RGC Resources Inc.

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Good morning. I am Paul Nestor, President and CEO of RGC Resources, Inc. Welcome and thank you for joining us as we discuss RGC Resources' first quarter 2020 results. First, I would like to go over a few administrative items. We have muted all lines and ask that all participants remain muted during the presentation. After the presentation is completed, we will take questions. The link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. Next, I would like to introduce our new Chief Financial Officer, Randy Burton. Randy joins us with more than 25 years experience in financial management, accounting, and auditing. He was a partner in a regional accounting firm for the last 12 years where he worked in varying capacities with many public registrants. We are excited he has decided to join our management team and welcome him to his first RGC Resources Earnings Call. Thanks, Paul.

I am happy to be part of the team and look forward to creating value for our shareholders, our customers, and our fellow team members. Thanks for having me. Thank you.

Now let's begin our presentation. As always on slide one, we provide a quick reminder regarding forward-looking statements. As outlined on slide two, our agenda includes reviewing company highlights from the first quarter and discussing our outlook for the remainder of fiscal 2020. After the conclusion of the presentation, we also welcome you to ask questions during our Q&A. Randy is now going to review some key highlights.

Thank you, Paul. As shown on slide three, Renault Gas' customer base continues to grow. The company has experienced 2% average customer growth since 2016 and added an additional 184 customers during the first quarter of 2020. As you may recall, we added approximately 670 total customers during all of fiscal 2019. Moving on to slide four, total gas volumes sold were consistent quarter over quarter. As noted on slide four, commercial and industrial volumes in combination increased slightly as compared to the first quarter of 2019. Though total volumes were consistent, it is important to consider that Q1 2020 was approximately 8% warmer than Q1 2019. Therefore, consistent volumes in this environment indicates that customer growth has outpaced the effect of an 8% warmer weather. Moving on to slide five. We invested $5.8 million in our regulated utility in the first quarter, a 2% increase compared to the same period last year. As noted on slide five, we spent approximately $2.2 million on infrastructure replacement, $1.5 million on customer growth, and $2.1 million on other capital needs. The quarter-to-quarter spending is consistent and aligns with the company's continued focus on maintaining and improving Roanoke gas infrastructure. Moving to slide six, we had a strong first quarter with diluted EPS increasing 63% over first quarter of 2019. Quarterly performance improved significantly due to the impact of our rate increase and earnings on our MVP investment. At this time, Paul will review our financial results in greater detail.

Thank you, Randy. To aid in this discussion, we have included our condensed consolidated statements of income on slide seven. Let's start with more details of our quarter-to-quarter results. Operating income increased approximately $1.8 million in the current quarter. Gas utility margin, as defined in our most recently filed 10-Q, increased approximately $2.3 million, or 25%, compared to the same period in the prior year. Primary driver of this increase was higher non-gas base rates. Our first quarter results reflect the final order from the rate case, which we will discuss in more detail later in the presentation. The increase in margin was offset by increased expense. Total operating expenses netted the cost of gas increased approximately half a million dollars. The increase in expenses was primarily driven by run-of-gases write-down of regulatory assets as required by the SCC in the final order. the amortization of regulatory assets, and higher corporate insurance premiums, as well as higher general taxes and depreciation expense related to continued investment in run of gas infrastructure. The non-cash equity earnings in our Mountain Valley Pipeline investment doubled to approximately $1.1 million due to construction spending to date. Increased borrowings resulted in a 33% increase in interest expense, Borrowings increased related to the continued funding of the MVP investment, as well as the continued funding of Roanoke Gas's capital projects. Income taxes increased $540,000 in the current year, primarily driven by the increase in taxable income. Now let's review results for the 12 months ended December 31, 2019. Operating income increased approximately $2.3 million to a total of $13.4 million. Primary drivers mirror those discussed in the quarter-to-quarter analysis, including revenue lift from the rate case, offset by higher expenses from both the amortization and required write-down of regulatory assets, as well as increases in general taxes and depreciation expense. Equity earnings in the MVP investment increased from $1.4 million to approximately $3.6 million related to the significant pipeline construction during the 2019 calendar year. Income tax expense increased 30% as the company's growth in taxable income outpaced favorable effects of transitioning to the 21% federal income tax rate. In combination, all of these factors resulted in a $2.6 million or 34% increase in net income for the calendar year ended December 31, 2019 as compared to the same period in 2018. We will now shift our focus and discuss the outlook for the remainder of fiscal 2020 as outlined on slide eight. First, we would like to provide further specifics on the Renault gas rate case. We received the Virginia Commission's final order on January 24th, thereby closing the proceeding that had been pending since we filed our rate application in October 2018. The Commission approved an annual increase of $7.25 million in total base rate revenue requirement and established the company's authorized return on equity at 9.44%. This ROE exceeds those established in recent Virginia rate case proceedings and is greater than recent national return on equity awards on average. The final order affirmed the company's need for connections to the MVP and its plans to acquire firm capacity from the pipeline. The Commission provided a detailed analysis of the projects where it stated, and I quote, that it was prudent for the company to construct the gate stations and the loop line, end quote. While the revenue requirement excluded the recovery of in-process construction costs of the gate stations, the order did allow for the deferral and potential future recovery of the related financing costs. We anticipate adjusting for these costs in the second quarter. Now let's review Renault Gas's capital expenditure projections. In fiscal 2020, we plan to invest approximately $22 million in the regulated utility and to continue our focus on infrastructure replacement and customer growth. Also in fiscal 2020, we anticipate investing $17 million in Mountain Valley Pipeline through our RGC midstream subsidiary. Approximately $5 million was invested during the first quarter of 2020 compared to $10 million in the same period last year. The MVP is approximately 90% complete, and at this time, the pipeline is scheduled to go in service in late 2020. At our annual meeting on February 3, 2020, shareholders approved an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock. The amendment has been approved by the Virginia State Corporation Commission. The company also filed an S3 with the Securities and Exchange Commission earlier this week, seeking to extend our equity shelf registration statement originally filed in August 2017. SEC approval is pending. These actions provide the company future flexibility in raising additional capital. After analyzing the information available to us at this time, our current physical 2020 earnings guidance is in the range of $1.18 per share to $1.28 per share. That concludes our prepared remarks. If you have any questions, please dial pound six to unmute your line. We'll just stay on the line for a moment more in case someone has a question. Again, just hit pound six to unmute your line if you have a question. Well, very good. Like I said, we're pleased to have Randy with us and have him on the call today, and we look forward to a great physical 2020. If there are no questions, this concludes our first quarter earnings call. We look forward to speaking with you again in May to review our second quarter results. Thank you again for joining us, and we hope you have a great day.