Forward-Looking Statements
This report contains forward-looking statements that relate to future
transactions, events or expectations. In addition, Resources may publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities, operational impacts and similar matters.
These statements are based on management's current expectations and information
available at the time of such statements and are believed to be reasonable and
are made in good faith. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to those set forth in the following discussion and
within Item 1A "Risk Factors" in the Company's 2019 Annual Report on Form 10-K.
All of these factors are difficult to predict and many are beyond the Company's
control. Accordingly, while the Company believes its forward-looking statements
to be reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. When
used in the Company's documents or news releases, the words, "anticipate,"
"believe," "intend," "plan," "estimate," "expect," "objective," "projection,"
"forecast," "budget," "assume," "indicate" or similar words or future or
conditional verbs such as "will," "would," "should," "can," "could" or "may" are
intended to identify forward-looking statements.
Forward-looking statements reflect the Company's current expectations only as of
the date they are made. The Company assumes no duty to update these statements
should expectations change or actual results differ from current expectations
except as required by applicable laws and regulations.
The three-month and six-month earnings presented herein should not be considered
as reflective of the Company's consolidated financial results for the fiscal
year ending September 30, 2020. The total revenues and margins realized during
the first six months reflect higher billings due to the weather sensitive nature
of the natural gas business.
COVID-19
COVID-19 has had and continues to have a significant impact on local, state,
national and global economies. The actions taken by governments, as well as
businesses and individuals, to limit the spread of the disease has significantly
disrupted normal activities throughout the Company's service territory. Numerous
businesses have either shut down or are operating on a limited basis, employees
have been furloughed or laid off and social distancing has been mandated through
stay-in-place orders.
The Company expects these actions to have a significant impact on the Company.
Reductions in business operations will result in lower demand for the commercial
use of natural gas for the next quarter and likely longer. Historically, during
the Company's fiscal third and fourth quarters, more than 75% of total natural
gas usage is by industrial and larger commercial customers associated primarily
with manufacturing activities. The Company is seeing a decline in natural gas
consumption as several businesses have temporarily closed or have significantly
cut back operations. Furthermore, the current economic environment will likely
result in increased financial hardship for both businesses and individuals. With
increased levels of unemployment, or a reduction in hours for those still
fortunate to continue working, the ability of these customers to remain current
on their financial obligations and expenses will become increasingly difficult.
Furthermore, the SCC issued an order in March, which extends through June 14,
2020, that prohibits any utility operating in Virginia from disconnecting
utility service to customers for non-payment or apply late payment fees to
delinquent accounts. As a result, the Company expects to see an increase in both
customer delinquencies and bad debts.
Due to the nature of its operations, Resources has been deemed an essential
entity due to the utility services provided through Roanoke Gas. Management has
updated and implemented its pandemic plan to ensure the continuation of safe and
reliable service to customers and maintain the safety of the Company's employees
during COVID-19.
The full extent of the impact to the Company's results of operations and
financial position due to the impact of COVID-19 cannot be currently determined.
Management has increased its estimate of bad debt expense in anticipation of an
increase in delinquencies. Furthermore, management also expects its financial
results over the remainder of the fiscal year to be below the same period last
year due to the expected decline in natural gas deliveries, higher bad debt
expense and other costs incurred to operate the Company in the current
environment. The extent to which COVID-19 will impact the Company will depend on
future developments, which are highly uncertain and cannot be reasonably
predicted, including the duration of the outbreak, the increase or reduction in
governmental restrictions to businesses and individuals, the potential for a
resurgence of the virus and other factors. The longer COVID-19 continues, the
greater the potential negative financial effect on the Company.

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Overview


Resources is an energy services company primarily engaged in the regulated sale
and distribution of natural gas to approximately 62,200 residential, commercial
and industrial customers in Roanoke, Virginia and surrounding localities through
its Roanoke Gas subsidiary.
In addition, Resources is a more than 1% investor in the MVP through its
Midstream subsidiary and provides certain unregulated services through its
Roanoke Gas subsidiary. The unregulated operations of Roanoke Gas represent less
than 2% of total revenues of Resources on an annual basis.
As a public company, Resources operates under the rules and regulations
promulgated by the SEC in regards to financial reporting matters. Under the
prior rules of the SEC, Resources was considered a smaller reporting company and
an accelerated filer under the definitions of Rule 12b-2 under the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended. On March 12, 2020, the
SEC adopted amendments to the Exchange Act that revised the definition of an
accelerated filer to exclude entities that have a public float of less than $700
million and annual revenues under $100 million. Under the revised definitions,
Resources now qualifies as a smaller reporting company and non-accelerated
filer. Furthermore, the non-accelerated filing status extends the deadlines for
SEC filings and removes the requirement of an auditor attestation report on the
Company's internal control over financial reporting in the their Form 10-K. The
Company is currently assessing these changes to the reporting requirements and
their potential application to Resources.
The Company's utility operations are regulated by the SCC, which oversees the
terms, conditions, and rates to be charged to customers for natural gas service,
safety standards, extension of service, accounting and depreciation. The Company
is also subject to federal regulation from the Department of Transportation in
regard to the construction, operation, maintenance, safety and integrity of its
transmission and distribution pipelines. FERC regulates the prices for the
transportation and delivery of natural gas to the Company's distribution system
and underground storage services. The Company is also subject to other
regulations which are not necessarily industry specific.
Over 98% of the Company's annual revenues, excluding equity in earnings of MVP,
are derived from the sale and delivery of natural gas to Roanoke Gas customers.
The SCC authorizes the rates and fees the Company charges its customers for
these services. 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.
On October 10, 2018, Roanoke Gas filed a general rate application requesting an
annual increase in customer non-gas base rates. Roanoke Gas implemented the
non-gas rates contained in its rate application for natural gas service rendered
to customers on or after January 1, 2019. On January 24, 2020, the SCC issued
the final order on the general rate application, granting Roanoke Gas an
annualized increase in non-gas base rates of $7.25 million. The order also
directed the Company to write-down $317,000 of ESAC assets that were not subject
to recovery under the final order. In March 2020, the Company refunded to its
customers the excess revenues collected plus interest for the difference between
the final approved rates and the interim rates billed since January 1, 2019.
In fiscal 2019, the Company completed its transition to the 21% federal
statutory income tax rate as a result of the TCJA that was signed into law in
December 2017. Between the enactment of the new tax rates and the Company's
implementation of new non-gas rates effective January 1, 2019, the Company was
recovering revenues based on a 34% federal income tax rate rather than a 21%
federal tax rate. As a result, during this period, the Company recorded a
provision for refund related to estimated excess revenues collected from
customers for the difference in non-gas rates derived under the lower federal
tax rate and the 34% rate in effect. Beginning in January 2019, Roanoke Gas
incorporated the effect of the 21% federal income tax rate with the
implementation of new non-gas base rates, as filed in its general rate
application, and began refunding the excess revenues associated with the change
in the tax rate. The refund of the excess revenues related to the reduction in
the federal income tax rate was completed in December 2019. The Company also
recorded a regulatory liability related to the excess deferred income taxes on
the regulated operations of Roanoke Gas. These excess deferred income taxes are
being refunded to customers over a 28-year period. Additional information
regarding the TCJA and non-gas base rate award is provided under the Regulatory
and Tax Reform section below.

