RGCO Rgc Resources Inc - 10-K

Item 1A.      Risk Factors

Please carefully consider the risks described below regarding the Company.  These risks are not the only ones faced by the Company.  Additional risks not presently known to the Company or that the Company currently believes are immaterial may also impair business operations and financial results.  If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be adversely affected.  In such case, the trading price of the Company’s common stock could decline and investors could lose all or part of their investment.  The risk factors below are categorized by operational, regulatory and financial:

OPERATIONAL RISKS

Risks associated with the operation of a natural gas distribution pipeline and LNG storage facility.

Numerous potential risks are inherent in the operation of a natural gas distribution system and LNG storage facility, including unanticipated or unforeseen events that are beyond the control of the Company. Examples of such events include adverse weather conditions, acts of terrorism or sabotage, accidents and damage caused by third parties, equipment failure, failure of upstream pipelines and storage facilities, as well as catastrophic events such as explosions, fires, earthquakes, floods, or other similar events.  These risks could result in injury or loss of life, property damage, pollution and customer service disruption resulting in potentially significant financial losses. The Company maintains insurance coverage to protect against many of these risks. However, if losses result from an event that is not fully covered by insurance, the Company’s financial condition could be significantly impacted if it were unable to recover such losses from customers through the regulatory rate-making process. Even if the Company did not incur a direct financial loss as a result of any of the events noted above, it could encounter significant reputational damage from a reliability, safety, integrity or similar viewpoint, potentially resulting in a longer-term negative earnings impact or decline in share price.

Security incident or cyber attacks on the Company ’ s computer or information technology systems.

The Company’s business operations and information technology systems are targets of cyber attack, and they may be vulnerable to an attack by individuals or organizations intending to disrupt the operations of the Company. Such an attack or cybersecurity incident on the Company’s information technology systems could result in corruption of the Company’s financial information; disruption of services to our customers; the unauthorized release of confidential customer, employee or vendor information; the interruption of natural gas deliveries to our customers; and/or compromise the safety of our distribution, transmission and storage systems. The Company has implemented policies, procedures and controls to prevent and detect these activities; however, there are no guarantees that Company processes will adequately protect against unauthorized access. In the event of an attack, the Company could be exposed to material financial and reputational risks, possible disruptions in natural gas deliveries or a compromise of the safety of the natural gas distribution system, as well as be exposed to claims by persons harmed by such an attack, all of which could materially increase the Company's costs to protect against such risks. The Company maintains cyber-insurance coverage, which does not protect the Company from cyber incidents but does provide some potential mitigation of the financial impacts resulting from such attacks. See Item 1C of this Form 10-K for additional discussion.

Volatility in the price and availability of natural gas.

Natural gas purchases represent the single largest expense of the Company.  Increasing demand from other areas, including electricity generation, combined with other factors, have placed upward pressure on natural gas commodity prices in the past.  If these factors return and continue for an extended period of time, higher natural gas prices could result in declining usage as well as increases in bad debt expense and increased competition from other energy providers.

Inability to attract and retain professional and technical employees.

The ability to implement the Company’s business strategy and serve customers is dependent upon employing talented professionals and attracting, training, developing and retaining a skilled workforce. As the Company expects key personnel to retire over the next several years, as well as higher mobility trends, failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and skills to new employees, or future availability and cost of contracted labor may adversely affect the ability to manage and operate the Company. In addition, certain specialized knowledge is required of the Company’s technical employees for construction and operation of the natural gas distribution facilities. If the Company is unable to attract and/or retain qualified employees, the Company could experience increased operating costs and expose the Company to other operational, reputational and financial risks.

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Availability of sufficient and reliable pipeline capacity.

The Company is currently served directly by three interstate pipelines. These pipelines carry 100% of the natural gas transported to the Company’s distribution system. Depending on weather conditions and the level of customer demand, failure of one or more of these interstate transmission pipelines could have a major impact on the Company’s ability to meet customer demand for natural gas and adversely affect the Company’s earnings as a result of lost revenue and the cost of service restoration. Frequent or prolonged failure could lead customers to switch to alternative energy sources. Hurricanes, floods, fires and other natural or man-made disasters could damage or inhibit production and/or pipeline transportation facilities, which could result in decreased natural gas supplies. Capacity limitations on existing pipeline and storage infrastructure could impact the Company’s ability to obtain additional natural gas supplies, thereby limiting its ability to add new customers or meet increased customer demand thereby limiting future earnings potential.

