RGC Resources Inc: Form 10-Q for the period ended Dec 31, 2025

Forward-Looking Statements

This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, Resources may announce or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects and closures, investments, inflation, ratemaking, debt refinancing, 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 2025 Annual Report on Form 10-K. 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,” “predict,” “target,” “expect,” “objective,” “projection,” “potential,” “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs such as “will,” “would,” “should,” “can,” “could,” “may,” or “might” 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, 2026. 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.

Overview

Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 63,700 residential, commercial and industrial customers in Roanoke, Virginia and surrounding localities through its Roanoke Gas subsidiary. Midstream, a wholly owned subsidiary of Resources, is a less than 1% investor in the MVP, Southgate and Boost. The utility operations of Roanoke Gas are regulated by the SCC, which oversees the terms, conditions and rates charged to customers for natural gas service, safety standards, extension of service and depreciation. The Company is also subject to regulation from the United States Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines. FERC regulates the prices for the transportation and delivery of natural gas to the Company’s distribution system and underground storage services. In addition, the Company is subject to other regulations which are not necessarily industry specific.

Nearly all of the Company’s revenues are derived from the sale and delivery of natural gas to Roanoke Gas customers based on rates and fees authorized by the SCC. These rates are designed to provide the Company with the opportunity to recover its gas and non-gas expenses and to earn a reasonable rate of return for shareholders based on normal weather. These rates are determined based on various rate applications filed with the SCC. Generally, investments related to extending service to new customers are recovered through the additional revenues generated by the non-gas base rates in place at that time. The investment in replacing and upgrading existing non-SAVE infrastructure, as well as recovering increases in non-gas expenses due to inflationary pressures, regulatory requirements or operational needs, are generally not recoverable until a formal rate application is filed to include the additional investment and higher costs, and new non-gas base rates are approved.

On December 2, 2025, the Company filed for an expedited rate application with the SCC to increase non-gas base rates by $4.3 million annually. Pursuant to the Commission’s December 29, 2025 Order for Notice and Comment, the new base rates went into effect for services rendered on or after January 1, 2026, subject to refund. The SCC's review of Roanoke Gas' filing is underway and a hearing has been set for July 15, 2026. Based on the procedural schedule established in the Commission’s Order, the Company anticipates final resolution of the case in the first quarter of fiscal 2027.

As the Company’s business is seasonal in nature, volatility in winter weather and the commodity price of natural gas can impact the effectiveness of the Company’s rates in recovering its costs and providing a reasonable return for its shareholders. In order to mitigate the effect of weather variations and other factors not provided for in the Company's base rates, Roanoke Gas has certain approved rate mechanisms in place that help provide stability in earnings, adjust for volatility in the price of natural gas and provide a return on qualified infrastructure investment. These mechanisms include the SAVE Rider, WNA, ICC, RNG Rider and PGA.

The SAVE Plan and Rider provides the Company with a mechanism through which it recovers costs related to qualified SAVE infrastructure investments on a prospective basis, until a rate application is filed incorporating these investments in non-gas base rates. Roanoke Gas filed and received approval from the SCC for an updated annual SAVE Rider rate which became effective October 1, 2025. As a result of the updated SAVE Rider, SAVE Plan revenues increased by approximately $271,000 for the three-month period ended December 31, 2025 compared to the same period last year. The updated SAVE Rider is expected to result in approximately $2.61 million of annualized SAVE-related revenues during fiscal 2026. Additional information regarding the SAVE Plan and Rider is provided in Note 4 of the condensed consolidated financial statements.

The WNA mechanism reduces the volatility in earnings due to the variability in temperatures during the heating season. The WNA is based on the most recent 30-year temperature average and provides the Company with a level of earnings protection when weather is warmer than normal and provides its customers with price protection when weather is colder than normal. The WNA allows the Company to recover from its customers the lost margin (excluding gas costs) from warmer-than-normal weather and correspondingly requires the Company to refund the excess margin earned for colder-than-normal weather. The WNA mechanism used by the Company is based on a linear regression model that determines the value of a single heating degree day and thereby estimates the revenue adjustment based on weather variance from normal. Any billings or refunds related to the WNA are completed following each WNA year, which extends for the 12-month period from April to March. For the three months ended December 31, 2025, the Company reduced revenues by approximately $319,000 under the WNA model for weather that was 4% colder than normal, compared to approximately $500,000 in additional revenues for weather that was 6% warmer than normal for the corresponding period last year.

The Company has an approved rate structure to mitigate the impact of the financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue by applying the ICC factor, based on the Company’s weighted-average cost of capital, including interest rates on short-term and long-term debt, and the Company’s authorized return on equity, to the average cost of natural gas inventory during the period. Total ICC revenues increased nominally for the three-month period ended December 31, 2025 compared to the corresponding period last year. The average price of gas in storage during the first quarter of fiscal 2026 increased by 3% compared to the same period in fiscal 2025. If natural gas prices remain at or higher than the prior year, the average dollar balance of gas in storage may continue to increase based on current storage levels and due to an increased ICC factor from the prior year may lead to higher ICC revenues in fiscal 2026.

