due to lower natural gas commodity prices during the 2023 summer storage injection season resulting in a lower average cost of natural gas in storage. The average price of gas in storage at September 30, 2024 declined by 23% compared to the same period last year. Accordingly, fiscal 2025 ICC revenues are expected to continue to remain below the prior year's levels.
In March 2023, Roanoke Gas began the operation of the RNG facility to produce commercial quality biogas for delivery into its distribution system through a cooperative agreement with the Western Virginia Water Authority. With SCC approval, Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and related operating costs through an RNG Rider added to customer bills. The customer benefits from this program through the monetization of environmental credits generated through RNG production, in which these credits are returned to customers through the RNG Rider. Total RNG revenue increased from approximately $712,000 in fiscal 2023 to $1,629,000 in fiscal 2024 as the facility was operational for a full twelve months in the current year compared to seven months in the prior year. See Note 4 of the consolidated financial statements for more information on RNG.
The cost of natural gas is a pass-through cost and is independent of the Company's non-gas rates. Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs through a quarterly filing (or more frequent if necessary) with the SCC. Once SCC approval is received, the Company adjusts the gas cost component of its rates. As actual costs and usage will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over an ensuing 12-month period as amounts are reflected in customer billings.
Inflation and Rising Prices
Natural gas commodity, delivery and storage capacity costs constitute the single largest expense of the Company, representing 53% of fiscal 2024 total operating expenses. After peaking in December 2022, natural gas commodity prices decreased significantly through the remainder of fiscal 2023 and fiscal 2024. The decline in prices was primarily due to improved supply availability resulting from a warm winter season. Roanoke Gas recovers natural gas costs through the PGA mechanism as noted above; however, in times where commodity prices rapidly increase, the timing of recovery may lag. Increasing natural gas prices, especially in relation to other energy options, may lead to reductions in energy consumption through customer conservation or fuel switching. In addition, there is potential for higher bad debts related to customers' inability to pay higher natural gas bills.
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Inflation, due to supply chain delays, labor shortages and limited availability of critical supplies, among other factors, affects the Company through increases in non-gas expenses such as labor, employee benefits, materials and supplies, contracted services, corporate insurance and other areas. The Company recovers non-gas related costs through the non-gas portion of its tariff rates, which are adjusted through a non-gas base rate application. Unlike the rate adjustments for the gas portion of rates which are done administratively, the non-gas base rate application process can result in an inherent lag in non-gas expense recovery. Therefore, authorized non-gas base rates may not keep pace with rising costs during inflationary periods. Management regularly evaluates the Company's operations, economic conditions and other factors to assess the need to apply for a non-gas base rate adjustment. Accordingly, management filed a non-gas rate application in February 2024 to incorporate increased expense levels from continued inflationary pressures since the last non-gas base rate application. These new non-gas base rates were implemented effective July 1, 2024, subject to refund. See Note 4 of the consolidated financial statements for more information, including reaching settlement with SCC staff.
Results of Operations
The analysis on the results of operations is based on the consolidated operations of the Company, which are primarily associated with the utility segment. Additional segment analysis is provided when Midstream's investment in affiliates represents a significant component of the comparison. Net income increased by $461,614 from the prior year primarily due to AFUDC and earnings from the MVP and the implementation of new non-gas base rates effective July 1, 2024, partially offset by increased inflationary pressures on operating expenses and higher interest rates.
The Company's operating revenues are affected by the cost of natural gas, as reflected in the consolidated statement of income under the line item cost of gas - utility. The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost. Accordingly, management believes that gross utility margin , a non-GAAP financial measure defined as utility revenues less cost of gas, is a useful and relevant measure to analyze financial performance. The term gross utility margin is not intended to represent or replace gross margin, t he most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies. A reconciliation between gross utility margin and gross margin is presented under the Gross Utility Margin section below.
The following results of operations analyses will reference gross utility margin.
Fiscal Year 2024 Compared with Fiscal Year 2023
The tables below reflect operating revenues, volume activity and heating degree days.
