Forward-Looking Statements

This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, RGC Resources, Inc. ("Resources" or the "Company") may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities 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, the following: (i) failure to earn on a consistent basis an adequate return on invested capital; (ii) ability to retain and attract professional and technical employees; (iii) the potential loss of large-volume industrial customers to alternate fuels, facility closings or production changes; (iv) volatility in the price and availability of natural gas; (v) uncertainty in the demand for natural gas in the Company's service area; (vi) general economic conditions both locally and nationally; (vii) increases in interest rates; (viii) increased customer delinquencies and conservation efforts resulting from high fuel costs, difficult economic conditions and/or colder weather; (ix) variations in winter heating degree-days from the 30-year average on which the Company's billing rates are set; (x) impact of potential climate change legislation regarding limitations on carbon dioxide emissions; (xi) impact of potential increased regulatory oversight and compliance requirements due to financial, environmental, safety and system integrity laws and regulations; (xii) failure to obtain timely rate relief for increasing operating or gas costs from regulatory authorities;
(xiii) capital market conditions and the availability of debt and equity financing; (xiv) impact of terrorism; (xv) volatility in actuarially determined benefit costs and plan asset performance; (xvi) effect of natural disasters on production and distribution facilities and the related effect on supply availability and price; and (xvii) changes in accounting regulations and practices, which could change the accounting treatment for certain transactions. All of 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," "expect," "objective," "projection," "forecast", "budget", "assume", "indicate" or similar words or future or conditional verbs such as "will," "would," "should," "can", "could" or "may" 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, 2009. The total revenues and margins realized during the first three months reflect higher billings due to the weather sensitive nature of the gas business. Improvement or decline in earnings depends primarily on weather conditions during the remaining winter months, energy costs and the level of operating and maintenance costs during the remainder of the year.

Overview

Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 57,000 residential, commercial and industrial customers in Roanoke, Virginia and the surrounding areas through its Roanoke Gas Company ("Roanoke Gas") subsidiary. Natural gas service is provided at rates and for the terms and conditions set forth by the Virginia State Corporation Commission ("SCC").

Resources also provided regulated sale and distribution of natural gas to Bluefield, West Virginia, the Town of Bluefield, Virginia and surrounding areas through its Bluefield Gas Company ("Bluefield") subsidiary and the Bluefield division of Roanoke Gas (collectively called "Bluefield Operations"). Effective as of October 31, 2007, Resources closed on the sale of the stock of Bluefield to ANGD, LLC and Roanoke Gas completed the sale of the assets of its Bluefield division to Appalachian Natural Gas Company, a subsidiary of ANGD, LLC. The corresponding activities of the Bluefield Operations up to the effective date of the sale have been classified as discontinued operations. See Note 2 above for more information on these transactions.

Resources also provides certain unregulated natural gas related services through Roanoke Gas Company and information system services to software providers in the utility industry through RGC Ventures, Inc. of Virginia, which operates as Application Resources. Such operations represent less than 1% of total revenues and income of Resources.

Winter weather conditions and volatility in natural gas prices both have a direct influence on the quantity of natural gas sales to the Company's customers and management believes each factor has the potential to significantly impact earnings. A majority of natural gas sales are for space heating during the winter season. Consequently, during warmer than normal (normal means average heating degree-days for a specified period) winters, customers may significantly reduce their consumption of natural gas. Furthermore, significant increases in natural gas commodity prices could also affect customer usage by encouraging conservation or use of alternative fuels.

Because the SCC authorizes billing rates for the utility operations of Roanoke Gas based on normal weather, warmer than normal weather may result in the Company failing to earn its authorized rate of return. The Company has been able to mitigate a portion of the risk associated with warmer than normal winter weather by the inclusion of a weather normalization adjustment ("WNA") factor as part of its rate structure, which allows the Company to recover revenues equivalent to the margin that would be realized at approximately 6% warmer than the 30-year normal. The Company did not record a WNA adjustment for the quarter ended December 31, 2008, as the number of heating degree-days (an industry measure by which the average daily temperature falls below

65 degrees Fahrenheit) fell within the 6% weather band during the current WNA measurement period. The Company recorded approximately $315,000 in additional revenues for the quarter ended December 31, 2007 to reflect the impact of the WNA for the difference in margin realized for weather between 12% and 6% warmer than the 30-year average during the prior WNA period. Whether or not the Company triggers the WNA during the current measurement period will be dependent on the weather during the quarter ended March 2009.

