RGC Resources, Inc. (NASDAQ:RGCO) Q1 2022 Earnings Conference Call February 8, 2022 9:00 AM ET Company Participants Tommy Oliver - CFO Paul Nester - President & CEO of RGC Resources Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide. Conference Call ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended December 31, 2021 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Transition Period From to Commission File Number 000-26591 RGC Resources, Inc. (Exact name of Registrant as Specified in its Charter) Virginia 54-1909697 (State or Other Jurisdiction of In ...

RGC Resources, Inc. (NASDAQ:RGCO) Q4 2021 Earnings Conference Call December 3, 2021 9:00 AM ET Company Participants Paul Nestor – President and CEO of RGC Resources Tommy Oliver – CFO David Garcia – Director of Finance Automated Voice – Unidentified Conference Call Participants Mike – Analyst Jack – Analyst Automated Voice You will now be placed into conference. Paul Nestor Good morning. I'm Paul Nestor, President and CEO of RGC Resources. Thank you for taking time on this Friday to join us for our Fourth Q ...

Part I [Business](index=11&type=section&id=Item%201.%20Business) RGC Resources, Inc. operates Roanoke Gas, a regulated natural gas utility, with revenue dominated by utility operations and a focus on residential customers - RGC Resources, Inc. is a holding company primarily operating Roanoke Gas, a regulated natural gas utility, and holds an investment in the Mountain Valley Pipeline (MVP)[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) Customer and Margin Mix (FY 2021) | Customer Category | % of Customers | % of Volume | % of Revenue | % of Margin | | :--- | :--- | :--- | :--- | :--- | | Residential | 91.3% | 37% | 58% | 63% | | Commercial | 8.6% | 31% | 34% | 25% | | Industrial | 0.1% | 32% | 7% | 11% | - The company's business is seasonal, with approximately **63% of natural gas deliveries** occurring between November and March[28](index=28&type=chunk) - Roanoke Gas relies on two main interstate pipelines and operates an LNG facility with **200,000 DTH of storage capacity** for peak demand[29](index=29&type=chunk)[30](index=30&type=chunk) - The company holds exclusive, long-term franchise agreements in its primary service areas, renewed until **December 31, 2035**[33](index=33&type=chunk) - As of September 30, 2021, the company had **99 full-time employees**, with **17% unionized** under an agreement expiring July 31, 2022[40](index=40&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant operational, regulatory, and financial risks, notably dependence on pipelines, cyber threats, and MVP investment delays - Operational risks include **100% reliance on two interstate pipelines** for gas transport, system failures, and cyber-attack vulnerability[46](index=46&type=chunk)[47](index=47&type=chunk)[49](index=49&type=chunk) - Regulatory risks include new environmental laws, increased pipeline safety requirements, and the need for timely rate relief from the Virginia SCC[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - The Mountain Valley Pipeline (MVP) investment poses a major financial risk due to significant delays and cost overruns impacting financial position and dividend capacity[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk) - The company faces financial risks from pandemics like COVID-19, potentially reducing demand, increasing bad debt, and straining liquidity[73](index=73&type=chunk)[74](index=74&type=chunk)[75](index=75&type=chunk) - Costs and funding obligations for defined benefit pension and retiree medical plans depend on market returns and actuarial assumptions, posing financial risk[79](index=79&type=chunk) [Unresolved Staff Comments](index=27&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - No unresolved staff comments[84](index=84&type=chunk) [Properties](index=27&type=section&id=Item%202.%20Properties) The company's properties include approximately **1,157 miles of pipelines** and an **LNG storage facility** with **200,000 DTH capacity** - The company's utility property includes approximately **1,157 miles of transmission and distribution pipeline**, representing **89% of total utility plant investment**[85](index=85&type=chunk) - The company owns an LNG storage facility with a capacity to store up to **200,000 DTH of natural gas**[86](index=86&type=chunk) [Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) The company is not known to be a party to any pending legal proceedings - The Company is not known to be a party to any pending legal proceedings[88](index=88&type=chunk) [Mine Safety Disclosures](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[89](index=89&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under RGCO, with **FY2021 dividends totaling $0.74 per share**, up from **$0.70** in