Operating Revenues
Year Ended September 30,
2024
2023
Increase / (Decrease)
Percentage
Gas utility
$
84,533,101
$
97,325,307
$
(12,792,206
)
(13
)%
Non utility
108,131
114,458
(6,327
)
(6
)%
Total operating revenues
$
84,641,232
$
97,439,765
$
(12,798,533
)
(13
)%
Delivered Volumes
Year Ended September 30,
2024
2023
Increase / (Decrease)
Percentage
Regulated natural gas (DTH)
Residential and commercial
6,252,546
6,408,436
(155,890
)
(2
)%
Transportation and interruptible
3,796,224
3,776,569
19,655
1
%
Total delivered volumes
10,048,770
10,185,005
(136,235
)
(1
)%
HDD
3,094
3,290
(196
)
(6
)%
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Total gas utility operating revenues for the year ended September 30, 2024 decreased by 13% from the year ended September 30, 2023 primarily due to significantly lower natural gas commodity prices and lower deliveries due to warmer weather more than offsetting the implementation of a non-gas base rate increase and increases in WNA and RNG revenues. Natural gas commodity prices for fiscal 2024 purchases declined by 43% per DTH from the prior year and the total commodity component of gas costs decreased by 44% per DTH from the prior year. Total gas costs, including pipeline and storage demand charges, decreased by 29% compared to a year ago, which corresponds to a 31% decline in the gas cost component included in total customer billing rate. Corresponding to the lower average price of natural gas in storage during 2024, ICC revenues declined 25%. In addition, total heating degree days decreased by 6% from the same period last year, resulting in a 2% decline in the weather-sensitive residential and commercial volumes, while transportation and interruptible volumes, primarily driven by business activity rather than weather, increased by 1%. The non-gas base rate increases implemented in 2023 and 2024 were the main contributing factors to an approximate $1.7 million increase in non-gas volumetric revenues, net of lower delivered volumes, and a $522,000 increase in customer base charge revenue. Additionally, the operation of the RNG facility for a full twelve months in the current year compared to seven months in the prior year resulted in increased revenues of approximately $917,000.
Gross Utility Margin
Year Ended September 30,
2024
2023
Increase
Percentage
Gas utility revenues
$
84,533,101
$
97,325,307
$
(12,792,206
)
(13
)%
Cost of gas - utility
35,967,987
51,742,718
(15,774,731
)
(30
)%
Gross utility margin
$
48,565,114
$
45,582,589
$
2,982,525
7
%
Gross utility margin increased over the prior fiscal year primarily as a result of the implementation of new non-gas base rates, net of SAVE, WNA and RNG revenue, offset by the reductions in ICC revenues. When adjusted for WNA, the volumetric margin increased by approximately $2,430,000. Base charge revenues increased by approximately $522,000 due to the non-gas base rate increase. The RNG Rider contributed an additional $917,000 to margin, as it was operational for all twelve months of fiscal 2024 compared to seven months during fiscal 2023, and ICC revenue declined by $239,000 due to lower cost of gas in storage.
