NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30,
2016
,
2015
AND
2014
|
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
—RGC Resources, Inc. is an energy services company primarily engaged in the sale and distribution of natural gas. The consolidated financial statements include the accounts of RGC Resources, Inc. and its wholly owned subsidiaries (“Resources” or the “Company”): Roanoke Gas Company (“Roanoke Gas”); Diversified Energy Company; RGC Ventures of Virginia, Inc., operating as Application Resources and The Utility Consultants; and RGC Midstream, LLC. Roanoke Gas is a natural gas utility, which distributes and sells natural gas to approximately
59,600
residential, commercial and industrial customers within its service areas in Roanoke, Virginia and the surrounding localities. The Company’s business is seasonal in nature as a majority of natural gas sales are for space heating during the winter season. Roanoke Gas is regulated by the Virginia State Corporation Commission (“SCC” or “Virginia Commission”). RGC Ventures of Virginia, Inc. was dissolved in 2016 after Application Resources, which provided information system services to software providers in the utility industry, ceased operations in 2016, and The Utility Consultants, which provided regulatory consulting services to other utilities, ceased operations in 2015. RGC Midstream, LLC is a wholly-owned subsidiary created in 2015 to invest in the Mountain Valley pipeline project. Diversified Energy Company is currently inactive.
The Company follows accounting and reporting standards established by the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”).
Resources has only
one
reportable segment as defined under FASB ASC No. 280 –
Segment Reporting
. All intercompany transactions have been eliminated in consolidation.
Rate Regulated Basis of Accounting
—The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No. 980,
Regulated Operations
. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this situation occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). In the event the provisions of FASB ASC No. 980 no longer apply to any or all regulatory assets or liabilities, the Company would write off such amounts and include them in the consolidated statements of income and comprehensive income in the period for which FASB ASC No. 980 no longer applied.
Regulatory assets and liabilities included in the Company’s consolidated balance sheets as of
September 30, 2016
and
2015
are as follows:
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|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
2016
|
|
2015
|
|
Regulatory Assets:
|
|
|
|
|
Current Assets:
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
Accrued WNA revenues
|
$
|
148,663
|
|
|
$
|
229,281
|
|
|
Other:
|
|
|
|
|
Accrued pension and postretirement medical
|
835,704
|
|
|
530,781
|
|
|
Utility Property:
|
|
|
|
|
In service:
|
|
|
|
|
Other
|
11,945
|
|
|
11,945
|
|
|
Other Assets:
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
Premium on early retirement of debt
|
2,055,369
|
|
|
2,169,556
|
|
|
Accrued pension and postretirement medical
|
11,460,738
|
|
|
8,378,419
|
|
|
Other
|
816,344
|
|
|
375,268
|
|
|
Total regulatory assets
|
$
|
15,328,763
|
|
|
$
|
11,695,250
|
|
|
Regulatory Liabilities:
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Over-recovery of gas costs
|
$
|
909,687
|
|
|
$
|
1,901,426
|
|
|
Accrued expenses:
|
|
|
|
|
Over-recovery of SAVE Plan revenues
|
238,694
|
|
|
153,365
|
|
|
Deferred Credits and Other Liabilities:
|
|
|
|
|
Asset retirement obligations
|
5,682,556
|
|
|
5,295,868
|
|
|
Regulatory cost of retirement obligations
|
9,348,443
|
|
|
8,885,486
|
|
|
Total regulatory liabilities
|
$
|
16,179,380
|
|
|
$
|
16,236,145
|
|
As of
September 30, 2016
, the Company had regulatory assets in the amount of
$13,261,449
on which the Company did not earn a return during the recovery period. These assets primarily pertain to the net funded position of the Company’s benefit plans related to its regulated operations. As such, the amortization period is not specifically defined.
Utility Plant and Depreciation
—Utility plant is stated at original cost and includes direct labor and materials, contractor costs, and all allocable overhead charges. The Company applies the group method of accounting, where the costs of like assets are aggregated and depreciated by applying a rate based on the average expected useful life of the assets. In accordance with Company policy, expenditures for depreciable assets with a life greater than one year are capitalized, along with any upgrades or improvements to existing assets, when they significantly improve or extend the original expected useful life of an asset. Expenditures for maintenance, repairs, and minor renewals and betterments are expensed as incurred. The original cost of depreciable property retired is removed from utility plant and charged to accumulated depreciation. The cost of asset removals, less salvage, is charged to “regulatory cost of retirement obligations” or “asset retirement obligations” as explained under Asset Retirement Obligations below.
Utility plant is composed of the following major classes of assets:
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|
|
|
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|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
Distribution and transmission
|
$
|
160,354,300
|
|
|
$
|
143,172,628
|
|
|
LNG storage
|
12,594,294
|
|
|
12,501,179
|
|
|
General and miscellaneous
|
12,628,692
|
|
|
12,359,225
|
|
|
Total utility plant in service
|
$
|
185,577,286
|
|
|
$
|
168,033,032
|
|
Provisions for depreciation are computed principally at composite straight-line rates over periods ranging from
5
to
76 years
. Rates are determined by depreciation studies which are required to be performed at least every
5 years
on the regulated utility assets of Roanoke Gas. The Company completed its last depreciation study in June 2014. The composite weighted-average depreciation rate realized using the most recently completed depreciation study was
3.25%
for each of the fiscal years ended September 30, 2016, 2015 and 2014.
The composite rates are composed of two components, one based on average service life and one based on cost of retirement. As a result, the Company accrues the estimated cost of retirement of long-lived assets through depreciation expense. Retirement costs are not a legal obligation but rather the result of cost-based regulation and are accounted for under the provisions of FASB ASC No. 980. Such amounts are classified as a regulatory liability.
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These reviews have not identified any impairments which would have a material effect on the results of operations or financial condition.
Asset Retirement Obligations
—FASB ASC No. 410,
Asset Retirement and Environmental Obligations
, requires entities to record the fair value of a liability for an asset retirement obligation when there exists a legal obligation for the retirement of the asset. When the liability is initially recorded, the entity capitalizes the cost, thereby increasing the carrying amount of the underlying asset. In subsequent periods, the liability is accreted, and the capitalized cost is depreciated over the useful life of the underlying asset. The Company has recorded asset retirement obligations for its future legal obligations related to purging and capping its distribution mains and services upon retirement, although the timing of such retirements is uncertain.
The Company’s composite depreciation rates include a component to provide for the cost of retirement of assets. As a result, the Company accrues the estimated cost of retirement of its utility plant through depreciation expense and creates a corresponding regulatory liability. The costs of retirement considered in the development of the depreciation component include those costs associated with the legal liability. Therefore, the asset retirement obligation is reclassified from the regulatory cost of retirement obligation. If the legal obligations were to exceed the regulatory liability provided for in the depreciation rates, the Company would establish a regulatory asset for such difference with the anticipation of future recovery through rates charged to customers. In 2016, the Company increased its asset retirement obligation to reflect revisions to the estimated cash flows for asset retirements.
The following is a summary of the asset retirement obligation:
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|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
Beginning balance
|
$
|
5,295,868
|
|
|
$
|
4,802,015
|
|
|
Liabilities incurred
|
85,263
|
|
|
62,890
|
|
|
Liabilities settled
|
(176,090
|
)
|
|
(162,072
|
)
|
|
Accretion
|
310,568
|
|
|
281,762
|
|
|
Revisions to estimated cash flows
|
166,947
|
|
|
311,273
|
|
|
Ending balance
|
$
|
5,682,556
|
|
|
$
|
5,295,868
|
|
Cash, Cash Equivalents and Short-Term Investments
—From time to time, the Company will have balances on deposit at banks in excess of the amount insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses on these accounts and does not consider these amounts to be at credit risk. As of
September 30, 2016
, the Company did not have any bank deposits in excess of the FDIC insurance limits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Customer Receivables and Allowance for Doubtful Accounts
—Accounts receivable include amounts billed to customers for natural gas sales and related services and gas sales occurring subsequent to normal billing cycles but before the end of the period. The Company provides an estimate for losses on these receivables by utilizing historical information, current account balances, account aging and current economic conditions. Customer accounts are charged off annually when deemed uncollectible or when turned over to a collection agency for action.