Inability to complete necessary or desirable pipeline expansion or infrastructure improvement projects.

In order to serve new customers or expand service to existing customers, the Company installs new pipeline facilities and maintains, expands or upgrades its existing distribution, transmission and/or storage infrastructure. Various factors may prevent or delay the completion of such projects or make them more costly, such as the inability to obtain required approval from local, state and/or federal regulatory and governmental bodies, public opposition to the projects, inability to obtain adequate financing, competition for labor and materials, construction delays, cost overruns, and an inability to negotiate acceptable agreements relating to rights-of-way, construction or other material development components. As a result, the Company may not be able to adequately serve existing customers or expand its distribution system to support customer growth. These factors could negatively impact earnings.

Increased dependence on technology may hinder the Company ’ s business operations and adversely affect its financial condition and results of operations if such technologies fail.

Over the last several years, the Company has implemented or acquired a variety of technological tools including both Company-owned information technology and technological services provided by outside parties. Additionally, the Company upgraded its financial system and is in the process of updating its customer information system.  These tools and systems support critical functions including, scheduling and dispatching of service technicians, automated meter reading systems, customer care and billing, revenue recognition, operational plant logistics, and external financial reporting. Issues in the implementation or the failure of these or other similarly important technologies, or the Company’s inability to have these technologies supported, updated, expanded, or integrated into other technologies, could hinder its business operations and adversely impact its financial condition and results of operations.  Although the Company has, when possible, developed alternative sources of technology and built redundancy into its computer networks and tools, there can be no assurance that these efforts would protect against all potential issues related to the loss of any such technologies.

Geographic concentration of business activities.

The Company's business activities are concentrated in the Roanoke Valley and surrounding areas. Changes in the local economy, politics, regulations and weather patterns or other factors limiting demand for natural gas could negatively impact the Company's existing customer base, leading to declining usage patterns and financial condition of customers. Furthermore, these changes could also limit the Company's ability to serve its customers or add new customers within its service territory. These factors could adversely affect earnings.

Competition from other energy providers.

The Company competes with other energy providers in its service territory, including those that provide electricity, propane, coal, fuel oil, wind and solar. Price is a significant competitive factor. Higher natural gas costs or decreases in the price of other energy sources may enhance competition and encourage customers to switch to alternative energy sources, thus lowering natural gas deliveries and earnings. Price considerations could also inhibit customer and revenue growth if builders and developers do not perceive, or are regulatorily prevented from installing, natural gas as a better value than other energy options and elect to install heating systems that use energy sources, including those perceived as more environmentally friendly.

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REGULATORY RISKS

Laws or regulations associated with ESG matters.

Focus on ESG matters related to, among other things, concerns raised by advocacy groups about climate change, social issues and corporate governance may lead to increased regulatory review, which in turn may lead to new state and federal safety laws, regulations, guidelines, and enforcement interpretations. Social, corporate and environmental governance initiatives retain importance.  In addition, several federal and state legislative and regulatory initiatives have been proposed and enacted in recent years in an attempt to limit the effects of climate change, including greenhouse gas emissions such as those created by the combustion of fossil fuels, including natural gas. Full implementation and/or passage of environmental legislation or implementation of regulations that mandate the use of electric rather than gas appliances, or reductions in greenhouse gas emissions or other similar restrictions could have a negative effect on the Company’s core operations and its investment in the LLC. Such legislation could impose limitations on greenhouse gas emissions, require funding of new energy efficiency objectives, impose new operational requirements or lead to other additional costs to the Company. Regulations restricting or prohibiting the use of coal as a fuel for electric power generation has increased the demand for natural gas, and could at some point potentially result in natural gas supply concerns and higher costs for natural gas. Legislation or regulations could limit the exploration and development of natural gas reserves, making the price of natural gas less competitive and less attractive as a fuel source for consumers. Future legislation could also place limitations on the amount of natural gas used by businesses and homeowners to reduce the level of greenhouse gas emissions, resulting in reduced deliveries and earnings or provide incentives to customers to utilize alternative energy sources not associated with fossil fuels.

In addition, advocacy groups, both domestically and internationally, have campaigned for governmental and private action to influence change in the business strategies of oil and gas companies, including through the investment and voting practices of investment advisors, public pension funds, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change and energy transition matters, such as promoting the use of substitutes to fossil fuel and encouraging the divestment of investments in the oil and gas industry, as well as pressuring lenders and other financial services companies to limit or curtail activities with oil and gas companies. If investors or financial institutions shift funding away from companies in the oil and gas industry, the Company’s access to and costs of capital or the market for the Company’s securities may be adversely impacted.

