Rgc Resources Inc Q3 FY2025 Earnings Call

Good morning, and thank you for joining us as we discuss RGC Resources' 2025 Third Quarter Results. I am Kelsie Davenport, Director of Finance of RGC Resources, Inc. I am joined today this morning by Paul Nester, our President and CEO; and Tim Mulvaney, our VP, Treasurer and Chief Financial Officer. Let's review a few administrative items before we start. The link to today's presentation is available on the Investor & Financial Information page of our website at www.rgcresources.com. At the conclusion of the presentation and our remarks, we will take questions. Turning 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 third quarter and first 9 months of our 2025 fiscal year. We will then review our outlook for the remainder of the 2025 fiscal year with time allotted for questions at the end. I will now turn the presentation over to Paul. Paul?

Thank you, Kelsie, and good morning. Just to put everyone's mind at ease, Tommy is not with us today as he's spending some time with his recently arrived grandchild. So we're wishing Tommy and his family well. Let's begin on Slide 3. Main extensions were strong and renewal activity was steady for the first 9 months of fiscal 2025. Investing in our system safety and reliability remains a high priority for us. Through our SAVE program, we have renewed 3.1 miles of main and 228 services year-to-date. We continue to experience robust residential growth. We installed 3.9 new main miles, which is already 50% higher than the total main miles installed in all of fiscal 2024, and we've connected 541 new services through June 30. Both of those are just outstanding numbers 9 months into the year. Slide 4 shows delivered gas volumes for the quarter. Total volumes increased 6% compared to the third quarter of 2024, as one industrial customer who has fuel switching capability continued their high natural gas consumption this year. Residential and commercial volumes were slightly down when compared to the same quarter in the prior year. As most of you know, the April, May, June period is considered a shoulder period. Sometimes you have colder weather and warmer weather, and the mix of that can impact those volumes. On Slide 5, though, there's a different story in our delivered gas volumes for the year-to-date of fiscal 2025. We simply had a colder winter, as we've discussed on our first and second quarter calls, with heating degree days up 18%. Total volumes moved up 15% compared to 2024 across all 3 categories shown on the slide. The same large industrial customer continues to be up year-over-year and, in fact, has already established through June 30 a new annual delivery record of 1.5 Bcf through June. So just an outstanding consumption there. I would like to provide a couple of quick updates on the regulatory front. As we discussed on our most recent call, we received the final order from the 2024 rate case in early April. We also filed our normal rider updates for SAVE and the renewable natural gas facility in May and June, respectively, and we expect to receive those final orders prior to September 30, 2025. Slide 6 shows year-to-date CapEx. Total spending was $15.7 million in the current year, which is down approximately 5% from the same period a year ago. You may recall as we were moving toward Mountain Valley in service on June 14, 2024 and the conclusion of June 30 quarter, that we invested $3.2 million to complete our 2 Mountain Valley interconnects and to also establish our first customer in Franklin County with the main and service installation there. We just haven't had that kind of one-time capital expenditure so far in 2025. We will provide more color on CapEx as we discuss the full year outlook later in the presentation. I will now turn the microphone over to our Chief Financial Officer, Tim Mulvaney, to review our financial results and some outstanding developments related to our balance sheet.