A reconciliation of changes in the allowance for doubtful accounts is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Beginning balance
|
$
|
52,721
|
|
|
$
|
70,747
|
|
|
$
|
68,539
|
|
|
Provision for doubtful accounts
|
14,074
|
|
|
87,908
|
|
|
148,881
|
|
|
Recoveries of accounts written off
|
137,055
|
|
|
139,282
|
|
|
136,369
|
|
|
Accounts written off
|
(126,916
|
)
|
|
(245,216
|
)
|
|
(283,042
|
)
|
|
Ending balance
|
$
|
76,934
|
|
|
$
|
52,721
|
|
|
$
|
70,747
|
|
Financing Receivables
—Financing receivables represent a contractual right to receive money either on demand or on fixed or determinable dates and are recognized as assets on the entity’s balance sheet. Trade receivables are the Company's one primary type of financing receivables, resulting from the sale of natural gas and other services to its customers. These receivable are short-term in nature with a provision for uncollectible balances included in the financial statements.
Inventories
—Inventories, consisting of natural gas in storage and materials and supplies, are recorded at average cost. Injections into storage are priced at the purchase cost at the time of injection and withdrawals from storage are priced at the weighted average price in storage. Materials and supplies are removed from inventory at average cost.
Unbilled Revenues
—The Company bills its natural gas customers on a monthly cycle; however, the billing cycle period for most customers does not coincide with the accounting periods used for financial reporting. As the Company recognizes revenue when gas is delivered, an accrual is made to estimate revenues for natural gas delivered to customers but not billed during the accounting period. The amounts of unbilled revenue receivable included in accounts receivable on the consolidated balance sheets at
September 30, 2016
and
2015
were
$1,004,061
and
$1,001,418
, respectively.
Income Taxes
—Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. A valuation allowance against deferred tax assets is provided if it is more likely than not the deferred tax asset will not be realized. The Company and its subsidiaries file state and federal consolidated income tax returns.
Debt Expenses
—Debt issuance expenses are deferred and amortized over the lives of the debt instruments. The unamortized balances are offset against the carrying value of long-term debt.
Over/Under-Recovery of Natural Gas Costs
—Pursuant to the provisions of the Company’s Purchased Gas Adjustment (“PGA”) clause, the SCC provides the Company with a method of passing along to its customers increases or decreases in natural gas costs incurred by its regulated operations, including gains and losses on natural gas derivative hedging instruments. On a quarterly basis, 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 the projections used in establishing the PGA rate, the Company may either over-recover or under-recover its actual gas costs during the period. Any difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the deferral period, the balance of the net deferred charge or credit is amortized over an ensuing
12
-month period as amounts are reflected in customer billings.
Fair Value
—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company determines fair value based on the following fair value hierarchy which prioritizes each input to the valuation methods into one of the following three broad levels:
|
|
•
|
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
•
|
Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in
|
markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity which require the Company to develop its own assumptions.
|
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). All fair value disclosures are categorized within one of the three categories in the hierarchy. See fair value disclosures below and in Notes 7 and 11.
Use of Estimates
—The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Excise and Sales Taxes
—Certain excise and sales taxes imposed by the state and local governments in the Company’s service territory are collected by the Company from its customers. These taxes are accounted for on a net basis and therefore are not included as revenues in the Company’s Consolidated Statements of Income.
Earnings Per Share
—Basic earnings per share and diluted earnings per share are calculated by dividing net income by the weighted-average common shares outstanding during the period and the weighted-average common shares outstanding during the period plus dilutive potential common shares, respectively. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. A reconciliation of basic and diluted earnings per share is presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net Income
|
$
|
5,806,866
|
|
|
$
|
5,094,415
|
|
|
$
|
4,708,440
|
|
|
Weighted-average common shares
|
4,766,604
|
|
|
4,728,210
|
|
|
4,715,478
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Options to purchase common stock
|
6,571
|
|
|
3,466
|
|
|
804
|
|
|
Diluted average common shares
|
4,773,175
|
|
|
4,731,676
|
|
|
4,716,282
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
Basic
|
$
|
1.22
|
|
|
$
|
1.08
|
|
|
$
|
1.00
|
|
|
Diluted
|
$
|
1.22
|
|
|
$
|
1.08
|
|
|
$
|
1.00
|
|
Business and Credit Concentrations
—
The primary business of the Company is the distribution of natural gas to residential, commercial and industrial customers in its service territories.
No sales to individual customers accounted for more than
5%
of total revenue in any period or amounted to more than
5%
of total accounts receivable.
Roanoke Gas currently holds the only franchises and certificates of public convenience and necessity to distribute natural gas in its service area. These franchises are effective through
January 1, 2036
. The Company's current certificates of public convenience and necessity in Virginia are exclusive and are intended for perpetual duration.
Roanoke Gas is served directly by
two
primary pipelines that provide all of the natural gas supplied to the Company’s customers. Depending upon weather conditions and the level of customer demand, failure of one or both of these transmission pipelines could have a major adverse impact on the Company.
Derivative and Hedging Activities
—FASB ASC No. 815,
Derivatives and Hedging
, requires the recognition of all derivative instruments as assets or liabilities in the Company’s balance sheet and measurement of those instruments at fair value.
The Company’s hedging and derivatives policy allows management to enter into derivatives for the purpose of managing commodity and financial market risks of its business operations. The Company’s hedging and derivatives policy specifically prohibits the use of derivatives for speculative purposes. The key market risks that RGC Resources, Inc. hedges against include the price of natural gas and the cost of borrowed funds.
The Company historically has entered into collars, swaps and caps for the purpose of hedging the price of natural gas in order to provide price stability during the winter months. The fair value of these instruments is recorded in the balance sheet with the offsetting entry to either under-recovery of gas costs or over-recovery of gas costs. Net income and other comprehensive income are not affected by the change in market value as any cost incurred or benefit received from these instruments is recoverable or refunded through the PGA as the SCC allows for full recovery of prudent costs associated with natural gas purchases. At
September 30, 2016
and
2015
, the Company had
no
outstanding derivative instruments for the purchase of natural gas.
The Company also had
two
interest rate swaps that essentially converted its variable interest rate notes to fixed rate debt instruments. Both swaps were terminated in September 2014 as part of the Company's debt refinancing. These swaps qualified as cash flow hedges with changes in fair value reported in other comprehensive income.
No derivative instruments were deemed to be ineffective for any period presented.
Non-Cash Activity
—
Non-cash increase in investment in unconsolidated affiliate and corresponding increase in capital contributions payable of
$287,794
.
O
ther Comprehensive Income(Loss)
—
A summary of other comprehensive income is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax
Amount
|
|
Tax
(Expense)
or Benefit
|
|
Net of Tax
Amount
|
|
Year Ended September 30, 2016:
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
Net loss arising during period
|
$
|
(560,887
|
)
|
|
$
|
213,137
|
|
|
$
|
(347,750
|
)
|
|
Amortization of actuarial losses
|
221,070
|
|
|
(84,006
|
)
|
|
137,064
|
|
|
Other comprehensive loss
|
$
|
(339,817
|
)
|
|
$
|
129,131
|
|
|
$
|
(210,686
|
)
|
|
Year Ended September 30, 2015:
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
Net loss arising during period
|
$
|
(1,910,573
|
)
|
|
$
|
726,017
|
|
|
$
|
(1,184,556
|
)
|
|
Amortization of actuarial losses
|
60,221
|
|
|
(22,884
|
)
|
|
37,337
|
|
|
Other comprehensive loss
|
$
|
(1,850,352
|
)
|
|
$
|
703,133
|
|
|
$
|
(1,147,219
|
)
|
|
Year Ended September 30, 2014:
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
Unrealized losses
|
$
|
(58,800
|
)
|
|
$
|
22,321
|
|
|
$
|
(36,479
|
)
|
|
Transfer of realized losses to interest expense
|
926,262
|
|
|
(351,609
|
)
|
|
574,653
|
|
|
Transfer of realized losses to regulatory asset
|
1,119,233
|
|
|
(424,861
|
)
|
|
694,372
|
|
|
Net interest rate swaps
|
1,986,695
|
|
|
(754,149
|
)
|
|
1,232,546
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
Net loss arising during period
|
(397,714
|
)
|
|
151,131
|
|
|
(246,583
|
)
|
|
Amortization of actuarial losses
|
41,846
|
|
|
(15,901
|
)
|
|
25,945
|
|
|
Net defined benefit plans
|
(355,868
|
)
|
|
135,230
|
|
|
(220,638
|
)
|
|
Other comprehensive income
|
$
|
1,630,827
|
|
|
$
|
(618,919
|
)
|
|
$
|
1,011,908
|
|
The amortization of actuarial losses and transition obligation is included as components of net periodic pension and postretirement benefit costs and is included in operations and maintenance expense.