As the Company's business is seasonal in nature, volatility in winter weather
and the commodity price of natural gas can impact the effectiveness of the
Company's rates in recovering its costs and providing a reasonable return for
its shareholders. In order to mitigate the effect of variations in weather and
the cost of natural gas, the Company has certain approved rate mechanisms in
place that help provide stability in earnings, adjust for volatility in the
price of natural gas and provide a return on increased infrastructure
investment. These mechanisms include SAVE, WNA, ICC and PGA.
The Company's non-gas base rates provide for the recovery of non-gas related
expenses and a reasonable return to shareholders. These rates are determined
based on the filing of a formal non-gas rate application with the SCC utilizing

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historical and proforma information, including investment in natural gas
facilities. Generally, investments related to extending service to new customers
are recovered through the non-gas base rates currently in place, while the
investment in replacing and upgrading existing infrastructure is not recoverable
until a formal rate application is filed and approved. The SAVE Plan and Rider
provides a mechanism through which the Company recovers on a prospective basis
the related depreciation and expenses and provides a return on related qualified
capital investments until such time that a formal rate application is filed. As
the Company has made significant SAVE qualified expenditures since the last
non-gas base rate increase in 2013, SAVE Plan revenues have continued to
increase each year. With the filing of the 2018 non-gas rate application, the
SAVE Rider reset effective January 2019 as the prior revenues associated with
the qualified SAVE Plan infrastructure investments were incorporated into the
new non-gas rates. Accordingly, SAVE Plan revenues declined by approximately
$760,000 for the six-month period ended March 31, 2020 compared to the same
period last year; however, SAVE Plan revenues increased by approximately
$267,000 for the corresponding three-month periods.
The WNA model reduces earnings volatility, related to weather variability in the
heating season, by providing the Company a level of earnings protection when
weather is warmer than normal and providing customers some price protection when
the weather is colder than normal. The WNA is based on a weather measurement
band around the most recent 30-year temperature average. Under the WNA, the
Company recovers from its customers the lost margin (excluding gas costs) from
the impact of weather that is warmer than normal or refunds the excess margin
earned for weather that is colder than normal. The WNA mechanism used by the
Company is based on a linear regression model that determines the value of a
single heating degree day. For the three months and six months ended March 31,
2020, the Company accrued $1,651,000 and $1,817,000 in additional revenues under
the WNA model for weather that was approximately 20% and 13% warmer than normal,
respectively. For the corresponding periods last year, the Company accrued
$46,000 in additional revenues and a $111,000 reduction in revenues for weather
that was 1% warmer than normal and 1% colder than normal, respectively. The
current WNA year ended on March 31, 2020. The SCC approved the Company's request
to delay billing customers for the WNA until later in the year in order to
reduce the current financial burdens on its customers as a result of the impact
from COVID-19. See Regulatory and Tax Reform section below for more information.
The Company also has an approved rate structure in place that mitigates the
impact of financing costs associated with its natural gas inventory. Under this
rate structure, Roanoke Gas recognizes revenue for the financing costs, or
"carrying costs," of its investment in natural gas inventory. This ICC factor
applied to the cost of inventory is based on the Company's weighted-average cost
of capital including interest rates on short-term and long-term debt and the
Company's authorized return on equity. During times of rising gas costs and
rising inventory levels, the Company recognizes ICC revenues to offset higher
financing costs associated with higher inventory balances. Conversely, during
times of decreasing gas costs and lower inventory balances, the Company
recognizes less carrying cost revenue as financing costs are lower. In addition,
ICC revenues are impacted by the changes in the weighting of the components that
are used to determine the weighted-average cost of capital. Total ICC revenues
for the three and six month periods ended March 31, 2020 declined by
approximately 8% and 12%, respectively, from the same periods last year due to a
combination of lower average price of gas in storage balances and a reduction in
the ICC factor used in calculating these revenues.
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. The cost of
natural gas is a pass-through cost and is independent of the non-gas base rates
of the Company. This rate component, referred to as the PGA, allows the Company
to pass along to its customers increases and decreases in natural gas costs
incurred by its regulated operations. On a quarterly basis, or more frequently
if necessary, the Company files a PGA rate adjustment request with the SCC to
adjust the gas cost component of its tariff rates depending on projected price
and activity. Once administrative approval is received, the Company adjusts the
gas cost component of its rates to reflect the approved amount. As actual costs
will differ from 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 those amounts are reflected in customer billings.
Cyber Risk
Cyber attacks are a constant threat to businesses and individuals. The Company
remains focused on these threats and is committed to safeguarding its
information technology systems. These systems contain confidential customer,
vendor and employee information as well as important financial data. There is
risk associated with unauthorized access of this information with a malicious
intent to corrupt data, cause operational disruptions or compromise information.
Management believes it has taken reasonable security measures to protect these
systems from cyber attacks and similar incidents; however, there can be no
guarantee that an incident will not occur. In the event of a cyber incident, the
Company will execute its Security Incident Response Plan. The Company maintains
cyber insurance to mitigate financial exposure that may result from a cyber
incident.


