RGCO - NASDAQ

Good morning, and thank you for joining us as we discuss RGC Resources 2025 second quarter results. I am Tommy Oliver, Senior Vice President, Regulatory and External Affairs for RGC Resources Inc. I'm joined this morning by Paul Nestor, our President and CEO and Tim Mulvaney, our VP, treasurer and Chief Financial Officer. Before we get started, I want to review a few administrative items. First, we have muted all lines and ask that all participants remain muted. Second, the link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. And lastly, at the conclusion of the presentation and our remarks, we will take questions. Let's move 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 our operational and financial highlights for the second quarter of our 2025 fiscal year. We will then review our outlook for the rest of the 2025 fiscal year with time allotted for questions at the end. Turning now to operations on slide 3. Main extensions and renewal activity for the first half of fiscal 2025 were strong. We installed 2.7 main miles, which is higher than the total main miles installed in the full 2024 fiscal year. We also connected 359 new services in the first six months of the fiscal year as residential development in the region was robust. In addition, we renewed 1.9 miles of Main and 159 services during the first half of the 2025 fiscal year. While this is down from a year ago, it demonstrates our continued investment in our system to enhance safety and reliability for our customers. Slide 4 shows our delivered gas volumes for the quarter. Total volumes were up 20% compared to the second quarter of 2024 as one industrial customer with the ability to fuel switch continued its higher consumption of natural gas in the current year. Residential and commercial volumes were up as well due to the 21% increase in heating degree days compared to quarter two of the fiscal 2024. The story of delivered gas volumes is much the same in the first six months of fiscal 2025. Total volumes were up strongly at 18% compared to the first half of fiscal 2024 due to the same customer. That increase was enhanced by residential and commercial volumes with heating degree days increase sitting at 16% so far this year. Slide 6 will give you a little regulatory update. We're in good place after a busy regulatory year. In early April, the State Corporation Commission entered its final order in our 2024 rate case confirming the rates that we have been billing customers since November. As a reminder, in this case, we produced an annual increase in revenue of more than $4 million based on a 9.9% ROE and a 59% equity ratio. We will be filing normal rider updates for SACE and RNG in the third quarter. Slide 7 shows our capital expenditures for the first half of fiscal 2025 compared to 2024. Total spending was $10.7 million in the current year, down approximately 5% over the same period a year ago. Winter weather early in the quarter affected our spending and has also contributed to a slower than hoped expansion in Franklin County. I will now turn the presentation over to our CFO, Tim Mulvaney, to review our financial results for the quarter. Tim?

Thank you, Tommy. Moving on to slide 8. We had an outstanding quarter with increased grown up gas margins due to the rates that went into effect this past July, overcoming lower earnings from our unconsolidated affiliate and higher interest expense. Net income of $7.7 million or $0.74 per share compared to net income in the same quarter a year ago of $6.4 million or $0.63 per share, a 17% increase. The year-to-date results are also shown on slide 8. The themes for the first half of the year are very similar to the quarter: higher Roanoke gas margins made up for lower MVP earnings and higher interest expense. Net income of $12.9 million in the first half of fiscal '25 or $1.26 per share compared to $1.14 per share in the first half of fiscal ‘24, an 11% increase. As a reminder, for the back half of the year, the rates that were finalized went into effect July 1, 2024, so there will be no corresponding lift in the gas margins in the fourth quarter of this year. At the same time, the MVP pipeline went into service in June of 2024, and the shipper agreements became active on July 1, 2024. As a result, our share of MVP earnings should be comparable in the fourth quarter of this coming year. Transitioning now to slide 9, I'd like to make one final comment. We have ended the second quarter with a very strong balance sheet. As we noted in the Form 10Q, we renewed Roanoke Gas' line of credit for two years and raised the maximum availability to $30 million at the March. We do have $26.6 million of midstream debt that is classified as current. This debt supports our investment in MVP. MVP made the transition from construction to operation. This is the first of our debt maturities since that has occurred. We are considering long term options that may include additional debt amortization. The conversations with our bankers have been positive and productive, and we fully expect to have refinanced this prior to its maturity on December 31, 2025. We will have more to share on this topic in the future. I will now pass the presentation over to our CEO, Paul Nester.