FY2020 - The company's common stock is listed on the NASDAQ Global Market under the trading symbol **RGCO**[92](index=92&type=chunk) Quarterly Stock Price and Dividends | Year Ending Sep 30 | Quarter | High Price ($) | Low Price ($) | Dividends Declared ($) | | :--- | :--- | :--- | :--- | :--- | | **2021** | First | $27.40 | $22.82 | $0.185 | | | Second | $25.60 | $22.08 | $0.185 | | | Third | $25.60 | $21.32 | $0.185 | | | Fourth | $26.02 | $22.33 | $0.185 | | **2020** | First | $30.00 | $27.53 | $0.175 | | | Second | $31.98 | $24.55 | $0.175 | | | Third | $28.85 | $23.15 | $0.175 | | | Fourth | $24.86 | $22.58 | $0.175 | Equity Compensation Plan Information (as of Sep 30, 2021) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price ($) | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 45,250 | $19.34 | 457,079 | [Selected Financial Data](index=28&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable as the company is a smaller reporting company - Not applicable[94](index=94&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, noting increased revenues from higher gas prices but decreased net income due to lower MVP equity earnings and ongoing investment in infrastructure [Results of Operations (FY2021 vs. FY2020)](index=35&type=section&id=Results%20of%20Operations) FY2021 operating revenues increased **19% to $75.2 million**, but net income decreased to **$10.1 million** due to a **$3.1 million reduction** in MVP equity earnings Operating Revenues and Delivered Volumes | Year Ended September 30, | 2021 ($) | 2020 ($) | Change ($) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $75,174,779 | $63,075,391 | $12,099,388 | 19% | | Total Delivered Volumes (DTH) | 9,909,529 | 10,357,174 | (447,645) | (4)% | Gross Utility Margin | Year Ended September 30, | 2021 ($) | 2020 ($) | Change ($) | % Change | | :--- | :--- | :--- | :--- | :--- | | Gas Utility Revenues | $75,045,103 | $62,408,925 | $12,636,178 | 20% | | Cost of Gas - Utility | $35,179,842 | $23,949,481 | $11,230,361 | 47% | | **Gross Utility Margin** | **$39,865,261** | **$38,459,444** | **$1,405,817** | **4%** | - Equity in earnings from the MVP decreased by **$3.1 million** in FY2021 due to temporary cessation of AFUDC activity[124](index=124&type=chunk) Net Income and Earnings Per Share | Metric | FY 2021 ($) | FY 2020 ($) | | :--- | :--- | :--- | | Net Income | $10,102,062 | $10,564,534 | | Basic & Diluted EPS | $1.22 | $1.30 | [Capital Resources and Liquidity](index=38&type=section&id=Capital%20Resources%20and%20Liquidity) Liquidity is managed through cash flow, debt, and equity, with FY2021 operating cash decreasing to **$11.6 million** and **$25.8 million** used in investing activities Summary of Cash Flows | Cash Flow Summary (Years Ended Sep 30) | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,568,108 | $12,823,903 | | Net cash used in investing activities | ($25,849,237) | ($30,721,011) | | Net cash provided by financing activities | $15,508,380 | $16,556,826 | | Net increase (decrease) in cash | $1,227,251 | ($1,340,282) | - Capital expenditures for Roanoke Gas's utility plant were approximately **$20 million** in FY2021, primarily for pipe replacement and customer growth[139](index=139&type=chunk) - Midstream's cash investment in the MVP was **$6.0 million** in FY2021, with total expected funding increasing to between **$60 million and $62 million**[141](index=141&type=chunk) - The company issued **142,726 shares** through its At-the-Market (ATM) stock offering program during fiscal 2021[149](index=149&type=chunk) [Equity Investment in Mountain Valley Pipeline](index=43&type=section&id=Equity%20Investment%20in%20Mountain%20Valley%20Pipeline) The MVP project faces ongoing legal and regulatory challenges, targeting a summer 2022 in-service date at a **$6.2 billion** cost, with AFUDC accrual temporarily suspended - The MVP project targets a full in-service date in **summer 2022** at an estimated total cost of approximately **$6.2 billion** (excluding AFUDC)[154](index=154&type=chunk) - The LLC temporarily suspended AFUDC accrual from **January 1, 2021, through March 31, 2021**, significantly reducing equity earnings from the MVP investment[156](index=156&type=chunk) - Management, with a third-party valuation, concluded the MVP investment was **not impaired** as of September 30, 2021[157](index=157&type=chunk) [Critical Accounting Policies and Estimates](index=49&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Critical accounting policies involve significant estimates for regulatory accounting, revenue recognition, doubtful accounts, pension and postretirement benefits, and derivative instruments - Critical accounting policies include Regulatory Accounting (ASC 980), Revenue Recognition, Allowance for Doubtful Accounts, Pension