RGC Resources Q2 2024 Earnings Call Transcript

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May 6, 2024

There are 4 speakers on the call.

Operator

Good morning and thank you for joining us as we discuss RGC Resources Inc. 2024 Second Quarter Results. I am Tommy Oliver, Senior Vice President, Regulatory and External Affairs for RGC Resources. I am joined this morning by Paul Nestor, President and CEO of RGC Resources and Tim Mulvaney, our Treasurer and CFO. Before we get started, I wanted to review a few administrative items.

Operator

We have muted all lines and ask that all participants remain muted. The link to today's presentation is available on the Investor and Financial Information page on our website at www.rdcresources.com. At the conclusion of the presentation and our remarks, we will take questions. So let's start on Slide 1. This presentation contains forecasts and projections.

Operator

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 review our quarterly operational and financial results, provide an update on our rate case and the MDP and discuss the outlook for the full year fiscal 2024 with time allotted for questions at the end. So turning to Slide 3. Total billed customers at the end of April were 63,660.

Operator

This reflects our continued steady growth within our historic footprint. Main extensions for the 1st 6 months of the 2024 fiscal year totaled 1.2 miles and we connected 317 new services during that same period. Slide 4 shows our delivered gas volumes for the quarter. Volumes overall were 9% higher compared to last year's 2nd quarter, attributable to colder weather in the Q2 of the 2024 fiscal year. Gas volumes were up in total, residential and commercial volumes were higher as a result of more heating degree days.

Operator

It was enhanced by a year over year increase in industrial throughput as natural gas prices are at historic levels. Slide 5 shows the same two charts for the year to date. Total volumes were up modestly for the first half of fiscal twenty twenty four despite fewer heating degree days. As in the quarter, delivered gas volumes were lower. Now we're on Slide 6.

Operator

Our CapEx spending totaled $11,300,000

Speaker 1

for the 1st 6 months

Operator

of fiscal 2024 compared to $12,900,000 last year at the same time. This decrease is attributable to the $3,100,000 spent in 2023 related to the RNG facility, offset by current year spending for the MVP interconnections. Excluding the RNG spend, our overall capital spend is up $1,700,000 over last fiscal year's comparable period spending. And Paul will discuss the full year's capital spending projection shortly. But now I'm going to turn it over to Tim Mulvaney, our Treasurer and CFO, who will discuss our financial results.

Operator

Tim?

Speaker 2

Thank you, Tommy. We're moving on to Slide 7. We had a steady quarter against inflationary headwinds. 2nd quarter operating income decreased $960,000 or approximately 10% to $8,600,000 in the Q2 compared to the Q2 of 2023. We continue to experience cost pressures across the board, but particularly in personnel and IT related costs.

Speaker 2

We expect this pressure to continue in the 3rd quarter with rates under the February 2 filed rate case taking effect July 1. Tommy will discuss the rate case in more detail shortly. Equity in the earnings of unconsolidated affiliates was $1,200,000 pre tax due to non cash AFUDC, which resulted from our investment in the MVP. This AFUDC will taper off as the construction on various sections is completed and ultimately cease as the pipeline goes into service. Interest expense increased $170,000 due to higher interest rate environment, which is impacting our floating rate debt, which supports our investment in the Mountain Valley Pipeline as well as the Roanoke Gas line of credit.

Speaker 2

Our net income was $6,400,000 in the Q2 of this year compared to $6,300,000 in the same quarter a year ago. The presence of the AFUDC from the MVP this year drove the strong results. EPS was $0.63 per diluted share for the Q2 of this year compared to $0.64 per diluted share in the quarter a year ago. The year to date numbers are also on Slide 7. The story while similar to the Q2 is more favorable.

Speaker 2

Net income was $11,500,000 or $1.13 per diluted share through 6 months of fiscal 2024 compared to $9,600,000 or $0.97 per diluted share in fiscal 2023. While the inflationary pressures and higher interest rates were present as they were in the Q2 of fiscal 2024, revenues from the prior year rate case were present for all 6 months of fiscal 2024, but only for 3 months in fiscal 2023. An additional note related to the balance sheet. We had nearly $34,000,000 in debt supporting our investment in the MVP coming due in 2024 that we refinanced in 2 pieces with new maturities at the end of 2025 and in 2026. The details are in our Form 10 Q that we filed on Friday.

Speaker 2

Finally, we renewed our operating line of credit at Roanoke Gas in March. I will now turn the presentation back to Tommy to discuss our latest rate case. Tommy?

Operator

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 $4,300,000 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. Authorized the new rates to go into effect July 1, subject to refund.

Operator

The $4,300,000 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 Q2 of 2025. I will now pass the presentation to Paul Master, President and CEO of RGC Resources to discuss the MVP.

