RGC Resources, Inc. (RGCO) Earnings Call Transcript & Summary

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. [Operator Instructions] 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 of Regulatory Affairs and Strategy; and Kelly Davenport, our Director of Finance. Okay. Let's go to Slide 1. We do have forward-looking projections and forecasts in this presentation, in this our disclaimer of such. The agenda is on Slide 2. 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 3. Our operational results continue to be impressive in 2022. Customer additions are up 17% for the first 9 months when compared to 2021. New main miles are ahead 12% of 2021, totaling 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 2020, we've installed over 12 miles of new mains. It's just an outstanding result. We believe the new customer main addition trends should continue through fiscal year end. If 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 600 customers. This is due to customers from our turnoffs for nonpayment. And as this change is more pronounced than prior periods, we thought it worth discussing. The service disconnection moratorium which prohibited 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. But from March of 2022 to June of 2022, we turned off just over 900 customer accounts for nonpayment. If prepandemic history is an indicator, we expect a large number of these customers to make necessary payment 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 prepandemic experiences. Jason will now discuss our delivered volumes, financial statements and capital spending.

Thank you, Paul. We are on Slide 4. Our third quarter delivered volumes were strong with 2 million dekatherms delivered for the quarter, up almost 200,000 dekatherms 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 that customer to continue to use natural gas in their manufacturing process through the summer. If you move to Slide 5, 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 has been utilizing natural gas to a greater extent this year compared to last year. If you move to Slide 6, our financial results. For the third quarter of 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 $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 to the quarter, the 9 months and the 12 months ending June 30 is increased gas cost and is reflected in the higher revenues in the operating expenses of each period. As a reminder, gas cost is a pass-through with no operating income impact. Non-gas operating expenses for the 3 months have increased primarily due to higher corporate insurance premiums, professional services and bad debt expense net of higher capitalized overhead. For the 9 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 9 months and 12 months reflected the significant impact of the noncash impairment on our investment in the Mountain Valley Pipeline, which we recorded in the second quarter. Both the 9 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 7. To aid in the comparison of our financial performance attributed to operations for the 9 months and 12 months ended June 30, we have adjusted our GAAP results for the noncash impairment loss on our MVP investment that was recorded in the second quarter. Our underlying net income for the 9 months and 12 months ending June 30, adjusting for the impairment was $9.3 million for both periods and represented a decline of $847,000 and $517,000, respectively. The decline for both periods was generally the result of the limited growth construction activity of the MVP in the current year compared to 2021. In the prior year, we recognized noncash AFUDC of over $1.4 million for the 9 months and $2.8 million for the 12 months ending June 30, 2021. Let's transition to Slide 8. This represents our year-to-date capital expenditures and investments made by Roanoke gas Utility property for the 9 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 in 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 just do an outstanding job. The financial results, particularly in our Roanoke gas subsidiary continue to reflect that. We are on Slide 9, and Slide 9 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 alluding 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 -- it's largely 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. Like I 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 through a rate adjustment cost. So it's a separate mechanism outside of base rates. It's similar to our SAVE rider and that it's trued up 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 at a rate case was about 59.5% and the 100 basis points on our 9.44% 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 great environmental benefit to the community. The gas -- or the project will also provide an additional source of gas within the interior of our distribution system, where we desperately need it. And we believe if this is approved, we will be the first utility in the state and possibly the country to have an RNG facility in rate base. No one's been able to point out one anywhere in the country where the utility has it in rate base. So we're very proud of that.

Yes. Thank you, Tom. 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. It's an outstanding achievement in many, many ways. And Tommy and his team, again, are the first to file such an application by 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 month due to favorable construction condition. 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 our -- the completion of our last gate station renewal Brown's Farm. If you've been with us for many years, you know starting back in 2014 that we began the renewal of all of our interstate pipeline interconnects as well as the interior stations that stepped down from transmission to distribution pressure. And Brown's Farm is the last of those stations, fantastic result. The RNG project that Tommy just so eloquently described will require about 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're still not in the field working. The project is continuing to pursue the reissuance of the buy off and the 4 service permits and, of course, continuing to work on the Army Corps of Engineers permit. The FERC extension 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 and 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, really, really a strong demonstration of report. There's obviously been a little bit of news about proposed energy permitting reform and Senator Manchin is at the forefront of that. We're pleased with the positive nature of those discussions. And certainly, we're pleased that it has highlighted the need for Mountain Valley probably on a more national scale, a little bit of a less regional scale than what we've had previously. There's an article in today's Wall Street Journal about, I guess, the politicking going on around that. Again, more to come on that process, and it seems like they're just 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 2 operating segments, the Roanoke Gas Utility and RGC Midstream. After adjusting for the noncash 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 are projecting a loss in the fiscal fourth quarter primarily due to the interest carrying cost of MVP in the midstream subsidiary. That concludes our prepared remarks. If you have questions, we'd be happy to entertain those. [Operator Instructions]

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

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