Rgc Resources Inc Q3 FY2022 Earnings Call

Good morning. I'm Paul Nester, President and CEO of RGC Resources. Thank you for joining us as we discuss RGC Resources 2022 third quarter results. Let's review a few administrative items. We have muted all lines. The link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. Joining me today is Jason Field, our Chief Financial Officer; Tommy Oliver, our Vice President in Regulatory Affairs and Strategy; and Kelsie Davenport, our Director of Finance. Okay. Let's go to Slide 1. We do have forward-looking projections and forecast in this presentation and this is our disclaimer of such. The agenda is on Slide 02. We're going to start with an update of our operational results for the quarter. Jason will then discuss our delivered natural gas volumes and financial results. Tommy is going to give us a nice update on our Renewable Natural Gas project and I will conclude with a discussion of the outlook for the remainder of fiscal 2022. Moving to Slide 03. Our operational results continued to be impressive in 2022. Customer additions are up 17% for the first 09 months when compared to 2021. New main miles are ahead 12% at 2021, third one just over 5.5 miles. You may recall that last year was also a significant increase over historical norms for new customers in main miles. Since October 2022, we've installed over 12 miles of new main, it's just an outstanding result. We believe the new customer main addition trend will continue through fiscal year-end. As you reviewed our recently filed 10-Q carefully, you may have noticed that from the March quarter to the June quarter, our total customer count receded from 63,000 in March to approximately 62,400 or 62,600 customers. This was due to customer turnoffs for nonpayment. And as this change is more pronounced than prior period, we thought it's worth discussing. Service disconnection moratorium was prohibitive, customer turnoffs for nonpayment during the pandemic was lifted in late summer of 2021. However we did not begin turning off customers until the winter season concluded here in March of 2022. So, from March of 2022 to June of 2022, we turned off just over 900 customer accounts for nonpayment. The pre-pandemic history is an indicator, we expect a large number of these customers to make necessary payments and request service this fall with the arrival of colder weather. There's no question the pandemic and the moratoriums that were associated with that have had a noticeable change in customer behavior from pre-pandemic experiences. Jason will now discuss our delivered volumes, financial statements, and capital spending.

Thank you, Paul. We are on Slide 04. Our third quarter delivered volumes were strong with 2 million decatherms delivered for the quarter, up almost 200,000 decatherms compared to the third quarter of 2021, or an 11% increase. This increase was largely due to customer volumes in the industrial class. The same customer that we highlighted in our second quarter earnings call continued blending natural gas in their fuel mix, and we expect our customer to continue to use natural gas in their manufacturing process through the summer. If we move to Slide 05, our year-to-date total volumes are 3% higher than the volumes we delivered through June 30 of last year. That’s in spite of a 6% decline in heating-degree days; the decline in weather-related deliveries to our residential customers was offset by the increase in our industrial transportation volumes again impacted by that same customer that's been utilizing natural gas to a greater extent this year compared to last year. If you move to Slide 06, our financial results for the third quarter 2022, our operating income of $1.6 million exceeded the third quarter of 2021 by about $98,000 or 6.3%. The overall net income however for the quarter of $593,000 was a decline from the third quarter of 2021, approximately $18,000 or a $0.01 a share. This was generally due to the decline in equity earnings of our investment in the Mountain Valley pipeline held by our wholly owned subsidiary Midstream. One thing that is common at the quarter the 09 months and the 12 months ending June 30 is increased gas costs, which are reflected in the higher revenues and operating expenses each period. As a reminder, gas costs are a pass-through with no operating income impact. Non-gas operating expenses for the three months have increased primarily due to higher corporate insurance premiums, professional services, and bad debt expense, met with a higher capital overhead. For the 09 months ending June 30, 2022, operating income which is mainly from the Roanoke Gas subsidiary was $14.5 million, an increase of $238,000. Our net loss for the 09 months and 12 months reflected the significant impact of the non-cash impairment on our investment in the Mountain Valley pipeline which we recorded in the second quarter. Both the 09 and 12 months that ended June 2022 reflected a net loss that was $20.3 million, and we had no net income in the fourth quarter of 2021. That's why those numbers are the same at $20.3 million. Let's discuss our underlying financial results on Slide 07. This represents our year-to-date capital expenditures and investments made by Roanoke Gas for Utility Property for the nine months of fiscal year 2022 totaled $17,431,000 and was approximately 17% higher than last year. Capital expenditures are up primarily in customer growth and system expansion, which includes approximately $2.5 million spent during the year on our Renewable Natural Gas project which Tommy will describe in greater detail later in the presentation. Paul will now discuss the outlook for the remainder of the fiscal year.