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Results of Operations
Three Months Ended March 31, 2020:
Net income increased by $1,010,226, or 22%, for the three months ended March 31,
2020, compared to the same period last year. Quarterly performance improved
significantly due to the impact of the non-gas rate increase and the earnings on
the MVP investment, offsetting increases in non-gas expenses.
The tables below reflect operating revenues, volume activity and heating
degree-days.

                                             Three Months Ended March 31,
                                                                                    Increase /
                                                 2020                 2019          (Decrease)       Percentage
Operating Revenues
Gas Utility                             $     22,275,719         $ 25,058,749     $  (2,783,030 )       (11 )%
Non utility                                      162,012              216,210           (54,198 )       (25 )%
Total Operating Revenues                $     22,437,731         $ 25,274,959     $  (2,837,228 )       (11 )%
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial                     2,675,117            3,281,556          (606,439 )       (18 )%
Transportation and Interruptible                 917,159              799,875           117,284          15  %
Total Delivered Volumes                        3,592,276            4,081,431          (489,155 )       (12 )%
HDD (Unofficial)                                   1,661                2,045              (384 )       (19 )%


Total operating revenues for the three months ended March 31, 2020, compared to
the same period last year, declined due to a 12% reduction in total delivered
volumes and a 25% reduction in the commodity price of natural gas more than
offsetting the net non-gas rate increase. The average commodity price of natural
gas for the current quarter was $2.30 per decatherm compared to $3.06 per
decatherm for the same period last year. Natural gas prices are expected to
remain at these lower prices due to abundant supplies and depressed demand as a
result of the effects of COVID-19. Furthermore, total residential and commercial
volumes declined by 18% due to the current quarter having 19% fewer heating
degree days than for the same period last year. Transportation and interruptible
volumes increased by 15% primarily related to one multi-fuel use industrial
customer, which has significantly increased the use of natural gas during the
current fiscal year. The Company placed new non-gas base rates into effect for
natural gas service rendered on or after January 1, 2019, subject to refund. The
initial rates implemented in the prior year allocated approximately 80% of the
rate increase to the customer base charge and approximately 20% to volumetric
revenues. Based on subsequent discussions with the SCC, and ultimately included
in the final rate order, the approved increase in non-gas rates were allocated
approximately 20% to the customer base charge and 80% to volumetric revenues. As
a result, the current quarter reflects a much larger volumetric revenue
component and margin per decatherm as compared to the prior year, while customer
base charge reflects an overall decrease in comparison. SAVE Plan revenues
increased by $266,974 as the rates for the SAVE plan reset effective January 1,
2019. Non-utility revenue declined due to lower demand for services during the
quarter.

The Company's operations are affected by the cost of natural gas, as reflected
in the condensed consolidated income statements under the line item cost of gas
- utility. The cost of natural gas is passed through to customers at cost, which
includes commodity price, transportation, storage, injection and withdrawal fees
with any increase or decrease offset by a correlating change in revenue through
the PGA. Accordingly, management believes that gross utility margin, a non-GAAP
financial measure defined as utility revenues less cost of gas, is a more useful
and relevant measure to analyze financial performance. The term gross utility
margin is not intended to represent operating income, the most comparable GAAP
financial measure, as an indicator of operating performance and is not
necessarily comparable to similarly titled measures reported by other companies.
Therefore, the following discussion of financial performance will reference
gross utility margin as part of the analysis of the results of operations.


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                                             Three Months Ended March 31,
                                                                                    Increase /
                                                 2020                 2019          (Decrease)       Percentage
Gross Utility Margin
  Gas Utilities Revenue                 $     22,275,719         $ 

25,058,749 $ (2,783,030 ) (11 )%


  Cost of Gas - Utility                        8,672,997           

12,771,338 (4,098,341 ) (32 )%


  Gross Utility Margin                  $     13,602,722         $ 

12,287,411 $ 1,315,311 11 %




Gross utility margins increased from the same period last year primarily as a
result of the revised allocation of the non-gas rate increase, an adjustment to
the WNA pricing model and increases in SAVE Plan revenues. As discussed above,
the rate design in the final order resulted in an even greater level of earnings
during the weather sensitive heating season due to the increased allocation to
the weather sensitive component of non-gas rates and lower earnings in the
non-heating season due to lower fixed rate revenues. The current quarter
reflects the revenues and margin as approved in the final rate order; however,
the quarter ended March 31, 2019 reflected the higher allocation to customer
base charge. Furthermore, the WNA revenue model, which adjusts the Company's
natural gas margin for the variance in weather from normal temperatures, was
adjusted by approximately $204,000 during the quarter to reflect the higher
allocation of the non-gas rates to the volumetric component for the current WNA
year resulting in an increase in the corresponding WNA revenues. SAVE Plan
margin increased by $266,974 as the level of qualified SAVE infrastructure
investment continues to increase since the reset of the SAVE Plan.
COVID-19 had only a minimal impact on the Company's natural gas deliveries
during the 2020 second fiscal quarter; however, reductions in sales volumes are
expected in future periods.
The components of and the change in gas utility margin are summarized below:
                          Three Months Ended March 31,
                              2020                2019         Increase / (Decrease)
Customer Base Charge $      3,610,679         $  4,331,767    $            (721,088 )
Carrying Cost                  85,134               92,932                   (7,798 )
SAVE Plan                     289,999               23,025                  266,974
Volumetric                  7,934,022            7,777,889                  156,133
WNA                         1,650,558               46,412                1,604,146
Other Gas Revenues             32,330               15,386                   16,944
Total                $     13,602,722         $ 12,287,411    $           1,315,311


