RGC Resources Inc.

Good morning. I am Paul Nestor, President and CEO of RGC Resources Incorporated. Welcome and thank you for joining us as we discuss RGC Resources' third 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. The link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. Let's begin our presentation. Slide one presents our forward-looking statements disclaimer. This presentation contains forecasts and projections. As outlined on slide two, we will begin with a review of third quarter results, followed by the outlook for the fourth quarter of fiscal 2020, which ends September 30th. As noted on slide three, our customer count and additions are in line with expectations for the first month, first nine months of fiscal 2020, Despite the COVID-19 pandemic, we expect this trend to continue through the fourth quarter. The 54% increase in total volumes on slide four is not a misprint. We have had one of the most interesting quarters in the company's history. The third quarter was one of the coolest in recent memory with a 141% increase in heating degree days over 2019. This weather was 41% colder than normal. Commiserate with this cool weather, residential volumes increased 50%. Despite the pandemic, certain commercial customers, for example, a food can manufacturer and CNG fuel delivery fleet experienced significant volume increases that offset the customers most negatively impacted by the pandemic in our service territory, the hotels, restaurants, and schools, for example. Finally, a large multi-fuel manufacturer, also mentioned on the last call, switched to 100% natural gas beginning in late March, adding 0.5 BCF to the industrial throughput for the quarter. They are now our number one customer based on delivered volumes with approximately one BCF used June year to date. This customer had immaterial usage in 2019. As shown on slide five, fiscal 2020 year to date total volumes delivered increased 3% compared to last year. Unlike the cooler weather experienced in the third quarter, the first six months or nine months of 2020 was 6% warmer than the prior year. Again, the increase in industrial volumes offset the decrease in our residential and commercial classes were primarily attributable to the customer previously mentioned. Moving on to slide six, $17 million of capital spending for fiscal 2020 year-to-date is slightly ahead of the prior year. Through the SAVE infrastructure rider, we have invested approximately $7 million to continue modernizing our system, renewing over five miles of main year-to-date. As we have discussed over recent years, the SAVE rider continues to provide the company with a regulatory mechanism that allows us to make our distribution system safer and more reliable. I might add that our current application for the 2021 SAVE program is pending before the SEC, and we expect approval by fiscal year-end. Additionally, we have invested almost $6 million in growth and expansion of our system. I would like to update you on the Blue Ridge Main Extension project mentioned on our last call. This project extends our system to unserved customers and is one of the largest capital projects by dollar value in Renault gas history. It is on schedule. We have completed the installation of the 7,000 feet of 6-inch steel main, should complete the remaining plastic mains and services by the end of the fiscal year. Randy Burton, our CFO, will now walk us through our earnings highlights.

Randy? Thanks, Paul. Good morning, everyone. As indicated on slide 7, the resources had a strong first nine months of fiscal 2020, with diluted EPS increasing 31% over the prior year to $1.34 per diluted share. Performance significantly improved due to favorable utility margins and earnings on our MVP investments. Now let's turn to an overview of our operating results. To aid in this discussion, we have included our condensed consolidated statement of income on slide eight. Let's start with our quarter over quarter results. In spite of the pandemic, Rono Gas Utility had a strong quarter with increased volumes and improved gas utility margins net of prior year rate case estimates. As addressing our 10Q gas utility margin, is a non-GAAP measure defined as gas utility revenue less cost of gas. 2019 Q3 margins were abnormally high as a result of updates in rate case assumptions prompted by SCC staff report. Excluding these effects, gas utility margins for the quarter would have increased approximately 4.3%. As you will see, on a year-to-date basis, this had a minimal impact. Non-gas operating expenses increased approximately $115,000. This was primarily driven by an increased professional services bad debt expense, as well as higher general taxes and depreciation related to the continued investment in rhino gas infrastructure. The non-cash equity earnings from RGC Midstream's investment in the Mountain Valley Pipeline increased 55% to approximately $1.2 million due to construction spending to date. The increase in the other income reflects the recognition of AFUDC related to capital spending on the two MVP interconnect projects discussed on prior calls. Interest expense increased during the quarter due to the higher overall borrowings related to investment in the MVP. The increase in expense was offset by the recognition of the financing component of AFUDC. Income tax increased 57,000 for the third quarter, primarily as a result of the increases in taxable income. Overall, the net income for the quarter increased to 1.2 million or 15 cents per diluted share, compared to 1.1 million or 14 cents per diluted share for the prior quarter. Now let's review results for the nine months into June 30th, 2020. Operating income increased approximately $2.3 million to a total of $13.4 million. Primary drivers were the increased non-gas rates and a positive W&A adjustments revenue due to the warmer weather. The increases were 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, increases in professional services, bad debt expense, general taxes, and depreciation. Equity earnings on the MVP investment increased by approximately $1.4 million to $3.5 million, again related to the construction spend to date. Like the quarter-over-quarter analysis, the other income increase reflects the recognition of AFUDC related to the two MVP interconnect project as discussed earlier. Increased borrowings resulted in a 18% 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 our run of gas capital projects. Income tax expense increased due to the company's growth in taxable income. In combination, all of these factors resulted in a 2.7 million or 32% increase in net income for the first nine months of fiscal 2020. as compared to the same period in fiscal 2019. This concludes our review of financial results. I will now hand the presentation back over to Paul.

