RGC Resources Inc.

Good morning, everyone. I'm Paul Nestor, President and CEO of RGC Resources, Inc. Thank you for joining us as we discuss RGC Resources' 2022 fourth quarter results. We do have a few administrative items to cover, one of a technical nature. Apparently, the conference call service has not allowed us to mute all lines, so we do ask if you're participating today, if you could mute your line individually, we would greatly appreciate that. Let's review a few other administrative items. 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. Jason Field, our CFO, and Tommy Oliver, our Vice President of Regulatory Affairs and Strategy, as well as Kelsey Davenport, our Director of Finance, are with me on the call this morning. All right, moving over to slide one, we do have forecasts and projections in today's presentation, and our forward-looking statement disclaimer can be found on the first slide. Moving on to slide two, the agenda, we'll start with a review and update of some of our operational results and financial highlights for fiscal 2022, as well as the fourth quarter. And Jason will then cover specially delivered volumes and financial results. Tommy will give us an update on the RNG project and our base rate case that we just filed last week. And I will conclude with a discussion of the outlook for fiscal 2023. Moving to slide three, we just had another outstanding year in our Renault gas subsidiary operationally. Our customer additions are up 11% compared to last year. and we added 6.9 new miles of Maine in the fiscal year. You notice our customer count may appear to be lower than last year and I believe we've talked about this in previous calls but that is due to the service disconnect moratorium which started in the spring of 2020 with the pandemic and lasted until the late summer of 2021. We did not reinstitute our processes of turning off delinquent customers until March of this year. So as we went through the summer, we were able to reestablish those disconnect processes. And now that we're into colder weather here in early December, a lot of those customers, as we've seen in the past, have started to pay their bills and seek service reconnection. We certainly expect our first quarter 2023 customer count number to reflect that change. I would also like to mention a few other operational highlights that are not on the slide. We talk about our saved capital spending, but just wanted to give you a couple of stats from 2022. We renewed 8.3 miles of main and 605 services on the heels of doing 7.8 miles of main in fiscal 21 and 620 service. So in total, in the last 24 months into September 30th, we've renewed over 16 miles of main and 1,225 services, just an outstanding result. A couple of the other initiatives that we undertook this year, we did a really thorough safety culture survey in our operation. Safety is our number one priority and that survey produced good results and has given us some action plans to incorporate throughout our operation. I'll now hand it over to Jason, who will discuss our delivered volumes, financial statements, and capital spending.

Thank you, Paul. We are on slide four. Our fourth quarter delivered volumes were up approximately 181,000 decatherms compared to the fourth quarter of 2021, which was a 14% increase. This increase was largely due to the same industrial customer we've highlighted in the past. This customer has the ability to fuel switch between their natural gas and coal in its construction materials manufacturing process. Their natural gas usage has continued into the first quarter of 2023. Let's move on to slide number five. We ended our year with total delivered volumes that were approximately 4% higher than fiscal 2021 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. In fact, six of our top seven customers by volumes delivered increased their usage over 2021. We move on to slide number six. Our financial results reflect an additional impairment that was recorded in the fourth quarter in our midstream subsidiary. This second impairment, as you recall, the first impairment was taken in March, was a result of a reassessment of the fair value of our investment in the Mountain Valley pipeline as of September 30, 2022. The 10-K provides all of the details, but the most recent hearing in the U.S. Fourth Circuit of Appeals and the timing of permit reissuances drove this assessment. For the fourth quarter of 2022, our operating income of $455,000 was approximately $100,000 less than the fourth quarter of 2021. Non-gas operating expenses for the quarter exceeded the prior year due to higher balances of bad debt expense, professional fees, and general inflationary increases in other costs. Other income for the quarter was higher than the prior year due to the transfer of natural gas distribution assets from a local housing authority. In exchange for the renewed assets, Roanoke Gas assumed responsibility for their operation. For the year, we are pleased to report our operating income of $14,916,000, which is $137,000 higher than 2021. We've experienced increasing costs related to bad debt, professional fees, and other higher operating and maintenance expenses. Our teams continue to do a great job managing these expenses in an overall inflationary environment. Interest expense increased approximately $466,000 due to a combination of higher overall debt balances and an increase in the interest rate on our variable rate debt. Additionally, with no construction on the MVP since November of 2021, There was a significant reduction in equity earnings in our midstream affiliate, which is reflected in our fourth quarter and full year operating results. We move on to slide number seven. To aid in the comparison of our financial performance attributed to operations for the quarter and the year ended 9-30, we've adjusted our gap results for the non-cash impairment loss on our MVP investment that were recorded in the second and fourth fiscal quarters. Our underlying net income for the three and 12 months ending September 30th adjusting for the impairment was a $75,000 net loss for the quarter and $9,179,000 of net income for the year. The decline for both periods was largely the result of the limited growth construction activity of the MVP in the current year compared to 2021. In the prior year, We recognize non-cash AFUDC of approximately $181,000 in the fourth quarter and $1.7 million for the 12 months ending September 30, 2021. Let's move on to slide number eight. We experienced strong investments made by the Roanoke Gas for Utility property for the 12 months of fiscal year 2021, which totaled $25,461,000 an increase of approximately 27.5% over the prior year. The fourth quarter was a robust capital spending quarter due to the RNG project, which Tommy will review in a minute, as well as execution by our teams and favorable construction conditions. For the year, capital expenditures were up, primarily in SAFE, customer growth and system expansion, along with approximately $3.4 million invested on the RNG project. Paul will now discuss the outlook for fiscal 2023.

