RGC Resources - Q3 2024

Transcript

Tommy Oliver (SVP of Regulatory and External Affairs)

Good morning, everyone, and thank you for joining us as we discuss RGC Resources' 2024 Q3 results. I am Tommy Oliver, Senior Vice President, Regulatory and External Affairs for RGC Resources. I am joined this morning by Paul Nester, President and CEO of RGC Resources, and Tim Mulvaney, our VP, Treasurer, and Chief Financial Officer. Before we begin, I want to review a few administrative items. First, we have muted online and ask that all participants remain muted. Two, the link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. Third, at the conclusion of the presentation, in our remarks, we will take questions. So let's turn to slide one. This presentation contains forecasts and projections. Slide one has information about risks and uncertainties, including forward-looking statements, that should be understood in the context of our public filings.

Slide two contains our agenda. We will discuss the MVP, review our quarterly operational and financial results, provide a regulatory update, discuss the outlook for full year fiscal 2024, and provide a brief or brief comments on fiscal 2025, with time allotted for questions at the end. So I'll turn the presentation over to Paul Nester now to talk about the MVP.

Paul Nester (President and CEO)

Well, thank you, Tommy Oliver, and good morning, everyone. Thank you for joining us. We hope your day is off to a good start. We thought we would just end the suspense immediately in the earnings call and talk about Mountain Valley at the beginning. Hopefully, you've had the opportunity to see our press release issued on June 14th, declaring the MVP in service, and in fact, on that same day, receipt of the initial natural gas delivery into our Roanoke Gas system. It's hard to believe, but we're almost two months in operation now as of this day. We're just so excited to have finally reached and achieved this milestone.

Although gas flows started in mid-June, the shipper contracts for the capacity and demand charges did not go into effect on July 1st, and that was contemplated in those agreements. Tim Mulvaney's gonna give us some additional color on how this transition from construction to pipeline operation will be reflected in our financial statements when he gives us his remarks shortly. Moving on to Slide four. This is a picture we've used in some of our other presentations. You may have seen it, but it's what the Mountain Valley Pipeline right of way looks like once it has been restored and the vegetation has had an opportunity to take hold. As you can see, it's quite beautiful. The joint venture is completing the restoration along the entire right of way of the pipeline as we speak.

One important point, once this restoration is finished, the construction project will also be deemed complete, and at that point, RGC Midstream's final ownership level will be set. In other words, our percentage of the operating earnings and the available cash flows from the joint venture will be locked in at that point in time. Moving to Slide five, we've included a picture of our Lafayette interconnect in today's presentation. That's one of our two interconnects to the Mountain Valley, the other being the Summit View Gate Station in Franklin County. Both interconnect stations are complete, and in fact, attached to MVP and gas is flowing.

We've stated this for many, many years, but these stations will enable the additional firm capacity provided by MVP and contracted for by Roanoke Gas to enter the Roanoke Gas system, and of course, to also provide gas through that Summit View interconnect in Franklin County for the first time in Franklin County's history. We are working earnestly to connect our first customer in Franklin County, and we expect that connection to be completed very, very soon. In fact, the picture on the agenda page that Tommy Oliver reviewed was from just a few weeks ago, where we were installing the natural gas main in the Summit View Park, downstream of the Summit View Gate Station. Finally, we're just gonna mention this one last time. We really believe the Mountain Valley, now that it's operational, will spur economic development in this region.

We're excited about that. We continue to actively participate with our Roanoke Regional Partnership and the Virginia Economic Development Partnership and the other localities, their economic development offices to promote and enhance economic development. With that, I'll turn it back to Tommy Oliver.

