Earnings Call Transcript - RGCO Q1 2022

Unidentified Company Representative, Company Representative

Despite the dramatic increase in customer counts as discussed by Paul, our first quarter firm volumes were negatively impacted by the 7% warmer-than-normal weather that Roanoke experienced. As shown on Slide 4, residential volumes declined by 8% and commercial volumes declined by 5% due to the much warmer December 2021. In fact, it was 32% lower heating degree days in that month compared to normal. Overall, industrial volumes were down, primarily due to the large customer that fuel switched to natural gas in 2020. Excluding this multi-fuel customer that switched its primary fuel from natural gas to coal, industrial volumes would have increased. Transition to Slide 5 where we'll review our capital spending. Our capital spend during the first quarter of the current fiscal year is running slightly ahead of spending during the first quarter of fiscal 2021. The majority of this spending has been on customer growth and system expansion, including our continued investment in the Blue Ridge project, as Paul just mentioned. Paul also talked about our miles of main extensions and new customers a few minutes ago. In addition to these investments, we have spent approximately $1 million on a one-time gas supply infrastructure project. Moving to Slide 6, where our condensed consolidated statements of income are shown. I'm going to separately review the financial results from our two operating segments, Roanoke Gas, our regulated utility and RGC Midstream. I want to start with the first quarter results for Roanoke Gas. Operating income for the first quarter of fiscal 2020 showed a modest decline compared to the prior year's quarterly results. Gross margins increased due to the SAVE rider and customer growth, which was offset by higher depreciation expense and receipt of CARES Act money in the first quarter of fiscal year 2021. Turning to RGC Midstream. Midstream continued with its significant quarterly year-over-year decline in equity and earnings from the Mountain Valley partnership. Equity and earnings declined by over $1.2 million quarter-over-quarter. For the trailing 12 months, Roanoke Gas operating income increased by 12% year-over-year which is a testament to the outstanding performance by our utility subsidiaries Paul just discussed. Specifically, the increased margin is largely attributable to our SAVE program revenues and customer growth which, as we discussed, added as we discussed in an earlier slide related to our main extensions and new customer additions. The strong Roanoke Gas earnings were offset by a year-over-year $4.6 million decline in equity and earnings from Midstream's investment in the Mountain Valley pipeline, resulting in a $1.08 per share earnings on a consolidated basis compared to $1.38 for the prior 12 months. I will now turn it back over to Paul, who will discuss the outlook for the remainder of the fiscal year.