Composition of Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
Swaps
|
|
Defined Benefit
Plans
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance September 30, 2013
|
$
|
(1,232,546
|
)
|
|
$
|
(918,688
|
)
|
|
$
|
(2,151,234
|
)
|
|
Other comprehensive income (loss)
|
1,232,546
|
|
|
(220,638
|
)
|
|
1,011,908
|
|
|
Balance September 30, 2014
|
—
|
|
|
(1,139,326
|
)
|
|
(1,139,326
|
)
|
|
Other comprehensive income (loss)
|
—
|
|
|
(1,147,219
|
)
|
|
(1,147,219
|
)
|
|
Balance September 30, 2015
|
—
|
|
|
(2,286,545
|
)
|
|
(2,286,545
|
)
|
|
Other comprehensive income (loss)
|
—
|
|
|
(210,686
|
)
|
|
(210,686
|
)
|
|
Balance September 30, 2016
|
$
|
—
|
|
|
$
|
(2,497,231
|
)
|
|
$
|
(2,497,231
|
)
|
Recently Adopted Accounting Standards
—In April 2015, the FASB issued ASU 2015-03,
Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The Company previously recognized debt issuance costs in assets and amortized those costs over the term of the debt. This guidance is effective for the Company for the annual reporting period ending September 30, 2017 and interim periods within that annual period. Early application is permitted. The Company adopted the ASU in the period ended September 30, 2015. The adoption of this ASU did not have any effect on the Company's results of operations or cash flows; however, the unamortized balance of debt issuance costs were reclassified from assets to an offset against long-term debt. Certain deferred costs related to the early retirement of debt in 2014 are classified as regulatory assets and are not offset against debt.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
. The ASU requires that all deferred tax assets and liabilities be presented as noncurrent and eliminates prior guidance to classify and present deferred tax assets and liabilities as current and noncurrent. This ASU is effective for the Company for the annual reporting period ended September 30, 2018 and interim periods within that annual period. Early application is permitted. The Company adopted this ASU for the quarter ended December 31, 2015. The Company applied the retrospective approach in adopting this ASU and reclassified
$2,293,536
previously reflected as a current deferred income tax asset against the balance of the non-current deferred tax liability in the September 30, 2015 consolidated balance sheet. There was no other impact to the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance is effective for the Company for the annual reporting period ending September 30, 2018 and interim periods within that annual period. Early adoption is permitted. The Company adopted this ASU for the quarter ended September 30, 2016. Under the prior guidance, excess tax benefits were to be tracked in an APIC pool and not recognized in the income statement. Tax deficiencies were netted against the accumulated APIC pool and only recognized in the income statement starting at the time tax deficiencies exceeded the pool. Under ASU 2016-09, the APIC pool is eliminated with all excess tax benefits and deficiencies recognized in income tax expense on the income statement. Prior to the adoption of this ASU, stock option activity did not result in the accumulation of an APIC pool; therefore, adopting the ASU had minimal impact on the Company’s current financial position, results of operations or cash flows and no impact on prior results.
Recently Issued Accounting Standards
—In May 2014, the FASB issued guidance under FASB ASC No. 606 -
Revenue from Contracts with Customers
that affects any entity that enters into contracts with customers for the transfer of goods or services or transfer of non-financial assets. This guidance supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition,
and most industry-specific guidance. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, the entity
satisfies the performance obligation. The new guidance is effective for the Company for the annual reporting period ending September 30, 2018 and interim periods within that annual period. Early application was not permitted. In August 2015, the FASB issued ASU 2015-14 that deferred the effective date of this guidance by one year to September 30, 2019. The FASB has issued subsequent guidance under ASC No. 606 to provide clarification of certain aspects of the original ASU. All additional guidance is being considered as part of the Company's evaluation of the revenue recognition standard. Although Management has not completed its evaluation of all the issued guidance under ASC No. 606, the Company does not currently expect the guidance to have a material effect on its financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The ASU enhances the reporting model for financial instruments to provide users of the financial statements with more useful information through several provisions, including the following: (1) requires equity investments, excluding investments accounted for under the equity method, be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values, (3) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (5) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The new guidance is effective for the Company for the annual reporting period ending September 30, 2019 and interim periods within that annual period. Management has not completed its evaluation of the new guidance. However, the Company does not currently expect the new guidance to have a material effect on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02,
Leases.
The ASU leaves the accounting for leases mostly unchanged for lessors, with the exception of targeted improvements for consistency; however, the new guidance requires lessees to recognize assets and liabilities for leases with terms of more than 12 months. The ASU also revises the definition of a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Consistent with current GAAP, the presentation and cash flows arising from a lease by a lessee will primarily depend on its classification as a finance or operating lease. In contrast, the new ASU requires both types of leases to be recognized on the balance sheet. In addition, the new guidance includes quantitative and qualitative disclosure requirements to aid financial statement users in better understanding the amount, timing and uncertainty of cash flows arising from leases. The new guidance is effective for the Company for the annual reporting period ending September 30, 2020 and interim periods within that annual period. Early adoption is permitted. Management has not completed its evaluation of the new guidance. However, the Company does not currently expect the new guidance to have a material effect on its financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or other standard–setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.
The SCC exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions and rates to be charged to customers for natural gas service, safety standards, service extension, accounting and depreciation.
On June 30, 2016, the Company filed with the SCC an application for a modification to the SAVE (Steps to Advance Virginia's Energy) Plan and Rider. The original SAVE Plan has been modified each year to incorporate certain changes and to include new projects that qualify for rate recovery under the the Plan. The SAVE Plan provides a mechanism for the Company to recover the related depreciation and expenses and return on rate base of the additional capital investment without the filing of a formal application for an increase in non-gas base rates. On October 18, 2016, the Company received approval of its application for a modification to the SAVE Plan and Rider. Under the order, the SCC approved the extension of the SAVE Plan for an additional
three years
through 2021, the replacement of
three
gas custody transfer stations and the replacement of coated steel tubing services in addition to the existing plan to replace pre-1973 plastic pipe.
In October 2015, the Company, through its wholly-owned subsidiary, RGC Midstream, LLC ("Midstream"), acquired a
1%
equity interest in the Mountain Valley Pipeline, LLC (the “LLC”).
The LLC was established to construct and operate a natural gas pipeline originating in northern West Virginia and extending through south central Virginia. The proposed pipeline will have the capacity to transport approximately
2
million decatherms of natural gas per day. If approved by the Federal Energy Regulatory Commission, the pipeline is expected to be in service by late 2018.
The total project cost is estimated to be approximately
$3.5
billion. The Company's
1%
equity interest in the LLC will require a total estimated investment of approximately
$35
million, by periodic capital contributions throughout the design and construction phases of the project. Midstream held an approximate
$3.5
million equity method investment in the LLC at
September 30, 2016
. Initial funding for Midstream's investment in the LLC is provided through
two
unsecured Promissory Notes, each with a
5
-year term, as further described in Note 5 below.
The Company will participate in the earnings generated from the transportation of natural gas through the pipeline in proportion to its level of investment.