Operations and maintenance expenses increased by $396,065, or 11%, from the same
period last year due to higher compensation costs, bad debt expense and
professional services. Compensation costs increased by $203,000 primarily due to
the vesting of officer restricted stock awards during the quarter. As discussed
in the Regulatory and Tax Reform section below, the Company increased its
provision for bad debt expense by $83,000 over last year even though gross
billings for the quarter declined by 33% due to reductions in natural gas
deliveries and the completion of the non-gas rate refund during March. Estimated
bad debt reserves increased in anticipation of rising delinquencies on current
customer balances and ultimately higher bad debt expense due to customers
inability to meet their financial obligations as a result of current economic
conditions and government restrictions related to COVID-19. Professional
services increased by $64,000 due to a variety of factors including additional
regulatory support regarding the non-gas rate increase, network systems support,
consulting services on benefit plans and support on project evaluations. The
remaining $46,000 relates to a variety of other net increases in expense.
General taxes increased by $31,537, or 6%, associated with higher property and
payroll taxes. Property taxes continue to increase corresponding to higher
utility property balances related to ongoing infrastructure replacement, system
reinforcements and customer growth.

Depreciation expense increased by $82,741, or 4%, on an increase in utility
plant investment.
Equity in earnings of unconsolidated affiliate increased by $490,418, or 70%, as
the investment in MVP continues to increase.
Other income, net increased by $196,183 primarily due to $163,000 in AFUDC
related to two natural gas transfer stations that will interconnect with the MVP
and a $25,000 increase in the non-service components of net periodic benefit
costs. In the final order on the Company's non-gas rate increase, the SCC
allowed Roanoke Gas to defer financing costs of these infrastructure

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RGC RESOURCES, INC. AND SUBSIDIARIES




projects for potential recovery in future rate proceedings instead of providing
a return on the investment under the non-gas rates approved in the final order.
The Company recorded the AFUDC based on activity retro-active to January 1,
2019, the effective date of the new non-gas rates.
Interest expense increased by $145,644, or 16%, due to a 34% increase in total
average debt outstanding between quarters. The higher borrowing levels derived
from the ongoing investment in MVP and financing expenditures in support of
Roanoke Gas' capital budget, partially offset by a 12% reduction in the weighted
average interest rate and capitalization of the interest component of AFUDC
related to the two interconnect stations with the MVP.
Roanoke Gas interest expense increased by $76,487 as total average debt
outstanding increased by $8,500,000 associated with the issuance of two separate
debt issuances offset by reductions in the line-of-credit balances. The average
interest rate increased from 3.78% to 3.86% between periods. In addition,
Roanoke Gas reduced interest expense related to the capitalization of $54,000
for the interest portion of AFUDC. The equity component of AFUDC is included in
other income, net.
Midstream interest expense increased by $69,157 as total average debt
outstanding increased by $14,700,000 associated with cash investments in the
MVP. The average interest rate decreased from 3.80% to 3.09% due to the decline
in the variable interest rate on Midstream's credit facility and the entry into
two separate notes with swap rates at 3.24% and 3.14%.
Income tax expense increased by $326,864 corresponding to an increase in taxable
income. The effective tax rate was 23.9% and 23.8% for the three month periods
ended March 31, 2020 and 2019, respectively. Both periods included the
amortization of excess deferred taxes.
Six Months Ended March 31, 2020:
Net income increased by $2,583,000, or 36%, for the six months ended March 31,
2020, compared to the same period last year due to the impact of the non-gas
rate increase and the earnings on the MVP investment, more than offsetting
increases in non-gas expenses.
The tables below reflect operating revenues, volume activity and heating
degree-days.

                                            Six Months Ended March 31,
                                                                               Increase /
                                              2020               2019          (Decrease)       Percentage
Operating Revenues
Gas Utilities                           $    41,901,325     $ 46,095,330     $  (4,194,005 )        (9 )%
Other                                           321,859          396,376           (74,517 )       (19 )%
Total Operating Revenues                $    42,223,184     $ 46,491,706     $  (4,268,522 )        (9 )%
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial                    4,924,373        5,647,630          (723,257 )       (13 )%
Transportation and Interruptible              1,786,741        1,549,940           236,801          15  %
Total Delivered Volumes                       6,711,114        7,197,570          (486,456 )        (7 )%
HDD (Unofficial)                                  3,101            3,605              (504 )       (14 )%