The current slow down in the economy has significantly reduced projected construction and development, which may have an impact on the growth of the Company's customer base. Furthermore, with the current difficulties in the economy and the growing job losses, the Company may begin to experience a greater level of customer payment delays and rising bad debt expense. Bad debt expense has increased for the quarter ended December 31, 2008, due to increased billings. As of December 31, 2008, the aging of past due balances is proportionate to last year's levels considering the higher billings during the quarter. The effect that the current economic climate has on the collectibility of customer accounts during the balance of the year is not currently known. Management is closely monitoring accounts receivable activity, however, and intends to take action to mitigate the impact to the Company and its customers if the level of customer delinquencies and bad debts increases.

Volatility in natural gas prices also presents issues for the Company. The commodity price of natural gas has declined from its peak of more than $13.00 per decatherm last summer to under $7.00 a decatherm in December. Currently, futures prices for natural gas on the NYMEX (New York Mercantile Exchange) range between $4.50 and $7.00 per decatherm over the next 12 months. If natural gas prices remain at these levels over the next 12 months, both the Company and its customers should benefit by having relative stability in pricing. However, if supply or other issues cause an escalation in prices, the Company could be negatively impacted by making natural gas a less attractive energy source.

The Company has an approved rate structure in place that mitigates the impact of financing costs of inventory related to rising natural gas prices. Under this rate structure, Roanoke Gas accrues revenue to cover the financing costs or "carrying costs" related to the level of investment in natural gas inventory. During times of rising gas costs and rising inventory levels, the Company recognizes revenues to offset higher financing costs associated with higher inventory balances. Conversely, during times of decreasing inventory costs and lower inventory balances, the Company recognizes less carrying cost revenue as the financing costs would be less. The Company recognized approximately $865,000 and $629,000 in carrying cost revenues for the three-month periods ended December 31, 2008 and 2007, respectively. The increase in carrying cost revenues was primarily attributable to the higher per decatherm price of gas in storage due to steep increases in the commodity price of natural gas during the summer months when gas was injected into storage. If natural gas prices remain at the lower levels as indicated by the NYMEX futures prices discussed above, the per decatherm value of natural gas will decline once storage balances begin to refill in the late spring. Lower natural gas inventory values will lead to reduction in the amount of carrying cost revenues included in natural gas margins.

RGC RESOURCES, INC. AND SUBSIDIARIES



Results of Operations

Consolidated net income (loss) from continuing and discontinued operations is as
follows:



                                              Three Months Ended
                                                 December 31,
                                              2008          2007
                 Net Income

                 Continuing Operations     $ 1,949,159   $ 1,566,008
                 Discontinued Operations            -        (36,690 )


                 Net Income                $ 1,949,159   $ 1,529,318

Continuing Operations

Three Months Ended December 31, 2008:

The table below reflects operating revenues, volume activity and heating
degree-days.



                                    Three Months Ended
                                       December 31,            Increase/
                                    2008           2007       (Decrease)      Percentage
  Operating Revenues
  Gas Utility                   $ 28,191,923   $ 25,554,643   $ 2,637,280             10 %
  Other                              267,272        186,265        81,007             43 %


  Total Operating Revenues      $ 28,459,195   $ 25,740,908   $ 2,718,287             11 %


  Delivered Volumes
  Regulated Natural Gas (DTH)
  Tariff Sales                     2,297,508      2,001,016       296,492             15 %
  Transportation                     702,658        707,203        (4,545 )           -1 %


  Total                            3,000,166      2,708,219       291,947             11 %

  Heating Degree Days                  1,508          1,291           217             17 %
  (Unofficial)

Total operating revenues for the three months ended December 31, 2008 compared to the same period last year increased due to significantly higher natural gas deliveries related to much colder weather, the implementation of a non-gas base rate increase and higher inventory carrying cost revenues.