The financial statement locations of the investment in the LLC are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
|
Balance Sheet Location of Other Investments:
|
2016
|
|
2015
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
$
|
3,496,404
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Capital contributions payable
|
$
|
287,794
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years ended September 30
|
|
Income Statement Location of Other Investments:
|
2016
|
|
2015
|
|
2014
|
|
Equity in earnings of unconsolidated affiliate
|
$
|
152,864
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has available an unsecured line-of-credit with a bank which will expire
March 31, 2017
. The Company anticipates being able to extend or replace this line-of-credit upon expiration. The Company’s available unsecured line-of-credit varies during the year to accommodate its seasonal borrowing demands. Available limits under this agreement for the remaining term are as follows:
|
|
|
|
|
|
|
Effective
|
Available
Line-of-Credit
|
|
September 30, 2016
|
$
|
24,000,000
|
|
|
March 1, 2017
|
17,000,000
|
|
A summary of the line-of-credit follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Line-of-credit at year-end
|
$
|
24,000,000
|
|
|
$
|
24,000,000
|
|
|
$
|
15,000,000
|
|
|
Outstanding balance at year-end
|
14,556,785
|
|
|
9,340,997
|
|
|
9,045,050
|
|
|
Highest month-end balance outstanding
|
15,246,089
|
|
|
17,366,052
|
|
|
9,045,050
|
|
|
Average daily balance
|
9,620,914
|
|
|
6,377,040
|
|
|
1,340,833
|
|
|
Average rate of interest during year on outstanding balances
|
1.40
|
%
|
|
1.17
|
%
|
|
1.16
|
%
|
|
Interest rate at year-end
|
1.53
|
%
|
|
1.20
|
%
|
|
1.16
|
%
|
|
Interest rate on unused line-of-credit
|
0.15
|
%
|
|
0.15
|
%
|
|
0.15
|
%
|
Associated with the line-of-credit is a credit agreement that contains various provisions including a requirement that the Company maintain an interest coverage ratio of not less than
1.5
to
1
.
On December 29, 2015, Midstream, a wholly-owned subsidiary of Resources, entered into a Credit Agreement (the “Agreement”) and related Promissory Notes (the “Notes”) with Union Bank & Trust and Branch Banking & Trust
(collectively, the “Banks”), under which Midstream may borrow up to a total of
$25
million, over a period of
5 years
, with an interest rate of
30-day LIBOR
plus 160 basis points. Midstream issued the Notes to provide financing for capital contributions in respect of its
1%
interest in the LLC. Coinciding with Midstream's entry into the Agreement and Notes, Resources entered into a Guaranty in favor of the Banks by which it guarantees Midstream's payment and performance on the Notes.
Interest on the Notes is due monthly with the outstanding balance on the Notes due in full on December 29, 2020. The
Notes are unsecured. In accordance with the terms of the Agreement, at such point in time as Midstream has borrowed
$17.5
million under the Notes, Midstream is required to provide the next
$5
million towards its capital contributions to the LLC. Once Midstream has completed its
$5
million in contributions, it may resume borrowing under the Notes up to the
$25
million limit.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
2016
|
|
2015
|
|
|
Principal
|
|
Unamortized Debt Issuance Costs
|
|
Principal
|
|
Unamortized Debt Issuance Costs
|
|
Roanoke Gas Company:
|
|
|
|
|
|
|
|
|
Unsecured senior notes payable, at 4.26%, due on September 18, 2034
|
$
|
30,500,000
|
|
|
$
|
173,773
|
|
|
$
|
30,500,000
|
|
|
$
|
183,427
|
|
|
RGC Midstream, LLC:
|
|
|
|
|
|
|
|
|
Unsecured term notes payable, at 30-day LIBOR plus 1.60% due December 29, 2020
|
3,396,200
|
|
|
86,376
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
33,896,200
|
|
|
$
|
260,149
|
|
|
$
|
30,500,000
|
|
|
$
|
183,427
|
|
Debt issuance costs are amortized over the life of the related debt. As of September 30,
2016
and
2015
, the Company also had an unamortized loss on the early retirement of debt of
$2,055,369
and
$2,169,556
, respectively, which has been deferred as a regulatory asset and is being amortized over a
20
year period.
The unsecured notes payable contain various provisions, including
two
financial covenants. First, total long-term debt, including current maturities, shall not exceed
65%
of total capitalization. Second, the Company shall not allow priority indebtedness to exceed
15%
of total assets.
The aggregate annual maturities of long-term debt for the next five years ending after September 30, 2016 are as follows:
|
|
|
|
|
Year Ending September 30
|
Maturities
|
2017
|
$
|
—
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
3,396,200
|
|
Thereafter
|
30,500,000
|
|
Total
|
$
|
33,896,200
|
|
The details of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current income taxes:
|
|
|
|
|
|
|
Federal
|
$
|
(1,216,745
|
)
|
|
$
|
379,180
|
|
|
$
|
1,789,294
|
|
|
State
|
415,975
|
|
|
374,541
|
|
|
290,458
|
|
|
Total current income taxes
|
(800,770
|
)
|
|
753,721
|
|
|
2,079,752
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
Federal
|
4,302,906
|
|
|
2,289,729
|
|
|
687,417
|
|
|
State
|
164,048
|
|
|
127,112
|
|
|
175,464
|
|
|
Total deferred income taxes
|
4,466,954
|
|
|
2,416,841
|
|
|
862,881
|
|
|
Amortization of investment tax credits
|
—
|
|
|
—
|
|
|
(3,093
|
)
|
|
Total income tax expense
|
$
|
3,666,184
|
|
|
$
|
3,170,562
|
|
|
$
|
2,939,540
|
|
Income tax expense for the years ended September 30,
2016
,
2015
and
2014
differed from amounts computed by applying the U.S. Federal income tax rate of
34%
to earnings before income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income before income taxes
|
$
|
9,473,050
|
|
|
$
|
8,264,977
|
|
|
$
|
7,647,980
|
|
|
Income tax expense computed at the federal statutory rate
|
$
|
3,220,837
|
|
|
$
|
2,810,092
|
|
|
$
|
2,600,313
|
|
|
State income taxes, net of federal income tax benefit
|
382,815
|
|
|
331,091
|
|
|
307,509
|
|
|
Amortization of investment tax credits
|
—
|
|
|
—
|
|
|
(3,093
|
)
|
|
Other, net
|
62,532
|
|
|
29,379
|
|
|
34,811
|
|
|
Total income tax expense
|
$
|
3,666,184
|
|
|
$
|
3,170,562
|
|
|
$
|
2,939,540
|
|
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
Allowance for uncollectibles
|
$
|
29,203
|
|
|
$
|
20,012
|
|
|
Accrued pension and postretirement medical benefits
|
2,532,672
|
|
|
2,502,774
|
|
|
Accrued vacation
|
262,273
|
|
|
249,837
|
|
|
Over-recovery of gas costs
|
345,318
|
|
|
721,782
|
|
|
Costs of gas held in storage
|
1,077,849
|
|
|
930,524
|
|
|
Deferred compensation
|
770,868
|
|
|
651,336
|
|
|
Other
|
340,121
|
|
|
265,951
|
|
|
Total gross deferred tax assets
|
5,358,304
|
|
|
5,342,216
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Utility plant
|
24,264,165
|
|
|
19,804,862
|
|
|
MVP investment
|
40,776
|
|
|
—
|
|
|
Accrued gas costs
|
11,217
|
|
|
157,385
|
|
|
Total gross deferred tax liabilities
|
24,316,158
|
|
|
19,962,247
|
|
|
Net deferred tax liability
|
$
|
18,957,854
|
|
|
$
|
14,620,031
|
|
Current federal tax expense for fiscal 2016 reflected the effect of
50%
bonus depreciation for the entire fiscal year 2016 as well as for nine months of fiscal 2015. The Protecting Americans from Tax Hikes (PATH Act), which extended
50%
bonus depreciation for calendar 2015, was signed into law on December 18, 2015, subsequent to the issuance of the Company's September 30, 2015 annual report. As a result,
$1,283,925
of deferred taxes that related to fiscal 2015 bonus depreciation were reflected in the current year's tax provision, thereby reducing the current tax expense and increasing deferred tax expense by the same amount. The same situation occurred in fiscal 2014 when the extension of
50%
bonus depreciation was not signed into law until December 19, 2014, following the issuance of the Company's financial statements for the year ended September 30, 2014. Correspondingly, fiscal 2015 income tax expense included the tax effect of the
50%
bonus depreciation for fixed asset additions during the last nine months of fiscal 2014, which resulted in
$1,442,211
in deferred tax expense related to fiscal 2014 being included in fiscal 2015. The recording of the effect of the adjustments for bonus depreciation had no effect on total income tax expense, net income or earnings per share. Only the current and deferred components of income tax expense and their corresponding assets and liabilities were affected.