The changes in the components of the gross utility margin are summarized below:
Years Ended September 30,
Increase
2024
2023
(Decrease)
Customer base charge
$
16,235,406
$
15,713,521
$
521,885
SAVE Plan
460,758
1,103,547
(642,789
)
Volumetric
25,600,298
23,925,200
1,675,098
WNA
3,760,540
3,005,249
755,291
ICC
727,825
966,851
(239,026
)
RNG
1,628,926
712,362
916,564
Other revenues
151,361
155,859
(4,498
)
Total
$
48,565,114
$
45,582,589
$
2,982,525
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Reconciliation between gross utility margin and gross margin is presented below:
Gas Utility
Investment in Affiliates
Consolidated Total
For the Year Ended September 30, 2024:
Operating revenues
Gas utility
$
84,533,101
$
—
$
84,533,101
Non utility
108,131
—
108,131
Total operating revenues
84,641,232
—
84,641,232
Cost of sales
Cost of gas - utility
(35,967,987
)
—
(35,967,987
)
Cost of sales - non utility
(24,003
)
—
(24,003
)
Depreciation and amortization
(10,518,094
)
—
(10,518,094
)
Operations and maintenance
(18,215,354
)
(133,486
)
(18,348,840
)
Corporate and other
—
—
(5,896
)
Total operations and maintenance
(18,215,354
)
(133,486
)
(18,354,736
)
Total cost of sales
(64,725,438
)
(133,486
)
(64,864,820
)
Gross margin (GAAP)
19,915,794
(133,486
)
19,776,412
Corporate and other, net
(84,128
)
—
(78,232
)
Depreciation and amortization
10,518,094
—
10,518,094
Operations and maintenance
18,215,354
133,486
18,348,840
Gross utility margin (Non-GAAP)
$
48,565,114
$
—
$
48,565,114
Gas Utility
Investment in Affiliates
Consolidated Total
For the Year Ended September 30, 2023:
Operating revenues
Gas utility
$
97,325,307
$
—
$
97,325,307
Non utility
114,458
—
114,458
Total operating revenues
97,439,765
—
97,439,765
Cost of sales
Cost of gas - utility
(51,742,718
)
—
(51,742,718
)
Cost of sales - non utility
(25,603
)
—
(25,603
)
Depreciation and amortization
(9,764,678
)
—
(9,764,678
)
Operations and maintenance
(15,669,677
)
(229,650
)
(15,899,327
)
Corporate and other
—
—
(4,645
)
Total operations and maintenance
(15,669,677
)
(229,650
)
(15,903,972
)
Total cost of sales
(77,202,676
)
(229,650
)
(77,436,971
)
Gross margin (GAAP)
20,237,089
(229,650
)
20,002,794
Corporate and other, net
(88,855
)
—
(84,210
)
Depreciation and amortization
9,764,678
—
9,764,678
Operations and maintenance
15,669,677
229,650
15,899,327
Gross utility margin (Non-GAAP)
$
45,582,589
$
—
$
45,582,589
Operations and Maintenance Expense - Operations and maintenance expense increased by $2,450,764, or 15%, over the prior year primarily due to inflationary effects on personnel costs, professional services, costs associated to operate and maintain the RNG facility and lower capitalized overheads. Personnel costs increased by approximately $1,094,000 due to increased staffing and the inflationary impact on salaries and benefits as well as awards of restricted stock. During fiscal 2023, no performance-based restricted stock was awarded, but was reinstated in fiscal 2024. Professional services expenses increased approximately $270,000 primarily due to increased external audit fees, actuarial services, recruiting costs and IT support. Further, costs associated with the RNG facility increased approximately $299,000, as the facility was only operational during seven months of the prior year as compared to all twelve months in the current year. Total capitalized construction overheads declined by approximately $429,000 compared to the prior year primarily due to a reduction in direct construction expenditures related to the RNG project, which was completed in fiscal 2023. Corporate insurance premiums accounted for much of the remaining cost increase.
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Taxes Other Than Income Taxes - Taxes other than income taxes increased by $370,338, or 16%, primarily due to higher property tax rates and growth in utility property, as well as increases in payroll taxes related to increased staffing and compensation.
Depreciation and Amortization - Depreciation and amortization expense increased by $753,416, or 8%, corresponding to a similar increase in net additions to depreciable utility property.
Equity in Earnings of Unconsolidated Affiliate - The equity in earnings of the MVP investment increased by $1,766,881 associated with the recognition of AFUDC as a result of MVP construction activities continuing through May 2024. With the MVP in service, the Company now recognizes its share of operational earnings from the MVP, favorably adjusted for the amortization of a basis difference that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. See Note 5 of the consolidated financial statements for additional information related to the MVP.
Other Income, Net - Other income increased by $382,233, or 59%, primarily due an increase of approximately $471,000 related to donations of certain natural gas distribution assets from a local housing authority. Additionally, revenue sharing related to the asset management agreements increased by approximately $239,000. These increases were offset by an approximate $286,000 decrease in AFUDC related to the RNG facility, which was placed in service in March 2023, and approximately $62,000 less interest income.
