Rgc Resources Inc Q2 FY2024 Earnings Call

Good morning, and thank you for joining us to discuss RGC Resources, Inc.'s 2024 Second Quarter Results. I am Tommy Oliver, Senior Vice President of Regulatory and External Affairs for RGC Resources. I am here with Paul Nester, President and CEO of RGC Resources; and Tim Mulvaney, our Treasurer and CFO. Before we begin, I want to go over a few administrative details. The link to today's presentation can be found on the Investor and Financial Information page on our website at www.rgcresources.com. After the presentation and our comments, we will open the floor to questions. Let's start with Slide 1. This presentation includes forecasts and projections, as well as information about risks and uncertainties, especially concerning forward-looking statements. Slide 2 outlines our agenda. We will review our quarterly operational and financial results, provide an update on our rate case and the MVP, and discuss the outlook for the entire fiscal year of 2024, leaving time for questions at the end. Moving to Slide 3, the total number of billed customers at the end of April reached 63,660, indicating our steady growth within our established area. In the first six months of the 2024 fiscal year, main extensions totaled 1.2 miles, and we added 370 new services during that time. Slide 4 presents our delivered gas volumes for the quarter, which were 9% higher compared to last year's second quarter due to colder weather. Overall gas volumes increased, while residential and commercial volumes rose because of more heating degree days. This was further boosted by a year-over-year rise in industrial throughput as natural gas prices reached historic levels. Slide 5 reflects similar data year-to-date. Despite fewer heating degree days, total volumes increased modestly in the first half of fiscal 2024. As seen in the quarter, delivered gas volumes were lower. Now, on Slide 6, our capital expenditures for the first six months of fiscal 2024 amounted to $11.3 million, down from $12.9 million at the same time last year. This reduction is due to $3.1 million spent in 2023 for the RNG facility, which is offset by this year's spending on the MVP interconnections. When excluding the RNG expenditures, our overall capital spending rose by $1.7 million compared to the same period last fiscal year. Paul will provide further details on the full year's capital spending projection shortly. Now, I will hand it over to Tim Mulvaney, our Treasurer and CFO, to discuss our financial results. Tim?

Thank you, Tommy. We're moving on to Slide 7. We had a steady quarter despite facing inflationary challenges. In the second quarter, our operating income fell by $960,000, or about 10%, to $8.6 million compared to the same quarter in 2023. We are still feeling cost pressures, especially in personnel and IT-related expenses, and we anticipate these pressures will persist into the third quarter due to rates tied to our February case, which will take effect on July 1. Tommy will provide more details on the rate case shortly. Our equity earnings from unconsolidated affiliates amounted to $1.2 million pretax to noncash AFUDC, resulting from our investment in the MVP. This AFUDC will gradually decrease as construction on various sections wraps up and will eventually stop when the pipeline starts operating. Interest expenses rose by $170,000 due to a higher interest rate environment affecting our floating rate debt, which underpins our investment in the Mountain Valley Pipeline and the Roanoke Gas line of credit. Our net income for the second quarter was $6.4 million, slightly up from $6.3 million in the same quarter last year. The strong results this year were driven by the AFUDC from the MVP. EPS was $0.63 per diluted share for this quarter, compared to $0.64 per diluted share last year. The year-to-date figures are also shown on Slide 7. The trends, while similar to the second quarter, are more favorable. Net income for the first six months of fiscal 2024 was $11.5 million, or $1.13 per diluted share, compared to $9.6 million, or $0.97 per diluted share, in fiscal '23. Inflationary pressures and rising interest rates were present just like in the second quarter of fiscal 2024. Revenues from the previous rate case were included for all six months of fiscal '24, but only for three months in fiscal '23. Additionally, we had nearly $34 million in debt related to our investment in the MVP that is due in 2024, which we refinanced in two parts with new maturities set for the end of 2025 and 2026. You can find the details in our Form 10-Q filed last Friday. Lastly, we renewed our operating line of credit at Roanoke Gas in March. I will now pass the presentation back to Tommy to go over our latest rate case. Tommy?