Operating revenues for the six months ended March 31, 2020 declined from the
same period last year due to a 7% reduction in total delivered volumes, lower
natural gas commodity prices and reduced SAVE Plan revenue more than offsetting
the increase in non-gas rates. The weather sensitive residential and commercial
natural gas deliveries declined by 13% corresponding to a 14% decline in the
number of heating degree days during the period. Transportation and industrial
volumes increased 15% primarily related to one multi-fuel use industrial
customer significantly increasing the use of natural gas in its production
activities during the period. The extent or expected duration of the increased
natural gas consumption by this customer is not currently known and could revert
to lower usage patterns in the future. The average commodity price of natural
gas delivered for the first six months of fiscal 2020 was approximately 30% per
decatherm lower than the same period last year due to available supplies and
higher storage levels from a mild winter. SAVE Plan revenues declined by
$760,000 as the SAVE Rider reset effective January 1, 2019, and all qualifying
SAVE Plan investments were included in rate base used to derive the new non-gas
base rates. The fiscal 2019 SAVE Plan revenues represented an accumulation of 5
years of SAVE investment for the first three months of the period. As noted
above, the Company placed into effect new interim non-gas base rates on January
1, 2019. Revenues for the current fiscal year reflect the non-gas rate increase
for the entire period, while the estimated non-gas

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RGC RESOURCES, INC. AND SUBSIDIARIES




rate increase was reflected in prior year revenues beginning January 1, 2019.
Furthermore, the current year non-gas revenues reflect the findings in the final
order specifying that approximately 80% of the non-gas rate increase be
reflected in the volumetric portion of rates, while the original rate
application reflected non-gas rates that allocated approximately 80% of the
non-gas rate increase to customer base charge revenues. Non-utility revenue
declined due to lower demand for services during the quarter.

                                            Six Months Ended March 31,
                                                                               Increase /
                                              2020               2019          (Decrease)       Percentage
Gross Utility Margin
  Gas Utilities Revenue                 $    41,901,325     $ 46,095,330

$ (4,194,005 ) (9 )%


  Cost of Gas - Utility                      16,850,803       24,677,797    

(7,826,994 ) (32 )%


  Gross Utility Margin                  $    25,050,522     $ 21,417,533

$ 3,632,989 17 %




Gross utility margins increased from the same period last year primarily as a
result of the implementation of higher non-gas base rates and an adjustment to
the WNA pricing model, partially offset by a reduction in SAVE revenues.
Customer base charge revenues declined by $258,334, while volumetric and WNA
margin increased by $4,128,715 as a result of the non-gas base rate increase and
the re-allocation of the increase from mostly customer base charge to volumetric
margin. SAVE Plan revenues declined by $759,925 as all related SAVE investments
were incorporated into the new non-gas base rates effective January 1, 2019. WNA
margin increased by $1,928,077 as weather moved from colder than normal in the
prior year to 13% warmer than normal during the current period In addition, the
WNA model was adjusted by $204,000 to reflect the revisions to the non-gas
volumetric rates during the WNA year. The prior year included a reserve for
excess revenues attributable to the reduction in income tax rates. The current
year has no such adjustment as the new non-gas rates incorporate the effect of
lower federal income tax rates.
The components of and the change in gas utility margin are summarized below:
                         Six Months Ended March 31,
                           2020              2019         Increase / (Decrease)
Customer Base Charge  $    7,191,428    $  7,449,762     $            (258,334 )
Carrying Cost                241,041         274,567                   (33,526 )
SAVE Plan                    470,612       1,230,537                  (759,925 )
Volumetric                15,237,865      13,037,227                 2,200,638
WNA                        1,817,155        (110,922 )               1,928,077
Other Gas Revenues            92,421          60,243                    32,178
Excess Revenue Refund              -        (523,881 )                 523,881
Total                 $   25,050,522    $ 21,417,533     $           3,632,989


Operations and maintenance expenses increased by $791,536, or 11%, from the same
period last year related to the write-off of a portion of the ESAC regulatory
assets, amortization of the remaining regulatory assets, and increases in
compensation costs, cost of professional services, bad debt expense and
corporate insurance, partially offset by higher capitalized overheads. Beginning
in January 2019, concurrent with the implementation of new non-gas rates, the
Company began amortizing certain regulatory assets for which recovery was
included in the rate application. Total amortization of regulatory assets
increased by $129,000. The final order on the Company's non-gas rate increase
directed the Company to write-down $317,000 of ESAC assets that were not subject
to recovery. Compensation costs increased by $214,000 primarily related to the
vesting of officer restricted stock awards. Professional services increased by
$123,000 due to a variety of factors including legal assistance in the non-gas
rate application, network systems support, benefit plan consulting and project
support activities. Bad debt expense increased by $77,000 related to COVID-19.
Corporate insurance expense increased by $78,000 due to higher premiums related
to increased liability limits. Capitalized overheads increased by $113,000
primarily due to timing of LNG production related to facility upgrades at the
plant during the summer. The remaining difference relates to a variety of small
increases and decreases in expenses.
General taxes increased by $66,885, or 6%, primarily associated with higher
property taxes on corresponding increases in utility property balances related
to ongoing investment in the natural gas distribution facilities.


