RGC Resources Inc.

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' second 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. After the presentation is completed, we will take questions. And the link to today's presentation is available on the Investor and Financial Information page of our website, www.rgcresources.com. Now let's begin our presentation. Slide one presents our forward-looking statements disclaimer. This presentation does contain forecasts and projections. As outlined on slide two, we will begin with a review of second quarter results, followed by a discussion of the impacts from the COVID-19 pandemic. and conclude with the outlook for the remainder of fiscal 2020. We will take questions after the presentation. As noted on slide three, through the first six months of fiscal 2020, Renault Gas continued to experience consistent growth in its customer base. COVID-19 pandemic restrictions instituted in the second half of March broke this trend. Firm delivered volumes were down approximately 18% from the prior year due to 19% warmer weather, as noted on slide four. Transportation and interruptible volumes were strong in the current quarter, primarily driven by a multi-fuel customer that significantly increased tenfold, actually, its natural gas usage during the quarter. As shown on slide five, fiscal 2020 year-to-date total volumes delivered declined 7% compared to last year. Mirroring the trends of the quarter, the first six months of fiscal 2020 was 14% warmer than the prior year. Again, the increase in industrial volumes offset the decrease in our residential and commercial classes and were primarily attributable to the customer just mentioned. Moving on to slide six, the pandemic restrictions have not yet impacted our capital project plans and hence our capital spending. We invested approximately $10.4 million in Renault gas utility plants during the first half of fiscal 2020. This is a 5% decrease compared to the same period in 2019. The second quarter of 2019 was slightly elevated due to materials purchases for our two MVP interconnects or gate stations. I would like to highlight one project, the Blue Ridge Main Extension, a 7,000-foot, 6-inch steel pipe and 4,500-foot, 4-inch and 2-inch plastic pipe project, one of the largest capital projects by dollar value in reno gas history and the largest capital project planned for fiscal 2020. It is on schedule with $1.8 million of spending fiscal year to date. Randy Burton, our CFO, he's with me today, will now walk us through our earnings highlights.

Randy? Thanks, Paul, and good morning. As indicated on slide 7, resources had a strong first half of fiscal 2020 with diluted EPS increasing 35% over the prior year to $1.19 per share. Performance improved significantly due to favorable utility margins and earnings on our MVP investment. Now let's turn to an overview of our operating results. To aid in this discussion, we have included our condensed consolidated statements of income on slide eight. Let's start with our quarter over quarter results. Operating income increased approximately 0.8 million in the quarter. This increase reflects a higher gas utility margin of approximately 1.3 million or 11% compared to the same period in the prior year. As addressed in our T&Q, gas utility margin is a non-GAAP measure defined as gas utility revenue less cost of gas. The margin increase is a result of the implementation of the non-gas base rates from our recent general rate case discussed in our first quarter call. The increase in margin was offset by increased operating expenses of approximately $491,000. This was primarily driven by accelerated vesting of our restricted stock related to our previous CEO's retirement, professional services, and bad debt expense, as well as higher general taxes and depreciation expense related to continued investment in run-of-gas infrastructure. Non-cash equity earnings from RGC's midstreams investment in the Mountain Valley pipeline increased 70% to approximately $1.2 million in due to construction spending to date. The increase in the other income reflects the recognition that the AFUDC related to capital spending on the two MVP interconnect projects. As we discussed on our first quarter call, the FCC allowed Roanoke Gas to defer for potential future recovery carrying costs related to the MVP interconnect stations. Therefore, AFUDC was recognized during the quarter based on construction spending from the effective date of the final order in the rate case. Interest expense increased during the quarter due to the higher overall borrowings related to investment in the MVP. The increase in interest expense was offset by recognition of the financing component of the AFUDC discussed earlier. Income taxes increased $326,000 for the second quarter primarily a result of increased taxable income. Overall, net income for the quarter increased to $5.7 million or $0.70 per share compared to $4.7 million or $0.58 per share for the prior quarter. Now let's discuss the results for the six months ended March 31, 2020. Operating income increased approximately $2.6 million to a total of $12.1 million. The primary drivers mirror those discussed in the quarter-over-quarter analysis, including revenue lift from the final order in the rate case, offset by higher expenses from the amortization and first quarter write-down of regulatory assets, accelerated vesting of restricted stock, and, to a lesser extent, increase in professional services, bad debt expense, general taxes, and depreciation. Equity earnings on the MVP investment increased $1.3 million to approximately $2.3 million, again related to construction spend to date. Other income increased 92% primarily related to the second quarter recognition of AFUDC as earlier discussed. Increased borrowings resulted in a 24% increase in interest expense Borrowing levels increased over the same period of the prior year due to the continued funding of our MVP investment as well as funding of Run Up Gas's capital projects. Income tax expense increased due to the company's growth in taxable income. In combination, all these factors resulted in a $2.6 million or 36% increase in net income for the first half of fiscal 2020 as compared to the same period of fiscal 2019. As this concludes our review of financial results, I will now hand the presentation back over.