Regulatory actions or failure to obtain timely rate relief.

The Company’s natural gas distribution operations are regulated by the SCC. The SCC approves the rates that the Company charges its customers.  During periods of enhanced inflationary pressure or the incurrence of significant additional costs, if the SCC did not timely authorize rates that provide for the recovery of such costs including a reasonable rate of return on investment in natural gas distribution facilities, earnings could be negatively impacted.

Furthermore, issuance of debt and equity by Roanoke Gas is also subject to SCC regulation and approval. Delays or lack of approvals could inhibit the ability to access capital markets and negatively impact liquidity or earnings.

Increased compliance and pipeline safety requirements and fines.

The Company is committed to the safe and reliable delivery of natural gas to its customers. Working in concert with this commitment are numerous federal and state laws and regulations. Failure to comply with these laws and regulations could result in the levy of significant fines. There are inherent risks that may be beyond the Company’s control, including third-party actions, which could result in damage to pipeline facilities, injury and even death. Such incidents could subject the Company to lawsuits, large fines, increased scrutiny and loss of customers, all of which could have a significant effect on the Company’s financial position and results of operations.

FINANCIAL RISKS

Access to capital to maintain liquidity.

The Company relies on a variety of capital sources to operate its business and fund capital expenditures, including internally generated cash from operations, borrowings under its line-of-credit, proceeds from the issuance of additional shares of its common stock and other sources. Access to a line-of-credit is essential to provide seasonal funding of natural gas operations and provide capital budget bridge financing. Access to capital markets and other long-term funding sources is important for refinancing and capital outlays. The ability of the Company to secure longer-term financing and to maintain and renew its line-of-credit is critical to operations. Adverse market trends, market disruptions or deterioration in the financial condition of the Company could increase the cost of borrowing, restrict the Company's ability to issue additional shares of its common stock or otherwise limit the Company’s ability to secure adequate funding.

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Failure to comply with debt covenant requirements.

The Company's long-term debt obligations and bank line-of-credit contain financial covenants. Noncompliance with any of these covenants could result in an event of default which, if not cured or waived, could accelerate payment on outstanding debt obligations or cause prepayment penalties. In such an event, the Company may not be able to refinance or repay all of its indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration would cause a material adverse change in the Company's financial condition.

Investment in Mountain Valley Pipeline, LLC.

The MVP went into service in June 2024. The LLC’s gas infrastructure facilities are subject to many operational risks. Operational risks could result in, among other things, lost revenues due to prolonged outages, increased expenses due to monetary penalties or fines for compliance failures, liability to third parties for property damage and personal injury, a failure to perform under applicable sales agreements and associated loss of revenues from terminated agreements or liability for liquidated damages under continuing agreements. The consequences of these risks, if realized, could adversely affect the LLC’s business, cash flows, financial condition, results of operations and prospects. Uncertainties and risks inherent in operating and maintaining the LLC's facilities include, but are not limited to, risks associated with the success of new projects to generate additional cash flows. The LLC’s business, cash flows, financial condition, results of operations and prospects potentially could be adversely affected by weather conditions, including, but not limited to, the impact of severe weather. Threats of terrorism and catastrophic events resulting from terrorism, sabotage, cyber-attacks, or individuals and/or groups attempting to disrupt the LLC’s business, or the businesses of third parties, may materially adversely affect the LLC’s business, financial condition, results of operations and prospects.

Any adverse developments, such as those noted above, could have a significant effect on the LLC and the Company's earnings, cash flows and financial position, and materially impact Resources' consolidated financial position and results of operations, including Resources' ability to pay shareholder dividends at the current level or remain in compliance with credit agreement covenants.

Obligations for income taxes that may arise from examinations by taxing authorities.

The Company is subject to federal and state income taxes as prescribed by the laws within the United States.  Significant judgments are required in determining the provisions for income taxes.  Our total income tax expense could be affected by changes in tax rates in various jurisdictions, changes in the valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation.  In preparing its tax provisions and returns, the Company must make calculations and assumptions regarding tax treatment of various transactions, including the applicability of tax credits.  The Company’s tax returns are subject to examination by the IRS and state tax authorities as disclosed in Note 9 of the consolidated financial statements.  Although the Company utilizes the assistance of tax professionals in the preparation of its tax returns, the final determination of tax examinations and any related litigation could be materially different than what is reflected in historical income tax provisions and accruals.  If a taxing authority disagrees with the positions we have taken, the Company could face additional tax liability, including interest and penalties, which could adversely affect our financial results.