Thank you, Paul. Moving to Slide 7. We had another good quarter, although it was a different situation compared to last quarter. Increased earnings this quarter from our share of MVP's regular operations, combined with lower interest costs, offset the decrease in operating income. Last year, our earnings from MVP were tied to AFUDC, which decreased as the pipeline was utilized. Our net income was $538,000, or $0.05 per share, compared to $157,000, or $0.02 per share, in the same quarter last year. The year-to-date results also appear on Slide 7. The performance for the first nine months of the fiscal year compared to the same period last year is strong. Increased Roanoke Gas margins, driven by higher base rates, more than made up for the lower MVP earnings from AFUDC in the previous year and higher interest expenses. Net income rose significantly to $13.5 million in the first nine months of fiscal 2025, or $1.31 per share, compared to $1.15 per share in the same period of fiscal 2024, marking a solid 16% increase. As a reminder for the fourth quarter, the finalized rates went into effect on July 1, 2024, meaning there won’t be a corresponding increase in gas margins for this year's fourth quarter. In fact, we expect a small loss for the quarter as most revenues will have been captured in the volumes under the rate case. The MVP pipeline started operations in June 2024, and shipper agreements became effective on July 1, 2024. Thus, our share of MVP earnings should be similar to the fourth quarter of the previous year. Moving to Slide 8. We concluded the third quarter with a strong balance sheet. We continue to invest in and grow our utility property. We renewed the Roanoke Gas line of credit for two years, raising our maximum availability to $30 million by the end of March. Last quarter, we mentioned that we were having positive discussions about our Midstream debt. After the end of this quarter, we struck a deal with two banks concerning our Midstream debt, which will benefit us for years and allows us to classify much of this debt as long-term. Moving to Slide 9. Before I hand the presentation back to Paul to discuss economic development, capital forecasting, and our full-year earnings expectations, let me elaborate on the agreement for Midstream's debt. On Slide 10, we received a commitment from two banks to provide us a new note to refinance all debt associated with Midstream, which currently comprises four separate facilities. This new note will last for seven years and will carry interest at SOFR plus 1.55%. We intend to convert that variable rate to a fixed rate while retaining our two existing interest rate swaps, which offer very favorable rates until they mature. We will begin to pay down the debt based on the remaining duration of the MVP shipping contracts, amounting to approximately $711,000 per quarter. Additionally, we expect to establish a new line of credit with one of the banks to allow us to invest in MVP projects to improve future cash flows. These arrangements place us in a strong position, providing us with the time and resources needed to bolster MVP cash flows while ensuring manageable amortization. Now I will turn the presentation back to Paul.

Thank you, Tim, for discussing the recent refinancing. It’s a great result that brings more certainty to what had been somewhat uncertain due to the floating nature of some debt and its short-term characteristics. Great job to you and the finance team on this. Now, moving to Slide 11, last quarter we mentioned some regional successes in economic development, while keeping under wraps our work with Botetourt County in the Roanoke area to finalize a deal with Google. This deal, announced in late June, is likely the largest investment the region has ever seen, and there’s a lot of excitement surrounding it. As always, we collaborate with localities and the Roanoke Regional Partnership, our local economic development leader, on numerous other opportunities at different stages of development. Some may directly benefit Roanoke Gas, while others might have indirect benefits similar to the recent Google announcement. With MVP now operational, the energy availability it offers is generating considerable interest across various industries, and we contribute where we can. Roanoke is solidifying its role as the health care hub for the broader region. We previously mentioned the new $400 million hospital expansion, which is progressing well and is proving to be a major success. The cancer center construction is also underway, which is exciting. Moreover, other health care providers and businesses are looking to establish or expand in the area around this hub, many of whom gain from the reliability and cost-effectiveness natural gas provides. One project that has taken longer to develop this year than expected is the Franklin County expansion. We're in regular discussions with the county and other localities there. We plan to serve more customers soon and are preparing to make the necessary investments for that. However, we are delaying some of that capital investment allocation until fiscal 2026. Now, turning to Slide 12, looking at our capital forecast for the year, we are still around the upper $21 million range, just under $22 million, similar to what we indicated last quarter. We have reallocated how we plan to use that money based on the opportunities ahead, assuming cooperative weather. July was one of the wettest on record in this region, which affected some construction activity. Moving on to Slide 13, we are maintaining our earnings per share guidance in the range of $1.22 to $1.27. We do expect a modest net loss in the fourth quarter since our revenue and earnings are more dependent on the weather-sensitive volumes from the first and second quarters. Like others, we are keeping an eye on inflation and interest rates, while being careful about our expenses. Tim and I discuss this regularly. The renewals on contracts and necessary services are exceeding the national averages of 2% to 3%, so we’re very mindful of that and are making every effort to manage our expenses. In closing my remarks before we take questions, I want to thank our employees for their hard work, which has contributed to the impressive $1.31 year-to-date earnings per share. The system has performed excellently, and the refinancing we achieved is a significant victory. The economic development activities remain strong, and the Google announcement is indeed a remarkable milestone for this region. We also appreciate our shareholders for their continued support, particularly during the more challenging times with the Mountain Valley Pipeline investment. We are now happy to take any questions.

