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Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2024

Significant Accounting Policies [Text Block]

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—RGC Resources, Inc. is an energy services company primarily engaged in the sale and distribution of natural gas. The consolidated financial statements include the accounts of Resources and its wholly owned subsidiaries: Roanoke Gas and Midstream. Roanoke Gas is a natural gas utility, which distributes and sells natural gas to approximately 62,500 residential, commercial and industrial customers within its service areas in Roanoke, Virginia and the surrounding localities. The Company’s business is seasonal in nature as a majority of natural gas sales are for space heating during the winter season. Roanoke Gas is regulated by the SCC. Midstream is a wholly owned subsidiary created primarily to invest in the LLC.

The Company follows accounting and reporting standards established by the FASB and the SEC, including certain provisions allowed under the smaller reporting company exceptions.

Rate Regulated Basis of 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 situation occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of ASC 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the consolidated statements of income and comprehensive income in the period which ASC 980 no longer applied.

Regulatory assets and liabilities included in the Company’s consolidated balance sheets as of September 30, 2024 and 2023 are as follows:

	*September 30*
	*2024*		*2023*
Assets:
Current Assets:
Regulatory assets:
Accrued WNA revenues	$	919,375	$	414,689
Under-recovery of gas costs		2,690,247		1,383,340
Under-recovery of RNG revenues		1,331,064		797,804
Under-recovery of SAVE Plan revenues		107,678		—
Accrued pension		42,785		243,017
Other deferred expenses		12,761		15,426
Total current		5,103,910		2,854,276
Other Non-Current Assets:
Regulatory assets:
Premium on early retirement of debt		1,141,872		1,256,059
Accrued pension		2,998,881		3,786,265
Other deferred expenses		304,291		347,121
Total non-current		4,445,044		5,389,445

Total regulatory assets	$	9,548,954	$	8,243,721
Liabilities and Stockholders' Equity:
Current Liabilities:
Regulatory liabilities:
Over-recovery of SAVE Plan revenues	$	—	$	146,861
Rate refund		37,500		652,018
Deferred income taxes		591,764		527,034
Supplier refunds		30,556		275,649
Other deferred liabilities		174,458		31,154
Total current		834,278		1,632,716
Deferred Credits and Non-Current Other Liabilities:
Regulatory cost of retirement obligations		14,409,847		13,029,376
Regulatory liabilities:
Deferred income taxes		15,468,096		16,249,776
Deferred postretirement medical		3,858,471		1,781,917
Total non-current		33,736,414		31,061,069

Total regulatory liabilities	$	34,570,692	$	32,693,785

Amortization of $116,085 and $213,450 of regulatory assets for the years ended September 30, 2024 and 2023, respectively, is included in operations and maintenance expense on the consolidated statements of income. Amortization of $211,863 and $237,911 of regulatory assets for the years ended September 30, 2024 and 2023, respectively, is included in other income, net on the consolidated statements of income. Amortization of $114,187 of regulatory assets for both years ended September 30, 2024 and 2023 is included in interest expense on the consolidated statements of income.

As of September 30, 2024, the Company had regulatory assets in the amount of $9,548,954 on which the Company did not earn a return during the recovery period.

Utility Property and Depreciation—Utility property is stated at original cost and includes direct labor and materials, contractor costs, and all allocable overhead charges. The Company applies the group method of accounting, where the costs of like assets are aggregated and depreciated by applying a rate based on the average expected useful life of the assets. In accordance with Company policy, expenditures for depreciable assets with a life greater than one year are capitalized, along with any upgrades or improvements to existing assets, when such upgrades or improvements significantly improve or extend the original expected useful life. Expenditures for maintenance, repairs, and minor renewals and betterments are expensed as incurred. The original cost of depreciable property retired is removed from utility property and charged to accumulated depreciation. The cost of asset removals, less salvage, is charged to “regulatory cost of retirement obligations” or “asset retirement obligations” as explained under Asset Retirement Obligations below.