Thank you, Randy. As we near the end of fiscal 2020, let's review our outlook on slide nine. We are in prime construction season. We anticipate investing $5 million in the fourth quarter, bringing total 2020 run of gas investment to approximately $22 million. investment and save infrastructure rider projects, and the Blue Ridge project will lead the way. The MVP is targeting an early calendar 2021 in-service date, though the project has not yet returned to construction and is still working through various permit issues. Accordingly, our required physical 2020 cash investment will be lower than previously disclosed. We wanted to give you a quick update regarding the effects of the pandemic The pandemic continues to create significant uncertainty for the foreseeable future. As Randy discussed earlier, so far there have been minimal impacts on operational and financial results. We are still monitoring the possible impacts of COVID-19 on the safety of our employees and customers, certainly the broader economy. And we're taking the possible effects of the pandemic into consideration during our physical 2021 planning. I would like to reemphasize what we talked about on the prior call, the dedication of our employees and our partners here at the company has been outstanding over these last several weeks and months and responding to the pandemic and keeping the gas flowing. I just would like to say thank you to them again. That concludes our prepared remarks. If you have questions, please dial pound six to unmute your line.

Good morning, everyone.

Hey, Mike, good morning. How are you?

I'm good, sir. Yourself?

Very good. We are well, thank you.

Congrats on the quarter. Much better than I expected.

Well, thank you. I think, as you recall, at the end of the last call in our outlook discussion, we stated there was a lot of uncertainty, and of course everyone, I think, is dealing with the uncertainty, and Um, we have been fortunate as we mentioned in today's call, some things have, you know, um, fallen our way, if you will, in our customer's way. And that that's been helpful.

Yeah. I'd say the only question I have, um, I certainly a lot of news since your last call Atlantic coast being taken off the boards, um, certainly makes MVP just that much more valuable. So maybe you could share with us what you can on kind of where we are with MVP. I think last time it was 91%, 92% complete. Are they back in the field? Is there construction going on? Is the timeline still in place? And maybe any chatter about future expansions of MVP now that ACP is off the boards.

Yeah, I'd be glad to talk through that a little bit and Certainly, we can share with you what Equitrans Midstream, the managing partner, has shared. Their earnings release earlier this week on August 4th, I think they stated, Mike, they expect the biological opinion from the Fish and Wildlife Service to be issued shortly. They hope to, at that point, receive a fairly quick approval from the FERC to get back into the field and resume construction. They're not Obviously not in the field at the moment, but again, pending those two steps, hopefully very, very soon they can get back in the field. I think they also disclosed in that earnings release, Mike, that they expect the Army Corps to reissue the nationwide 12 permit, which is a big deal too. That's going to allow water body crossings to resume. Hopefully a lot of things to come here in the very near future. As to the Atlantic Coast being canceled, that was frankly a surprise development to a lot of us, I think, in the industry. It does have ramifications to the Mountain Valley. I think there's been quite a bit of press on EQT, who is the largest shipper on the Mountain Valley. what they're doing with some of their capacity, possibly with Duke and Dominion, who of course were the primary partners in the Atlantic Coast pipeline. A lot of market dynamics happening now around that, which we think are positive to the Mountain Valley. Expansion, I think there's been some press on expansion. I'm not sure that Equitrans has made any public comments on expansion at at this point, but hopefully down the road there'll be more discussion about that.

Yeah, I would think... I mean, you have the capability to up compression on the pre-existing line, correct?

Yeah, I think that's right. The pipe is engineered as it was presented to PERC to allow for more more natural gas to flow through the pipe, right?

Okay. Yep. All right. Well, listen, that's all I had other than the congratulations on the quarter. I look forward to chatting with you next quarter.

Well, thank you very much for joining today and asking your questions. And if you have further questions, let us know.

Thank you.

Does anyone else on the call have a question they'd like to ask? You can unmute yourself by dialing pound six. Well, if there are no more questions, this concludes our third quarter earnings call for fiscal 2020. We look forward to speaking with you again in December to review our full fiscal 2020 results. Thank you again for joining us and please stay safe and healthy as we all try to work to reduce the spread of the virus. We hope you have a great day and a great weekend. Thank you.