RGC Resources, Inc. ($RGCO)

Good morning, and thank you for joining us as we discuss RGC Resources 2026 Second Quarter Results. I'm Kelsie Davenport, Director of Finance of RGC Resources, Inc., and I'm joined this morning by Paul Nester, President and CEO of RGC Resources; Tim Mulvaney, our VP, Treasurer and Chief Financial Officer; and Tommy Oliver, Senior Vice President of Regulatory and External Affairs. I'll review a few administrative items. The link to today's presentation is available on the Investor and 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 operational and financial highlights for the second quarter and first 6 months of our 2026 fiscal year. We will then review our outlook for the rest of the 2026 fiscal year with time allotted for questions at the end. I will now turn the presentation over to Tommy.

Well, thank you, Kelsie, and good morning, everyone. Turning now to operations on Slide 3. Main extensions and renewal activity for the first half of fiscal 2026 were steady. We installed 2.7 main miles, a similar total to the main miles installed in the first half of fiscal 2025. In addition, we connected 340 new services in 2026, which was close to the 359 connections from 2025, evidence that residential development continued across the region in the first half of the fiscal year. As shown on the right side of the slide, we renewed 1.5 miles of Maine and 196 services during the first half of the 2026 fiscal year. While the main miles renewed were down in part due to weather compared to the same period last year, the service renewals increased by almost 25%. Let's move to Slide 4, where we show our delivered gas volumes for the quarter. Despite an extreme cold spell in late January and early February, the quarter as a whole was warmer compared to the same quarter in the fiscal 2025 year. Total volumes were down 5% compared to the second quarter of 2025. Residential and commercial volumes were both down approximately 5% and heating degree days were down 2% compared to the quarter 2 of fiscal 2025. Let's move to Slide 5. The story of delivered gas volumes was a little different in the first 6 months of the fiscal 2026 despite the larger number of heating degree days. Total volumes were down 3% compared to the first half of fiscal 2025 with the decline in industrial usage primarily attributable to one customer being the main reason. Unlike the quarter, heating degree days for the 6 months increased 3% as the first 6 months of the fiscal year were colder than the prior year. Let's move to Slide 6, where we'll talk about CapEx. CapEx for the first half of fiscal 2026 compared to 2025. Total spending was $9.8 million in the current year, down approximately 8% over the same period a year ago. Winter weather related to winter storm burn in late January and early February affected our spending. We picked back up in March and we'll discuss plans for the remainder of the year later in the presentation. I'm going to now turn it over to our CFO, Tim Mulvaney, to review our financial results for the quarter. Tim?

Thank you, Tommy. Moving to Slide 7. This shows both our second quarter and first half results for fiscal '26. We had a robust quarter with increased Roanoke gas margins due to the rates that went into effect January 1, combined with higher earnings from our unconsolidated affiliate, MVP, and lower interest expense to overcome higher expenses related to investment in our gas system and inflationary pressures, which remain higher than the Fed's 2% target. Net income of $8.7 million or $0.84 per diluted share compared to net income in the same quarter a year ago of $7.4 million or $0.74 per diluted share, a 14% increase. The year-to-date results are also shown on Slide 8. The strong Q2 results drove the 6-month performance as well as the first quarter did not have the benefit of the January rates. Net income was $13.6 million in the first half of 2026 or $1.31 per diluted share compared to $1.26 per diluted share in the first half of fiscal 2025, a 5.3% increase. A reminder about the seasonality of our industry. With recent ratemaking activity, much of our revenue is generated through volumetric factors. And accordingly, our performance in the back half of the year when volumes are lower inevitably results in fewer revenues and profits. Paul will discuss our outlook for the remainder of 2026 in a few moments. Moving forward to Slide 8. Our balance sheet remains strong. We do have a $15 million note at Roanoke Gas that matures in August that is included in our current maturities of long-term debt. We are deep in conversations with our lenders to refinance this note. We have long known that we would be unable to replicate the 2% rate that we have enjoyed. The discussions with lenders have been positive and should allow us to refinance this note at a rate consistent with our plans. We will have more to share on this in the near term. I will now pass the presentation to Paul Nester, our CEO. Paul?