                                  Three Months Ended
                                     December 31,           Increase/
                                  2008          2007        (Decrease)    Percentage
      Gross Margin

      Gas Utility              $ 7,948,583   $ 7,257,914   $    690,669           10 %
      Other                        147,454       110,915         36,539           33 %


      Total Operating Margin   $ 8,096,037   $ 7,368,829   $    727,208           10 %

Regulated natural gas margins from Roanoke Gas' utility operations increased for the same reasons as operating revenues increased. The 17% increase in the number of heating-degree days provided for a 15% increase in tariff sales (consisting primarily of residential and commercial volumes). Transportation volumes, which generally correspond to production activities of certain larger industrial customers, declined slightly. The unfavorable economic environment has caused some of our transportation customers to reduce activities, which may lead to additional reductions in natural gas consumption during the second quarter and beyond. The Company placed increased non-gas base rates into effect during the first quarter. These rates were placed into effect subject to refund pending a final order from the SCC. As a result of the higher rates and customer growth, the Company realized approximately $117,000 in additional margin from customer base charges, which is a flat monthly fee billed to each natural gas customer. WNA margin declined as the colder weather during the current WNA period did not result in a WNA accrual, while last year's much warmer weather caused a $315,000 accrual for WNA. The total volumetric margin increased by approximately $666,000 due to the combination of increases in delivered volumes and the effect of the rate increase. Carrying cost revenues, as explained above, increased by approximately $236,000 due to a higher average investment in natural gas storage during the period.

The components of the gas utility margin increase are summarized below:

           Net Margin Increase

           Customer Base Charge (including rate increase)   $  117,140
           WNA                                                (315,109 )
           Carrying Cost                                       235,992
           Volumetric (rate increase and volume increase)      666,303
           Other                                               (13,657 )

           Total                                            $  690,669

Other margins increased by $36,539 over last year primarily due to paving services provided to another local utility. The contract for the paving services will expire during the second quarter and the Company anticipates being able to renew the contract for an additional year for similar terms and conditions. Paving services contributed approximately $77,000 to other margins during the quarter.

Operations expenses remained nearly unchanged from the same period last year as increases in bad debt expense and contractor and company labor costs offset reductions in professional services. Bad debt expense increased by more than $33,000 due to higher level of billings and increases in past due balances. Contractor and company labor increased approximately $59,000 due to the timing of annual leak survey work performed on the Company's natural gas distribution system and normal salary adjustments less attrition. Professional services declined by approximately $50,000 attributable to a modest reduction in accounting fees combined with a reduction in costs related to the transfer of benefit plan and actuarial services to a lower cost provider. Total employee benefit costs declined by approximately $7,000 from the same period last year as increases in pension and post-retirement medical costs were offset by lower health insurance premiums. Benefit costs are expected to increase over last year as the renewal of the medical insurance plan will result in higher premiums beginning in January. The remaining difference is attributable to minor reductions in other operating expense categories. Maintenance expenses increased by $50,773, or 14%, primarily due to the timing of repairs of pipeline leaks in the Company's distribution system determined through annual leak surveys.

General taxes increased by $16,473, or 6%, related to higher property taxes associated with increased investment in utility plant and higher payroll taxes. Depreciation expense increased $55,019, or 5%, on a corresponding increase in utility plant associated with extending service to new customers and replacing cast iron and bare steel pipe. Other income, net, decreased by $10,523 due to lower interest earnings related to a reduction in available cash for investment and lower interest rates on such investments.

Interest expense declined by $33,162, or 6%, even though total average debt outstanding during the period increased by more than $4,800,000. The reduction in interest is due to a combination of significantly lower interest rates on the Company's line-of-credit and the retirement of the $5,000,000 first mortgage note, which was replaced by a lower interest rate note as discussed in Note 4. The interest rate on the Company's line-of-credit arrangement is based on LIBOR and the effective average rate for the quarter was 2.8% compared to 5.4% for the same period last year. The increase in total period ending debt and average outstanding debt over the same period last year is attributable to an increased investment in natural gas storage inventories, utility plant and accounts receivable.

Income tax expense increased by $237,547, or 25%, which corresponds to the increase in pre-tax income from continuing operations for the quarter. The effective tax rate was 38% for both periods.

Critical Accounting Policies and Estimates

The consolidated financial statements of Resources are prepared in accordance with accounting principles generally accepted in the United States of America. The amounts of assets, liabilities, revenues and expenses reported in the Company's 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 professional judgments. Actual results may differ significantly from these estimates and assumptions.

The Company considers an estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. The Company considers the following accounting policies and estimates to be critical.

Regulatory accounting - The Company's regulated operations follow the accounting and reporting requirements of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities).

If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the Company would remove the regulatory assets or liabilities from the balance sheet related to those portions no longer meeting the criteria and include them in the consolidated statement of income and comprehensive income for the period in which the discontinuance occurred.