Interest Expense - Total interest expense increased by $886,080, or 16%, primarily due to higher interest rates on the Company's variable rate debt and, to a lesser extent, higher borrowing levels. The weighted-average interest rate on the Company's total debt increased from 3.83% during fiscal 2023 to 4.27% during fiscal 2024, representing a 12% increase in the average rate. Total average debt outstanding during fiscal 2024 increased by 3% from fiscal 2023. Total borrowing levels were mitigated by equity issues through the ATM in fiscal 2024.
Roanoke Gas' interest expense increased by $484,454, or 15%, as total average debt outstanding increased by approximately $5,600,000 associated with net borrowings under the Company's line-of-credit. The average interest rate increased slightly from 3.51% in fiscal 2023 to 3.72% in fiscal 2024. All of Roanoke Gas' long-term debt carry fixed rates either due to fixed rate notes or with variable rate debt that has a corresponding swap agreement. See Note 6 and 7 of the consolidated financial statements for more information on the Company's debt.
Midstream's interest expense increased by $401,626, or 17%, as the average interest rate on Midstream's total debt increased from 4.32% to 5.21% related to higher interest rates on the variable rate credit facilities that were refinanced in 2024, net of an approximate $1,600,000 decrease in total average debt outstanding during the period.
The current interest rate environment may result in lower interest costs associated with the Company's variable rate debt.
Income Taxes - Income tax expense increased by $204,700, or 6%, corresponding to an increase in pre-tax income. The effective tax rate was 23.9% and 23.6% for fiscal 2024 and 2023, respectively. The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and tax credits. See Note 9 of the consolidated financial statements for the impact of tax credits on the effective tax rate.
Earnings Per Share and Dividends - Basic and diluted earnings per share were $1.16 in fiscal 2024 compared to $1.14 per share in fiscal 2023. Dividends declared per share of common stock were $0.80 in fiscal 2024 compared to $0.79 in fiscal 2023.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the impact of weather variability, the Company’s primary capital needs are the funding of its capital projects, the seasonal funding of its natural gas inventories and accounts receivables, debt service and payment of dividends to shareholders. The Company anticipates funding these items through its operating cash flows, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.
Cash and cash equivalents decreased by approximately $618,000 in fiscal 2024 compared to $3.4 million in fiscal 2023. The following table summarizes the categories of sources and uses of cash:
Cash Flow Summary
Years Ended September 30,
2024
2023
Net cash provided by operating activities
$
17,433,625
$
23,796,700
Net cash used in investing activities
(22,033,632
)
(27,402,118
)
Net cash provided by financing activities
3,981,761
218,935
Net decrease in cash and cash equivalents
$
(618,246
)
$
(3,386,483
)
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Cash Flows Provided by Operating Activities:
The seasonal nature of the natural gas distribution business causes operating cash flows to fluctuate significantly during the year, as well as from year to year. Factors, including weather, energy prices, natural gas storage levels and customer collections, all contribute to working capital levels and related cash flows. Generally, operating cash flows are positive during the second and third fiscal quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth fiscal quarters, operating cash flows generally decrease due to the combination of increasing natural gas storage levels and rising customer receivable balances.