Thank you, Tim. Rental gas, like most consumers and businesses continue to experience upward expense pressure. Accordingly, as we discussed in our prior earnings call, on February 2, we filed a general rate case with the Virginia State Corporation Commission in which we are seeking an increase in base rates of approximately $4.3 million or about a 5% increase in total revenues. The increase includes a projected rate base through June 30, 2025, and an increase in our authorized ROE to $10.35, which reflects current capital market conditions. The commission has authorized the new rates to go into effect July 1 subject to refund. The $4.3 million in incremental revenue does not include the roll-in of SAVE or RNG Capital and revenues as we had received authority for a new 5-year SAVE plan this past October. Since the RNG facility by statute qualifies for a 100 basis point adder to our ROE, we do not expect the RNG facility to be ever rolled into base rates. The SEC staff review of our rate case is underway and a hearing with the commission is set for November 7. We do not expect final resolution until the second quarter of 2025. I will now pass the presentation to Paul Nester, President and CEO of RGC Resources to discuss the MVP.

Good morning. Thank you, Tommy. We are on Slide 9. We are genuinely excited about the progress and the upcoming commercial operation of the Mountain Valley Pipeline. The MVP recently filed with FERC to request permission to begin operations and has set a proposed in-service date of May 23, 2024, which is just two and a half weeks away. If the timeline remains on track, the shipper contract for the pipeline would become active on June 1. For Roanoke Gas, we will connect with the pipeline at two locations. The Lafayette Gate station is nearly complete, and we are conducting final tests there. The station in Franklin County is also close to completion and should be ready for operation when MVP gas starts flowing. The image on Slide 9 shows the installation of the first natural gas line for a distribution company in Franklin County’s history, located in the Summit View Business Park near the gate station. We are thrilled to be laying this pipe and about to provide service to a customer in Summit View Park. It is a historic achievement and we are pleased to collaborate with the county and the local business community. Now, moving to Slide 10, let's review our expected capital spending and earnings for 2024. The image I mentioned earlier of the Lafayette Gas station looks impressive, and we are delighted that it is nearing full operational status. On Slide 11, the 2024 Roanoke Gas capital investment plan remains stable, with a slight increase. We are experiencing pressure in capital expenditures, similar to our operating and maintenance costs, as Tim and Tommy noted earlier. However, we are overspending less than we did in 2023 due to the completion of the RNG project. I would like to emphasize that we are meeting our targets on SAVE and renewal spending, as well as on customer growth and system expansion. I want to commend our entire operation for maintaining safety as we continue to invest in our system to ensure it is safe and reliable. On Slide 12, our consolidated earnings guidance remains unchanged from what we provided in the first quarter. As Tim noted, the AFUDC from the Mountain Valley project has been somewhat higher this year than we anticipated. The minor changes in the in-service date and the extended construction timeline have impacted the rate case that Tommy described, with interim rates starting July 1, which will significantly influence the latter half of the year, particularly the fiscal fourth quarter. So with that, we can conclude our prepared remarks.

I guess one question on gas supply. Now that you're looking at Mountain Valley gas coming into the system here shortly, we've already got gas prices at pretty cheap levels. Is there a big step down in the cost of your gas supply when Mountain Valley starts mixing in, given where prices are today?

Yes, that's a great question, Mike. And you're right, our earlier comments alluded to the really historically low natural gas prices, particularly when you're looking at the Henry Hub or the NYMEX right now. Coming out of a warm winter, gas prices are still low. Industrial and commercial demand is still strong, which I think makes sense based on those low prices. Mountain Valley's coming online, if you will, in a warmer period, Mike. We don't see a lot of change in our overall natural gas basket or portfolio of pricing that our State Corporation Commission approved. How it rolls through the winter is something we're more carefully analyzing and looking at, just a small regulatory tidbit, which we alluded to, I think, in our 10-Q that we have incorporated the Mountain Valley demand charge into our purchased gas adjustment actually starting at the order approved by the commission.

Okay. And then just kind of a follow-up. Does it make sense for you to take every molecule you can get out of MVP versus the other pipes?

That's a good question. So we utilize an asset manager to optimize our natural gas supply as it relates to our capacity for our customers' benefit, Mike. And I think on a day-to-day nominating basis, they'll again, do what they always do, which is the most cost efficient for the customer. So as you know, it will depend on market conditions on a day-to-day basis. And how the pricing hubs are moving relative to our pricing basket. I think, Tommy, we have 7 pricing points, 8 pricing points in our basket currently.

That's right, yes.

Yes. So all that, Mike, will come together on a daily basis. So I don't know that it's 100% certain every single day that they would take full MVP capacity versus, in this case, East Tennessee or TransCanada.

Well, hearing none, we thank everyone for joining us this morning and reviewing our second quarter. We, as always, look forward to being with you in about 3 months as we review our third quarter results, wishing everyone a safe and pleasant Monday and rest of the work week. Thank you very much.