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Depreciation expense increased by $165,771, or 4%, on an increase in utility
property balances.
Equity in earnings of unconsolidated affiliate increased by $1,021,455, or 81%,
as a result of AFUDC related to the increased construction activity in the MVP
investment.
Other income, net increased by $227,940, or 92%, primarily due to the $163,000
in AFUDC income related to the two Roanoke Gas transfer stations that will
interconnect with the MVP and the non-service components of net periodic benefit
costs.
Interest expense increased by $414,047, or 24%, due to a 30% increase in total
average debt outstanding for the periods related to the ongoing investment in
MVP and Roanoke Gas' infrastructure, partially offset by a reduction in the
weighted average interest rate during the period.
Roanoke Gas interest expense increased by $219,101 as total average debt
outstanding increased by $9,000,000 associated with two separate debt issuances
offset by reductions in the line-of-credit balances. The average interest rate
increased from 3.73% to 3.79% between periods.
Midstream interest expense increased by $194,946 as total average debt
outstanding increased by $16,600,000 associated with its investment in the MVP.
The average interest rate decreased from 3.71% to 3.13% due to the decline in
the variable interest rate on Midstream's credit facility and the entry into two
separate notes with swap rates at 3.24% and 3.14%.
Income tax expense increased by $866,238, or 40%, on a corresponding increase in
taxable income. The effective tax rate was 23.8% and 23.3% for the six month
periods ended March 31, 2020 and 2019, respectively.
Critical Accounting Policies and Estimates
The consolidated financial statements of Resources are prepared in accordance
with accounting principles generally accepted in the United States of America.
The amounts of assets, liabilities, revenues and expenses reported in the
Company's consolidated 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 judgments. Actual
results may differ significantly from these estimates and assumptions.
The Company considers an estimate to be critical if it is either quantitatively
or qualitatively material to the financial statements and requires assumptions
to be made that were uncertain at the time the estimate was derived and changes
in the estimate are reasonably likely to occur from period to period. The
Company increased it provision for bad debts in anticipation of the economic
fallout expected from COVID-19. The anticipated impact on customers from the
virus and governmental restrictions combined with the SCC orders prohibiting
customer disconnection of utility service will likely result in rising customer
delinquencies and higher bad debt expense in the future. The Company's estimated
reserve for bad debts is based on historical activity as well as evaluating the
limited information currently available. Management will continue to evaluate
collectability of its receivables and revise its estimate of bad debts as more
information becomes available.
The Company adopted 2016-02, Leases, and subsequent guidance and amendments
effective October 1, 2019. The adoption of the ASU did not have a significant
effect on the Company's results of operations, financial position or cash flows
as the Company has only one lease, and management determined that the value of
the lease obligation was de minimis. The Company does have easements for
rights-of-way for its distribution system; however, all related costs associated
with these have been paid in advance with no remaining obligation.
There have been no other changes to the critical accounting policies as
reflected in the Company's Annual Report on Form 10-K for the year ended
September 30, 2019.
Asset Management
Roanoke Gas uses a third-party asset manager to manage its pipeline
transportation, storage rights and gas supply inventories and deliveries. In
return for being able to utilize the excess capacities of the transportation and
storage rights, the asset manager pays Roanoke Gas a monthly utilization fee. In
accordance with an SCC order issued in 2018, a portion of the utilization fee is
retained by the Company with the balance passed through to customers through
reduced gas costs.

Equity Investment in Mountain Valley Pipeline



On October 1, 2015, Midstream entered into an agreement to become a 1% member in
the LLC. The purpose of the LLC is to construct and operate the MVP, a
FERC-regulated natural gas pipeline connecting Equitran's gathering and
transmission system in northern West Virginia to the Transco interstate pipeline
in south central Virginia.

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On November 19, 2019, the Company's Board of Directors approved a pro-rata
increase in its participation in MVP, which will result in an estimated
additional cash investment of $1.8 million above the current $53 to $55 million
estimate. As a result of this increased participation, Midstream's equity
interest will increase to approximately 1.03% by the time the pipeline is placed
in service.

Management believes the investment in the LLC will be beneficial for the
Company, its shareholders and southwest Virginia. In addition to Midstream's
potential returns from its investment in the LLC, Roanoke Gas will benefit from
this additional delivery source. Currently, Roanoke Gas is served by two
pipelines and an LNG peak-shaving facility. Damage to or interruption in supply
from any of these sources, especially during the winter heating season, could
have a significant impact on the Company's ability to serve its customers. This
additional capacity would reduce the impact from such an event as well as allow
the Company to better meet both current and future demands for natural gas. In
addition, the proposed pipeline path would provide the Company with a more
economically feasible opportunity to provide natural gas service to currently
unserved areas within its certificated service territory.

The MVP project is currently 90% complete. Activity on the MVP has been limited
this year to maintaining the infrastructure currently in place and restoration
activities. The LLC is actively working with the respective regulatory bodies on
the reissuance of water crossing permits that were rescinded by the Fourth
Circuit as well as the permit to cross a section of the Jefferson National
Forest. Until such time as approval is granted, activity on the pipeline will be
limited as most of the pipeline work not encompassed in the revoked permits has
been completed.

Assuming timely resolution of the permit issues above and no extended
restrictions on construction activities due to COVID-19, the LLC projects an
in-service date for the MVP in late calendar year 2020. The delays in completing
the project combined with the increased costs will reduce the corresponding
return on investment, absent a regulatory action that could provide for the
recovery of these higher costs by MVP.

Midstream entered into the Third Amendment to Credit Agreement and amended the
corresponding associated notes to increase the borrowing capacity under the
credit facility from $26 million to $41 million and extend the maturity date to
December 29, 2022. Under the amended agreement and notes, Midstream should have
the needed financing to meet its funding requirements in the MVP. If the
rescinded permits are not re-issued and approved in a reasonable time period
and/or restrictions imposed by the government related to COVID-19 continue for
an extended period, both the cost of the MVP and Midstream's capital
contributions will increase above current estimates and the in-service date will
likely be extended beyond 2020.

The current earnings from the MVP investment are attributable to AFUDC income
generated by the deployment of capital in the design, engineering, materials
procurement, project management and construction of the pipeline. AFUDC is an
accounting method whereby the costs of debt and equity funds used to finance
facility infrastructure are credited to income and charged to the cost of the
project. The level of investment in MVP, as well as the AFUDC, will continue to
grow as construction activities continue. When the pipeline is completed and
placed into service, AFUDC will cease. Once operational, earnings will be
derived from capacity charges for utilizing the pipeline. Continued delays in
the project could ultimately result in future earnings from the operation of the
pipeline to be below the level of AFUDC recognized.

In 2018, Midstream became a participant in Southgate, a project to construct a
74-mile pipeline extending from the MVP mainline at the Transco interconnect in
Virginia to delivery points in North Carolina. Midstream is a less than 1%
investor in the Southgate project and, based on current estimates, will invest
approximately $2.5 million in Southgate. Midstream's participation in the
Southgate project is for investment purposes only. The Southgate in-service date
is currently targeted for 2021.