The passage of the PATH Act provides for
50%
bonus depreciation through December 31, 2017,
40%
in calendar 2018 and
30%
in calendar 2019 with
no
provision for bonus depreciation after 2019. Virginia tax law does not recognize bonus depreciation; therefore, state income taxes were not impacted by the delayed bonus depreciation extensions.
FASB ASC No. 740 -
Income Taxes
provides for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recognized in the financial statements. The Company has evaluated its tax positions and accordingly has not identified any significant uncertain tax positions. The Company’s policy is to classify interest associated with uncertain tax positions as interest expense in the financial statements. Penalties are classified under other expense.
The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia. The federal returns and the state returns for both Virginia and West Virginia for the tax years ended prior to September 30, 2013 are no longer subject to examination.
|
|
7.
|
EMPLOYEE BENEFIT PLANS
|
The Company sponsors both a noncontributory defined benefit pension plan ("pension plan") and a postretirement benefit plan ("postretirement plan"). The pension plan covers substantially all employees and benefits fully vest after
5 years
of credited service. Benefits paid to retirees are based on age at retirement, years of service and average compensation. In November 2016, the Board of Directors approved a "soft freeze" to the pension plan, whereby no
employees hired on or after January 1, 2017 will be eligible to participate in the pension plan. Employees hired prior to January 1, 2017 will continue to participate in the plan and accrue benefits. The Board of Directors is also considering the implementation of a contribution to the 401(k) Plan for employees hired on or after January 1, 2017. The Company paid contribution would be equal to
3%
of the employees' annual compensation. This Company contribution would be in addition to any employee elected deferrals and employer match as provided for under the 401(k) Plan.
The postretirement benefit plan provides certain health care, supplemental retirement and life insurance benefits to retired employees who meet specific age and service requirements. Employees hired prior to January 1, 2000 are eligible to participate in the postretirement benefit plan. Employees must have a minimum of
10 years
of service and retire after attaining the age of
55
in order to vest in the postretirement plan. Retiree contributions to the plan are based on the number of years of service to the Company as determined under the defined benefit plan.
Employers who sponsor defined benefit plans must recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in its statement of financial position and recognize changes in that funded status in the year in which the changes occur through comprehensive income. For pension plans, the benefit obligation is the projected benefit obligation, and for other postretirement plans, the benefit obligation is the accumulated benefit obligation. The Company established a regulatory asset for the portion of the obligation expected to be recovered in rates in future periods. The regulatory asset is adjusted for the amortization of the transition obligation and recognition of actuarial gains and losses. The portion of the obligation attributable to the unregulated operations of the holding company is recognized in other comprehensive income.
The following tables set forth the benefit obligation, fair value of plan assets, the funded status of the benefit plans, amounts recognized in the Company’s financial statements and the assumptions used.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement Plan
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Accumulated benefit obligation
|
$
|
25,090,968
|
|
|
$
|
22,853,206
|
|
|
$
|
18,504,710
|
|
|
$
|
15,355,668
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
27,167,621
|
|
|
$
|
24,636,695
|
|
|
$
|
15,355,668
|
|
|
$
|
14,983,169
|
|
|
Service cost
|
694,375
|
|
|
654,782
|
|
|
148,018
|
|
|
167,580
|
|
|
Interest cost
|
1,132,776
|
|
|
1,025,908
|
|
|
624,579
|
|
|
600,096
|
|
|
Actuarial loss
|
2,440,957
|
|
|
1,487,278
|
|
|
2,812,516
|
|
|
70,196
|
|
|
Benefit payments, net of retiree contributions
|
(1,940,779
|
)
|
|
(637,042
|
)
|
|
(436,071
|
)
|
|
(465,373
|
)
|
|
Benefit obligation at end of year
|
$
|
29,494,950
|
|
|
$
|
27,167,621
|
|
|
$
|
18,504,710
|
|
|
$
|
15,355,668
|
|
|
Change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
21,394,399
|
|
|
$
|
20,514,179
|
|
|
$
|
10,443,629
|
|
|
$
|
10,646,249
|
|
|
Actual return on plan assets, net of taxes
|
2,159,437
|
|
|
(182,738
|
)
|
|
615,225
|
|
|
(237,247
|
)
|
|
Employer contributions
|
1,500,000
|
|
|
1,700,000
|
|
|
500,000
|
|
|
500,000
|
|
|
Benefit payments, net of retiree contributions
|
(1,940,779
|
)
|
|
(637,042
|
)
|
|
(436,071
|
)
|
|
(465,373
|
)
|
|
Fair value of plan assets at end of year
|
$
|
23,113,057
|
|
|
$
|
21,394,399
|
|
|
$
|
11,122,783
|
|
|
$
|
10,443,629
|
|
|
Funded status
|
$
|
(6,381,893
|
)
|
|
$
|
(5,773,222
|
)
|
|
$
|
(7,381,927
|
)
|
|
$
|
(4,912,039
|
)
|
|
Amounts recognized in the balance sheets consist of:
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
$
|
(6,381,893
|
)
|
|
$
|
(5,773,222
|
)
|
|
$
|
(7,381,927
|
)
|
|
$
|
(4,912,039
|
)
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax
|
1,583,345
|
|
|
1,694,924
|
|
|
913,886
|
|
|
591,621
|
|
|
Total amounts included in other comprehensive loss, net of tax
|
$
|
1,583,345
|
|
|
$
|
1,694,924
|
|
|
$
|
913,886
|
|
|
$
|
591,621
|
|
|
Amounts deferred to a regulatory asset:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
6,732,800
|
|
|
5,280,756
|
|
|
5,563,642
|
|
|
3,628,448
|
|
|
Amounts recognized as regulatory assets
|
$
|
6,732,800
|
|
|
$
|
5,280,756
|
|
|
$
|
5,563,642
|
|
|
$
|
3,628,448
|
|
Effective with the valuation of the September 30, 2015 defined benefit obligations, the Company adopted the RP-2014 Mortality Tables as issued by the Society of Actuaries in late 2014. The adoption of the new tables, which reflected an increase in assumed life expectancy, increased the September 30, 2015 pension liability by an estimated
$1,300,000
and the postretirement liability by an estimated
$1,000,000
.
During 2016, the Company offered a one-time, lump sum pay out option for vested, terminated employees not currently receiving payments under the pension plan. The lump sum offer was accepted by
40
of the
63
eligible participants. In September, the pension plan distributed
$1,241,529
to the participants electing to receive the lump sum payments, which resulted in a corresponding reduction of approximately
$1,500,000
in the projected pension obligation.
The Company expects that approximately
$256,000
before tax, of accumulated other comprehensive loss will be recognized as a portion of net periodic benefit costs in fiscal 2017 and approximately
$836,000
of amounts deferred as regulatory assets will be amortized and recognized in net periodic benefit costs in fiscal 2017.
The following table details the actuarial assumptions used in determining the projected benefit obligations and net benefit cost of the pension and the accumulated benefit obligations and net benefit cost of the postretirement plan for
2016
,
2015
and
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement Plan
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.42
|
%
|
|
4.22
|
%
|
|
4.22
|
%
|
|
3.33
|
%
|
|
4.15
|
%
|
|
4.10
|
%
|
|
Expected rate of compensation increase
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Assumptions used to determine benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.22
|
%
|
|
4.22
|
%
|
|
4.82
|
%
|
|
4.15
|
%
|
|
4.10
|
%
|
|
4.73
|
%
|
|
Expected long-term rate of return on plan assets
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
4.89
|
%
|
|
4.90
|
%
|
|
4.92
|
%
|
|
Expected rate of compensation increase
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
To develop the expected long-term rate of return on assets assumption, the Company, with input from the plans' actuaries and investment advisors, considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of each plan’s portfolio.