Cash flows from operating activities decreased by $6.4 million from the prior year. The table below summarizes the significant components operating cash flow:
Years Ended September 30,
Increase
Cash Flows From Operating Activities:
2024
2023
(Decrease)
Net income
$
11,760,896
$
11,299,282
$
461,614
Non-cash adjustments:
Depreciation
10,518,094
9,993,206
524,888
Equity in earnings
(3,851,871
)
(2,084,990
)
(1,766,881
)
AFUDC
—
(362,685
)
362,685
Changes in working capital and regulatory assets and liabilities:
Accounts receivable and customer deposits, net
(275,196
)
1,393,153
(1,668,349
)
Inventories and gas in storage
2,568,942
5,285,142
(2,716,200
)
Prepaid income taxes
865,475
(139,789
)
1,005,264
Change in under collection of gas costs
(1,306,907
)
(66,760
)
(1,240,147
)
Change in under collection of RNG revenues
(533,260
)
(797,804
)
264,544
Rate refund
(614,518
)
652,018
(1,266,536
)
Other
(1,698,030
)
(1,374,073
)
(323,957
)
Net cash provided by operating activities
$
17,433,625
$
23,796,700
$
(6,363,075
)
The decline in operating cash flows is primarily due to the reduction in the value of gas withdrawn from storage. The average price of gas in storage during fiscal 2023 was more than $6.00 per DTH compared to approximately $4.00 per DTH during the current fiscal year. The decrease in the unit cost of gas in storage was attributable to much lower commodity prices during last year's summer storage injections as compared to fiscal 2022. Accordingly, as lower-priced gas was withdrawn from storage during fiscal 2024, cash flow levels were reduced when compared to fiscal 2023. Additionally, though the SCC issued its final order in December 2023, Roanoke Gas implemented interim billing rates in January 2023; therefore, the Company began accruing an estimated rate refund representing the amount due customers for the difference between total customer billings at interim rates versus total customer billings at final rates. Upon SCC approval of final rates, Roanoke Gas issued refunds in February 2024 to all customers that were billed at interim rates since January 2023. When compared to the prior year, the distribution of the rate refund to customers reduced cash available for operations by $1.3 million.
Cash Flows Used in Investing Activities:
Investing activities primarily consist of expenditures related to Roanoke Gas' utility property, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet the demands of customer growth. Roanoke Gas' expenditures were approximately $22.1 million and $25.3 million in fiscal 2024 and 2023, respectively. The $3.2 million decrease in expenditures is primarily due to higher prior-year investment for the RNG project, which was placed in service in March 2023. Roanoke Gas renewed 5.4 miles of main and 412 service lines and 5.7 miles of main and 452 service lines in fiscal years 2024 and 2023, respectively. With the recent approval of its new SAVE Plan and Rider, the Company is continuing its focus on SAVE infrastructure replacement projects, including the replacement of pre-1973 first generation plastic pipe. New customer demand for natural gas continues to be strong and therefore extending the natural gas distribution system within its service territory is also a priority. Roanoke Gas’ capital expenditures included costs to extend natural gas distribution mains and services to 521 customers in fiscal 2024, compared to 430 customers in fiscal 2023.
Capital expenditures are expected to be approximately $22 million annually over the next few years as Roanoke Gas continues to focus on its SAVE Plan, as well as system improvements and customer growth. The Company expects to utilize its operating cash flows and credit facilities, as well as to consider additional long-term debt and equity capital, to meet the funding requirements of these planned expenditures.
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Investing cash flows also reflects the fiscal 2024 funding of approximately $18,000 for Midstream's participation in the LLC, down from the $2.1 million in fiscal 2023. Midstream ceased future participation in capital calls following its May 2023 funding payment based on an agreement with the LLC's managing partner. Midstream continues to be invested in the LLC; however, its ownership percentage declined as it did not make additional investments. Now that the MVP is in service, Midstream will incur normal periodic capital investment related to ongoing MVP operations requirements and system improvements, in which it will again participate. Midstream has and will continue to make capital investments in Southgate. The targeted timing for completion of the Southgate project is 2028.
Cash Flows Provided by Financing Activities:
Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends. Net cash flows provided by financing activities were approximately $4.0 million and $200,000 in fiscal 2024 and 2023, respectively. The $3.8 million increase in financing cash flows is primarily attributable to net borrowings of $6.8 million under Roanoke Gas' line-of-credit during fiscal 2024 compared to $4.3 million in net borrowings in the prior year. Additionally, Midstream borrowed a net amount of $680,000 during fiscal 2024 from its amended credit facility compared to net repayments of approximately $196,000 in the prior year. During fiscal 2024, the Company realized $4.7 million from the issuance of 234,645 shares through the ATM program and DRIP activity compared to $3.9 million received from the issuance of 194,719 shares from those same activities, as well as the exercise of stock options, during the prior year. Cash outflows for dividend payments were $8.0 million as the annualized dividend rate increased from $0.79 to $0.80 per share and total outstanding shares increased as a result of the stock issuance activity. The Company’s consolidated capitalization was 44.1% equity and 55.9% long-term debt at September 30, 2024, exclusive of unamortized debt expense. This compares to 44.4% equity and 55.6% long-term debt at September 30, 2023.