Yeah, thank you, Jason. And we're on slide nine. Before we review our fiscal 2023 capital spending forecast and our EPS forecast, Tommy will provide a brief overview and update of the RNG project and discuss the recently filed rate case, which will increase the non-gas base rates our customers pay for natural gas service. Tommy?

Thank you, Paul, and good morning, everybody. We are pleased how the project is progressing, both from a construction and regulatory perspective. Type work on the RNG project is expected to be completed over the next couple of weeks, which point we'll start moving the components over to the site, and those components have already been constructed. Operationally, we expect it to go into service in the second quarter of our fiscal year. From a regulatory perspective, the hearing was held the week of Thanksgiving, so the record is closed and it's in the hands of the hearing examiner or the administrative law judge. We expect a ruling from the hearing examiner in late December and a final order from the commission in late January of next year. As discussed in prior earnings calls, the RNG project should add about $7.7 million to our rate base, which is going to be recovered through a rate adjustment clause. And this rate base, the 7.7, which includes APDC and a G&A draw, is eligible for an enhanced return on equity of 100 basis points or 10.44%. Turning to the rate case, we did file that rate case and expedited case with the SEC last Friday, December 2nd. We will be rolling in the revenues that are currently being recovered through our save rider, so you'll see the save rider get reset. We're requesting an incremental revenues net of save of about $4.4 million. We're not requesting a change in our authorized ROE of 9.44%. We have requested that the rates go into effect on an interim basis with billings beginning in January of 2023. We expect the review process to take anywhere from six to 12 months, just depending on what parties intervene. I'll turn it back over to Paul now.

Thank you, Tommy. We continue to be excited with the RNG project and our partnership with the Western Virginia Water Authority and really looking forward to that project coming online. We are on slide 11. You can see the RNG project in green there. We have approximately $3.2 million of capital slated in fiscal 2023 to wrap up that project and move to that $7.7 million number that Tommy mentioned. We're gonna continue, of course, moving on down the track with our SAVE infrastructure rider investments, renewing that pre-'73 Adelaide plastic and related services as well as some coated steel main services. And we also continue to have steady customer growth and system expansion in 2023. Let's conclude by reviewing our EPS estimate for fiscal 2023 on slide 12. We've adjusted 2022 to the underlying numbers that Jason presented previously. Our 2023 forecast does show a loss in our midstream subsidiary as a result of the financing costs and in particular interest expense related to the higher interest rate environment while we await the Mountain Valley project to get completed. Our fiscal year ending September 30th, we don't expect any operating income from Mountain Valley in our fiscal year. We are of course forecasting a strong result from Roanoke Gas with the rate case helping starting in January with January billings and offsetting the inflationary cost pressures that we're still seeing in the utility. We would like to note the dilution effect in fiscal 2023 from the March 2022 equity offering. That's approximately 7 cents per share. And finally, we're pleased to remind everyone about our slightly increased dividend to an implied annual rate of 79 cents per share. The payout ratio again on that 2023 forecast is in the 85 to 95 percent range and we're pleased with that. That concludes our prepared remarks. If you have any questions please unmute your individual line and we'll be happy to entertain those.

Good morning, everyone.

Good morning, Mike. How are you today?

You're doing well yourself.

We're doing well, too. Thank you.

I think it's cold in Roanoke.

It was a beautiful cold morning, about 25 degrees here today, and the gas is flowing through the pipes, and the meters are turning.

Two questions for you gentlemen today on MVP. Do you have a range of what you would expect your carrying costs to be for 2023, your fiscal 2023?

Yeah, I think Jason can chime in here, too, if I'm slightly off. But I think, Mike, we're expecting those pre-tax costs to be in the $2 million to $2.2 million range for the fiscal year.