Yes. Thank you, Jason. As we've said on previous calls, our teams continue to do an outstanding job of the financial results particularly in our Roanoke Gas subsidiary continue to reflect that. We are on Slide 09. And Slide 09 contains a rendering of our Renewable Natural Gas or RNG equipment. And Tommy is going to give us a nice overview of that exciting project. Tommy?

Thanks, Paul. And good morning, everybody. As we've been leading to for some time, we are partnering with the Western Virginia Water Authority on a Renewable Natural Gas project. We did make an announcement about the project in mid-May. And last week, we filed an application with the Virginia State Corporation Commission for recovery of our costs associated with that project. Under the terms of our agreement with the water authority, we will be buying digester gas from the water authority that they would normally flare. What we're investing in is the equipment that is necessary to clean the digester gas and convert it into commercial-quality natural gas or RNG. As noted, we filed our application with the commission last week and in that application we are seeking recovery of our costs associated with the project to a rate adjustment cost. So, it's a separate mechanism outside of base rate; it's similar to our SAVE rider in that it is adjusted each year. If the application is approved, the project will add about $7.7 million in rate base on which we will be allowed to earn a return based on our cost of capital from our prior rate case plus an additional 100 basis points to our authorized return on equity. If you recall our equity ratio coming out of that rate case was about 59.5%, and the 100 basis points on our authorized ROE will be a 10.44% return on that project if approved. The initial rate that we're proposing is $0.04 to an average residential customer that's on a monthly charge. Our consultant has estimated that the greenhouse gas emissions on a carbon equivalent basis will decline by over 13,700 metric tons, which is a great benefit to the community. The gas project will also provide an additional source of gas within the interior of our distribution system where we desperately need it. We believe that if this is approved, we will be the first utility in the state and possibly the country that has an RNG facility in rate base. No one has been able to point out one anywhere in the country where the utility has it in rate base, and we are very proud of that.

Yes, thank you, Tommy. I'd just like to state my thanks and appreciation to Tommy and his team and even the other natural gas utilities in Virginia. Going back to our most recent General Assembly session here in the state, they were able to navigate and help persuade some bipartisan legislation to be passed and ultimately signed by Governor Youngkin as an outstanding achievement in many ways. Tommy and his team again are the first to file such an application by a Virginia natural gas utility in the state of Virginia. It's an outstanding achievement. We look forward to going through the process with the SEC staff. We are on Slide 11. As we look ahead to the remainder of our fiscal year, we believe our full-year capital spending will be approximately $23.5 million. The fourth quarter is typically a strong capital spending mark due to favorable construction conditions. We expect to invest approximately $6 million in the fourth quarter, including $1.4 million for new business and $2.8 million for renewals, including approximately $750,000 for the completion of our last gate station renewal: Brown Farm. It's been with us for many years. You know, we started back in 2014, the renewal of all of our interstate pipeline interconnects, as well as the anterior stations that step down from transmission to distribution pressure. Brown Farm is the last of the stations. Fantastic results. The RNG project that Tommy just described so eloquently will require another $2.7 million to complete. That's going to straddle this fiscal year into 2023, but $750,000 will be allocated to that project in the fourth quarter of 2022. Moving to Slide 12. The Mountain Valley pipeline. Not a whole lot of update from the last quarter in terms of construction progress, as there has not been any; they are still not in the field working. The project's continuing to pursue the reissuance of the buy-off and the four service permits and, of course, is continuing to work on the Army Corp of Engineers permit. The FERC expansion request is also in progress and the public support for that was just outstanding. I think it's the best we've seen since the project really started. A variety of entities from elected officials both at the local and state levels submitted written comments, including the Governors of Virginia and West Virginia. Many of the utilities in Virginia, North Carolina, and South Carolina also submitted comments about the need for the project. All of those are publicly available on the FERC's website, but it was really a strong demonstration of support. Lastly, a little bit of news about proposed energy permitting reform and Senator Manchin's at the forefront of that. We're well pleased with the positive nature of those discussions and certainly we’re pleased that it has highlighted the need for Mountain Valley on a more national scale, a little bit of a less regional scale than what we've had previously. There is an article in today's Wall Street Journal about the power ticking going on around that, and again, more to come on that process. It seems like they're getting started in earnest on that this week. Let's conclude by discussing our earnings guidance on Slide 13. This slide depicts the underlying earnings from our two operating segments: the Roanoke Gas Utility and RGC Midstream. After adjusting for the non-cash impairment loss, we expect underlying earnings for fiscal 2022 to be in the range of $0.96 to $1.02 per share, which is consistent with our prior quarter guidance. We project a loss in the fiscal fourth quarter primarily due to the interest carrying costs of the MVP and the Midstream subsidiary. That concludes our prepared remarks. If you have questions, we'd be happy to entertain those.