Regulatory and Tax Reform



On October 10, 2018, Roanoke Gas filed a general rate case application
requesting an annual increase in customer non-gas base rates. This application
incorporated into the non-gas base rates the impact of tax reform, non-SAVE
utility plant investment, increased operating costs, recovery of regulatory
assets, including all deferred ESAC related costs, and SAVE Plan investments and
related costs previously recovered through the SAVE Rider. Approximately $4.7
million of the rate increase was attributable to moving the SAVE Plan related
revenues into non-gas base rates. The new non-gas base rates were placed into
effect for gas service rendered on or after January 1, 2019, subject to refund,
pending audit by SCC staff, hearing and final order by the SCC.

Following the completion of the SCC staff audit and the issuance of the hearing examiner's report, the SCC issued their final order. The SCC order awarded Roanoke Gas an annualized non-gas rate increase of $7.25 million with approximately 80% of


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the increase allocated to the volumetric component of rates. The non-gas rate
award provided for a 9.44% return on equity but excluded from recovery, at the
current time, a return on the investment of two interconnect stations with the
MVP. In addition, the final order directed the Company to write-off a portion of
ESAC assets that were excluded from recovery under the rate award. As a result,
the Company expensed an additional $317,000 of ESAC assets above the normal
amortization amount. Management submitted its rate design to reflect the
increase of $7.25 million in non-gas rates, which was approved by the SCC at the
end of January 2020. The Company completed the rate refund during March 2020 by
applying a total of $3.8 million in refunds plus interest to the accounts of
active customers and mailing checks to former customers.

As noted above, the SCC order excluded a return on investment of the two
interconnect stations currently under construction that will link the MVP
pipeline with the Company's distribution system. However, the order did provide
for the ability to defer financing costs of these investments for future
recovery, which was done through the application of an AFUDC calculation to
capitalize both the equity and debt financing costs during the construction
phases. Prior to recording the adjustment, the Company conferred with the SCC
regarding the proposed treatment and the calculation of the AFUDC. The specific
time period allowed for the recovery of these costs has yet to be determined;
therefore, the Company has taken a conservative position and has reflected only
the amount of AFUDC since January 1, 2019, the date in which the rate award was
effective. If the SCC concludes that the AFUDC applies to an earlier period, the
Company will reflect any additional AFUDC at that time. The condensed
consolidated financial statements for the current quarter include $217,000 in
AFUDC income with $163,000 reflected in other income and $54,000 as an offset to
interest expense.

On March 16, 2020, in response to COVID-19, the SCC issued an order applicable
to all utilities operating in Virginia to suspend disconnection of service to
all customers until May 15, 2020, which was subsequently extended to June 14,
2020. This order was effective on issuance and also directed utilities to not
assess late payment fees due to the coronavirus public health emergency. Under
this order, the Company is unable to disconnect any customer for non-payment of
their natural gas service. As a result of COVID-19, management expects to
experience an increase in bad debts due to business closings and higher
unemployment; however, the prohibition to disconnect service to any customer for
a period of 90 days will allow the level of bad debts to increase above the
previously expected higher levels. Customers that were not able to pay their
bills will now have the potential to owe the Company for an additional three
months of service. The Company has increased its provision for bad debts as of
March 31, 2020; however, the potential magnitude of the combined impact from the
economy and this order on bad debts is unknown at this time. The Company
supports the decision to suspend service disconnections in light of the current
economic situation and will work with its customers in making arrangements to
keep or bring their accounts current. On April 29, 2020, the SCC issued an order
permitting regulated utilities in Virginia to defer certain incremental
prudently incurred costs associated with the COVID-19 pandemic. Management is
currently evaluating this order and the potential application to the Company.

For the WNA year ended March 31, 2020, the Company accrued at total of
$2,387,000 of which $1,817,000 was attributable to the current fiscal year.
According to the provisions of the Company's WNA rate schedule, the Company
submits its annual filing to the SCC for approval of rates to collect any
revenue shortfall or refund any excess revenues, which must then be reflected in
customers bills between the months of May and August. However, due to the
current issues related to COVID-19, management submitted a request to the SCC to
delay the customer billing related to the WNA revenues. The Company believes
that it is in the best interest of its customers to delay billing at this time
for the additional revenues attributable to the warmer weather. On April 14,
2020, the SCC issued an order granting the Company a waiver of the terms under
the WNA rate schedule. The order did not specify when such customer billings
will begin; however, the manner and timing of such billings will be determined
in consultation with the SCC staff.

The general rate case application incorporated the effects of tax reform, which
reduced the federal tax rate for the Company from 34% to 21%. Roanoke Gas
recorded two regulatory liabilities to account for this change in the federal
tax rate. The first regulatory liability related to the excess deferred taxes
associated with the regulated operations of Roanoke Gas. As Roanoke Gas had a
net deferred tax liability, the reduction in the federal tax rate required the
revaluation of these excess deferred income taxes to the 21% rate at which the
deferred taxes are expected to reverse. The excess net deferred tax liability
for Roanoke Gas' regulated operations was transferred to a regulatory liability,
while the revaluation of excess deferred taxes on the unregulated operations of
the Company were flowed into income tax expense in the first quarter of fiscal
2018. A majority of the regulatory liability for excess deferred taxes was
attributable to accelerated tax depreciation related to utility property. In
order to comply with the IRS normalization rules, these excess deferred income
taxes must be flowed back to customers and through tax expense based on the
average remaining life of the corresponding assets, which approximates 28 years.
The corresponding balances related to the excess deferred taxes are included in
the regulatory liability schedule in Note 14 of the condensed consolidated
financial statements.

