This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good morning. I'm Paul Nestor, 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. We've muted all lines and ask that all participants remain muted. At the conclusion of the presentation and our remarks, we will take questions. 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 Kelsey Davenport, our Director of Finance. Okay, let's go to slide one. We do have forward-looking projections and forecasts in this presentation and this is our disclaimer of such. The agenda is on slide two. 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 physical 2022. Moving to slide three, our operational results continue to be impressive in 2022. Customer additions are up 17% for the first nine months when compared to 2021. New main miles are ahead 12% of 2021, totaling just over five and a half 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 main. It's just an outstanding result. We believe the new customer and main addition trends should continue through physical year end. If you reviewed our recently filed T&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 customer 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 non-payment. If pre-pandemic history is an indicator, we expect a large number of these customers to make necessary payments 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 Noticeful change in customer behavior from pre-pandemic experiences. Jason will now discuss our delivered volumes, financial statements, and capital spending.
spk00: Thank you, Paul. We are on slide four. Our third quarter delivered volumes were strong with 2 million decatherms delivered for the quarter, up almost 200,000 decatherms 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 five, our year-to-date total volumes are 3% higher than the volumes we delivered through June 30th 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's been utilizing natural gas to a greater extent this year compared to last year. If you move to slide six, 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 a penny 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 theme that is common to the quarter, the nine months, and the 12 months ending June 30 is increased gas costs and is reflected in the higher revenues and operating expenses of each period. As a reminder, gas costs is a pass-through with no operating income impact. Non-gas operating expenses for the three months have increased primarily due to higher corporate insurance premiums, professional services, and bad debt expense. net of higher capitalized overheads. For the nine 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 nine months and 12 months reflected the significant impact of the non-cash impairment on our investment in the Mountain Valley Pipeline, which we recorded in the second quarter. Both the nine 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 seven. To aid in the comparison of our financial performance attributed to operations for the nine months and 12 months ended June 30th, we have adjusted our gap results for the non-cash impairment loss on our MVP investment that was recorded in the second quarter. Our underlying net income for the nine months and 12 months ending June 30th, 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 non-cash AFUDC of over $1.4 million for the nine months and $2.8 million for the 12 months ending June 30, 2021. Let's transition to slide eight. This represents our year-to-date capital expenditures and investments made by Roanoke Gas for Utility Property for the nine 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 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 detail later in the presentation. Paul will now discuss the outlook for the remainder of the fiscal year.
spk02: Thank you, Jason. As we said on previous calls, our teams continue to just do an outstanding job. The financial results, particularly in our reno 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?
spk01: 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 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 clause. So it's a separate mechanism outside of base rates. It's similar to our save rider in 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 944 authorized ROE will be a 1044 return on that project if approved. The initial rate that we're proposing is four cents 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.
spk02: Yeah, thank you Tommy. 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. Tommy and his team, again, are the first to file such an application by a Virginia natural gas utility in the state of Virginia. 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 four-year capital spending will be approximately $23.5 million. The fourth quarter is typically a strong capital spending month due to favorable construction conditions. 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 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 step 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's continuing to pursue the reissuance of the buy-off and the Forest 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 the utilities in Virginia North Carolina and South Carolina also submitted comments about the need for the project all of those are publicly available on the first website but it was really really really a strong demonstration of support there's obviously been a little bit of news about proposed energy permitting reform and Senator Manchin's 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. 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 two operating segments, the Renault Gas Utility and RGC Midstream, after adjusting for the non-cash impairment loss. We expect underlying earnings for fiscal 2022 to be in the range of 96 cents to a dollar two 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. Please dial star six to unmute your line.
spk03: Star six to unmute your line. Good morning, everyone. Mike, good morning. How are you?
spk05: I'm good, sir. And yourself?
spk04: We're doing just fine. Thank you for joining us today.
spk05: My pleasure. Two questions. The industrial customer, is this the same one that was switching between coal and gas in the past?
spk02: It is, and most notably in 2020, as you may recall. It is the same customer.
spk05: Okay. I'm just kind of curious. You said you expect them to use elevated gas volumes through the rest of this year. I'm thinking of the way to ask the question. So is gas now cheaper than coal or are they using both coal and gas?
spk02: Yeah, I'll try to maybe answer that from a sort of broader market perspective because we're obviously not privy to their coal contracts or even how they're purchasing gas through their marketer. Certainly, prices for both are at very, very elevated levels. As you know, natural gas in the spot market today is higher than it's been since approximately 2010. We're at $8.50 a decatherm at the Henry Hub, very high. It's been very volatile this summer, as you're probably well aware. Certainly, last year, natural gas was about $3 at the Henry Hub, plus or minus. There's been a big change there. Coal, particularly Central Appalachian Basin coal, is similarly elevated. Obviously, some of the Powder River Basin and some of the coal fire prices out west are also higher. there's a tremendous export demand for coal right now and our understanding is sort of at the national level it's hard to domestically take a coal shipment because most of them are headed to the port. So we believe customers experiencing some of that. So even though the prices on a per BTU basis may be Fairly close, I think we would say. It's probably more of a supply availability consideration.
spk05: You think they'll continue with that through the winter? Does it look that way?
spk02: We try to stay in regular communication with them, Mike, because of the volume of gas that they have the capacity or ability to consume. It's conducive in the summertime for them to use high volumes of gas. We like that and appreciate that from a system load standpoint. The wintertime, again back to the Mountain Valley, without the Mountain Valley the wintertime is a little bit of a different consideration and we try to balance that out. They're in the construction materials business so typically the winter is a little bit slower for them, if you will, which also helps. As Jason said, a little more to come on that as we continue to stay in touch with them.
spk05: And then on MVP, just wondering any important dates we should be watching in terms of the permits or anything else that could swing momentum or sentiment on the project?
spk02: Yeah, that's a great question. Certainly this FERC extension is, as we said, in progress. And I don't believe there are, at this moment, firm dates on when the FERC may act in terms of their response to the request for the extension. That's a very important item, obviously. We're hopeful that it's in the near term. Certainly that's one to keep an eye on. the biological assessment and I think the project publicly disclosed this a few days ago was provided to the Fish and Wildlife Service that was an incredibly comprehensive and thorough document we believe as comprehensive and as thorough as any that's ever been prepared in this country so that that was important it's a key piece to the biological opinion permit ultimately being reissued by the Fish and Wildlife Service. Again, there's not a definitive timetable on that at this point, but things are moving there and making forward progress.
spk05: All right. Well, I thank you for the time. That's all I've got for this morning.
spk04: Thank you, Mike. Thanks again for being with us. Do we have any other questions? Star six, to unmute your line.
spk03: Star six.
spk02: Well, if there are no more questions, this concludes our third quarter earnings call. And thank you again for joining us. And we hope you enjoy the remainder of the summer. And of course, please, please be safe. And we look forward to speaking with you again in December to review our full year of fiscal 2022 bolts. Have a great day.
Disclaimer