The cost of providing post-retirement benefits.

The Company provides certain pension and post-retirement benefits. The costs of providing defined benefit pension and retiree medical plans are dependent on a number of factors such as the rates of return on plan assets, discount rates used in determining plan liabilities, the level of interest rates used to measure the required minimum funding levels of the plan, future government regulation, changes in life expectancy and required or voluntary contributions made to the plan. Changes in actuarial assumptions and differences between the assumptions and actual results, as well as a significant decline in the value of investments that fund these plans, if not offset or mitigated by a decline in plan liabilities, could increase the expense of these plans and require significant additional funding. Although the Company has soft-frozen both plans to limit future growth in each plan's liabilities, ongoing funding obligations and expenses could have a material impact on the Company's financial position, results of operation and cash flows should there be a material reduction in the amount of the recovery of these costs through rates currently charged to customers or significant delays in the timing of the recovery of such costs.

Exposure to market risks.

The Company is subject to market risks that are beyond the Company’s control, such as commodity price volatility and interest rate risk. The Company is generally isolated from commodity price risk through the PGA mechanism.  With respect to interest rate risk, there has been significant movement in interest rates in recent years.  Much of the Company's outstanding debt is comprised of fixed rate notes or have interest rate swaps in place.  However, higher interest rates do impact the Company through higher borrowing costs on Roanoke Gas' line-of-credit and Midstream's variable rate credit facilities as well as any future borrowings by the Company.

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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 the MVP, Southgate and Boost. 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.

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%.  On April 10, 2025, the SCC issued a final order approving the settlement in its entirety.  The order also directed Roanoke Gas to refund the excess revenues collected during the time the interim rates were in effect with interest.  The refunds to customers, which had previously been accrued as a regulatory liability, were made to customers in May 2025.

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 Rider 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.  Roanoke Gas filed and received approval from the SCC for an updated annual SAVE Rider rate which became effective October 1, 2024.  As a result of the updated SAVE Rider, SAVE Plan revenues increased to approximately $1,588,000 in fiscal 2025 from approximately $461,000 in fiscal 2024.  Roanoke Gas filed and received approval from the SCC for an updated annual SAVE Rider rate to become effective October 1, 2025 that will result in approximately $2,610,000 of SAVE-related revenues during fiscal 2026.  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 $1,056,000 and $3,761,000 in additional revenues under the WNA for weather that was approximately 4% and 20% warmer than normal for the fiscal years ended September 30, 2025 and 2024, 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 $728,000 in fiscal 2024 to $587,000 in fiscal 2025 due to lower natural gas commodity prices during the 2024 summer storage injection season resulting in a lower average cost of natural gas in storage.  The average price of gas in storage during fiscal 2025 declined by 12% compared to fiscal 2024, while the average price of gas in storage at September 30, 2025 increased by 5% compared to the same period last year.  If natural gas prices remain at or higher than the prior year, the average dollar balance of gas in storage may increase based on current storage levels and due to an increased ICC factor from the prior year may lead to higher ICC revenues in fiscal 2026.

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, which are returned to customers through the RNG Rider.  Total RNG revenue increased from approximately $1,629,000 in fiscal 2024 to $1,760,000 in fiscal 2025. 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 55% of fiscal 2025 total operating expenses.  After peaking in December 2022, natural gas commodity prices decreased significantly for the remainder of fiscal 2023 and through fiscal 2025.   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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The Company continues to experience inflation over the 2% level targeted by the Federal Reserve.  Inflation levels in health care spending, certain types of insurance, contracted services and IT service costs, as well as other items, continue to put upward pressure on the Company's expenses.  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, on December 2, 2025, the Company filed a non-gas base rate application with the SCC to increase revenues by  $4.3  million annually.

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 $1,519,074 from the prior year primarily due to the implementation of higher non-gas base rates and record natural gas deliveries, as well as lower post-retirement benefit costs, partially offset by lower WNA revenues and lower equity earnings from the MVP as the project transitioned from construction into service.