Components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement Plan
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Service cost
|
$
|
694,375
|
|
|
$
|
654,782
|
|
|
$
|
553,291
|
|
|
$
|
148,018
|
|
|
$
|
167,580
|
|
|
$
|
168,634
|
|
|
Interest cost
|
1,132,776
|
|
|
1,025,908
|
|
|
1,020,302
|
|
|
624,579
|
|
|
600,096
|
|
|
602,684
|
|
|
Expected return on plan assets
|
(1,492,241
|
)
|
|
(1,440,846
|
)
|
|
(1,312,354
|
)
|
|
(507,858
|
)
|
|
(516,656
|
)
|
|
(496,476
|
)
|
|
Recognized loss
|
501,678
|
|
|
257,378
|
|
|
136,394
|
|
|
250,173
|
|
|
197,058
|
|
|
89,515
|
|
|
Net periodic benefit cost
|
$
|
836,588
|
|
|
$
|
497,222
|
|
|
$
|
397,633
|
|
|
$
|
514,912
|
|
|
$
|
448,078
|
|
|
$
|
364,357
|
|
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for the postretirement medical plan as of September 30,
2016
,
2015
and
2014
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre 65
|
|
Post 65
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Health care cost trend rate assumed for next year
|
7.50
|
%
|
|
8.00
|
%
|
|
8.50
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
Year that the rate reaches the ultimate trend rate
|
2021
|
|
|
2021
|
|
|
2021
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
The health care cost trend rate assumptions could have a significant effect on the amounts reported. A change of 1% would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
|
Effect on total service and interest cost components
|
$
|
137,000
|
|
|
$
|
(109,000
|
)
|
|
Effect on accumulated postretirement benefit obligation
|
3,083,000
|
|
|
(2,491,000
|
)
|
The primary objectives of the Plan’s investment policy are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, achieve asset returns that are competitive with like institutions employing similar investment strategies and meet expected future benefits in both the short-term and long-term. The investment policy provides for a range of investment allocations to allow for flexibility in responding to market conditions. The investment policy is periodically reviewed by the Company and a third-party investment advisor.
The Company’s target and actual asset allocation in the pension and postretirement benefit plans as of September 30,
2016
and
2015
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement
Plan
|
|
|
Target
|
|
2016
|
|
2015
|
|
Target
|
|
2016
|
|
2015
|
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
60
|
%
|
|
63
|
%
|
|
64
|
%
|
|
50
|
%
|
|
52
|
%
|
|
52
|
%
|
|
Debt securities
|
40
|
%
|
|
36
|
%
|
|
35
|
%
|
|
50
|
%
|
|
47
|
%
|
|
47
|
%
|
|
Cash
|
—
|
%
|
|
1
|
%
|
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
Other
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
The assets of the plans are invested in mutual funds. The Company uses the fair value hierarchy described in Note 1 to classify these assets. The mutual funds are included under Level 2 in the fair value hierarchy as their fair values are determined based on individual prices for each security that comprises the mutual funds. Most of the individual investments are determined based on quoted market prices for each security; however, certain fixed income securities and other investments are not actively traded and are valued based on similar investments. The following table contains the fair value classifications of the benefit plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
Fair Value Measurements - September 30, 2016
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
117,265
|
|
|
$
|
117,265
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common and Collective Trust and Pooled Funds:
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
4,497,373
|
|
|
—
|
|
|
4,497,373
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
3,426,041
|
|
|
—
|
|
|
3,426,041
|
|
|
—
|
|
|
Domestic Large Cap Value
|
4,543,385
|
|
|
—
|
|
|
4,543,385
|
|
|
—
|
|
|
Domestic Small/Mid Cap Core
|
2,149,566
|
|
|
—
|
|
|
2,149,566
|
|
|
—
|
|
|
Foreign Large Cap Value
|
1,795,897
|
|
|
—
|
|
|
1,795,897
|
|
|
—
|
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
3,615,209
|
|
|
—
|
|
|
3,615,209
|
|
|
—
|
|
|
Foreign Fixed Income
|
234,622
|
|
|
—
|
|
|
234,622
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
1,043,395
|
|
|
—
|
|
|
1,043,395
|
|
|
—
|
|
|
Foreign Large Cap Growth
|
366,420
|
|
|
—
|
|
|
366,420
|
|
|
—
|
|
|
Foreign Large Cap Value
|
373,480
|
|
|
—
|
|
|
373,480
|
|
|
—
|
|
|
Foreign Large Cap Core
|
950,404
|
|
|
—
|
|
|
950,404
|
|
|
—
|
|
|
Total
|
$
|
23,113,057
|
|
|
$
|
117,265
|
|
|
$
|
22,995,792
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
Fair Value Measurements - September 30, 2015
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
106,502
|
|
|
$
|
106,502
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common and Collective Trust and Pooled Funds:
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
3,996,246
|
|
|
—
|
|
|
3,996,246
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
3,150,561
|
|
|
—
|
|
|
3,150,561
|
|
|
—
|
|
|
Domestic Large Cap Value
|
4,183,172
|
|
|
—
|
|
|
4,183,172
|
|
|
—
|
|
|
Domestic Small/Mid Cap Core
|
1,937,613
|
|
|
—
|
|
|
1,937,613
|
|
|
—
|
|
|
Foreign Large Cap Value
|
1,873,313
|
|
|
—
|
|
|
1,873,313
|
|
|
—
|
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
3,313,331
|
|
|
—
|
|
|
3,313,331
|
|
|
—
|
|
|
Foreign Fixed Income
|
213,118
|
|
|
—
|
|
|
213,118
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
1,030,957
|
|
|
—
|
|
|
1,030,957
|
|
|
—
|
|
|
Foreign Large Cap Value
|
653,276
|
|
|
—
|
|
|
653,276
|
|
|
—
|
|
|
Foreign Large Cap Core
|
936,310
|
|
|
—
|
|
|
936,310
|
|
|
—
|
|
|
Total
|
$
|
21,394,399
|
|
|
$
|
106,502
|
|
|
$
|
21,287,897
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plan
Fair Value Measurements - September 30, 2016
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
43,455
|
|
|
$
|
43,455
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
5,109,834
|
|
|
—
|
|
|
5,109,834
|
|
|
—
|
|
|
Foreign Fixed Income
|
87,821
|
|
|
—
|
|
|
87,821
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
1,824,796
|
|
|
—
|
|
|
1,824,796
|
|
|
—
|
|
|
Domestic Large Cap Value
|
1,770,664
|
|
|
—
|
|
|
1,770,664
|
|
|
—
|
|
|
Domestic Small/Mid Cap Growth
|
195,319
|
|
|
—
|
|
|
195,319
|
|
|
—
|
|
|
Domestic Small/Mid Cap Value
|
198,884
|
|
|
—
|
|
|
198,884
|
|
|
—
|
|
|
Domestic Small/Mid Cap Core
|
427,409
|
|
|
—
|
|
|
427,409
|
|
|
—
|
|
|
Foreign Large Cap Value
|
964,827
|
|
|
—
|
|
|
964,827
|
|
|
—
|
|
|
Foreign Large Cap Core
|
456,100
|
|
|
—
|
|
|
456,100
|
|
|
—
|
|
|
Other
|
43,674
|
|
|
—
|
|
|
43,674
|
|
|
—
|
|
|
Total
|
$
|
11,122,783
|
|
|
$
|
43,455
|
|
|
$
|
11,079,328
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plan
Fair Value Measurements - September 30, 2015
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
58,749
|
|
|
$
|
58,749
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
4,845,174
|
|
|
—
|
|
|
4,845,174
|
|
|
—
|
|
|
Foreign Fixed Income
|
38,654
|
|
|
—
|
|
|
38,654
|
|
|
—
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Domestic Large Cap Growth
|
1,746,621
|
|
|
—
|
|
|
1,746,621
|
|
|
—
|
|
|
Domestic Large Cap Value
|
1,638,695
|
|
|
—
|
|
|
1,638,695
|
|
|
—
|
|
|
Domestic Small/Mid Cap Growth
|
194,260
|
|
|
—
|
|
|
194,260
|
|
|
—
|
|
|
Domestic Small/Mid Cap Value
|
186,344
|
|
|
—
|
|
|
186,344
|
|
|
—
|
|
|
Domestic Small/Mid Cap Core
|
417,980
|
|
|
—
|
|
|
417,980
|
|
|
—
|
|
|
Foreign Large Cap Value
|
893,115
|
|
|
—
|
|
|
893,115
|
|
|
—
|
|
|
Foreign Large Cap Core
|
378,596
|
|
|
—
|
|
|
378,596
|
|
|
—
|
|
|
Other
|
45,441
|
|
|
—
|
|
|
45,441
|
|
|
—
|
|
|
Total
|
$
|
10,443,629
|
|
|
$
|
58,749
|
|
|
$
|
10,384,880
|
|
|
$
|
—
|
|
Each mutual fund has been categorized based on its primary investment strategy.