I have one area of questions regarding the 2025 capital forecast as shown on Slide 12 and how that will break down. While I’m not seeking specific guidance for 2026, I notice there has been very minimal MVP growth this year. You mentioned earlier the possibility of refinancing, which could allow for new opportunities with MVP, and there’s also the ongoing developments with Google. As you consider 2026, do you anticipate MVP growth to increase? Additionally, regarding investments related to Google, do you expect customer growth and system expansion to rise as well?

Yes. Thank you for the question. I may start, and Tim is welcome to chime in. We are presently working on our 2026 budgets. And hence, we'll hopefully have a forecast on 2026 earnings in the September, early September time frame. But the quick answer on MVP growth is yes, again, tied back to Franklin County expansion. We essentially pushed some of the plans and the thoughts we had, Mike, in the summer of 2025 this time into 2026. So we do expect that category to be significantly higher next year. Our SAVE Rider spending, we think, will be pretty consistent as it's really been over the history of the SAVE program going back to 2013. We think it will be consistent into next year. We still have the manpower and the capital ready to deploy there. And certainly, the customer growth piece, how much of that will be tied to Google, we don't really know, Mike. Google has not really made public yet their exact plans for construction. And as more of that becomes known, we hope to have an opportunity to support that even if it's in an ancillary way. I'll talk a little more about customer growth. This year, again, is remarkably higher than last year, and a lot of that was due to the timing of the way some of the housing developments have landed. We knew those developments were in the works and getting their permitting last year, and now they've essentially broken ground this year, and we're laying main in those. So hence, the strong main extension number that we discussed. Right now, it appears that, that trend continues. There's rumbling nationwide about some housing slowdown. There's also discussion about housing shortage. We're still short here in the Roanoke region and the development communities doing what they can to address that shortage. So we're optimistic that the customer growth system expansion categories at least equal next year to this year, if not a little bit better. Tim, I don't know if you want to add anything to that?

No, I think that was a good summary. The one thing that I might supplement with is there is some minor constraint with just having crews to do all things at one time, so there could be some movement. For example, we do a little less SAVE and do more MVP growth or something like that. So overall, the total will probably end up somewhere in the same neighborhood.

I'd like to ask about your customer penetration along existing mains. Is there significant growth potential in that area? The reason I'm inquiring is that we've seen numerous reports from major outlets regarding last year's PJM auction pricing impacting July electric bills in the Mid-Atlantic region. There have been accounts of exceptionally high electricity rates in Pennsylvania, New Jersey, and Maryland. I'm curious if you're experiencing an increase in customer growth along the mains due to the higher electricity rates in your area, and if there are still opportunities for growth in that sector.

Yes. That's actually a great question and some people in the industry refer to that as saturation, and you do saturation studies to see where you have existing mains and the number of customers you do not have or potential customers you do not have along those existing mains. And we are active in our saturation studies and our penetration analysis. And in fact, that area is under Tommy, and they do a great job of contacting those folks who do not presently have natural gas and encouraging them or doing what we can under our tariff to aid them in having natural gas service. I don't have an exact statistic on the inflation and electricity cost to the average consumer. We are also in the PJM territory, as you know. And so that phenomenon is real, in addition to the requirements of the Virginia Clean Economy Act, which have greatly increased electricity bills in this region and our state. So we do experience, I think, Mike, what we call a conversion. Those are conversion customers. They are new customers, but they're conversions from a non-natural gas fuel source, and that has been steady to strong. It's a great question. We'll do a little more analysis on that and try to put a finer point to that. But it feels like, to your good question, that trend is going to continue. I don't think the electricity rates are going to abate or recede any in our region.

Yes. We don't see significant generation coming on that would be available to non-hyperscaler customers until probably 2031. So it looks like we're going to have several years of these high prices in PJM. So I would think that would be a pretty good driver of future growth for all the gas utilities within the PJM network because pretty much in our cost down.

Yes. The one part of your question I failed to answer. Our saturation is pretty strong, and some of that's just due to the concentration of our customer base. As you know, you've been to Roanoke and the Roanoke Valley, we are very concentrated, and that does aid in strong saturation. But again, we're still always seeking to add more.

Okay. Well, hearing none, this concludes our 2025 third quarter earnings call. We again thank you for joining us, and thank you for your support, and we look forward to hosting you again in early December to discuss the full year 2025 results. Thank you, and have a great day.