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 2025 Compared with Fiscal Year 2024

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

Operating Revenues

Year Ended September 30,

Increase / (Decrease)

Percentage

Gas utility

Non utility

Total operating revenues

Delivered Volumes

Year Ended September 30,

Increase

Percentage

Regulated natural gas (DTH):

Residential and commercial

Transportation and interruptible

Total delivered volumes

HDD

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Total gas utility operating revenues for the year ended September 30, 2025 increased by 13% from the year ended September 30, 2024 primarily due to the implementation of a non-gas base rate increase, along with higher delivered volumes, gas costs and SAVE revenues, partially offset by a decrease in WNA revenue.  The non-gas base rate increase implemented in July 2024 was the main contributing factor to an approximate $5.6 million increase in non-gas volumetric revenues.  In addition, total heating degree days increased by 18% from the prior fiscal year, resulting in a 9% increase in the weather-sensitive residential and commercial volumes, while transportation and interruptible volumes increased 24%, primarily driven by business activity of a single, multi-fuel customer during the period.  Total gas costs also increased over the prior year primarily due to pipeline capacity charges increasing over $4.0 million as a result of higher rates and MVP capacity.  SAVE Plan revenues increased as Roanoke Gas continues to invest in qualified SAVE infrastructure projects, resulting in approximately $1,127,000 more revenue compared to the same period in the prior year. WNA revenues declined approximately $2.7 million from the prior fiscal year as weather was only 4% warmer than normal during the current year compared to 20% warmer than normal during the prior year.

Gross Utility Margin

Year Ended September 30,

Increase

Percentage

Gas utility revenues

Cost of gas - utility

Gross utility margin

Gross utility margin increased over the prior fiscal year primarily as a result of the implementation of new non-gas base rates and increases in SAVE revenues, slightly offset by the reduction in ICC revenues. The volumetric margin, net of the WNA, increased by approximately $2.8 million primarily due to the new non-gas base rates and increases in transportation and interruptible volumes.  As previously discussed, the SAVE Plan contributed an additional $1,127,000 to margin, while ICC revenues decreased by approximately $141,000 due to lower cost and volumes of gas in storage.

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

Years Ended September 30,

Increase

(Decrease)

Customer base charge

SAVE Plan

Volumetric

WNA

ICC

RNG

Other revenues

Total

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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, 2025:

Operating revenues

Gas utility

Non utility

Total operating revenues

Cost of sales

Cost of gas - utility

Cost of sales - non utility

Depreciation and amortization

Operations and maintenance

Total cost of sales

Gross margin (GAAP)

Corporate and other, net

Depreciation and amortization

Operations and maintenance

Gross utility margin (Non-GAAP)

Gas Utility

Investment in Affiliates

Consolidated Total

For the Year Ended September 30, 2024:

Operating revenues

Gas utility

Non utility

Total operating revenues

Cost of sales

Cost of gas - utility

Cost of sales - non utility

Depreciation and amortization

Operations and maintenance

Corporate and other

Total operations and maintenance

Total cost of sales

Gross margin (GAAP)

Corporate and other, net

Depreciation and amortization

Operations and maintenance

Gross utility margin (Non-GAAP)

Operations and Maintenance Expense - Operations and maintenance expense increased by $1,556,674, or 8%, over the prior year primarily due to inflationary effects on personnel costs and contracted services, RNG-related costs and bad debt expense.  Personnel costs and contracted services increased by approximately $969,000 due to increased staffing and the inflationary impact on salaries and benefits.  RNG expenses increased approximately $231,000 primarily due to increases in electric and telemetering charges.  Bad debt expense increased by approximately $170,000 due to higher bills from colder weather and more inactive accounts resulting from non-pay customer turnoffs.  Increased corporate insurance premiums accounted for much of the remaining increase.

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Taxes Other Than Income Taxes  - Taxes other than income taxes increased by $239,135, or 9%, 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 $952,547, or 9%, corresponding to a similar increase in net additions to depreciable utility property.  Increases in fixed assets with shorter useful lives during the current fiscal year resulted in depreciation expense increasing slightly more than the 6% increase in utility property.

Equity in Earnings of Unconsolidated Affiliate - The equity in earnings of the MVP investment decreased by $617,239, or 16%. 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.  These in-service earnings did not fully replace the amount of AFUDC recognized while construction activities were ongoing during the first eight months of fiscal 2024.  See Note 5 of the consolidated financial statements for additional information related to the MVP.