If you have questions, please press '*6' to unmute your lines.

Good morning, everyone.

Mike, good morning. How are you?

I'm good. Sir, yourselves?

We are doing just fine. Thank you for joining us today.

My pleasure. Two questions. In the industrial customer, is this the same one that was switching between coal and gas in the past?

It is. And most notable in 2020 as you may recall, it is the same customer.

I'm curious about your expectation to use elevated gas lines for the rest of this year. Is gas currently cheaper than coal, or are both coal and gas being used?

Yes. I'll try to maybe answer that from a broader market perspective because we're actually not privy to there. Coal contracts or even other purchasing gas through their marketer, suddenly prices for both are at a very elevated level. As you know, natural gas from the spot market today is higher than it's been since approximately 2010. We're at $8.0 to $8.50 a decatherm at the Henry Hub, very high. And it's been very volatile this summer as you're probably well aware. Certainly, last year, natural gas was about $3 at the Henry Hub plus or minus. So, there's been a big change there. Coal, and particularly central Appalachian coal is similarly elevated. Obviously, some of the Powder River basin and some of the coal top prices out West are also higher. There is a tremendous export demand for coal right now. Our understanding is at the national level it's hard to domestically take a coal shipment because most of them are headed to the port. So, we believe that customers are experiencing some of that. The prices on a BTU basis may be fairly close, I think we would say. It's probably more of a supply availability consideration.

Okay. I take it we'll continue with that through the winter, is it because it looks that way or?

Yes. We try to stay in communication, regular communication with them, Mike, because of the volume of gas that they have past their ability to consume. This conduces in the summertime for them to use high volumes of gas. We like that and appreciate that from our system load standpoint. The winter time again back to the Mountain Valley. Without the Mountain Valley, the winter time is a little bit of a different consideration and we try to balance that out. They're in the construction materials business, so typically the winter is a little bit slower for them, which also helps.

Yes.

As Jason said, a little more to come on that as we continue to stay in touch with them.

Okay. And then, on MVP. Just wondering if there are any important dates we should be watching in terms of the permits or anything else that could swing momentum or sentiment on the project?

Yes, it's a great question. Certainly, this FERC extension is as we said in progress and I don’t believe there are firm dates on when the FERC may act in terms of their response to the request for the extension. That's a very important item obviously. We're hopeful that it's in the near term. Certainly, that's one to keep an eye on. The biological assessment, and I think the project publicly disclosed this a few days ago, was provided to the Fish and Wildlife Service. That was an incredibly comprehensive and thorough document we believe, as comprehensive and thorough as any that's ever been prepared in this country. So, that was important; it's a key piece to the biological opinion permit ultimately being reissued by the Fish and Wildlife Service. Again, there is not a definitive timetable on that at this point but things are moving there and making forward progress.

Alright. Well, thank you for the time. That's all I've got for this morning.

Thank you, Mike. Thanks again for being with us. Do we have any other questions? Please press '*6' to unmute your lines. Now as there are no more questions, this concludes our third quarter earnings call. And thank you again, for joining us. We hope you enjoy the remainder of the summer. Of course, please be safe. We look forward to speaking with you again in December to review our full-year fiscal 2022 call. Have a great day.