Paul Nester, CEO

Thank you, Tommy. We are now on Slide 7, which outlines our agenda for the outlook. Moving to Slide 8, our capital spending forecast for the fiscal year remains approximately $25 million. As mentioned last quarter, this will represent the largest capital expenditure in Roanoke Gas's 139-year history. We continue to see momentum in main extensions and new customer additions, and we expect to allocate around $6 million specifically for these items in fiscal 2022. We've initiated the renewal of the loan gate station that was outstanding in our system, with spending already occurring in the first quarter and completion expected by late summer. We've also spoken about phase 3 of Blue Ridge and are preparing to begin phase 4, involving an additional 2,300-foot main extension. Lastly, the substantial special project that Tommy mentioned is on track and is anticipated to cost about $5 million by the end of this fiscal year. We are still in the process of planning a public announcement regarding that project, although we faced some delays in January due to severe wet and cold weather, among other issues. We aim to make that announcement soon. Now, let's move on to Slide 9 regarding the Mountain Valley pipeline. Most of you are likely aware of the Fourth Circuit's decision to vacate and remand the permits related to the Jefferson National Forest and Biological Opinion. We are currently assessing those actions and potential next steps. As noted in our recently filed 10-Q, we currently lack sufficient information to determine any changes to the project cost or schedule. It’s a good moment to reflect on the Mountain Valley pipeline. Our slide deck includes a stunning image of a completed and restored section of the right-of-way. For those on the phone, I encourage you to view the slide deck on our website, especially this specific image. Since October 1, 2015, RGC Resources through RGC Midstream has been a partner in the Mountain Valley joint venture. At the same time, Roanoke Gas signed a precedent agreement to become a shipper on the pipeline. It’s worth recalling our rationale back in 2015. The Roanoke region and Southwest Virginia showed great potential for growth. In 2015, developments like our medical school and other revitalization initiatives in our downtown area were just beginning. We determined that our customers, present and future, would demand more natural gas. As Tommy testified in last fall's hearings, we have gained over 3,000 customers since we entered the partnership. Our belief in the region's economic and cultural development over the past 6 or 7 years has proven to be accurate, as has our assumption regarding our expanding customer base. Additionally, at that time, we recognized the necessity for more natural gas and gas infrastructure in Virginia and the eastern United States, a situation that remains valid today. Therefore, our mission as Roanoke Gas, along with RGC Resources, the holding company, is to provide continued service. We've been serving the Roanoke Valley since 1883, which is incredibly meaningful to us, and we intend to maintain that service. The Mountain Valley Pipeline is essential for us to continue delivering that service, and our commitment to this remains strong. The average person relies on natural gas, and when considering the broader context, it’s important to remember four key points: it’s the cleanest hydrocarbon, affordable, widely available, and ensures long-term energy security. These points have not changed. Despite opposition to the pipeline and the agencies overseeing its permits, some fundamental aspects of the situation remain stable. Now, let’s look at Slide 10, which covers our earnings guidance. This slide illustrates the earnings from our two operating segments: the Roanoke Gas utility and RGC Midstream. I want to highlight that Midstream’s earnings for 2022 include a level of noncash AFUDC that aligns with the resumption of MVP growth construction. Our earlier guidance remains unchanged as of today. As discussed earlier, we currently don’t have sufficient information to alter that guidance, and I direct you to our 10-Q along with the disclosures about the project, as well as footnote number 15 in the financial statement concerning subsequent events. Thus, our forecast for Roanoke Gas's 2022 earnings also remains unchanged. That wraps up our prepared remarks.

Michael Gaugler, Analyst

Good morning.

Paul Nester, CEO

Hey, Mike, good morning. How are you.

Michael Gaugler, Analyst

I'm good. How about yourself?

Paul Nester, CEO

We are doing just fine. Thank you.

Michael Gaugler, Analyst

Yeah. I'm looking at the guidance, and I'm guessing that in terms of volumes, that you're going to see through rolling up gas for the heating season. You're still probably thinking that those are largely unchanged so that January offsets December. Is that right?

Paul Nester, CEO

Yes, that's a good question. December's heating degree day statistic was 32% warmer than normal, and the volumes were unusually low for that month. In fact, based on our analysis of the last 30 years, it was the second warmest December during that timeframe. As Tommy mentioned and the slide indicates, we did see a drop in volume, but January has been colder than usual overall. We've experienced several very cold days, with many in the mid and upper teens, which we consider good gas days. We are currently finalizing our January figures, but we have a good estimate of our delivered volumes for that month, which were quite strong. Additionally, February has also been cold so far, and we will see how the rest of the quarter unfolds.

Michael Gaugler, Analyst

Okay. Regarding Mountain Valley, the recent court decision will not completely prevent them from accessing the fields. They can still return to the fields and carry out some work. I assume this is related to the Jefferson National Forest, is that correct?

Paul Nester, CEO

Mike, I don't know the exact answer to that question right now. I think that's still being determined based on the biological opinion result as well, probably more to come on that from the joint venture as they know more.

Michael Gaugler, Analyst

Okay. When would they typically be heading back into the field, April?

Paul Nester, CEO

Yes. It depends on the weather. We've had a lot of moisture recently, with significant snowfall in mid-January that is just now melting, along with heavy rain yesterday. This typical winter weather isn't suitable for construction. I believe a reasonable person would conclude that they won't be able to return to the field in the next few weeks. Conditions would need to improve and be a bit drier before that can happen.

Michael Gaugler, Analyst

That's all I had, gentlemen. Thank you.

Paul Nester, CEO

Well, thank you, Mike.

Operator, Operator

If there are no more questions, this concludes the first quarter earnings call. Thank you for joining us, and we look forward to speaking with you again in May to discuss the second quarter. We hope you all have a safe and wonderful day. Thank you.