In March 2023, Roanoke Gas began operating the RNG facility, through a cooperative agreement with the Western Virginia Water Authority, to produce commercial quality RNG for delivery into its distribution system. Roanoke Gas is allowed to recover the costs associated with the investment in RNG facilities and the related operating costs through an RNG Rider added to customer bills. Customers receive the benefit of environmental credits generated through the production of RNG. Roanoke Gas recognized approximately $484,000 in RNG revenue for the three months ended December 31, 2025 compared to approximately $388,000 for the corresponding period in the prior year.

The cost of natural gas, which is a pass-through cost, is independent of the Company's non-gas rates. Accordingly, the Company's approved billing rates include a component designed to allow for the recovery of the cost of natural gas used by its customers. This rate component, referred to as the PGA, allows the Company to pass along to its customers increases and decreases in natural gas costs through a quarterly filing, or more frequent if necessary, once SCC staff approval is received. As actual costs will differ from the projections used in establishing the PGA rate, the Company will either over-recover or under-recover its actual gas costs during the period. The difference between actual costs incurred and costs recovered through the application of the PGA is recorded as a regulatory asset or liability. At the end of the annual deferral period, the balance is amortized over a succeeding 12-month period through the ensuing non-gas rate component. Due to the extended and extreme cold weather experienced across the eastern half of the United States, natural gas prices spiked from less than $4 per DTH to well over $30 per DTH at the end of January, resulting in an $8 million to $10 million under collection. These amounts are anticipated to be collected from customers over the ensuing 12 to 18 months through the PGA.

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 when Midstream's investment in affiliates represents a significant component of the comparison.

The Company's operating revenues are affected by the cost of natural gas, as reflected in the condensed consolidated statements of income under cost of gas - utility. The cost of natural gas, which includes commodity price, transportation, storage, injection and withdrawal fees, with any increase or decrease offset by a correlating change in revenue through the PGA, is passed through to customers at cost. Accordingly, management believes that gross utility margin, a non-GAAP financial measure defined as utility revenues less cost of gas, is a useful and relevant measure to analyze financial performance. The term gross utility margin is not intended to represent or replace gross margin, 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. A reconciliation between gross utility margin and gross margin is presented under the Gross Utility Margin section below. The following results of operations analyses will reference gross utility margin.

Three Months Ended December 31, 2025:

Net income decreased by $386,824 for the three months ended December 31, 2025, compared to the same period last year, primarily due to continued inflationary pressures on operating costs slightly offset by lower interest expense and income taxes.

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

Total operating revenues for the three months ended December 31, 2025, compared to the same period last year, increased by approximately 11% primarily due to higher gas costs resulting from interstate pipeline providers increasing their rates over $1,000,000. Increased residential and commercial delivered volumes and SAVE revenues, slightly offset by a decrease in WNA revenue, also contributed to the increase in operating revenues over the prior period. Total heating degree days increased by 11% from the same period in the prior year, resulting in a 6% increase in the weather-sensitive residential and commercial volumes, while transportation and interruptible volumes, which has a lower margin contribution, decreased 10%, primarily driven by reduced business activity from a single, multi-fuel customer during the current period. The increased residential and commercial volumes contributed to an approximate $510,000 increase in non-gas volumetric revenues. In addition, SAVE Plan revenues increased as Roanoke Gas continues to invest in qualified SAVE infrastructure projects, resulting in an increase in revenue of approximately $271,000 compared to the same period in the prior year. WNA revenues declined approximately $819,000 from the corresponding period last year as previously discussed.

25

Gross utility margin increased slightly over the same period last year primarily as a result of the aforementioned increases in SAVE revenues, as well as increased RNG revenues, which contributed $271,000 and $96,000, respectively, to margin. As discussed in the Overview section, the WNA model adjusts for the impact of variability of temperatures during the heating season. The WNA model calculates what the corresponding volumes would be if temperatures were equivalent to the 30-year normal during each period and adjusts for the difference in margin from normal. In applying the WNA model to both the current and prior years, the volumetric margin, net of the WNA, decreased by approximately $310,000 due a decrease of 3% in WNA adjusted residential and commercial delivered volumes.