Utility property is composed of the following major classes of assets:

	*September 30*
	*2024*		*2023*
Distribution and transmission	$	312,999,348	$	286,200,652
LNG storage		15,437,447		15,407,053
General and miscellaneous		17,427,213		16,762,186
Total utility property in service	$	345,864,008	$	318,369,891

Provisions for depreciation are computed principally at composite straight-line rates over a range of periods. Rates are determined by depreciation studies, which are required to be performed at least every 5 years on the regulated utility assets of Roanoke Gas. The most recent depreciation study was completed and approved by the SCC staff in fiscal 2024. The composite weighted-average depreciation rate was 3.26% and 3.30% for the years ended September 30, 2024 and 2023, respectively.

The composite rates are composed of two components, one based on average service life and one based on cost of retirement. As a result, the Company accrues the estimated cost of retirement of long-lived assets through depreciation expense. These retirement costs are not a legal obligation but rather the result of cost-based regulation and are accounted for under the provisions of ASC 980. Such amounts are classified as a regulatory liability.

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These reviews have not identified any impairments which would have a material effect on the results of operations or financial condition.

In fiscal 2020, Roanoke Gas implemented the application of AFUDC related to infrastructure investments associated with two gate stations that interconnect with the MVP. Both gate stations were placed in service in fiscal 2024 upon MVP becoming operational. In fiscal 2022, the SCC approved the application of AFUDC on the RNG project during its construction phase. This treatment allowed capitalizing both the equity and debt financing costs during the construction phases. For the year ended September 30, 2023, the Company capitalized $76,785 of debt financing costs and $285,900 of equity financing costs related to the RNG project thereby affecting interest expense and other income, net on the consolidated statements of income. The RNG project was completed and placed in service in March 2023, thus the Company did not capitalize any financing costs related to these projects for the year ended September 30, 2024. See Note 4 for further information.

Asset Retirement Obligations—ASC 410, Asset Retirement and Environmental Obligations, requires entities to record the fair value of a liability for an ARO when there exists a legal obligation for the retirement of the asset. When the liability is initially recorded, the entity capitalizes the cost, thereby increasing the carrying amount of the underlying asset. In subsequent periods, the liability is accreted, and the capitalized cost is depreciated over the useful life of the underlying asset. The Company has recorded AROs for its future regulatory obligations related to purging and capping its distribution mains and services upon retirement, although the timing of such retirements is uncertain.

The following is a summary of the AROs:

	*Years Ended September 30*
	*2024*			*2023*
Beginning balance	$	10,792,831		$	10,204,079
Liabilities incurred		86,483			91,670
Liabilities settled		(168,913	)		(180,865	)
Accretion		582,383			677,947
Revisions to estimates and other		(150,689	)		—
Ending balance	$	11,142,095		$	10,792,831

Cash, Cash Equivalents and Short-Term Investments—From time to time, the Company will have balances on deposit at banks in excess of the amount insured by the FDIC. The Company has not experienced any losses on these accounts and does not consider these amounts to be at risk. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Customer Receivables and Allowance for Credit Losses—Accounts receivable include amounts billed to customers for natural gas sales and related services and gas sales occurring subsequent to normal billing cycles but before the end of the period. The Company provides an estimate for losses on these receivables by utilizing historical information, current account balances, account aging and current economic conditions. Customer accounts are charged off annually when deemed uncollectible or when turned over to a collection agency for action.

A reconciliation of changes in the allowance for credit losses is as follows:

	*Years Ended September 30*
	*2024*			*2023*
Beginning balance	$	155,164		$	371,271
Provision for credit losses		110,676			54,211
Recoveries of accounts written off		173,660			181,676
Accounts written off		(286,153	)		(451,994	)
Ending balance	$	153,347		$	155,164

Lease Accounting—The Company leases certain assets including office space and land classified as operating leases. The Company determines if an arrangement is a lease at inception of the agreement based on the terms and conditions in the contract. The operating lease ROU assets and operating lease liabilities are recognized as the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses an estimate of its secured incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is determined by management aided by inquiries of a third party. The operating lease ROU asset also is adjusted for any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease at certain dates, typically at the Company’s own discretion. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. Lease expense for minimum lease payments is recognized on a straight-line basis over the term of the agreement. The Company made an accounting policy election that payments under agreements with an initial term of 12 months or less will not be included on the consolidated balance sheet but will be recognized in the consolidated statements of operations on a straight-line basis over the term of the agreement.