Thank you, Randy. We are on slide nine. Let's further discuss the impacts of the COVID-19 pandemic in particular on our community and our company. To date, the greater Roanoke Valley, which is the Roanoke Gas Service Territory, has had fewer cases and deaths. per capita attributable to the virus in some of the larger metropolitan areas of our state and country. We've also been very fortunate to not have any known cases in our company ranks. Previous investments and upgrades to technology that strengthen customer interactions and improve operational communication and execution in combination with implementing our pandemic plan have allowed the company to safely and effectively provide uninterrupted natural gas service. I would like to take this opportunity to thank all of our employees and our contracting partners for their efforts and dedication to our customers and our company during these trying times. They have adapted and adjusted and stepped up where needed and when asked. I am very proud of them. Let's briefly discuss liquidity. As with our operations and employees, we are well positioned and prepared. We have sufficient availability in our Renault gas line of credit, which we are currently out of. and the RGC midstream credit facility that supports the MVP investment. Initializing the at-the-market program in early February provides immediate and cost-efficient access to the equities market as needed. However, the negative impact from restrictions, shutdowns, and closures in our service territory is meaningful. Two of our largest industrial customers associated with the automotive industry have had extended shutdowns. Our major hospital systems of which there are three of them and they are in our top 15 customer list, have been forced to reduce staffing and pay levels. The hospitality and tourism industry has completely halted. There are a few bright spots. A food can manufacturer, also one of our largest customers, has greatly increased their production and natural gas usage. One of the textile mills operating in our service territory has converted to making much-needed operating room gowns, which are also used by COVID-19 patients. The fact is the pandemic continues to create significant uncertainty for the foreseeable future. We believe the economic effects will negatively impact our results of operations, primarily through lost revenue. For the last six months of our fiscal year ended September 30th, 2020. We are still in the process of analyzing our daily usage data in the recently completed April billing cycle to assist in projecting pandemic influence usage trends and natural gas margins. Based on our latest estimates, we believe net income for the third and fourth quarters of fiscal 2020 will be lower than the corresponding periods of 2019. We are withdrawing previous earnings guidance for fiscal 2020 and 2021 at this time based on all of these factors. We will now shift our focus and discuss the other components of our outlook for the remainder of fiscal 2020 as outlined on slide 10. First, let's review Rhino Gas's capital expenditure projections. For fiscal 2020, we plan to invest approximately $22 million in the regulated utility and to continue our focus on infrastructure replacement and customer growth. The Blue Ridge project we mentioned earlier, we are categorizing as customer growth as it is serving a previously unserved area. In fiscal 2020, we also anticipate investing a total of $13 million in Mountain Valley Pipeline through our RGC midstream subsidiary. Approximately $5.9 million was invested during the first half of fiscal 2020 compared to $13.2 million in the same period last year. The project has not yet returned to construction and is still working through the various permit issues as well as awaiting the cow pasture ruling from the Supreme Court. the MVP is still targeting a late calendar 2020 end service date. Finally, we want to reaffirm our commitment to deliver shareholder value. One of the ways our company has done this for over 75 consecutive years is through the quarterly dividend. At its meeting last week, the Board of Directors declared the next quarterly dividend to be paid August 1, 2020. That concludes our prepared remarks. If you have any questions, Please dial pound six to unmute your line. Pound six to unmute your line. Do we have any questions this morning? Randy and I will Hang on for just a little bit longer in case someone has a question. Pound six to unmute your line. Okay. Well, if we don't have any questions, this concludes our second earnings call of physical 2020. We look forward to speaking with you again in August to review our third quarter results. And thank you again for joining us, and we do please urge you to stay safe and healthy as we all work to continue reducing the spread of the virus. We hope you have a great day and a great weekend. Thank you.