Okay. And then couldn't help but notice on one of the slides the volumes, particularly the industrial customer that we've talked about in the past. Do you expect to have those volumes at least through the winter months?

Yeah, so that was, you may have noticed we indicated that they're a construction materials manufacturer, and we did use that language intentionally, Mike, because obviously construction materials are sensitive to the broader economy. Even though this particular manufacturer, by the nature of their materials, seems to be hanging on and doing quite fine. In other words, they're not housing building materials specifically. It's more infrastructure type materials. They normally slow down a little bit in the winter, and that's regardless of economic conditions. They do some plant maintenance in January. expect reasonable volumes from them in the fiscal first quarter and then certainly as we get back into the warmer construction month around March or April for there to be hopefully reasonable volumes. Probably not quite as high as this year based on what we're seeing, but probably still an okay year.

Okay. Yeah, I was just wondering, I know that they could switch between coal and gas and was wondering how that dynamic's playing out at the moment in your market because it's different in every market.

Correct. Yeah, certainly in our fiscal 2022, they made a pretty significant switch from coal to gas. As those commodity prices have levelized and become a little more predictable going into calendar 2023, we think they're probably going to actually blend a little more coal in 2023.

All right, that's all I have for you, gentlemen. Thank you.

Well, thank you, Mike. Do we have any other questions from anyone on the call today? Well, if we do not have any more questions, this does conclude our fourth quarter earnings call. We really appreciate you joining us and look forward to speaking with you again in February as we discuss the first quarter results of Fiscal 2023. It is our prayer here that you and your families have a blessed and safe holiday season and a Merry Christmas. Thank you. you Thank you. Thank you. Thank you. Good morning, everyone. I'm Paul Nestor, President and CEO of RGC Resources, Inc. Thank you for joining us as we discuss RGC Resources' 2022 fourth quarter results. We do have a few administrative items to cover, one of a technical nature. Apparently, the conference call service has not allowed us to mute all lines, so we do ask if you're participating today, if you could mute your line individually, we would greatly appreciate that. Let's review a few other administrative items. 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. Jason Field, our CFO, and Tommy Oliver, our Vice President of Regulatory Affairs and Strategy, as well as Kelsey Davenport, our Director of Finance, are with me on the call this morning. All right, moving over to slide one, we do have forecasts and projections in today's presentation, and our forward-looking statement disclaimer can be found on the first slide. Moving on to slide two, the agenda, we'll start with a review and update of some of our operational results and financial highlights for fiscal 2022, as well as the fourth quarter. And Jason will then cover specially delivered volumes and financial results. Tommy will give us an update on the RNG project and our base rate case that we just filed last week. And I will conclude with a discussion of the outlook for fiscal 2023. Moving to slide three, we just had another outstanding year in our Renault gas subsidiary operationally. Our customer additions are up 11% compared to last year. and we added 6.9 new miles of Maine in the fiscal year. You notice our customer count may appear to be lower than last year and I believe we've talked about this in previous calls but that is due to the service disconnect moratorium which started in the spring of 2020 with the pandemic and lasted until the late summer of 2021. We did not re-institute our processes of turning off delinquent customers until March of this year. So as we went through the summer, we were able to re-establish those disconnect processes. And now that we're into colder weather here in early December, a lot of those customers, as we've seen in the past, have started to pay their bills and seek service reconnection. We certainly expect our first quarter 2023 customer count number to reflect that change. I would also like to mention a few other operational highlights that are not on the slide. We talk about our saved capital spending, but just wanted to give you a couple of stats from 2022. We renewed 8.3 miles of main and 605 services on the heels of doing 7.8 miles of main in fiscal 21 and 620 service. So in total, in the last 24 months into September 30th, we've renewed over 16 miles of main and 1,225 services, just an outstanding result. A couple of the other initiatives that we undertook this year, we did a really thorough safety culture survey in our operation. Safety is our number one priority and that survey produced good results and has given us some action plans to incorporate throughout our operation. I'll now hand it over to Jason, who will discuss our delivered volumes, financial statements, and capital spending.

