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OFFON

RGC RESOURCES, INC.

(RGCO)
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RGC RESOURCES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

02/11/2021 | 04:19pm EDT
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 2020 Annual Report on Form 10-K
and Item 1A of this report. 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 earnings presented herein should not be considered as reflective
of the Company's consolidated financial results for the fiscal year ending
September 30, 2021. The total revenues and margins realized during the first
three months reflect higher billings due to the weather sensitive nature of the
natural gas business.

COVID-19

As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual
Report on Form 10-K, while vaccines are becoming available, COVID-19 and the
resulting pandemic continue to have a significant impact on our local, state,
national and global economies. The actions taken to limit the spread and
overcome the virus have significantly disrupted normal activities throughout the
Company's service territory. Management continues to monitor current conditions
to ensure the continuation of safe and reliable service to customers and to
maintain the safety of the Company's employees. Since the beginning of the
pandemic, Resources has been deemed an essential entity by virtue of the utility
services provided through Roanoke Gas.

The Company continues to experience a decline in natural gas consumption by
commercial customers, excluding certain industrial customers that have increased
gas consumption for use in their business processes. The Company's volume of gas
delivered to residential customers, however, has remained relatively consistent
year over year, excluding seasonal changes.

We expect the service moratorium, as discussed below under "Regulatory and Tax
Reform," will continue at least into the summer of 2021. Among other things,
management has updated its provision for bad debts, is working with customers
and the SCC to maximize use of CARES Act assistance, and is deferring
incremental pandemic costs to file for relief with the SCC, as appropriate. The
full extent of these costs and the impact to the Company's results of operations
and financial position remain unpredictable.

As was discussed under Item 1A "Risk Factors" in the Company's 2020 Annual
Report on form 10-K, the ultimate impact to the Company will depend on future
developments, including the duration, scope and severity of the pandemic, the
increase or reduction in governmental restrictions to businesses and
individuals, the continued resurgence of the virus or any variants thereof, as
well as the timing, availability and efficacy of a vaccine. The longer the
pandemic continues, the greater the potential negative financial effect on the
Company and its customers. Management believes the economic impact of the
pandemic will continue well into calendar year 2021.



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RGC RESOURCES, INC. AND SUBSIDIARIES

Overview


Resources is an energy services company primarily engaged in the regulated sale
and distribution of natural gas to approximately 62,600 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. Currently, the unregulated operations of Roanoke Gas
represent less than 1% of total revenues of Resources on an annual basis.
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 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. The Company is also subject to other regulations which
are not necessarily industry specific.
Nearly all of the Company's annual revenues, excluding equity in earnings of
MVP, are derived from the sale and delivery of natural gas to Roanoke Gas
customers. The SCC authorizes the rates and fees the Company charges its
customers for these services. 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 (or the "interim rates") for
natural gas service rendered to customers on or after January 1, 2019. On
January 24, 2020, the SCC issued its final order on the general rate
application, granting Roanoke Gas an annualized increase in non-gas base rates
of $7.25 million. In March 2020, the Company refunded $3.8 million to its
customers, representing the excess revenues collected plus interest for the
difference between the final approved rates and the interim rates billed since
January 1, 2019.
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
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. The investment
in replacing and upgrading existing infrastructure is generally not recoverable
until a formal rate application is filed to include the additional investment,
and new non-gas base rates are approved. The SAVE Plan and Rider provides the
Company with the ability to recover costs related to these SAVE qualified
infrastructure investments on a prospective basis. The SAVE Plan provides a
mechanism through which the Company may recover the related depreciation and
expenses and provides a return on rate base of the additional capital
investments related to improving the Company's infrastructure until such time a
formal rate application is filed to incorporate these investments in the
Company's non-gas base rates. With the filing of the 2018 non-gas rate
application, the SAVE Rider reset effective January 2019, as the prior revenues
associated with the qualified SAVE Plan infrastructure investments were
incorporated into the new non-gas rates. Accordingly, SAVE Plan revenues
increased by $324,000 for the three month period ended December 31, 2020
compared to the same period last year, reflecting the reset of the SAVE Plan and
the subsequent SAVE Plan investment.
The WNA model reduces earnings volatility related to weather variability in the
heating season. The WNA is based on the most recent 30-year temperature average
and provides the Company with a level of earnings protection when weather is
warmer than normal and provides its customers with price protection when the
weather is colder than normal. The WNA allows the Company to recover from its
customers the lost margin (excluding gas costs) from the impact of weather that
is warmer than normal and correspondingly requires the Company to refund the
excess margin earned for weather that is colder than normal. The WNA mechanism
used by the Company is based on a linear regression model that determines the
value of a single heating degree day. For the three-months ended December 31,
2020, the Company accrued approximately $947,000 in additional revenues under
the WNA model for weather that was nearly 16% warmer than normal, compared to
approximately $167,000 in additional revenue for weather that was 4% warmer than
normal during the same period last year.
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RGC RESOURCES, INC. AND SUBSIDIARIES