and Postretirement Benefits, and Derivatives[169](index=169&type=chunk)[170](index=170&type=chunk)[172](index=172&type=chunk)[177](index=177&type=chunk)[179](index=179&type=chunk) Pension and Postretirement Plan Funded Status (as of Sep 30) | Plan | Funded Status 2021 ($) | Funded Status 2020 ($) | | :--- | :--- | :--- | | Pension | $1,259,639 (103% funded) | ($2,340,371) (94% funded) | | Postretirement | ($914,507) | ($3,809,156) | - The company shifted its pension plan asset allocation to **30% equity / 70% fixed income** and adopted a Liability Driven Investment (LDI) approach[183](index=183&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable as the company is a smaller reporting company - Not applicable[191](index=191&type=chunk) [Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for FY2021 and FY2020, including the independent auditor's report and detailed notes Consolidated Balance Sheet Summary (as of Sep 30) | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Assets | $310,109,193 | $281,679,507 | | Total Liabilities | $210,407,484 | $192,791,530 | | Total Stockholders' Equity | $99,701,709 | $88,887,977 | Consolidated Income Statement Summary (Years Ended Sep 30) | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Operating Revenues | $75,174,779 | $63,075,391 | | Operating Income | $14,778,309 | $12,518,182 | | Net Income | $10,102,062 | $10,564,534 | | Diluted EPS | $1.22 | $1.30 | Consolidated Cash Flow Summary (Years Ended Sep 30) | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net Cash from Operations | $11,568,108 | $12,823,903 | | Net Cash from Investing | ($25,849,237) | ($30,721,011) | | Net Cash from Financing | $15,508,380 | $16,556,826 | - The independent auditor identified the valuation of the equity method investment in Mountain Valley Pipeline, LLC (MVP) as a Critical Audit Matter due to significant judgment required for fair value determination[199](index=199&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=116&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[375](index=375&type=chunk) [Controls and Procedures](index=116&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2021, with no material changes - Management concluded the Company's disclosure controls and procedures were **effective** as of September 30, 2021[377](index=377&type=chunk) - Management concluded the Company's internal control over financial reporting was **effective** as of September 30, 2021, based on the COSO 2013 framework[381](index=381&type=chunk) [Other Information](index=118&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - No other information is reported for this item[383](index=383&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=119&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information for this item is incorporated by reference from the RGC Resources, Inc. Proxy Statement for the 2022 Annual Meeting of Shareholders[385](index=385&type=chunk)[386](index=386&type=chunk)[387](index=387&type=chunk) [Executive Compensation](index=119&type=section&id=Item%2011.%20Executive%20Compensation) Executive and director compensation information is incorporated by reference from the 2022 Proxy Statement - Information for this item is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[389](index=389&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=119&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information for beneficial owners and management is incorporated by reference from the 2022 Proxy Statement - Security ownership information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[391](index=391&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=119&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information for this item is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[392](index=392&type=chunk) [Principal Accounting Fees and Services](index=119&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Principal accounting fees and services information is incorporated by reference from the 2022 Proxy Statement - Information for this item is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[393](index=393&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=121&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits filed with the Form 10-K, with financial statements under Item 8 - All financial statements of the registrant are filed as part of **Item 8** of the report[396](index=396&type=chunk) - Financial statement schedules are either inapplicable or the information is included within the consolidated financial statements and related notes[396](index=396&type=chunk) [Form 10-K Summary](index=134&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - Not applicable[414](index=414&type=chunk)

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