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

The tables below provide a reconciliation between gross utility margin and gross margin:

26

RGC RESOURCES, INC. AND SUBSIDIARIES

Operations and maintenance expenses increased $533,810, or 11%, from the same period last year. The Company continues to experience inflation over the 2% level targeted by the Federal Reserve. Inflation levels in health care benefits, certain types of insurance, contracted services and IT service costs, as well as other items, continue to put upward pressure on the Company's expenses. Personnel costs increased by approximately $92,000 due to increased staffing and the inflationary impact on salaries and benefits. Contracted services increased by approximately $188,000 also due to inflationary pressures as well as increased customer turn-ons. Total capitalized construction overheads declined by approximately $188,000 due to a reduction in direct construction expenditures related to Roanoke Gas capital projects as a result of colder weather. Increased corporate insurance premiums accounted for much of the remaining cost increase, which were slightly offset by a decrease in professional services expenses.

Taxes other than income taxes increased by $107,682, or 15%, due to higher property taxes associated with growth in utility property and increased tax rates, as well as increases in payroll taxes.

Depreciation expense increased by $227,745, or 8%, corresponding to a similar increase in investments in depreciable utility property. Increases in fixed assets with shorter useful lives over the last year resulted in depreciation expense increasing slightly more than the 7% increase in the average utility property balance.

Equity in earnings of unconsolidated affiliate decreased by $27,143, or 3%. See Note 5 of the consolidated financial statements for additional information related to the MVP.

Interest expense decreased by $108,780, or 6%, as the weighted-average interest rate on total debt decreased from 4.45% during the first quarter of fiscal 2025 to 4.14% in the current quarter. Midstream's interest expense decreased by $121,278, or 16%, as the total average debt outstanding decreased by approximately $1,336,000 as a result of principal payments made on term notes, along with the weighted-average interest rate decreasing from 5.38% during the first quarter of fiscal 2025 to 4.62% in the current quarter. Roanoke Gas' interest expense increased by $12,498, or 1%, as total average debt outstanding increased by approximately $1,608,000 associated with net borrowings under the Company's line-of-credit. Roanoke Gas' weighted-average interest rate remained relatively flat from the first quarter of fiscal 2025 to the current quarter. See Notes 6 and 7 of the consolidated financial statements for more information on the Company's debt.

Income tax expense decreased by $277,570, or 17%, primarily corresponding to the decrease in pre-tax income. The effective tax rate was 21.4% and 23.4% for the three-month periods ended December 31, 2025 and 2024, respectively. The effective tax rate is below the combined statutory state and federal rate due to the amortization of excess deferred taxes and tax credits. Additionally, a one-time item related to R&D tax credits contributed to a further reduction to the effective tax rate during the current period.

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 significant changes to the critical accounting policies as reflected in the Company’s Annual Report on Form 10-K for the year ended September 30, 2025.

Asset Management

Roanoke Gas uses a third-party asset manager to oversee its pipeline transportation, storage rights and gas supply inventories and deliveries in order to provide a secure and reliable source of natural gas to its customers. In return for utilizing 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 management contract was signed for a three year period which will expire in March 2028.

Equity Investment in Mountain Valley Pipeline

The Company owns a less than 1% interest in the LLC that owns and operates the MVP, Southgate and Boost, as defined in the respective operating agreements. The Company accounts for its interest in the LLC under the equity method of accounting given the LLC maintains specific ownership accounts for each investor, and also considering the Company's rights under the LLC management agreement and the Company's involvement as a stakeholder of the MVP. The Company has been using the equity method since the inception of its investment in fiscal 2016.

With the MVP in operation, the Company recognizes its share of earnings from the LLC, favorably adjusted for a basis difference between the Company's proportional share of assets and its carrying value that arose when the Company recorded an other-than-temporary impairment of its investment in 2022. This basis difference amortization is a favorable non-cash adjustment over the operational life of the MVP, or 40 years. For the first quarter of fiscal 2026 and 2025, the Company recorded equity in earnings of consolidated affiliates of approximately $827,000 and $854,000, respectively. The Company received a quarterly cash distribution of its share from the LLC totaling approximately $753,000 and $802,000 during the first quarter of fiscal 2026 and 2025, respectively, which was a return on its invested capital, and expects future quarterly distributions to be of a similar magnitude. The Company is using this cash to pay interest and other expenditures related to Midstream. The Company refinanced all of the debt supporting its investment in the MVP in September 2025, as described in the liquidity section.

Regulatory

See Note 4 of the condensed consolidated financial statements for discussion on Regulatory matters.

Capital Resources and Liquidity

Due to the capital-intensive nature of the utility business, as well as the impact of weather variability, the Company’s primary capital needs are the funding of its capital projects, the seasonal funding of its natural gas inventories and accounts receivables, debt service and payments of dividends to shareholders. The Company anticipates funding these items through its operating cash flows, credit availability under short-term and long-term debt agreements and proceeds from the sale of its common stock.