Other Income, Net - Other income increased by $1,204,122, primarily due to an approximate $1,129,000 decrease in postretirement benefit plan costs as a result of actuarial changes, coupled with an increase of approximately $237,000 in revenue sharing related to the asset management agreements, which are described in more detail in Note 14 of the consolidated financial statements.

Interest Expense - Total interest expense remained relatively flat over the prior year, increasing slightly by $38,626, or 1%, primarily due to higher borrowing levels.  Total average debt outstanding during fiscal 2025 increased by 2% from fiscal 2024.  Roanoke Gas' total average debt outstanding increased by approximately $1,346,000 associated with net borrowings under the Company's line-of-credit, while Midstream's total average debt outstanding increased by approximately $1,441,000 during the year.  There were minimal fluctuations in the weighted-average interest rates between the periods.  See Note 6 and 7 of the consolidated financial statements for more information on the Company's debt.

Income Taxes - Income tax expense increased by $394,924, or 11%, corresponding to an increase in pre-tax income. The effective tax rate was 23.6% and 23.9% for fiscal 2025 and 2024, 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 $1.29 in fiscal 2025 compared to $1.16 per share in fiscal 2024. Dividends declared per share of common stock were $0.83 in fiscal 2025 compared to $0.80 in fiscal 2024.

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 increased by approximately $1,426,000 in fiscal 2025 compared to a decrease of approximately $618,000 in fiscal 2024. The following table summarizes the categories of sources and uses of cash:

Cash Flow Summary

Years Ended September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

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Cash Flows Provided by Operating Activities:

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

Cash flows from operating activities increased by $11.5 million from the prior year. The increase in operating cash flows is primarily due to net income increasing approximately $1,519,000, along with the cash distributions received from the LLC, direct impacts from weather and increased pipeline and storage capacity charges.  During fiscal 2025, the Company received approximately $3,645,000 in quarterly cash distributions from the LLC, which has been accounted for as a return on its invested capital.  The timing of collections related to gas costs, RNG and WNA resulted in approximately $5,011,000 in additional operating cash.  Colder weather and increased gas costs compared to the prior year resulted in higher accounts receivable and accounts payable balances.  Pipeline and storage capacity charges during fiscal 2025 increased over $3,400,000 from the prior year.  Additionally, total commodity costs increased from $3.44 per DTH in fiscal 2024 to $3.64 per DTH in fiscal 2025.

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.  New customer demand for natural gas continues to be steady and therefore extending the natural gas distribution system within its service territory is also a priority.  Roanoke Gas' expenditures were approximately $20.7 million and $22.1 million in fiscal 2025 and 2024, respectively.  The $1.4 million decrease in expenditures is primarily due to higher prior-year investment for the MVP gate stations, which were placed into service in fiscal 2024.  Roanoke Gas renewed 4.2 miles of main and 311 service lines and 5.4 miles of main and 412 service lines in fiscal years 2025 and 2024, respectively.  Under the SCC approved 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.  Roanoke Gas’ capital expenditures included costs to extend natural gas distribution mains and services to 594 new customers in fiscal 2025, compared to 521 new customers in fiscal 2024.

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 2025 funding of approximately $76,000 for Midstream's participation in the LLC, up from approximately $18,000 in fiscal 2024.  Now that the MVP is in service, Midstream will be required to make periodic capital investment related to ongoing MVP operations requirements and system improvements.  Midstream has and will continue to make capital investments in Southgate and Boost. The targeted timing for completion of the Southgate project is 2028 and the Boost project is 2029.

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 used in financing activities were approximately $6.8 million in fiscal 2025, compared to $4.0 million in net cash flows provided by financing activities in fiscal 2024.  The $10.8 million decrease in financing cash flows is primarily attributable to net borrowings of approximately $751,000 under Roanoke Gas' line-of-credit during fiscal 2025 compared to net borrowings of $6.8 million in the same period last year.  In addition, during fiscal 2025, Resources issued a total of 88,409 shares of common stock, primarily from DRIP activity, resulting in net proceeds of approximately $1.8 million. No shares were issued through the ATM program during fiscal 2025. During fiscal 2024, the Company realized $4.7 million from the issuance of 234,645 shares through the ATM program and DRIP activity.  Cash outflows for dividend payments were $8.5 million as the annualized dividend rate increased from $0.80 to $0.83 per share and total outstanding shares increased as a result of the stock issuance activity.  The Company’s consolidated capitalization was 43.7% equity and 56.3% long-term debt at September 30, 2025, exclusive of unamortized debt expense.  This compares to 44.1% equity and 55.9% long-term debt at September 30, 2024.