Good morning, and thank you, Tim. We have a few topics that we would like to discuss concerning the second half of 2026. These are listed on Slide 9. Before we get into the details of those, I do want to again thank our customers and employees for an outstanding winter performance. We discussed this a little bit on the first quarter call when we were just coming out of winter storm burn, but our system just performed admirably during that period. Our employees performed admirably and safely and also the customers. So again, we had an outstanding winter heating season. And again, just are appreciative of our employees and customers. We're here to serve our customers. We did have a couple of challenges that arose in the second quarter. One of our top 5 customers by volume a long-time manufacturer in the Roanoke Valley, in fact, over 60 years, idled their operations in March. And we really have great care and concern for the employees at that operation who lost their jobs in that process. Many of them had been there many, many years. And as Tim said, it's a headwind really into the second half of 2026. Again, they were a large gas customer. Tommy will talk about the rate-making impacts of that event in just a few moments. Another challenge was described in our 10-Q, which we filed yesterday afternoon. We had some damage at our LNG peak shaving facility in the middle of the quarter. we have hired tank experts and other experts to help us assess the cause and nature of this damage and to potentially design some solutions to remediate it. The outcome of that is that we do not expect to have use of our LNG peak shaving facility in the coming winter season. We have begun intense and thorough planning for that event and to provide service without the facility. As we disclosed in the 10-Q, right now, we're unable to estimate the costs associated with this event, and we're unable to estimate the investment required to possibly repair or if needed, replace the tank. Tommy will also incorporate the rate-making impacts of that into his comments. We will, of course, continue to update you in future communications and/or SEC filings as more facts about this become known. But I am going to turn it over to Tommy to give us an update on our pending rate case. Tommy?

Yes. Thank you, Paul, and we're moving to Slide 10 now. As we discussed in our most recent earnings call, Roanoke Gas filed an expedited rate case on December 2, seeking approximately $4.3 million in incremental annual revenues based on our current authorized return on equity of 9.9%. The interim rate became effective January 1, 2026, subject to refund. The SEC staff is in the process of their audit and is scheduled to file testimony in June. The hearing is scheduled for July 15, 2026, and we expect final resolution from the commission by calendar year-end. For 4 months beginning in January, we were offsetting the new rates through credits on bills to return the tax credits to customers that were resolved with the IRS late in fiscal 2025 had been included with our regulatory liabilities on the balance sheet. We concluded these refunds in April. And as Paul mentioned just a few minutes ago, we had a large customer cease operations in the second quarter. We informed the SEC staff of this closure, and we are optimistic that the SEC staff will incorporate the expected decline in usage over the coming year into their recommended revenue requirement when they file testimony in June. Regarding the damage that occurred to our LNG facility, we have alerted staff of this situation and have held discussions with staff regarding the establishment of a regulatory asset for these costs. So Paul, I'm going to turn it over to you.

Thank you, Tommy. I continue to be pleased with the work of Tommy and his team and really our whole company and our relationships with the State Corporation Commission, not only in the ratemaking side, but also in the safety aspect. So thank you for all that good work there. We're on Slide 11. Our capital spending forecast remains at $22 million for the fiscal year. We have rebalanced the mix of spending just slightly from what we presented at the end of the first quarter. And again, as more facts become known about our LNG facility, we will continue to be flexible to reposition certain investments as needed or even add to this capital -- potentially add to this capital spending plan. On Slide 12, with the strong second quarter that Jim reviewed, we've both narrowed and raised our 2026 earnings per share range -- on the lower end, we're at $1.31. And on the higher end, we've moved it up to $1.37. I think Tim's reminder about the seasonality is important. Obviously, the third and fourth quarters will not look like the first and second quarters from an earnings standpoint. We continue to see the same macroeconomic concerns that we've really been talking about now for several quarters. Our practical inflation remains above the 2% level that the Fed targets. We are constantly throughout the organization looking for ways to be more efficient and to save and manage expense. Interest rates, Tim talked about the refinancing of that note. Certainly, the global situation has caused the interest rate market to be volatile within a range, but still volatile. And we're working with our debt partners almost on a daily basis to optimize that refinancing. But the local economy, and we've said this as well for several years now, continues to be steady. The Google Data Center is moving forward. There's been a few other positive announcements recently across the Roanoke Valley. Our teams continue just to work every day with economic development, contractors and other folks that are facilitating this growth, and we do everything we can to support that. With that, we would love to entertain any questions that you may have. We'll wait just a few more moments in case anyone has a question. Okay. Well, hearing no questions from the audience, this does conclude our prepared remarks. Our team will be at the AGA Financial Forum in about 10 days, and we hope to have the opportunity there to greet and visit with many of our investors and financing partners there. But certainly, we wish the rest of you to have a safe and pleasant summer, and we look forward to speaking with you again in August to review our 2026 third quarter results. Thank you.