Operator

Good morning. Thank you, Tommy. We are on Slide 9. We truly are excited about the progress and what we believe to soon be the commercial operation of the Mountain Valley pipeline. The MVP filed with FERC recently for permission to initiate operations and requested a May

Speaker 1

23, 2024 in service date. So just 2.5 weeks away. If the schedule holds, this would make the shipper contracts for the pipeline active June 1. Perono Gas will interconnect with the pipeline in 2 locations. Lafayette Gate Station we'll see a picture in just a moment is substantially complete and we're doing final testing on that station.

Speaker 1

The Summit Muse station down in Franklin County is nearing substantial completion and we expect it to be ready when MVP gas flows again. The picture you're seeing on Slide 9 is actually from just about a week ago with the installation of the 1st distribution company natural gas main in the history of Franklin County. This picture is in the Summit View Business Park, very close to the gate station. We're just thrilled to finally be installing this pipe and approaching service to a customer in the Summit View Park. It really is a historic moment and something we're pleased to be partnering with the county and the business community on.

Speaker 1

All right, moving on to Slide 10. Let's just take a look at where we think we're going to be in 2024 with respect to our capital spending as well as our earnings. And this is the picture I just mentioned of the Lafayette Gate Station. As you can see, it looks fantastic and we're so happy to have it nearing 100% in service. Moving on to Slide 11.

Speaker 1

The 2024 Rhino Gas Capital Investment Plan is holding steady, up only slightly and we have been of course feeling pressure in capital expenditure just like our operating and maintenance expenditures as Tim and Tommy have mentioned a few moments ago. However, our overall spend is lower than 2023 because of the completion of the RNG project. I just want to note, we're hitting our targets on our save and renewal spending as well as our customer growth and system expansion plans there. And I want to complement our entire operation. We just continue to work safely and the investments we're making in our system to keep it safe and reliable are paying dividends.

Speaker 1

All right. On Slide 12, our consolidated earnings guidance, we haven't changed this from what we shared with you in the Q1. As Tim mentioned in the results, the AFUDC from the Mountain Valley project has been a little higher so far this year than we expected. Obviously, the slight changes in the in service date and the slightly prolonged construction has influenced that. The rate case that Tommy just described with the interim rates to begin July 1 is a real driver the second half of the year and in particular the fiscal Q4.

Speaker 1

So with that, we can conclude our prepared remarks. If you have questions, please dial 1 or 1 to unmute your line. We'll hold for just another 15 or so seconds to see if anyone has a question. 1 to unmute your line.

Operator

Good morning, everyone.

Speaker 1

Mike, how are you today?

Speaker 3

Fine. A little foggy here. How about yourself?

Speaker 1

Well, it's cleared up a little today. We did have a foggy, rainy weekend, but it's a beautiful spring morning today.

Speaker 3

Just 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 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?

Speaker 1

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 the warm winter, gas prices are still low. Industrial and commercial demand is still strong, which I think makes sense based on those low prices. Since Mountain Valley is 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 approves.

Speaker 1

How it rolls through the winter is something we're 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 charges into our purchase gas adjustments actually starting this quarter as approved by the commission.

Speaker 3

Okay. And 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?

Speaker 1

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' benefits, 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.

Speaker 1

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

Speaker 3

Okay. Well, thank you. Much appreciated. And congrats on an MVP in service, Dana. I guess there's going to be quite a party.

Speaker 1

Well, thank you. We haven't had time to plan the party yet, but we'll let you know.

Speaker 3

All right, Paul. Thank you.

Speaker 1

Thank you so much. Do we have any other questions? Well, hearing none, we thank everyone for joining us this morning and reviewing our Q2. We as always look forward to being with you in about 3 months as we review our Q3 results. Wishing everyone a safe and pleasant Monday and rest of their work week.

Speaker 1

Thank you very much.

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Key Takeaways

  • RGC reported Q2 operating income decreased 10% to $8.6 million amid inflationary pressures but net income remained stable at $6.4 million, with EPS of $0.63.
  • Through the first half of fiscal 2024, net income rose to $11.5 million ($1.13 EPS) compared to $9.6 million ($0.97 EPS) last year, aided by prior rate case revenues.
  • RGC filed a general rate case seeking a $4.3 million (5%) base rate increase and a 10.35% ROE, with new rates proposed effective July 1 subject to Virginia SCC approval and refund.
  • The Mountain Valley Pipeline is on track for commercial operation June 1, with interconnections at Lafayette and Summit stations and the first gas main installed in Franklin County.
  • Customer count reached 63,660 with 1.2 miles of main extensions and 317 new service connections, while Q2 delivered gas volumes rose 9% year-over-year due to colder weather and higher industrial throughput.
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Earnings Conference Call
RGC Resources Q2 2024
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