Financing Receivables—Financing receivables represent a contractual right to receive money either on demand, or on fixed or determinable dates, and are recognized as assets on the entity’s balance sheet. Trade receivables, resulting from the sale of natural gas and other services to customers, are the Company's primary type of financing receivables. These receivables are short-term in nature with a provision for credit losses included in the consolidated financial statements.

Inventories—Natural gas in storage and materials and supplies inventories are recorded at average cost. Natural gas storage injections are priced at the purchase cost at the time of injection and storage withdrawals are priced at the weighted average cost of gas in storage. Materials and supplies are removed from inventory at average cost.

Unbilled Revenues—The Company bills its natural gas customers on a monthly cycle; however, the billing cycle for most firm customers does not coincide with the accounting periods used for financial reporting. As the Company recognizes revenue when gas is delivered, an accrual is made to estimate revenues for natural gas delivered to customers but not billed during the accounting period. The amounts of unbilled revenue receivable included in accounts receivable on the consolidated balance sheets at September 30, 2024 and 2023 were $1,294,798 and $1,240,097, respectively.

Income Taxes—Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. A valuation allowance against deferred tax assets is provided if it is more likely than not the deferred tax asset will not be realized. The Company and its subsidiaries file consolidated state and federal income tax returns.

Debt Expenses—Debt issuance expenses are deferred and amortized over the lives of the debt instruments. The unamortized balances are offset against the carrying value of long-term debt.

Over/Under-Recovery of Natural Gas Costs—Pursuant to the provisions of the Company’s PGA clause, the SCC provides the Company with a method of passing along to its customers increases or decreases in natural gas costs incurred by its regulated operations, including gains and losses on natural gas derivative hedging instruments, if utilized. On at least a quarterly basis, the Company files a PGA rate adjustment request with the SCC to increase or decrease the gas cost component of its rates, based on projected price and activity. Once administrative approval is received, the Company adjusts the gas cost component of its rates to reflect the approved amount. As actual costs and usage will differ from the projections used in establishing the PGA rate, the Company may either over-recover or under-recover its actual gas costs during the period. Any difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the deferral period, the balance of the net deferred charge or credit is amortized over an ensuing 12-month period as amounts are reflected in customer bills.

Fair Value—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The Company determines fair value based on the following fair value hierarchy which prioritizes each input to the valuation methods into one of the following three broad levels:

•

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•

Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity which require the Company to develop its own assumptions.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). All fair value disclosures are categorized within one of the three categories in the hierarchy based on the lowest level that is significant to the valuation. See fair value disclosures below and in Notes 8 and 12.

Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Excise and Sales Taxes—Certain excise and sales taxes imposed by the state and local governments in the Company’s service territory are collected by the Company from its customers. These taxes are passed through to the state and local governments and included within accounts payable on the Company's consolidated balance sheets.

Earnings Per Share—Basic EPS and diluted EPS are calculated by dividing net income by the weighted-average common shares outstanding during the period and the weighted-average common shares outstanding during the period plus potential dilutive common shares, respectively. Potential dilutive common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. The computation of diluted EPS for the years ended September 30, 2024 and 2023 excludes potentially dilutive shares of 2,542 and 1,880, respectively, because to include them would be antidilutive for the period. However, these shares could potentially dilute EPS in the future. A reconciliation of basic and diluted EPS is presented below:

	*Years Ended September 30*
	*2024*		*2023*
Net income	$	11,760,896	$	11,299,282
Weighted-average common shares		10,152,909		9,922,701
Effect of dilutive securities:
Options to purchase common stock		3,571		4,456
Diluted average common shares		10,156,480		9,927,157
Earnings per share of common stock:
Basic	$	1.16	$	1.14
Diluted	$	1.16	$	1.14

Business and Credit Concentrations—The primary business of the Company is the distribution of natural gas to residential, commercial and industrial customers in its service territories.