The current interest rate environment may result in lower interest costs associated with the Company's variable rate debt.
Management regularly evaluates the Company’s liquidity through a review of its available financing resources and its cash flows. Resources maintains the ability to raise equity capital through its ATM program, private placement or other public offerings. Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including the line of credit and the two private shelf facilities. The first shelf facility provides for the issuance of up to $40 million in unsecured notes in addition to the $28 million previously issued. This shelf agreement is scheduled to expire on December 6, 2025. The second facility provides for the issuance of up to $70 million in unsecured notes during its current term, which expires September 30, 2025.
Roanoke Gas may also adjust capital spending as necessary, if such a need would arise. With the MVP now in service, Midstream's future cash requirements will relate to regular monthly operating expenses, debt service and capital contributions. The Company received its first cash distribution from MVP of approximately $800,000 in October 2024, and should receive similar distributions quarterly. On March 6, 2024, Midstream refinanced its Promissory Notes with one lender, increased the capacity of its $23 million credit facility to $25 million and extended the maturity date to December 31, 2025. Further, on May 2, 2024, Midstream established a new $9 million line of credit facility that matures on May 2, 2026. With these proceeds, Midstream paid in full the $9 million balance on its note payable that matured on June 1, 2024. With the extension of its original credit facility and the establishment of the new credit facility, Midstream's total debt repayment over the succeeding 12 months is $800,000 in principal payments. Management believes that it will be able to meet Midstream's cash requirements over the ensuing 12-month period with its quarterly cash distributions from MVP.
Notes 6 and 7 of the consolidated financial statements provide details on the Company's line-of-credit and borrowing activities.
ATM Program
Resources issued 129,164 shares of common stock for $2,635,200, net of $67,569 in fees, under the ATM program for the year ended September 30, 2024. For the year ended September 30, 2023, Resources issued 127,852 shares of common stock for $2,713,020, net of $69,565 in fees, under the ATM program.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
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Equity Investment in Mountain Valley Pipeline
Midstream owns a less than 1% equity investment in the LLC that owns and operates the MVP. The Company accounts for its interest in the LLC under the equity method of accounting given the LLC maintains specific ownership accounts for each investor, and also considering the Company's rights under the LLC management agreement and the Company's involvement as a customer of the MVP. The Company has been using the equity method since the inception of its investment in fiscal 2016. Following receipt of authorization from the FERC, the MVP entered commercial operation on June 14, 2024 and became available for interruptible or short-term firm transportation service. On July 1, 2024, the MVP commenced long-term firm capacity obligations. Midstream is also a less than 1% investor, accounted for under the cost method, in Southgate, which is in the design and permitting phase. Completion of the Southgate pipeline is targeted for June 2028.
From inception through May 2024, earnings from the LLC were primarily attributable to AFUDC income. With the MVP now in operation, the Company recognizes its share of earnings from the LLC, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. This basis difference amortization is a favorable non-cash adjustment over the operational life of the MVP, or 40 years. For fiscal 2024 and 2023, the Company recorded equity in earnings of consolidated affiliates of $3.9 million and $2.1 million, respectively, which included $3.0 million and $2.1 million from AFUDC. The Company participates in quarterly cash distributions by the LLC, the first of which was in October 2024. The Company's share was approximately $800,000.
Regulatory
See Note 4 of the consolidated financial statements for discussion on Regulatory matters.
Critical Accounting Estimates
The consolidated financial statements of Resources are prepared in accordance with GAAP. The amounts of assets, liabilities, revenues and expenses reported in the Company’s financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and management and professional judgments. Actual results may differ significantly from these estimates and assumptions.
The Company considers an estimate to be critical if it is material to the financial statements and requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. The Company considers the following accounting policies and estimates to be critical.
Regulatory accounting - The Company’s regulated operations follow the accounting and reporting requirements of ASC 980, Regulated Operations . The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as regulatory assets on the consolidated balance sheet and recorded as expenses in the consolidated statements of income and comprehensive income when such amounts are reflected in rates. Additionally, regulators can impose regulatory liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future.