Cash and cash equivalents increased by $335,665 for the three-month period ended December 31, 2025 compared to an increase of $1,204,178 for the three-month period ended December 31, 2024. The following table summarizes the sources and uses of cash:

28

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 contribute to higher cash inflows. During the first and fourth fiscal quarters, operating cash flows are generally moderate and 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, 2025 increased by $252,670 compared to the same period last year. Colder weather and increased gas costs compared to the same period last year resulted in higher accounts receivable and accounts payable balances increasing operating cash flows. Pipeline and storage capacity charges during the first three months of fiscal 2026 increased over $1,100,000 from the same period in the prior year. Additionally, total commodity costs increased from $3.44 per DTH during the first quarter of fiscal 2025 to $3.93 per DTH during the first quarter of fiscal 2026. WNA revenues for the first three months of fiscal 2026 declined by approximately $819,000 from the same period last year as previously discussed, increasing operating cash.

Cash Flows Used in Investing Activities:

Investing activities primarily consist of expenditures related to Roanoke Gas' utility property, which includes replacing aging natural gas pipe with new plastic or coated steel pipe, improvements to the LNG plant and gas distribution system facilities and expansion of its natural gas system to meet new customer demand. The Company is continuing its focus on SAVE infrastructure replacement projects, including the replacement of pre-1973 first generation plastic pipe. New customer demand for natural gas continues to be steady and therefore extending the natural gas distribution system within its service territory is also a priority. Roanoke Gas' total capital expenditures for the three-month period ended December 31, 2025 were approximately $5.6 million compared to $5.7 million during the same period last year. Total fiscal 2026 capital expenditures are expected to be approximately $22 million. With MVP in service, Midstream will incur periodic, future capital investment related to ongoing MVP operations requirements and system improvements. Midstream has and will continue to make capital investments in Southgate and Boost.

Cash Flows Provided by Financing Activities:

Financing activities generally consist of borrowings and repayments under credit agreements, issuance of common stock and the payment of dividends. Net cash flows provided by financing activities were approximately $5.4 million for the three months ended December 31, 2025, compared to approximately $6.1 million for the same period last year. The $700,000 decrease in financing cash flows is primarily attributable to net borrowings of $7.4 million under Roanoke Gas' line-of-credit during the first three months of fiscal 2026 compared to net borrowings of $7.9 million in the same period last year. Additionally, during the first quarter of fiscal 2026, Midstream repaid a net $169,000 compared to borrowing a net $40,000 during the same period in the prior year. Notes 6 and 7 provide details on the Company's line-of-credit and borrowing activity.

In addition, Resources issued a total of 19,492 shares of common stock resulting in net proceeds of approximately $384,000 during the first three months of fiscal 2026, compared to issuing 14,792 shares of common stock resulting in net proceeds of approximately $269,000 during the first three months of fiscal 2025. No shares were issued through the ATM program during the first quarter of fiscal 2026 or 2025.

Management regularly evaluates the Company’s liquidity through a review of its available financing resources and its cash flows. Roanoke Gas has a term note in the principal amount of $15 million coming due in August 2026. Management believes Roanoke Gas has access to sufficient financing resources to meet its cash requirements for the next year, including cash from operations and the line of credit. Roanoke Gas may also adjust capital spending as necessary, if such a need would arise.

Midstream's future cash requirements will relate to regular monthly operating expenses, debt service and capital contributions. The Company has received a quarterly cash distribution from MVP in fiscal 2026 of approximately $753,000, and should receive similar quarterly distributions going forward. On September 5, 2025, Midstream established new amortizing term notes with two banks in the initial amounts of $38.6 million and $15 million, which refinanced and replaced all of Midstream's outstanding debt. This term notes mature on September 5, 2032. Also on September 5, 2025, Midstream entered into a new Loan Agreement for the MVP Southgate extension and MVP Boost expansion that can be drawn to principal amounts of $1.85 million and $3.65 million, respectively. These loans mature on September 5, 2030, at which time the outstanding principal balance on each note is due. With the establishment of the new term notes, Midstream's total debt principal payments over the succeeding 12 months is $2,846,018. Management believes that it will be able to meet Midstream's cash requirements over the ensuing 12-month period with availability on the Southgate and Boost Loan Agreements and its quarterly cash distributions from MVP.

As of December 31, 2025, Resources' long-term capitalization ratio was 43% equity and 57% debt.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are identified, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

Through December 31, 2025, the Company has evaluated, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2025.

Changes in Internal Control over Financial Reporting

Management routinely reviews the Company’s internal control over financial reporting and makes changes, as necessary, to enhance the effectiveness of the internal controls. There were no changes in internal control over financial reporting that occurred during the three months ended December 31, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Because of the inherent limitations in an effective internal control system, any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will prevent or detect all misstatements, due to error or fraud, from occurring in the consolidated financial statements. Additionally, management is required to use judgment in evaluating controls and procedures.

There have been no material changes to the risk factors previously disclosed in Resources' Annual Report on Form 10-K for the year ended September 30, 2025.