Revenue recognition - Regulated utility sales and transportation revenues are based on rates approved by the SCC. The non-gas cost component of rates may not be changed without a formal rate increase application and corresponding authorization by the SCC; however, the gas cost component of rates may be adjusted periodically through the PGA mechanism with approval from the SCC.

The Company bills its regulated natural gas customers on a monthly cycle. The billing cycle periods for most customers do not coincide with the accounting periods used for financial reporting. The Company accrues estimated revenue for natural gas delivered to customers not yet billed during the accounting period. Determination of unbilled revenue relies on the use of estimates, weather during the period and current and historical data. The financial statements included unbilled revenue of $6,421,930 and $6,290,944 as of December 31, 2008 and 2007, respectively.

Allowance for Doubtful Accounts - The Company evaluates the collectibility of its accounts receivable balances based upon a variety of factors including loss history, level of delinquent account balances and general economic climate.

Pension and Postretirement Benefits - The Company offers a defined benefit pension plan ("pension plan") and a post-retirement medical and life insurance plan ("post-retirement plan") to eligible employees. The expenses and liabilities associated with these plans are based on numerous assumptions and factors, including provisions of the plans, employee demographics, contributions made to the plan, return on plan assets and various actuarial calculations, assumptions and accounting requirements. In regard to the pension plan, specific factors include assumptions regarding the discount rate used in determining future benefit obligations, expected long-term rate of return on plan assets, compensation increases and life expectancies. Similarly, the post-retirement medical plan also requires the estimation of many of the same factors as the pension plan in addition to assumptions regarding the rate of medical inflation and Medicare availability. Actual results may differ materially from the results expected from the actuarial assumptions due to changing economic conditions, volatility in interest rates and changes in life expectancy. Such differences may result in a material impact on the amount of expense recorded in future periods or the value of the obligations on the balance sheet.

Since June 30, 2008, the measurement date used for determining several of the actuarial assumptions as well as determining the market value of the plan assets of both the pension plan and post-retirement medical plan, the economic crisis resulting from issues in the credit markets has significantly reduced the value of the pension plan assets. If the plan assets do not quickly recover from the losses incurred in 2008, pension expense accruals for future periods will most likely increase significantly. Furthermore, the funded status of the plan has significantly deteriorated, which will result in increasing the Company's funding requirements in the future.

Derivatives - The Company may hedge certain risks incurred in its operation through the use of derivative instruments. The Company applies the requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires the recognition of derivative instruments as assets or liabilities in the Company's balance sheet at fair value. In most instances, fair value is based upon quoted futures prices for natural gas commodities and interest rate futures for interest rate swaps. Changes in the commodity and futures markets will impact the estimates of fair value in the future. Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the values used in determining fair value in prior financial statements.

Asset Management

Roanoke Gas uses a third party as an asset manager to manage its pipeline transportation and storage rights and gas supply inventories and deliveries. In return for being able to utilize the excess capacities of the transportation and storage rights, the third party pays Roanoke Gas a monthly utilization fee, which is used to reduce the cost of gas for customers. The current agreement expires in October 2010.

Energy Costs

Energy costs represent the single largest expense of the Company. To help mitigate the impact of potential price volatility, the Company uses various hedging mechanisms, including summer storage injections and financial instruments. Prudently incurred natural gas costs are fully recoverable under the present regulatory Purchased Gas Adjustment ("PGA") mechanism, and increases and decreases in the cost of gas are passed through to the Company's customers. Although rising energy prices are recoverable through the PGA mechanism, high energy prices may have a negative impact on earnings through increases in bad debt expense and higher interest costs because the delay in recovering higher gas costs requires borrowing to temporarily fund receivables from customers as well as decreased demand resulting from customer conservation or use of alternative fuels. The Company's rate structure provides a level of protection against the impact that rising energy prices may have on bad debts and carrying costs of gas in storage by allowing for more timely recovery of these costs. However, the rate structure will not protect the Company from increased rate of bad debts or increases in interest rates or decreased demand.

Regulatory Affairs

During the quarter ended December 31, 2008, Roanoke Gas Company placed into effect new base rates effective for service rendered on and after November 1, 2008 to provide for approximately $1,198,000 in additional annual revenues. These higher rates are subject to refund pending a final order by the Virginia . . .