Thank you, Tim, and good morning, everyone. Thank you for taking sometime today to join us on our call. As you can tell from Tommy's and Tim's comment, we just had an outstanding start to fiscal 2025. And I'd like to make a very noteworthy mention about our customers and our employees. Our customers, as Tommy highlighted with the volumes, just had an outstanding first six months across all sectors, residential, commercial and industrial. And then I would like to also highlight our employees, their focus on safety and ensuring our system performance has been exemplary. We did not have a single outage or system disruption this winter. That's something we're very proud of. I would also like to highlight that the interstate pipeline feeding our system also performed magnificently. So just incredible reliability through what was a sustained colder weather period. In fact, the coldest weather we've seen in this region in a decade. We're on slide 10. I'm going to take a few minutes and talk about some of the things happening in our area related to economic development and growth opportunities for our company. We've all been watching and experiencing to some degree the tariff roller coaster and the related uncertainty that has occurred thus far in 2025. We do feel that these macro factors have undoubtedly affected business activity. In fact, some of our largest customers are economic sensitive, which is normal for a utility of course. We have large customers in the building materials sector and in fact, the large fuel customer that Tommy described is in that sector, auto parts and food production. Again, through March 31, their volumes have been fantastic, really, really strong. How those look as we go through the remainder of our fiscal year and the remainder of calendar 2025 certainly is a question. One of the things we've been comparing that to, is maybe the 2020 COVID year, the fiscal year, we had great concerns coming out of the March 2020 government shut down. And as it turned out for our company in particular where we had the winter season volumes in the books, so to speak, that fiscal year turned out to be still pretty solid. This may be the same. So if we have some economic uncertainty, again related to those macroeconomic factors in the back half of the year, it's certainly helpful that we're through the winter heating season. Let's move to slide 11 and talk about economic development and we want to focus on some of the regional economic trends that we've seen here recently. And we call some of these wins, particularly the logos that you see on the slide there. These are all recent announcements primarily of expansions in the case of [indiscernible]. And those are companies doing great things with great operations here in the Roanoke Valley who again are expanding their business. So a little bit of a counter to that national macroeconomic narrative. I think those three in particular highlight the cooperation between our state economic development office, our regional economic development partners, our local government partners and even the governor's office. I did want to highlight the Tiny Cargo Company. It's no pun intended, it is a smaller economic development opportunity at this point, but it's noteworthy because it's a spin out from the Fralin Biomedical Research Institute and it's utilizing some incredible medical technology that has really an opportunity to revolutionize medicine and pharmacy. And we're just so happy to have it here in the Roanoke Valley. It's exciting and more to come there. There are some other economic development opportunities that are in various stages of progress. Some of these will represent potentially more direct opportunities for Roanoke gas and natural gas usage. But we're happy about all those opportunities because they really do contribute to the vibrancy of this region. We hope to be able to share some news and success from those in the third or fourth quarters. In terms of broader trends, it seemingly is in the press almost on a daily basis now, conversations related to data centers. Our view is that this region's access to energy, data lines and water make it attractive to those who would like to potentially locate a data center. Competition for those locations and that infrastructure is fierce as you probably know. But with MVP operational, there's a tremendous amount of energy. We've been talking about this frankly for years even before MVP was completed up to 2 billion decatherms daily. That simple fact continues to generate a lot of conversation and interest from a variety of industries and we're actively participating in those conversations. Finally, and this is also so important to this region's economy, we continue to enhance the Roanoke area through its three major hospital systems continues to enhance its ability to serve the wider region's healthcare needs. Our local hospital system downtown will be bringing on a $400 million plus expansion very, very soon, in fact, in just a few days or in the next few weeks. And that same system broke ground on a much needed new state of the art cancer center just a few days ago. That's going to be approximately $100 million investment as well. It's very exciting. Our other healthcare providers and businesses again are locating and expanding their presence in the region as well. And our view again on this is that these customers of the Roanoke Gas Company benefit from the reliability economics that natural gas provides. And again, our distribution system just continues to be there to meet the needs of this growing customer base. Moving to slide 12 and looking at our full year capital spending projection of $21.8 million that's up slightly from what we shared with you last quarter. We have reallocated the mix a little bit from what we presented last quarter. Again, total year spending is just up a little bit. The Mountain Valley growth category is a little delayed mostly because of the winter weather and the focus on our company and our efforts to make sure we delivered gas to every customer every day during the winter and a little bit of timing down in the Franklin County area there. But we're still have the same expectations if you will long term just some of that money is moving out of this fiscal year. Moving to slide 13, with a really strong second quarter that Tommy and Tim highlighted, we've raised our 2025 earnings per share guidance to $1.22 on the lower end and to $1.27 on the higher end. We do expect a small net loss in the fourth quarter as more of our revenues and earnings are tied to the weather sensitive volumes of the first and second quarters. So in conclusion, we continue to monitor inflation and interest rates while being prudent about the expense side of the income statement. Again, want to thank our employees for just an outstanding job of working safely and diligently across the sustained cold weather this winter. We're really encouraged by the recent economic development success and the potential for more success in the coming days this year in this Roanoke region. And we continue again just to be engaged and focused to participate in that growth to the benefit of our shareholders. So again, you, the shareholder, for your continued interest and support in RGC Resources. So that concludes our prepared remarks. If you have any questions, please dial #1 to unmute your line.

Got a couple of questions for you this morning. I thought we'd start on interest expense. I saw that dropped quarter over quarter, and Tim mentioned, you're going to be doing some refinancing this year. So I'm wondering now with where rates are today, MVP operational, should we expect interest expense to continue to decline quarter over quarter or there something in there that maybe I'm not factoring in?

I would love to know what interest expense was going to be for certain, and in particular, what was going to happen with interest rates. If you think back to the beginning of the year, last fall, the general consensus was the Fed was going to drop interest rates four to six times, and that by this point in the year, we would have a little bit lower interest expense. We are still a little bit lower than we were a year ago. So in the immediate quarter, we should be in good shape. And there are still if you read what the Fed is likely to do, the general consensus is that there probably is some sort of rate cut still coming, and that will be beneficial to us. A lot of our debt is fixed, and so it doesn't really, particularly on the Roanoke Gas side, it will not move either way. But the debt that supports midstream is subject to variable. And so in the short term, I expect we'll benefit a little bit. The longer term and the refinance, it really depends on how does the economy go, how does the Fed react. And so I don't really have a good prognostication there.

Southgate, Will we see any AFUDC for that next year that's meaningful?

We're a smaller by percentage owner in Southgate and that actually goes back to when the Southgate joint venture was formed, I think back in 2018. It's been quite some time. We actually have the cost method of accounting in that investment there, and that cost method precludes us from recognizing any AFUDC related to Southgate.

Customer refunds in 3Q associated with the rate case. Will those basically be offset by the WNA adjustment?

They will be totally offset by it, given the length of time that our interim rates are going to affect the- obligation is very small and expect to make those in May. But to your point, they will be offset by the WNA charge. Which is also starting in May. Yes. And that'll be billed every two months, the WNA May and June.

Well, thank you. Appreciate that, the cooler weather, again, it's a very real force in our business, and it obviously is demonstrating itself there in the year to date results in the quarter and year to date results as a matter of fact.