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 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, Roanoke Gas
recognizes ICC revenues to offset higher financing costs associated with higher
inventory balances. Conversely, during times of decreasing gas costs and lower
inventory balances, the Company recognizes less ICC revenue as financing costs
are lower. In addition, ICC revenues are impacted by the changes in the
weighted-average cost of capital. Total ICC revenues for the three month period
ended December 31, 2020 declined by approximately 19% from the same period last
year primarily due to lower average price of gas in storage balances and a
reduction in the ICC factor used in calculating these revenues.
The Company's approved billing rates include a component designed to allow for
the recovery of the cost of natural gas used by its customers. 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 rates up or down depending on projected
price and activity. Once administrative approval is received, the Company
adjusts the gas cost component of its rates to reflect the approved amount. 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.

The Company has recognized significant income from equity in earnings of MVP in
the past, as AFDUC has been added to income. Effective January 1, 2021, the LLC
determined to cease further recognition of AFUDC on the MVP. The decision to
temporarily suspend the accrual of AFUDC relates to the LLC's change in its
approach to seeking authorization to cross all remaining streams and wetlands on
the project route. The LLC will seek an individual permit for certain stream and
wetland crossings and will apply to amend the MVP project's CPCN to seek FERC
authority to cross certain streams and wetlands utilizing alternative trenchless
construction methods, resulting in limited growth construction activities during
the process to obtain the requisite approvals. Assuming the necessary approvals
are received for the crossings and construction resumes, AFUDC would again be
recognized until such time as the project is ready to be placed into service.
During the first quarter of fiscal 2021, the Company recognized $1,356,000 in
AFUDC income from its investment in the LLC. Therefore, effective January 1,
2021, the Company will no longer recognize AFUDC income from its investment in
the LLC until the LLC resumes such construction activities.

As a result of the above, effective January 1, 2021, Roanoke Gas will suspend
AFUDC on its two gate stations that will connect to MVP until such time as
construction activities resume on MVP. For the first quarter of fiscal 2021,
Roanoke Gas recognized $55,981 of AFUDC income associated with these gate
stations.

Results of Operations


The analysis on the results of operations is based on the consolidated
operations of the Company, which is primarily associated with the utility
segment. Additional segment analysis is provided in areas where the investment
in affiliates segment (investment in MVP and Southgate) represent a significant
component of the comparison.
Management believes that gross utility margin, a non-GAAP financial measure
defined as the difference between condensed consolidated income statement line
items gas utility revenues and cost of gas - utility, is a more useful and
relevant measure to analyze financial performance. The term gross utility margin
is not intended to represent or replace operating income, the most comparable
GAAP financial measure, as an indicator of operating performance and is not
necessarily comparable to similarly titled measures reported by other companies.
The following results of operations analyses will reference gross utility
margin.
Three Months Ended December 31, 2020:
Net income increased by $716,327, or 18%, for the three months ended December
31, 2020, compared to the same period last year. Quarterly performance improved
due to a combination of SAVE Plan revenues, earnings on the MVP investment and
reduction in operating and maintenance expenses.


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RGC RESOURCES, INC. AND SUBSIDIARIES


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

                                                          Three Months Ended December 31,
                                                             2020                    2019               Decrease             Percentage
Operating Revenues
Gas utility                                          $      19,483,500$ 19,625,606$ (142,106)                     (1) %
Non utility                                                     33,517               159,847            (126,330)                    (79) %
Total Operating Revenues                             $      19,517,017$ 19,785,453$ (268,436)                     (1) %
Delivered Volumes
Regulated Natural Gas (DTH)
Residential and Commercial                                   2,050,223             2,249,256            (199,033)                     (9) %
Transportation and Interruptible                               816,656               869,582             (52,926)                     (6) %
Total Delivered Volumes                                      2,866,879             3,118,838            (251,959)                     (8) %
HDD (Unofficial)                                                 1,248                 1,440                (192)                    (13) %



Total operating revenues for the three months ended December 31, 2020, compared
to the same period last year, declined by 1% as reduced revenues from lower
natural gas deliveries were mostly offset by higher WNA and SAVE revenues. Total
residential and commercial volumes declined by 9% due to a 13% decrease in
heating degree days from the same period last year. Transportation and
interruptible volumes, which are excluded from the WNA calculations, decreased
by 6%, in part as a result of the economic impact of COVID-19 on natural gas
sales. SAVE Plan revenues increased by $324,085 due to the ongoing investment in
qualified SAVE infrastructure projects. Non-utility revenues decreased due to
the completion of a significant long-term contract in fiscal 2020, which
accounted for more than 75% of total non-utility revenues.