If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the Company would remove the applicable regulatory assets or liabilities from the consolidated balance sheet and include them in the consolidated statements of income and comprehensive income for the period in which the discontinuance occurred.
Unbilled revenue recognition - The Company bills its regulated natural gas customers on a monthly cycle. The billing cycle for most customers does not coincide with the accounting periods used for financial reporting. The Company accrues revenue for estimated natural gas delivered to customers but not yet billed during the accounting period. The following month, the unbilled estimate is reversed, the actual usage is billed and a new unbilled estimate is calculated. The consolidated financial statements include unbilled revenue of $1,294,798 and $1,240,097 as of September 30, 2024 and 2023, respectively. Because the process is performed monthly, the Company routinely ensures its methodology continues to provide a reasonable estimate.
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Pension and Postretirement Benefits - The Company offers a pension plan and a postretirement plan to eligible employees. The expenses and liabilities associated with these plans, as disclosed in Note 12 of the consolidated financial statements, are based on numerous assumptions and factors, including provisions of the plans, employee demographics, contributions made to the plan, return on plan assets and various actuarial calculations, assumptions and accounting requirements. In regard to the pension plan, specific factors include assumptions regarding the discount rate used in determining future benefit obligations, expected long-term rate of return on plan assets, compensation increases and life expectancies. Similarly, the postretirement medical plan also requires the estimation of many of the same factors as the pension plan in addition to assumptions regarding the rate of medical inflation and Medicare availability. Actual results may differ materially from the results expected from the actuarial assumptions due to changing economic conditions, differences in actual returns on plan assets, different rates of medical inflation, volatility in interest rates and changes in life expectancy. Such differences may result in a material impact on the amount of expense recorded in future periods or the value of the obligations on the consolidated balance sheet.
In selecting the discount rate to be used in determining the benefit liability, the Company utilized t he FTSE Pension Discount Curve, which incorporates the rates of return on high-quality, fixed-income investments that corresponded to the length and timing of benefit streams expected under both the pension plan and postretirement plan. The Company used a discount rate of 4.83% for valuing both its pension plan and postretirement plan liabilities at September 30, 2024. These discount rates represent a decrease from the 5.63% for the pension plan and postretirement plan used for valuing the corresponding liabilities at September 30, 2023. The decrease in discount rates reflect the Federal Reserve's easing of interest rates in 2024 and general long-term rate decline. The yield on the 30-year Treasury increased from 3.79% at September 30, 2022 to 4.73% at September 30, 2023 and decreased to 4.14% at September 30, 2024. Corporate bond rates experienced a smaller increase as credit spreads have narrowed. The rise in the discount rates through 2023 was the primary factor in the reduction of the benefit obligations for both the pension and the postretirement plan. Mortality assumptions were based on the PRI-2012 Mortality Table with improvements projected generational using Projection Scale MP-2021 for the curr ent year valuation.
The Company has focused on minimizing the financial risk associated with these plans. With the soft freezes of both the pension and postretirement plans, future liability growth associated with participant service and compensation has been limited. Since January 2017, when the pension plan froze access to new employees, the asset allocation has transitioned from 60% equity and 40% fixed income to 25% equity and 75% fixed. During the same period, the fixed income portion of the plan was transitioned to an LDI approach, with the fixed income assets invested in securities with a duration that corresponds to the duration of the corresponding liability. This synchronization of the pension assets with the pension liabilities has reduced volatility in the funded status of the plan. This is evidenced by the relative stability of the funded status of the pension plan at September 30, 2024 and 2023 with a funded ratio o f 104 % and 100%, respectively. The 25% allocation to equity investments provides asset growth potential to offset increases in the pension liability related to those employees continuing to accrue benefits. Management will continue to evaluate the investment allocation as the liabilities mature and make adjustments as necessary.