The Company expects to contribute
$750,000
to its pension plan and
$1,000,000
to its postretirement benefit plan in fiscal 2017.
The following table reflects expected future benefit payments:
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending September 30
|
Pension
Plan
|
|
Postretirement
Plan
|
|
2017
|
$
|
774,312
|
|
|
$
|
642,842
|
|
|
2018
|
836,309
|
|
|
656,790
|
|
|
2019
|
910,261
|
|
|
679,876
|
|
|
2020
|
983,917
|
|
|
705,769
|
|
|
2021
|
1,048,990
|
|
|
747,426
|
|
|
2022-2026
|
6,613,848
|
|
|
4,226,050
|
|
The Company also sponsors a defined contribution plan (the “401k Plan”) covering all employees who elect to participate. Employees may contribute from
1%
to
50%
of their annual compensation to the 401k Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Company matches
100%
of the participant’s first
4%
of contributions and
50%
on the next
2%
of contributions. Company matching contributions were
$353,793
,
$338,896
and
$330,241
for
2016
,
2015
and
2014
, respectively.
The Company’s stockholders approved the RGC Resources, Inc. Key Employee Stock Option Plan (“KESOP”). The KESOP provides for the issuance of common stock options to officers and certain other full-time salaried employees to acquire shares of the Company’s common stock. As of September 30,
2016
, the number of shares available for future grants was
41,000
.
FASB ASC No. 718 -
Compensation
-
Stock Compensation
requires that compensation expense be recognized for the issuance of equity instruments to employees. During the fiscal years ended
2016
,
2015
and
2014
, the Board approved stock option grants to certain officers. As required by the KESOP, each option's exercise price per share equaled the
fair value of the Company's common stock on the grant date. Pursuant to the Plan, the options vest over a
six
-month period and are exercisable over a
ten
-year period from the date of issuance.
As the Company's stock options are not traded on the open market, the fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model including the following assumptions:
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
28.78%
|
|
34.34%
|
|
35.01%
|
Expected dividends
|
3.99%
|
|
4.11%
|
|
4.21%
|
Expected exercise term (years)
|
7.00
|
|
7.00
|
|
7.00
|
Risk-free interest rate
|
2.10%
|
|
1.98%
|
|
2.23%
|
The underlying methods regarding each assumption are as follows:
Expected volatility
is based on the historical volatilities of the daily closing price of the Company's common stock.
Expected dividend rate
is based on historical dividend payout trends.
Expected exercise term
is based on the average time historical option grants were outstanding before being exercised.
Risk-free interest rate
is based on the
7
-year Treasury rate on the date of option grant.
Forfeitures
are recognized when they occur.
Stock option transactions under the Company's plans for the years ended September 30,
2016
,
2015
and
2014
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted- Average Exercise Price
|
|
Weighted- Average Remaining Contractual Terms (years)
|
|
Aggregate Intrinsic Value
1
|
Options outstanding, September 30, 2013
|
|
21,000
|
|
|
$
|
19.01
|
|
|
9.5
|
|
$
|
5,229
|
|
Options granted
|
|
17,000
|
|
|
18.95
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Options expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding, September 30, 2014
|
|
38,000
|
|
|
18.98
|
|
|
8.8
|
|
34,840
|
|
Options granted
|
|
17,000
|
|
|
21.60
|
|
|
|
|
|
Options exercised
|
|
(2,600
|
)
|
|
18.99
|
|
|
|
|
|
Options expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding, September 30, 2015
|
|
52,400
|
|
|
19.83
|
|
|
8.3
|
|
43,086
|
|
Options granted
|
|
16,000
|
|
|
21.22
|
|
|
|
|
|
Options exercised
|
|
(2,200
|
)
|
|
18.98
|
|
|
|
|
|
Options expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
(8,000
|
)
|
|
19.80
|
|
|
|
|
|
Options outstanding, September 30, 2016
|
|
58,200
|
|
|
$
|
20.25
|
|
|
7.8
|
|
$
|
200,211
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 30, 2016
|
|
58,200
|
|
|
$
|
20.25
|
|
|
7.8
|
|
$
|
200,211
|
|
1
Aggregate intrinsic value includes only those options where the exercise price is below the market price.
The weighted-average grant-date fair value of options granted during the years ended September 30,
2016
,
2015
and
2014
was
$4.04
,
$4.92
and
$4.43
, respectively. The intrinsic value of the options exercised during fiscal
2016
and
2015
was
$8,418
and
$5,624
, respectively. The Company recognized
$64,640
,
$83,640
and
$75,310
in stock option expense in fiscal
2016
,
2015
and
2014
, respectively.
The Company received
$41,762
and
$49,366
from the exercise of options in
2016
and 2015.
No
options were exercised in
2014
.
Dividend Reinvestment and Stock Purchase Plan
The Company offers a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to shareholders of record for the reinvestment of dividends and the purchase of up to
$40,000
per year in additional shares of common stock of the Company. Under the DRIP, the Company issued
34,764
,
8,431
and
7
shares in
2016
,
2015
and
2014
, respectively. As of September 30,
2016
, the Company had
323,613
shares of stock available for issuance under the DRIP.
Restricted Stock Plan
The Board of Directors of the Company implemented the Restricted Stock Plan for Outside Directors (the “Plan”) effective January 27, 1997. Under the Plan, a minimum of
40%
of the monthly retainer fee paid to each non-employee director of Resources was paid in shares of common stock (“Restricted Stock”). The number of shares of Restricted Stock awarded each month is determined based on the closing sales price of Resources' common stock on the NASDAQ Global Market on the first business day of the month. The Restricted Stock issued under the Plan vests only in the case of a participant's death, disability, retirement, or in the event of a change in control of Resources. The Restricted Stock may not be sold, transferred, assigned or pledged by the participant until the shares have vested under the terms of the Plan. The shares of Restricted Stock will be forfeited to Resources by a participant's voluntary resignation during his or her term on the Board or removal for cause as a director. Effective October 1, 2016, the Board of Directors amended the Plan to remove the requirement that directors take a minimum
40%
of their retainer in Restricted Stock for those directors who owned at least
10,000
shares of Resources stock.
The Company assumes all directors will complete their term and there will be no forfeiture of the Restricted Stock. Since the inception of the Plan, no director has forfeited any shares of Restricted Stock. The Company recognizes as compensation the market value of the Restricted Stock in the period it is issued.
The following table reflects the director compensation activity pursuant to the Restricted Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Shares
|
|
Weighted-Average Fair Value on Date of Grant
|
|
Shares
|
|
Weighted-Average Fair Value on Date of Grant
|
|
Shares
|
|
Weighted-Average Fair Value on Date of Grant
|
Beginning of year balance
|
66,915
|
|
|
$
|
14.70
|
|
|
62,844
|
|
|
$
|
14.29
|
|
|
59,064
|
|
|
$
|
13.97
|
|
Granted
|
4,433
|
|
|
22.18
|
|
|
4,071
|
|
|
20.88
|
|
|
3,780
|
|
|
19.37
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
End of year balance
|
71,348
|
|
|
$
|
15.16
|
|
|
66,915
|
|
|
$
|
14.70
|
|
|
62,844
|
|
|
$
|
14.29
|
|
The fair market value of the Restricted Stock issued as compensation during fiscal
2016
,
2015
and
2014
was
$98,334
,
$85,000
and
$73,200
.
No
Restricted Stock vested or was forfeited during fiscal
2016
,
2015
and
2014
.
As of September 30,
2016
, the Company had
63,008
shares available for issuance under the Restricted Stock Plan.