Current interest rate trends may result in lower interest costs associated with the Company's variable rate debt in 2026.

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.  Roanoke Gas has a term note in the principal amount of $15 million coming due in August 2026.  Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including cash from operations and the line of credit.  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 four quarterly cash distributions from MVP in fiscal 2025 totaling approximately $3.6 million, and should receive similar quarterly distributions going forward.  On September 5, 2025, Midstream established a new $53.6 million term note with two banks, which refinanced and replaced all of Midstream's outstanding debt. This term note matures on September 5, 2032.  Also on September 5, 2025, Midstream entered into a new Loan Agreement for the MVP Southgate extension and MVP Boost expansion that can be drawn to principal amounts of $1.85 million and $3.65 million, respectively. These loans mature on September 5, 2030, at which time the outstanding principal balance on each note is due.  With the establishment of the new term note, Midstream's total debt principal payments over the succeeding 12 months is $2,846,018. Management believes that it will be able to meet Midstream's cash requirements over the ensuing 12-month period with availability on the Southgate and Boost Loan Agreements and 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

The Company opted to not utilize the ATM program for the year ended September 30, 2025, although it remains in place.  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.

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

The Company owns a less than 1% interest in the LLC that owns and operates the MVP, as defined in its operating agreement.  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 stakeholder of the MVP.  The Company has been using the equity method since the inception of its investment in fiscal 2016.

From inception through May 2024, earnings from the LLC were primarily attributable to AFUDC income. With the MVP 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. During fiscal 2025 and 2024, the Company recorded equity in earnings of consolidated affiliates of approximately $3.2 million and $3.9 million, respectively, with the 2024 amounts being primarily derived from AFUDC.  The LLC began to return excess cash in fiscal 2025.  Midstream received quarterly cash distributions of its share from the LLC totaling approximately $3.6 million during fiscal 2025, which was a return on its invested capital.  Future quarterly distributions are expected to be of a similar magnitude.  The Company is using this cash to pay interest and other expenditures related to Midstream.  The Company refinanced all of the debt supporting its investment in the MVP in September 2025, as described in the liquidity section above.

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 $1,373,512 and $1,294,798 as of September 30, 2025 and 2024, 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.  Demographic assumptions include projections of future mortality rates, pay increases and retirement patterns, as well as projected health care costs.  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 5.29% and 5.16% for valuing its pension plan liability and postretirement plan liability, respectively, at September 30, 2025.  These discount rates represent an increase from the 4.83% rate used for valuing the corresponding liabilities for both the pension plan and postretirement plan at September 30, 2024.  The increase in discount rates corresponds to the market reactions to the continuing inflationary pressures on the financial markets and economy . The yield on the 30-year Treasury increased from 4.14% at September 30, 2024 to 4.73% at September 30, 2025.  Corporate bond rates experienced a smaller increase as credit spreads have narrowed.  The rise in the discount rates was the primary factor in the reduction of the benefit obligations for both the pension and the postretirement plan.  Mortality assumptions were based on the PRI-2012 Mortality Table with improvements projected generational using Projection Scale MP-2021 for the 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 target 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, 2025 and 2024 with a funded ratio o f 103% and 104 %, 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 147% and 139% as of September 30, 2025 and 2024, 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, 2025

Pension

Postretirement

Total

Benefit obligation

Fair value of assets

Funded status

Funded status - September 30, 2024

Pension

Postretirement

Total

Benefit obligation

Fair value of assets

Funded status

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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 4.95% in fiscal 2024 to 5.75% for fiscal 2025 for both the pension plan and the postretirement plan.  Management evaluates the return assumptions and asset allocation and adjusts 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 2026 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

Rate of return on plan assets

Rate of increase in compensation

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 in Postretirement Benefit Cost

Increase in Accumulated Postretirement Benefit Obligation

Discount rate

Rate of return on plan assets

Medical claim cost increase

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 six interest-rate swaps outstanding at September 30, 2025 related to its variable rate notes, compared to four at September 31, 2024.  The corresponding fair value of the swaps is reflected on the consolidated balance sheets as of September 30, 2025 and 2024.  A 25 basis point decrease or increase on the yield curve would result in an approximately  $600,000 corresponding decrease or increase  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.