The Company has initiated a transition of the postretirement plan assets from a 50% equity and 50% fixed income allocation to a 30% equity and 70% fixed income allocation. This revision to the investment targets is in response to a greater proportion of participants that have transitioned to retirement. Similar to the pension plan, the revision to the asset allocation will seek to reduce the volatility in funded status while still providing the opportunity for asset growth through the equity portion of the portfolio. The funded status for the postretirement plan was 139% a nd 116% as of September 30, 2024 and 2023, respecti vely. The improvement in the funded status was due to stronger-than-expected market performance only partially offset by higher liabilities as the Company is effectively matching durations within the portfolio. M anagement will continue to monitor and evaluate the asset allocation and adjust as warranted.
A summary of the funded status of both the pension and postretirement plans is provided below:
Funded status - September 30, 2024
Pension
Postretirement
Total
Benefit obligation
$
29,873,428
$
10,842,455
$
40,715,883
Fair value of assets
31,054,138
15,078,281
46,132,419
Funded status
$
1,180,710
$
4,235,826
$
5,416,536
Funded status - September 30, 2023
Pension
Postretirement
Total
Benefit obligation
$
26,747,624
$
11,248,448
$
37,996,072
Fair value of assets
26,878,661
13,019,313
39,897,974
Funded status
$
131,037
$
1,770,865
$
1,901,902
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The Company annually evaluates the long-term rate of return on its targeted investment allocation model, as well as the overall asset allocation of its benefit plans, and reviews both plans' potential long-term rate of return assumptions with its investment advisors to determine the rates used in each plan's actuarial calculations. The long-term rates of return increased slightly from 4.50% in fiscal 2024 to 4.95% for fiscal 2025 for the pension plan and from 4.21% in fiscal 2024 to 4.95% for fiscal 2025 for the postretirement plan. Management will continue to evaluate the return assumptions and asset allocation and adjust both as market conditions warrant.
Management estimates that the Company will have no minimum funding requirements next year. The Company currently does not expect to make contributions to its pension plan and postretirement plan in fiscal 2025 due to the funded position of the plans. The Company will continue to evaluate its benefit plan funding levels in light of funding requirements and ongoing investment returns and make adjustments, as necessary, to avoid benefit restrictions and minimize PBGC premiums.
The following schedule reflects the sensitivity of pension costs to changes in certain actuarial assumptions, assuming that the other components of the calculation remain constant.
Actuarial Assumptions - Pension Plan
Change in Assumption
Increase in Pension Cost
Increase in Projected Benefit Obligation
Discount rate
-0.25
%
$
106,000
$
981,000
Rate of return on plan assets
-0.25
%
76,000
N/A
Rate of increase in compensation
0.25
%
46,000
212,000
The following schedule reflects the sensitivity of postretirement benefit costs from changes in certain actuarial assumptions, while the other components of the calculation remain constant.
Actuarial Assumptions - Postretirement Plan
Change in Assumption
Increase (Decrease) in Postretirement Benefit Cost
Increase in Accumulated Postretirement Benefit Obligation
Discount rate
-0.25
%
$
11,000
$
291,000
Rate of return on plan assets
-0.25
%
37,000
N/A
Medical claim cost increase
0.25
%
37,000
281,000
Derivatives - The Company may hedge certain risks incurred in its operation through the use of derivative instruments. The Company applies the requirements of ASC 815, Derivatives and Hedging, which requires the recognition of derivative instruments as assets or liabilities in the Company’s consolidated balance sheet at fair value. In most instances, fair value is based upon quoted futures prices for natural gas commodities and interest rate futures for interest rate swaps. Changes in the commodity and futures markets will impact the estimates of fair value in the future. Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the values used in determining fair value in prior financial statements. The Company had four interest-rate swaps outstanding at September 30, 2024 related to its variable rate notes. The corresponding fair value of these swaps is reflected on the consolidated balance sheets as of September 30, 2024 and 2023. A 25 basis point decrease and increase on the yield curve would result in a $228,248 decrease and $226,748 increase, respectively, in the fair value of the interest rate swaps on the balance sheet. See Notes 1 and 8 to the consolidated financial statements for additional information regarding the swaps.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 7B. Insider Trading Policy.
The information set forth under "Compensation Philosophy and Objectives" in the Proxy Statement for the 2025 Annual Meeting of Shareholders of Resources is incorporated herein by reference.