No sales to individual customers accounted for more than 5% of total revenue in any period. No individual customer amounted to more than 5% of total accounts receivable at September 30, 2024 and 2023.

Roanoke Gas currently holds the only franchises and/or CPCNs to distribute natural gas in its service area. These franchises generally extend for multi-year periods, are renewable by the municipalities and are intended for perpetual duration, including exclusive franchises in the cities of Roanoke, Salem and the Town of Vinton. All franchises are set to expire December 31, 2035.

Roanoke Gas is currently served by three primary pipelines that provide the natural gas supplied to the Company’s customers. Depending upon weather conditions and the level of customer demand, failure of one or all of these transmission pipelines could have a major adverse impact on the Company.

Derivative and Hedging Activities—ASC 815, Derivatives and Hedging, requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheet and measurement of those instruments at fair value.

The Company’s hedging and derivatives policy allows management to enter into derivatives for the purpose of managing the commodity and financial market risks of its business operations. The Company’s hedging and derivatives policy specifically prohibits the use of derivatives for speculative purposes. The key market risks that the Company may hedge against include the price of natural gas and the cost of borrowed funds.

From time to time, the Company has entered into collars, swaps and caps for the purpose of hedging the price of natural gas in order to provide price stability during the winter months. The fair value of these instruments is recorded in the consolidated balance sheets with the offsetting entry to either under- or over-recovery of gas costs. Net income and other comprehensive income are not affected by the change in market value as any cost incurred or benefit received from these instruments is recoverable or refunded through the PGA as the SCC allows for full recovery of prudent costs associated with natural gas purchases. At September 30, 2024 and 2023, the Company had no outstanding derivative instruments for the purchase of natural gas.

The Company has four interest rate swaps associated with certain of its variable rate debt. Roanoke Gas has two variable rate term notes in the amounts of $15 million and $10 million, with corresponding swap agreements to convert the variable interest rates into fixed rates of 2.00% and 2.49%, respectively. Midstream has two swap agreements corresponding to the $14 million and $8 million variable rate term notes. The swap agreements convert these two notes into fixed rate instruments with effective interest rates of 3.24% and 2.443%, respectively. The swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of the swaps were deemed ineffective during the periods presented.

See Notes 7 and 8 for additional information on the swaps and fair value.

Other Comprehensive Income (Loss)—A summary of other comprehensive income is provided below:

				*Tax*
	*Before Tax*			*(Expense)*			*Net of Tax*
	*Amount*			*or Benefit*			*Amount*
Year Ended September 30, 2024:
Interest rate swaps:
Unrealized losses	$	(554,778	)	$	142,800		$	(411,978	)
Transfer of realized gains to interest expense		(2,000,126	)		514,831			(1,485,295	)
Net interest rate swaps		(2,554,904	)		657,631			(1,897,273	)
Defined benefit plans:
Net gains arising during period		1,233,462			(317,492	)		915,970
Amortization of actuarial losses		73,505			(18,920	)		54,585
Net defined benefit plans		1,306,967			(336,412	)		970,555
Other comprehensive loss	$	(1,247,937	)	$	321,219		$	(926,718	)
Year Ended September 30, 2023:
Interest rate swaps:
Unrealized gains	$	1,560,426		$	(401,652	)	$	1,158,774
Transfer of realized gains to interest expense		(1,741,437	)		448,244			(1,293,193	)
Net interest rate swaps		(181,011	)		46,592			(134,419	)
Defined benefit plans:
Net gains arising during period		491,270			(126,453	)		364,817
Amortization of actuarial losses		78,813			(20,286	)		58,527
Net defined benefit plans		570,083			(146,739	)		423,344
Other comprehensive income	$	389,072		$	(100,147	)	$	288,925

The amortization of actuarial gains or losses are included as a component of net periodic pension and postretirement benefit costs under other income, net in the consolidated statements of income.