                                                   Three Months Ended December 31,
                                                                                                 Increase /
                                                      2020                    2019               (Decrease)             Percentage

Gross Utility Margin

  Gas Utility Revenue                         $      19,483,500$ 19,625,606$   (142,106)                     (1) %
  Cost of Gas - Utility                               7,700,699             8,177,806              (477,107)                     (6) %
  Gross Utility Margin                        $      11,782,801$ 11,447,800$    335,001                       3  %



Gross utility margins increased from the same period last year primarily as a
result of the aforementioned higher SAVE revenues. WNA-adjusted volumes remained
relatively flat year-over-year. The higher customer base charge revenues,
associated with customer growth, nearly offset reductions in ICC and other
revenues.
The components of and the change in gas utility margin are summarized below:
                              Three Months Ended December 31,
                                   2020                    2019          Increase / (Decrease)
Customer Base Charge    $       3,622,465$  3,580,749      $               41,716
Carrying Cost                     126,756                  155,907                     (29,151)
SAVE Plan                         504,698                  180,613                     324,085
Volumetric                      6,547,592                7,303,843                    (756,251)
WNA                               946,971                  166,597                     780,374
Other Gas Revenues                 34,319                   60,091                     (25,772)

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









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RGC RESOURCES, INC. AND SUBSIDIARIES


Operations and maintenance expenses decreased by $415,348 from the same period
last year primarily due to the write-down and amortization of ESAC regulatory
assets during the prior year. In January 2020, the SCC issued their final order
on Roanoke Gas' non-gas base rate application. Included in the order approving
the rate award on the non-gas base rate application was a requirement to
write-down $317,000 in ESAC assets that were not subject to recovery. In
addition, the first quarter of fiscal 2020 also included $107,000 of ESAC asset
amortization. In September 2020, the Company wrote-off the remaining ESAC
balance of $525,000 as a result of an earnings test required as part of the
annual AIF filing with the SCC. Accordingly, the Company did not reflect any
ESAC asset amortization during the quarter ended December 31, 2020.

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

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

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


Other income, net increased by $172,383 primarily due to a $112,000 decrease in
the non-service cost components of net periodic benefit costs and $42,000 from
the equity portion of AFUDC. Under the requirements of ASC 715, the components
of net periodic benefit costs other than service cost are to be classified
outside of income from operations. The reduction in these costs is attributable
to reduced interest cost due to a lower discount rate applied to the benefit
plans' liabilities and higher projected earnings on plan assets attributable to
asset growth. In the final order on the Company's non-gas rate application, the
SCC allowed Roanoke Gas to defer financing costs related to the two natural gas
transfer stations that will interconnect Roanoke Gas' distribution system with
the MVP. Beginning in the second quarter of fiscal 2020, the Company used the
industry standard practice of AFUDC to defer these costs for potential recovery
in future rate proceedings.

Interest expense decreased by $65,356, or 6%, as total average debt outstanding
increased 18% between quarters. The higher borrowing levels, derived from the
ongoing investment in MVP and financing expenditures in support of Roanoke Gas'
capital budget, were offset by a 16% reduction in the weighted average interest
rate on the Company's variable rate debt. Interest expense was also reduced by
$14,000 for the capitalization of the interest component of AFUDC related to the
two interconnect gate stations with the MVP and accrued interest in the prior
year related to the rate refund.

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


Midstream's interest expense decreased by $50,833. The decline in the average
variable interest rate of Midstream's credit facility from 3.17% to 2.28% more
than offset the effect of the $7,768,000 increase in total average debt
outstanding associated with cash investments in the MVP.
Income tax expense increased by $283,417 corresponding to an increase in taxable
income. The effective tax rate was 24.4% and 23.7% for the three month periods
ended December 31, 2020 and 2019, respectively. The effective tax rate for the
prior year was low due to excess deductions related to the vesting of restricted
stock and the exercise of stock options.

Critical Accounting Policies and Estimates


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 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.