The second regulatory liability relates to the excess revenues collected from
customers. The non-gas base rates used since the passage of the TCJA in December
2017 through December 2018 were derived from a 34% federal tax rate. As a
result, the

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Company over-recovered from its customers the difference between the federal tax
rate at 34% and the 24.3% blended rate in fiscal 2018 and 21% in fiscal 2019. To
comply with an SCC directive issued in January 2018, Roanoke Gas recorded a
refund for the excess revenues collected in fiscal 2018 and the first quarter of
fiscal 2019. Starting with the implementation of the new non-gas base rates in
January 2019, Roanoke Gas began returning the excess revenues to customers over
a 12-month period. The refund of the excess revenues was completed in December
2019.

The Company continues to recover the costs of its infrastructure replacement
program through its SAVE Plan. The original SAVE Plan was designed to facilitate
the accelerated replacement of aging natural gas pipe by providing a mechanism
for the Company to recover the related depreciation and expenses including a
return on qualifying capital investment without the filing of a non-gas base
rate application. Since the implementation and approval of the original SAVE
Plan in 2012, the Company has modified, amended or updated it each year to
incorporate various qualifying projects. In May 2019, the Company filed its most
recent SAVE Plan and Rider, which continues the focus on the ongoing replacement
of pre-1973 plastic pipe and the replacement of a natural gas transfer station.
In September 2019, the SCC approved the updated SAVE Plan and Rider effective
with the October 2019 billing cycle. The new SAVE Rider is designed to collect
approximately $1.1 million in annual revenues, an increase from the approximate
$500,000 in annual revenues under the prior SAVE rates. With the inclusion of
all previous SAVE investment through December 31, 2018 into the rate
application, the current SAVE Plan Rider reflects only the recovery of
qualifying SAVE Plan investments made since the beginning of January 2019. In
addition, the SAVE application includes a refund factor to return approximately
$543,000 in SAVE revenue over-collections from 2018, primarily resulting from
the effect of the reduction in the federal income tax rate.
Capital Resources and Liquidity
Due to the capital intensive nature of the utility business, as well as the
related weather sensitivity, the Company's primary capital needs are the funding
of its utility plant capital projects, investment in the MVP, the seasonal
funding of its natural gas inventories and accounts receivable and the payment
of dividends. To meet these needs, the Company relies on its operating cash
flows, line-of-credit agreement, long-term debt and equity capital.
Cash and cash equivalents increased by $2,172,880 and $1,720,152 for the
six-month periods ended March 31, 2020 and 2019, respectively. The following
table summarizes the sources and uses of cash:

                                             Six Months Ended March 31,
                                               2020              2019

Cash Flow Summary Net cash provided by operating activities $ 11,168,131 $ 10,933,123 Net cash used in investing activities (16,353,341 ) (24,279,040 ) Net cash provided by financing activities 7,358,090 15,066,069 Increase in cash and cash equivalents $ 2,172,880 $ 1,720,152




The seasonal nature of the natural gas business causes operating cash flows to
fluctuate significantly during the year as well as from year to year. Factors,
including weather, energy prices, natural gas storage levels and customer
collections, contribute to working capital levels and related cash flows.
Generally, operating cash flows are positive during the second and third
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 quarters, operating cash flows generally decrease due to
increases in natural gas storage levels, rising customer receivable balances and
construction activity.
Cash flow from operating activities for the six months ended March 31, 2020
increased by $235,008 over the same period in the prior year. The increase in
cash flow provided by operations was primarily driven by higher net income,
depreciation, reductions in natural gas storage inventory, and increases in
accounts receivable, net changes in regulatory assets and liabilities.
Net income and accounts receivable primarily contributed to the increase in cash
flows provided by operating activities. Net income, net of equity in earnings
and AFUDC, and depreciation contributed more than $1.3 million in cash as
compared to the same period last year. This increase was primarily driven by the
January 2019 implementation of the increase in non-gas base rates, as adjusted
in January 2020 per the SCC's final order. Due to a much warmer heating season,
delivered volumes for the six-month period ending March 31, 2020 were 7% lower
than the same period last year. Low commodity prices, combined with lower
delivered volumes, resulted in a much smaller increase in accounts receivable
balances in the first half of fiscal 2020 compared to the same six month period
of fiscal 2019, thereby improving cash flows by $6.3 million.

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The aforementioned contributions to cash flows provided by operating activities
were offset by cash used primarily by Roanoke Gas' rate refund, and WNA and PGA
mechanisms. Though the SCC issued its final order in January 2020, Roanoke Gas
implemented interim billing rates in January 2019; therefore, the Company began
accruing an estimated rate refund representing the amount due customers for the
difference between total customer billings at interim rates versus total
customer billings at final rates. Upon SCC approval of final rates, Roanoke Gas
issued refunds in March 2020 to all customers that were billed at interim rates
since January 2019. When compared to the six-month period ending March 31, 2019,
the distribution of the rate refund to customers reduced cash available for
operations by $4.9 million, which also resulted in a corresponding reduction in
accounts receivable. The WNA mechanism contributed to a decrease in cash of
approximately $1.7 million when compared to the same six-month period in the
prior year. The related receivable increased significantly as the WNA year ended
March 31, 2020 was 17% warmer than normal, compared to the 1% warmer weather
experienced during the WNA year ended March 31, 2019. Continued lower commodity
prices combined with a decrease in delivered volumes, attributable to warmer
weather, resulted in Roanoke Gas' PGA being in an over-collected position at
both March 31, 2020 and 2019. The cash provided by the over-collection for the
six-months ended March 31, 2020 lagged the cash provided over the same period in
the prior year, thereby reducing operating cash by approximately $1.5 million.
A summary of the cash provided by operations is provided below:

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