Tommy Oliver (SVP of Regulatory and External Affairs)

Well, thank you, Paul Nester, and we're now on slide six. Main extensions and renewals for the first nine months of 2024 fiscal year total 4.6 miles, and we connected 478 new services. In addition, we renewed 319 services during that same period. This reflects continued growth in our rate base and customer base. Now, on slide seven, where we're showing our delivered gas volumes for the quarter. Volumes overall were 6% lower compared to the Q3 of last year, with the decline attributable to the continuation of warmer weather throughout the Q3 of the 2024 fiscal year. This is very evident in the residential and commercial volumes, which are much more weather sensitive than industrial usage. Slide eight shows delivered gas volumes for the 2024 fiscal year to date.

As shown, total volumes have remained steady compared to last year's comparable period. We're on slide nine now. Our CapEx spending totaled $16.6 million for the first nine months of fiscal 2024, compared to $19.4 million last year at the same time. This decrease is attributable to the $3.1 million spent in 2023 related to the RNG project. Paul Nester will discuss the full year capital spending projection shortly. I'm now gonna turn it over to Tim Mulvaney, our Treasurer CFO, who will discuss our financial results. Tim Mulvaney?

Tim Mulvaney (VP, Treasurer, and CFO)

Thank you, Tommy Oliver. Moving on to slide 10. As we noted last quarter, we continue to experience cost pressures compared to a year ago, particularly for personnel and professional costs. Q3 operating income decreased $240,000, or 13%, to $1.6 million, compared to the Q3 of 2023, as the higher costs were not offset with new revenues during the quarter. New interim rates went into effect July 1st, under the February 2nd filed rate case. Tommy Oliver will discuss the rate case in more detail in a moment. Equity and earnings of the unconsolidated affiliates, or MVP, was down $237,000 pre-tax compared to a year ago, as the transition from construction phase that included non-cash AFUDC to the operational phase occurred this quarter.

With the MVP in operation, going forward, the company will recognize its share of earnings from the MVP, favorably adjusted for a basis difference between the company's share of the MVP assets and the carrying value of our investment. You may recall that we took sizable write-downs of our investment in 2022. This basis difference will be amortized over the operational life of the MVP for 40 years. Interest expense increased $145,000 compared to the same quarter a year ago, due to the higher interest rate environment, which is impacting our floating rate debt that supports our investment in the Mountain Valley Pipeline and our Roanoke Gas line of credit. Our net income was $160,000 in the Q3 of this year, compared to $690,000 in the same quarter a year ago.

The combination of cost pressures, lower MVP results, and higher interest expense led to the decline. EPS was $0.02 per diluted share for the Q3 this year, compared to $0.07 per diluted share in the quarter a year ago. The year-to-date numbers are also on slide 10. The performance for the nine months is more favorable than the Q3 alone. Net income was $11.6 million, or $1.15 per diluted share through nine months of fiscal 2024, compared to $10.3 million, or $1.04 per diluted share in fiscal 2023. While the inflationary pressures and higher interest rates were present as they were in the Q3 of fiscal 2024, revenues from the prior year rate case were present for all nine months in fiscal 2024, but only for six months in fiscal 2023.

Additionally, our share of AFUDC earlier in 2024 was stronger. I will now turn the presentation back to Tommy Oliver to discuss our latest rate case and regulatory developments.

Tommy Oliver (SVP of Regulatory and External Affairs)

Well, thank you, Tim Mulvaney. As we noted in our earnings call from last quarter, Roanoke Gas filed for an increase in base rates on February 2nd with the Virginia State Corporation Commission. The company is seeking an annual increase in its base rates of $4.3 million, or approximately 5% increase in total revenues. The increase includes a projected rate base through June 30th, 2025, and an increase in our authorized ROE to 10.35%, which reflects current market conditions. Unlike our prior rate case, we did not roll our SAVE Rider into base rates, nor did we roll in our RNG Rider. The audit of the rate case continues. Staff's testimony is due in the case on September 20th, and a hearing with the commission is set for November 7th. We do not expect final resolution until the Q2 of 2025.

With regard to the SAVE and RNG riders, on May 30th, we filed for an update to the RNG rider, and on June 28th, we filed for an update to our RNG rider. Both of these cases are pending before the commission, with the resolution expected in September 2024. I will now pass the presentation to Paul Nester to discuss our full year 2024 and expectations for 2025.

Paul Nester (President and CEO)

Yeah, thank you, Tommy Oliver. We're gonna start by just reviewing our Roanoke Gas capital investment plan, which is on slide 13. We're holding firm to what we've been communicating on that at $21.7 million for this fiscal year. As discussed a few moments ago, it is lower than last year. We obviously had the one-time step up in 2023 related to the RNG facility investment. We continue to focus on our growth strategies in the regulated utility of customer growth and infrastructure renewal. As you can see, SAVE spending this year is gonna get close to $10 million. Something we're very happy about, improving the safety and reliability, or I should say, continuing to improve the safety and reliability of our natural gas distribution system.

Moving to slide 14, and maybe before we talk about the EPS guidance, I just wanna summarize Tommy Oliver and Tim Mulvaney's comments. Really, the first nine months of the year have been really strong. I'm very happy with the company's performance. I think all of our employees and our departments are firing on all cylinders, doing exactly what we ask, which is to focus on customer service and safety. Tommy Oliver and his team, from a regulatory standpoint, as you can tell, have been very busy working very closely with the commission staff on all of these proceedings. We're just, again, very pleased with where we are through the first nine months. I believe $1.15 EPS is what Tim Mulvaney reported to us a moment ago.

So as you can see, for our full fiscal year, which ends September 30th, we've kept the upper end of the range at $1.16 per share. We've moved the lower end up $0.02 to $1.12. We feel very, very comfortable with that right now. You know, we think, again, the outstanding performance of the company and our employees, and in fact, our customers, too. Our customers economically have been hanging right in there so far this summer. You know, despite the Q4 being a lower revenue period, we're optimistic that this performance trend is going to continue for the next approximately 50 days-55 days toward the end of the fiscal year and push us toward the upper end of this EPS forecast. With that, let's talk for a minute about 2025.

Ordinarily, at this call, we would give some guidance for the next fiscal year. We've listed out several of what we're calling drivers or key variables to the next fiscal year. Obviously, the rate case, as Tommy Oliver just discussed, is still ongoing, and the final outcome of that is pending. In this inflationary environment, as Tim Mulvaney has discussed, we see a lot of that continuing or persevering into fiscal 2025. We're going to do everything we can as a management team and as a company to manage expense and keep that as reasonable as we can. We've got a great history of doing that. I think we're practiced in that, so it's not a new experience for us, and that's something, again, I'm expecting good results from.

Interest rates, we think, are going to hopefully trend favorably in 2025. There's prevailing literature on that, particularly with what the Fed may do over the next three to six months. So we're optimistic that we may see some with our floating rate debt, some favorable interest rate activity. Tim Mulvaney talked about the Mountain Valley investment and what that means to RGC Midstream. There is a change there, as he discussed, from the AFUDC related to the construction and now our operational earnings. Year-over-year, we'll see a decline in the book earnings related to that, but again, the cash flows are going to start in 2025. So we're excited about cash finally coming back to us from that investment.

We're still working on our capital spending plans for next fiscal year, but we think it should be very similar to this year in that $20 million-$22 million range. And, as always, we're in discussion with our board about our shareholder dividend, and we're, again, setting expectations for that relative to next year's earnings. We're seeking to maintain a fairly consistent payout ratio relative to those earnings. So with that, we're not providing any EPS guidance right now for 2025. Again, we're still working on that vigorously. We hope to be able to share that before the end of the fiscal year. So that concludes our prepared remarks. If you have any questions, please dial pound, pound one to unmute your line. Pound, pound one.

Speaker 3

Hey, good morning, Paul Nester. Morning, Tommy Oliver. Morning, Tim Mulvaney.

Paul Nester (President and CEO)

Mike, good morning. Thank you for joining us. Hope you're well today.

Speaker 3

Doing all right. Glad earning season's winding down. Seems to have been a longer one this quarter. Congrats on Mountain Valley, getting the flows finally into your service territory. Paul Nester, you'd mentioned you're getting ready to connect your first customer there. Is that in that industrial park in Franklin?

Paul Nester (President and CEO)

It is, Mike. It's approximately 1,500 ft from our gate station within the park. And we're just excited about that, and in fact, working closely with the county to bring that to fruition. And we hope to, you know, have a little sort of ribbon cutting and ceremony around that when it's ready. But it is within the Summit View Business Park.

Speaker 3

Are you? I've asked this before, but now with Mountain Valley open, it's probably a better question today. Are you seeing? What's the level of inquiries you're seeing now that gas is flowing? Has that gone up? Has it remained static? You know, is there a lot in that pipeline that looks now like it's actually going to come to realization?

Paul Nester (President and CEO)

Yes, it continues to be a good question, and thank you for asking it again. This region has continued to have steady inquiry, is what I would say, Mike, from economic development prospects. I don't know that it's increased now that Mountain Valley's finished, but it certainly has changed the tone and tenor of some of those inquiries. In other words, prior to completion, and certainly if you went back in time when there were still significant legal challenges. It was, when do you think it will be done? And when could we expect it to be done? Now that it is done, it just provides so much certainty to that prospect about what their opportunity is to receive gas, potentially directly from Mountain Valley at Summit View, or as a blended product in our existing Roanoke Gas system.

Speaker 3

Okay. And then just one final one. So looking forward to 2025, and the drivers, the one thing I didn't see on the slide is, and, and perhaps maybe you can add some color to it here. What was the negative weather impact to earnings for 2024 through your winter heating season? Because I'm just trying to get a feel for what earnings could be, if we have normal weather conditions this year.

Paul Nester (President and CEO)

Yeah, that's a great question, too. We're still fortunate here in Virginia to have weather normalization, and weather normalization allows us, Mike, to adjust back to normal weather. So I think our 30,000 ft level answer to that question is, we really didn't, in our firm load, see negative earnings impact. Tommy Oliver or Tim Mulvaney, anything you want to add to that relative to the WNA?

Tim Mulvaney (VP, Treasurer, and CFO)

I think you captured it pretty well, Paul Nester.

Paul Nester (President and CEO)

Yeah. Again, the industrial customers, and I think was alluded to in the remarks and, in fact, in our 10-Q, they've been steady, too, which we're pleased about. Certainly, there's uncertainty in the economy going forward, but so far, they've been steady. So, I hope that answered your question.

Speaker 3

It does. I mean, with most of my gas utilities coverage, even when even those that have, you know, weather normalization riders, there's usually a little bit of upside that they can realize if it's a colder winter. So and I'm just asking because I know this was extremely warm this year, and just trying to get a feel from a forecasting perspective of where numbers might be, if we get a cold one.

Paul Nester (President and CEO)

Yeah, certainly, Tim Mulvaney or Tommy Oliver, you may remember the exact statistic. This was one of the warmer winter seasons on record. My memory was we were greater than 20% warmer than normal over the winter period. But, certainly, we would see increased volume lift and delivery, Mike, if we return to a normal, winter. The other side of our WNA mechanism, if it's colder than normal, we're going to return the customers, and happy to do that. We think that's the appropriate way, again, when you're adjusting back to pure normal, 30-year normal, for that to work.

Speaker 3

All right. Thank you, gentlemen.

Paul Nester (President and CEO)

Thank you so much.

Tim Mulvaney (VP, Treasurer, and CFO)

Thanks, Mike.

Paul Nester (President and CEO)

Do we have any other questions, pound, pound one? To unmute your line. Any other questions at this time? Okay, well, hearing none, this concludes our Q4 earnings call. And again, thank you so much for taking time out of your morning to join us. And we really look forward to speaking with you again in early December as we review our full-year fiscal results. We hope you all have a safe and pleasant day and rest of the week. Thank you.