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

Asset Management


Roanoke Gas uses a third-party asset manager to oversee its pipeline
transportation, storage rights and gas supply inventories and deliveries. In
return for being able to utilize the excess capacities of the transportation and
storage rights, the asset manager pays Roanoke Gas a monthly utilization fee. 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. The current asset manager contract has been renewed through
March 31, 2022.
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RGC RESOURCES, INC. AND SUBSIDIARIES

Equity Investment in Mountain Valley Pipeline


While the total MVP project work is approximately 92% complete, recent
construction activity has been limited based on legal and regulatory challenges.
Although certain permits and authorizations were received in the fourth quarter
of fiscal 2020 and the first quarter of fiscal 2021, there remain pending
challenges and authorization requests impacting current progress.

Following a comprehensive review of all outstanding stream and wetland crossings
across the approximately 300-mile MVP project route, on January 26, 2021, the
LLC announced its intention to submit (i) a joint application package to each of
the Huntington, Pittsburgh and Norfolk Districts of the U.S. Army Corps of
Engineers (Army Corps) that will request an individual permit from the Army
Corps to cross certain streams and wetlands utilizing open cut techniques (the
Army Corps Individual Permit) and (ii) an application to amend the MVP project's
CPCN that will seek FERC authority to cross certain streams and wetlands
utilizing alternative trenchless construction methods. The LLC believes that
this modified approach to seeking authorization to cross all remaining streams
and wetlands on the project route, in lieu of continuing to pursue authority
under Nationwide Permit 12 and the formerly pending FERC request to amend the
CPCN to utilize trenchless construction methods to cross all streams and
wetlands for the first 77 miles of the project route, presents the most
efficient and effective path to project completion. The LLC continues to target
a full in-service date for the MVP project in late 2021 at a total project cost
of $5.8 billion to $6.0 billion (excluding AFUDC).

In order to complete the MVP project in accordance with the targeted full
in-service date and cost, the LLC must, among other things: (i) timely receive
the Army Corps Individual Permit, which will require Section 401 water quality
certification approvals or waivers from each of the West Virginia Department of
Environmental Protection and the Virginia Department of Environmental Quality
and certain other state-level approvals; (ii) maintain and, as applicable,
timely receive required authorizations, including authorization to proceed with
construction, related to the Jefferson National Forest from the Bureau of Land
Management, the U.S. Forest Service and the FERC; (iii) timely receive
authorization from the FERC to utilize alternative trenchless construction
methods for certain stream and wetland crossings; (iv) continue to have
available the orders previously issued by the FERC modifying its prior stop work
orders and extending the LLC's prescribed time to complete the MVP project; (v)
timely receive authorization from the FERC to complete construction work in the
portion of the project route currently remaining subject to the FERC's previous
stop work order; and (vi) continue to be authorized to work under the Biological
Opinion and Incidental Take Statement issued by the United States Department of
the Interior'sFish and Wildlife Service for the MVP project, in each case
including the continued effectiveness of any such foregoing or other
authorizations notwithstanding any pending or future challenge thereto. Failure
to achieve any one of the above items could lead to additional delays and higher
project costs.

Resources' current earnings from the MVP investment are attributable to AFUDC
income generated by the LLC. As a result of the above-described change in
approach to seeking authorization to cross all remaining streams and wetlands on
the project route, limited construction activities on the project are expected
during the process to obtain the requisite approvals. Accordingly, the LLC will
suspend the accruing of AFUDC on the project subsequent to December 31, 2020 and
until construction activities resume and, as a result, Resources will not
recognize AFUDC income from MVP during this suspension. Additionally, Roanoke
Gas will also suspend accruing AFUDC for a similar period of time on its two
gate stations that will interconnect with the MVP.

Midstream has borrowing capacity of $41 million under its current credit
facility, which matures in December 2022. As of December 31, 2020, $28.4 million
had been utilized. This credit facility will provide additional financing
capacity for MVP funding; however, due to ongoing delays, additional financing
may be required. If the legal and regulatory challenges, including any future
challenges, are not resolved in a timely manner and/or restrictions are imposed
by the government related to COVID-19 that impact future construction, the cost
of the MVP and Midstream's capital contributions may increase above current
projections, resulting in additional financing requirements.

Regulatory and Tax Reform


On January 24, 2020, the SCC issued its final general rate case order awarding
Roanoke Gas an annualized non-gas rate increase of $7.25 million and providing
for a 9.44% return on equity. The final order directed the Company to write-off
a portion of ESAC assets that were excluded from recovery under the rate award.
As a result, in the first quarter of fiscal 2020 Roanoke Gas expensed an
additional $317,000 of ESAC assets above the normal amortization amount. Rates
authorized by the SCC's final order required the Company to issue customers $3.8
million in rate refunds, which was completed in March 2020.