Composition of AOCI:

	*Interest Rate Swaps*			*Defined Benefit Plans*			*Accumulated Other Comprehensive Income (Loss)*
Balance September 30, 2022	$	3,563,341		$	(1,598,977	)	$	1,964,364
Other comprehensive income (loss)		(134,419	)		423,344			288,925
Balance September 30, 2023		3,428,922			(1,175,633	)		2,253,289
Other comprehensive income (loss)		(1,897,273	)		970,555			(926,718	)
Balance September 30, 2024	$	1,531,649		$	(205,078	)	$	1,326,571

Recently Issued Accounting Standards

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In combination with ASU 2021-01 and ASU 2022-06, the ASU provides temporary optional guidance to ease the potential burden in accounting for and recognizing the effects of reference rate change on financial reporting. The new guidance applies specifically to contracts and hedging relationships that reference LIBOR, or any other referenced rate that is expected to be discontinued due to reference rate reform. The new guidance is effective for the Company through December 31, 2024. The Intercontinental Exchange Benchmark Administration, the administrator for LIBOR and other inter-bank offered rates, announced that the LIBOR rates for one-day, one-month, six-month and one-year would cease publication in June 2023 and that no new financial contracts may use LIBOR after December 31, 2021. Subsequent to June 30, 2023, the one-day, one-month, six-month, and one-year LIBOR settings will continue to be published under an unrepresentative synthetic methodology until the end of September 2024 in order to bridge the transition to other reference rates. The Company has transitioned all LIBOR-based variable rate note to a new reference rate as of September 30, 2024. Each of the revised notes has a corresponding swap that was also transitioned to align with the related notes. See Note 7 and 8 for more information.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new guidance is designed to provide users of financial statements with enhanced disclosures regarding the information provided to the chief operating decision maker (CODM) and how the CODM uses the information in assessing the performance of each segment. The new guidance is effective for the Company for fiscal year beginning October 1, 2024 and interim periods within fiscal year beginning October 1, 2025. The Company is currently evaluating the new standard and determining the additional disclosure requirements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance requires that on an annual basis public business entities disclose specific categories in the rate reconciliation table and provide additional information for reconciling items that meet a quantitative threshold (items equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory rate). The required disclosures will provide more granularity regarding the payment of income taxes to federal, state and foreign entities. The Company does not expect certain requirements of this ASU to have a significant impact to its current disclosures as all of its operations are domestic and reside in two states. Changes to the rate reconciliation table will result in additional disclosure. The new guidance is effective for the Company for annual periods beginning October 1, 2025.

In March 2024, the SEC issued its final rule that requires registrants to provide climate disclosures in their annual reports and registration statements. The new guidance requires that registrants provide information about specified financial statement effects of severe weather events and other natural conditions, certain carbon offsets and renewable energy certificates, and material impacts on financial estimates and assumptions in the footnotes to financial statements. The rule also requires additional disclosures outside of the financial statements including governance and oversight of material climate-related risks, the material impact of climate risks on the company's strategy, business model and outlook, risk management processes for material climate-related risks and material climate targets and goals. The Company is currently evaluating the new rule and determining the impact of the additional disclosure requirements, as well as the data needed and the source of that data to comply with required disclosures. The new rule is currently effective for fiscal years beginning in 2027 for smaller reporting companies. The final rule was scheduled to become effective May 28, 2024; however, the SEC has voluntarily stayed the rule's effective date pending judicial review. Depending on when the legal challenges are resolved, the mandatory compliance date may be retained or delayed.

In November 2024, the SEC issued ASU 2024-03, Income Statement - Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures. The new guidance requires public business entities to disclose certain additional detail about expenses including, among other items, purchases of inventory, employee compensation, depreciation and intangible asset amortization included within each income statement expense line items within continuing operations. The guidance also requires disclosure of the total amount of selling expenses and the Company’s definition of selling expenses. Such disclosures must be made on an annual and interim basis and integrated with existing disclosure requirements in a tabular format in the footnotes to the financial statements. The new guidance is effective for the Company for fiscal year beginning October 1, 2027 and interim periods within fiscal year beginning October 1, 2028. The Company is currently assessing the impacts of the new guidance on its financial statement disclosures.

Other accounting standards that have been issued or proposed by the FASB or other standard–setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentations.