RGCO - NASDAQ

Good morning, everyone, and thank you for joining us as we discuss RGC Resources 2024 Third Quarter 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. [Operator Instructions] 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 and our remarks, we will take questions. So let's turn to Slide 1. This presentation contains forecasts and projections. Slide 1 has information about risks and uncertainties, including forward-looking statements that should be understood in the context of our public filings. Slide 2 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 '24 and provide brief comments on fiscal 2025 with time allotted for questions at the end. So I'll turn the presentation over to Paul now to talk about the MVP.

Well, thank you, Tommy, 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 suspend 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 14, 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 2 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 1 and that was contemplated in those agreements. Tim's going to 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 4. 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 5. We've included a picture of our Lafayette interconnect in today's presentation that's one of our 2 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 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, 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 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 going to 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 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.

Well, thank you, Paul, and we're now on Slide 6. Main extensions and renewals for the first 9 months of 2024 fiscal year totaled 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 7 where we're showing our delivered gas volumes for the quarter. Volumes, overall, were 6% lower compared to the third quarter of last year, with the decline attributable to the continuation of warmer weather throughout the third quarter 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 8 shows delivered gas volumes for the 2024 fiscal year-to-date. And as shown, total volumes have remained steady compared to last year's comparable period. We're on Slide 9 now. Our CapEx spending totaled $16.6 million for the first 9 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 will discuss the full year capital spending projection shortly. I'm now going to turn it over to Tim Mulvaney, our Treasurer, CFO, will discuss our financial results. Tim?

Thank you, Tommy. 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. Third quarter operating income decreased $240,000 or 13% to $1.6 million compared to the third quarter of 2023 as the higher costs were not offset with new revenues during the quarter. New interim rates went into effect July 1 under the February 2 filed rate case. Tommy will discuss the rate case in more detail in a moment. Equity and earnings of the unconsolidated affiliates or MVP, was down $237,000 pretax compared to a year ago as the transition from construction phase that included noncash 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 third quarter 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 third quarter 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 9 months is more favorable than the third quarter alone. Net income was $11.6 million or $1.15 per diluted share through 9 months of fiscal '24 compared to $10.3 million or $1.04 per diluted share in fiscal '23. While the inflationary pressures and higher interest rates were present as they were in the third quarter of fiscal '24, revenues from the prior year rate case were present for all 9 months in fiscal 2024 but only for 6 months in fiscal '23. Additionally, our share of AFUDC earlier in 2024 was stronger. I will now turn the presentation back to Tommy to discuss our latest rate case and regulatory developments.

Well, thank you, Tim. As we noted in our earnings call from last quarter, Roanoke gas filled for an increase in base rates on February 2 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 projected rate base through June 30, 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 in the base rates nor did we roll in our RNG rider. The audit of the rate case continues. Staff's testimony is due on the case on September 20 and a hearing with the commission is set for November 7. We do not expect final resolution until the second quarter of 2025. With regard to the SAVE and RNG riders on May 30, we filed for an update to the RNG rider; and on June 28, we filed for an update to our RNG rider. Both of these cases are pending before the commission with the resolution expected in September of 2024. I'll now pass the presentation to Paul Nester to discuss our full year 2024 and expectations for 2025.

Yes. Thank you, Tommy, and we're going to 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 onetime 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 going to 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 want to summarize Tommy and Tim's comments. Really, the first 9 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 asked, which is to focus on customer service and safety. Tommy 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 9 months. I believe the $1.15 EPS is what Tim reported to us a moment ago. So as you can see, for our full fiscal year, which ends September 30, we 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. 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. Despite the fourth quarter being a lower revenue period, we're optimistic that this performance trend, it's going to continue for the next approximately 50 to 55 days towards the end of the fiscal year and push us towards 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 just discussed, is still ongoing and the final outcome of that is pending. In this inflationary environment, as Tim 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 3 to 6 months. So we're optimistic that we may see some -- with our floating rate debt, some favorable interest rate activity. Tim 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 to $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. [Operator Instructions]

Glad earnings season is winding down. It seems to have been longer one this quarter. Congrats on Mountain Valley getting the flows finally into your service territory. Paul, you'd mentioned you'd get ready to connect your first customer there. Is that in that industrial park in Franklin?

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

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? Does it remain static? Is there a lot in that pipeline that looks now like it's actually going to come to realization?

Yes. It continues to be a good question, and thank you for asking it again. This region has continued to have steady inquiries, 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 magnificent 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 there opportunity is to receive gas, potentially, directly, from Mountain Valley at Summit View or as a blended product in our existing Roanoke Gas System.

And then just one final one. Looking forward to 2025 and the drivers. The one thing I didn't see on the slide is, and, perhaps, maybe you can add some color to it here, what was the negative weather impact to earnings for '24 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.

Yes, 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 sort of 30,000-foot level answer to that question is we really didn't in our firm load see negative earnings impact. Tommy or Tim, anything you want to add to that relative to the WNA.

I think you captured it pretty well, Paul. Yes. Again, the industrial customers, and I think it 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.

It does. With most of my gas utilities coverage, even those that have weather normalization riders, there's usually a little bit of upside that they can realize if it's a colder winter. 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.