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


began recognizing AFUDC during the second quarter of fiscal 2020 to capitalize
both the equity and debt financing costs incurred during the construction
phases. For the quarter ended December 31, 2020, Roanoke Gas recognized a total
of $55,980 in AFUDC, $41,977 and $14,003 of equity and debt carrying costs,
respectively. As of January 1, 2021, the LLC will temporarily cease recording
AFUDC while the MVP is temporarily inactive and awaiting the resolution of
regulatory and permitting issues; therefore, Roanoke Gas will temporarily cease
recording AFUDC on its related MVP interconnect construction projects.

On March 16, 2020, in response to COVID-19, the SCC issued an order applicable
to all utilities operating in Virginia to suspend disconnection of service to
all customers until May 15, 2020. The Commission extended the moratorium on
disconnections through October 5, 2020. Subsequently, the Virginia General
Assembly extended the moratorium for residential customers until the Governor
determines that the economic and public health conditions have improved such
that the prohibition does not need to remain in place, or until at least 60 days
after such declared state of emergency ends, whichever is sooner. Under the
moratorium, utilities are prohibited from disconnecting residential customers
for non-payment of their natural gas service and from assessing late payment
fees; therefore, residential customers that would normally be disconnected for
non-payment will continue incurring costs for gas service until the moratorium
is removed, resulting in higher potential bad debt write-offs. Roanoke Gas
continues to evaluate and adjust its provision for bad debts; however, the
potential magnitude of the combined impact from the economy and the moratorium
on bad debts continues to be uncertain. The Company supports the decision to
suspend service disconnections in light of the current economic situation and
continues to work with its customers in making arrangements to keep or bring
their accounts current.

In April 2020, the SCC issued an order allowing regulated utilities in Virginia
to defer certain incremental, prudently incurred costs associated with the
COVID-19 pandemic and to apply for recovery at a future date. Formal guidance
has not been provided by the SCC at this time. Roanoke Gas expects to defer
certain COVID related costs during fiscal 2021 and plans to seek recovery of
these deferrals at the appropriate time. CARES Act funds have been provided to
assist customers with past due balances. In December 2020, Roanoke Gas received
$403,000 in CARES Act funds and is currently working with the SCC to determine
the amount of funding for each eligible customer.

Roanoke Gas continues to recover the costs of its infrastructure replacement
program through its SAVE Plan. In May 2020, the Company filed its most recent
SAVE application with the SCC to further amend its SAVE Plan and for approval of
a SAVE Rider for the period October 2020 through September 2021. In its
application, Roanoke Gas requested to continue to recover the costs of the
replacement of pre-1973 plastic pipe. In addition, the Company requested to
include the replacement of certain regulator stations and pre-1971 coated steel
pipe as qualifying SAVE projects. In September 2020, the SCC issued its order
approving the updated SAVE Plan and Rider effective with the October 2020
billing cycle. The new SAVE Rider is designed to collect approximately $2.3
million in annual revenues, an increase from the approximate $1.2 million in
annual revenues from the prior SAVE Rider rates.

Capital Resources and Liquidity


Due to the capital intensive nature of the utility business, as well as the
related weather sensitivity, the Company's primary capital needs are the funding
of its utility plant capital projects, investment in the MVP, the seasonal
funding of its natural gas inventories and accounts receivable and the payment
of dividends. To meet these needs, the Company relies on its operating cash
flows and available financing under short-term and long-term credit agreements.

Cash and cash equivalents increased by $445,599 for the three-month period ended December 31, 2020, compared to a $619,001 decrease for the same period last year. The following table summarizes the sources and uses of cash:


                                                                           Three Months Ended December 31,
Cash Flow Summary                                                            2020                     2019
Net cash provided by operating activities                             $        152,910$     817,963
Net cash used in investing activities                                       (7,853,311)           (10,875,736)
Net cash provided by financing activities                                    8,146,000              9,438,772
Increase (decrease) in cash and cash equivalents                      $        445,599$    (619,001)







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RGC RESOURCES, INC. AND SUBSIDIARIES

Cash Flows Provided by Operating Activities:


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

Cash flows from operating activities for the three-months ended December 31,
2020 decreased by $665,053 from the same period last year. The decrease in cash
flow provided by operations was primarily driven by changes in regulatory assets
and liabilities, partially offset by net income.

The table below summarizes the significant operating cash flow components:

© Edgar Online, source Glimpses

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