Stock Bonus Plan
Under the Stock Bonus Plan, executive officers are encouraged to own a position in the Company’s common stock of at least
50%
of the value of their annual salary. To promote this policy, the Plan provides that all officers with stock ownership positions below
50%
of the value of their annual salaries must, unless approved by the Committee, use no
less than
50%
of any performance bonus to purchase Company common stock. Shares from the Stock Bonus Plan may also be issued to certain employees and management personnel in recognition of their performance and service. Under the Stock Bonus Plan, the Company issued
1,875
,
2,731
and
4,098
shares valued at
$39,819
,
$59,332
and
$78,841
, respectively, in
2016
,
2015
and
2014
. As of September 30,
2016
the Company had
6,299
shares of stock available for issuance under the Stock Bonus Plan.
|
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Long-Term Contracts
Due to the nature of the natural gas distribution business, the Company enters into agreements with both suppliers and pipelines to contract for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The Company obtains most of its regulated natural gas supply through an asset management contract between Roanoke Gas and a third party asset manager. The Company utilizes an asset manager to optimize the use of its transportation, storage rights, and gas supply inventories which helps to ensure a secure and reliable source of natural gas. Under the current asset management contract, the Company has designated the asset manager to act as agent for the Company's storage capacity and all gas balances in storage. The Company retains ownership of gas in storage. Under provisions of this contract, the Company is obligated to purchase its winter storage requirements from the asset manager during the spring and summer injection periods at market price. The table below details the volumetric obligations as of September 30,
2016
for the remainder of the contract period. The current asset management contract will expire in March 2018.
|
|
|
|
|
|
Year
|
Natural Gas Contracts
(In Decatherms)
|
|
2016-2017
|
2,071,061
|
|
|
2017-2018
|
295,866
|
|
|
Total
|
2,366,927
|
|
The Company also has contracts for pipeline and storage capacity which extend for various periods. These capacity costs and related fees are valued at tariff rates in place as of September 30,
2016
. These rates may increase or decrease in the future based upon rate filings and rate orders granting a rate change to the pipeline or storage operator. Roanoke Gas expended approximately
$24,852,000
,
$33,405,000
and
$44,884,000
under the asset management, pipeline and storage contracts in fiscal years
2016
,
2015
and
2014
, respectively. The table below details the pipeline and storage capacity obligations as of September 30,
2016
for the remainder of the contract period.
|
|
|
|
|
|
|
Year
|
Pipeline and
Storage Capacity
|
|
2016-2017
|
$
|
10,474,339
|
|
|
2017-2018
|
8,784,004
|
|
|
2018-2019
|
7,215,235
|
|
|
2019-2020
|
4,800,201
|
|
|
2020-2021
|
2,476,475
|
|
|
Thereafter
|
2,682,848
|
|
|
Total
|
$
|
36,433,102
|
|
Other Contracts
The Company maintains other agreements in the ordinary course of business covering various lease, maintenance, equipment and service contracts. These agreements currently extend through December 2031 and are not material to the Company.
Legal
From time to time, the Company may become involved in litigation or claims arising out of its operations in the normal course of business. At the current time, the Company is not known to be a party to any legal proceedings that would be expected to have a materially adverse impact on its financial position, results of operations or cash flows.
Environmental Matters
Both Roanoke Gas and a previously owned gas subsidiary operated manufactured gas plants (MGPs) as a source of fuel for lighting and heating until the early 1950’s. A by-product of operating MGPs was coal tar, and the potential exists for tar waste contaminants at the former plant sites. While the Company does not currently recognize any commitments or contingencies related to environmental costs at either site, should the Company ever be required to remediate either site, it will pursue all prudent and reasonable means to recover any related costs, including the use of insurance claims and regulatory approval for rate case recognition of expenses associated with any work required.
|
|
11.
|
FAIR VALUE MEASUREMENTS
|
The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements by level within the fair value hierarchy as defined in Note 1 as of September 30,
2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - September 30, 2016
|
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
Level 1
|
|
Significant Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Natural gas purchases
|
$
|
1,052,930
|
|
|
$
|
—
|
|
|
$
|
1,052,930
|
|
|
$
|
—
|
|
|
Total
|
$
|
1,052,930
|
|
|
$
|
—
|
|
|
$
|
1,052,930
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - September 30, 2015
|
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
Level 1
|
|
Significant Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Natural gas purchases
|
$
|
712,710
|
|
|
$
|
—
|
|
|
$
|
712,710
|
|
|
$
|
—
|
|
|
Total
|
$
|
712,710
|
|
|
$
|
—
|
|
|
$
|
712,710
|
|
|
$
|
—
|
|
Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on the weighted average first of the month index prices corresponding to the month of the scheduled payment. At September 30,
2016
and
2015
, the Company had recorded in accounts payable the estimated fair value of the liability determined on the corresponding first of month index prices for which the liability was expected to be settled.
The Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis consist of its asset retirement obligations. The asset retirement obligations are measured at fair value at initial recognition based on expected future cash flows to settle the obligation.
The carrying value of cash and cash equivalents, accounts receivable, borrowings under line-of-credit, accounts payable (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments. The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements as of September 30,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - September 30, 2016
|
|
|
Carrying
Amount
|
|
Quoted Prices in
Active Markets
Level 1
|
|
Significant Other
Observable Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
33,896,200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,163,523
|
|
|
Total
|
$
|
33,896,200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,163,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - September 30, 2015
|
|
|
Carrying
Amount
|
|
Quoted Prices in
Active Markets
Level 1
|
|
Significant Other
Observable Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
30,500,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,570,585
|
|
|
Total
|
$
|
30,500,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,570,585
|
|
The fair value of long-term debt for Roanoke Gas is estimated by discounting the future cash flows of the fixed rate debt based on the underlying
20
-year Treasury rate and estimated credit spread extrapolated based on market conditions since the issuance of the debt. A
52
basis point drop in the
20
-year Treasury combined with a reduction in the assumed credit spreads accounted for the increase in the fair value of the fixed rate debt. The fair value for the RGC Midstream debt is estimated by discounting the estimated credit spread extrapolated based on market conditions.
FASB ASC 825 –
Financial Instruments
requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants.
|
|
12.
|
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
Quarterly financial data for the years ended September 30,
2016
and
2015
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Operating revenues
|
$
|
16,010,056
|
|
|
$
|
21,777,773
|
|
|
$
|
11,295,197
|
|
|
$
|
9,980,265
|
|
|
Gross margin
|
$
|
8,738,116
|
|
|
$
|
10,649,269
|
|
|
$
|
6,312,340
|
|
|
$
|
5,865,189
|
|
|
Operating income
|
$
|
3,498,052
|
|
|
$
|
5,444,314
|
|
|
$
|
1,453,350
|
|
|
$
|
816,376
|
|
|
Net income
|
$
|
1,922,790
|
|
|
$
|
3,111,447
|
|
|
$
|
627,068
|
|
|
$
|
145,561
|
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.40
|
|
|
$
|
0.65
|
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
|
Diluted
|
$
|
0.40
|
|
|
$
|
0.65
|
|
|
$
|
0.13
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Operating revenues
|
$
|
21,250,065
|
|
|
$
|
26,431,729
|
|
|
$
|
10,774,409
|
|
|
$
|
9,733,404
|
|
|
Gross margin
|
$
|
8,622,143
|
|
|
$
|
10,213,770
|
|
|
$
|
5,961,828
|
|
|
$
|
5,408,692
|
|
|
Operating income
|
$
|
3,514,352
|
|
|
$
|
4,879,469
|
|
|
$
|
956,219
|
|
|
$
|
656,152
|
|
|
Net income
|
$
|
1,924,376
|
|
|
$
|
2,779,344
|
|
|
$
|
354,940
|
|
|
$
|
35,755
|
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.41
|
|
|
$
|
0.59
|
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
Diluted
|
$
|
0.41
|
|
|
$
|
0.59
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
On November 1, 2016, Roanoke Gas entered into a
5
-year unsecured note with Branch Banking and Trust in the principal amount of
$7,000,000
. The note is variable rate with interest based on
30-day LIBOR
plus 90 basis points. In addition, Roanoke Gas also entered into a swap agreement to convert the variable rate debt into a fixed-rate instrument with an annual interest rate of
2.30%
. The swap agreement is effective November 1, 2017, with the monthly interest rate floating until the swap period begins. The proceeds from the note will be used to convert a portion of the Company's line-of-credit balance into longer-term financing.
The Company has evaluated subsequent events through the date the financial statements were issued. There were no other items not otherwise disclosed which would have materially impacted the Company’s consolidated financial statements.
* * * * * *