Thank you, Paul. We are on slide four. Our fourth quarter delivered volumes were up approximately 181,000 decatherms compared to the fourth quarter of 2021, which was a 14% increase. This increase was largely due to the same industrial customer we've highlighted in the past. This customer has the ability to fuel switch between their natural gas and coal in its construction materials manufacturing process. Their natural gas usage has continued into the first quarter of 2023. Let's move on to slide number five. We ended our year with total delivered volumes that were approximately 4% higher than fiscal 2021 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. In fact, six of our top seven customers by volumes delivered increased their usage over 2021. We move on to slide number six. Our financial results reflect an additional impairment that was recorded in the fourth quarter in our midstream subsidiary. This second impairment, as you recall, the first impairment was taken in March. was a result of a reassessment of the fair value of our investment in the Mountain Valley pipeline as of September 30, 2022. The 10-K provides all of the details, but the most recent hearing in the U.S. Fourth Circuit of Appeals and the timing of permit reissuances drove this assessment. For the fourth quarter of 2022, our operating income of $455,000 was approximately $100,000 less than the fourth quarter of 2021. Non-gas operating expenses for the quarter exceeded the prior year due to higher balances of bad debt expense, professional fees, and general inflationary increases in other costs. Other income for the quarter was higher than the prior year due to the transfer of natural gas distribution assets from a local housing authority. In exchange for the renewed assets, Roanoke Gas assumed responsibility for their operations. For the year, we are pleased to report our operating income of $14,916,000, which is $137,000 higher than 2021. We've experienced increasing costs related to bad debt, professional fees, and other higher operating and maintenance expenses. Our teams continue to do a great job managing these expenses in an overall inflationary environment. Interest expense increased approximately $466,000 due to a combination of higher overall debt balances and an increase in the interest rate on our variable rate debt. Additionally, with no construction on the MVP since November of 2021, there was a significant reduction in equity earnings in our midstream affiliate, which is reflected in our fourth quarter and full year operating results. We move on to slide number seven. To aid in the comparison of our financial performance attributed to operations for the quarter and the year ended 9-30, we've adjusted our gap results for the non-cash impairment loss on our MVP investment that were recorded in the second and fourth fiscal quarters. Our underlying net income for the three and 12 months ending September 30th, adjusting for the impairment, was a $75,000 net loss for the quarter and $9,179,000 of net income for the year. The decline for both periods was largely 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 approximately $181,000 in the fourth quarter and $1.7 million for the 12 months ending September 30, 2021. Let's move on to slide number eight. We experienced strong investments made by the Roanoke Gas for Utility property for the 12 months of fiscal year 2021, which totaled $25,461,000, an increase of approximately 27.5% over the prior year. The fourth quarter was a robust capital spending quarter due to the RNG project, which Tommy will review in a minute, as well as execution by our teams and favorable construction conditions. For the year, capital expenditures were up, primarily in SAVE, customer growth and system expansion, along with approximately $3.4 million invested on the RNG project. Paul will now discuss the outlook for fiscal 2023.

Yeah, thank you, Jason, and we're on slide nine. Before we review our physical 2023 capital spending forecast and our EPS forecast, Tommy will provide a brief overview and update of the RNG project and discuss the recently filed rate case, which will increase the non-gas base rates our customers pay for natural gas service. Tommy?

Thank you, Paul, and good morning, everybody. We are pleased how The project is progressing both from a construction and regulatory perspective. Type work on the RNG project is expected to be completed over the next couple of weeks, which point we'll start moving the components over to the site, and those components have already been constructed. Operationally, we expect it to go into service in the second quarter of our fiscal year. From a regulatory perspective, the hearing was held the week of Thanksgiving, so the record is closed. and it's in the hands of the hearing examiner or the administrative law judge. We expect a ruling from the hearing examiner in late December and a final order from the commission in late January of next year. As discussed in prior earnings calls, the RNG project should add about $7.7 million to our rate base, which is going to be recovered through a rate adjustment clause. And this rate base, the 7.7, which includes APDC and a G&A draw, is eligible for an enhanced return on equity of 100 basis points or 10.44%. Turning to the rate case, we did file that rate case and expedited case with the SEC last Friday, December 2nd. We will be rolling in the revenues that are currently being recovered through our save rider, so you'll see the save rider get reset. We're requesting an incremental revenues net of save of about $4.4 million, We're not requesting a change in our authorized ROE of 9.44%. We have requested that the rates go into effect on an interim basis with billings beginning in January of 2023. We expect the review process to take anywhere from six to 12 months, just depending on what parties intervene. I'll turn it back over to Paul now. Thank you, Tommy.

We continue to be excited with the RNG project and our partnership with the Western Virginia Water Authority and really looking forward to that project coming online. We are on slide 11 and you can see the RNG project in green there. We have approximately $3.2 million of capital slated in fiscal 2023 to wrap up that project and move to that $7.7 million number that Tommy mentioned. We're gonna continue, of course, Moving on down the track with our SAVE infrastructure rider investments, renewing that pre-'73 Adelaide plastic and related services, as well as some coated steel main services. We also continue to have steady customer growth and system expansion in 2023. Let's conclude by reviewing our EPS estimate for fiscal 2023 on slide 12. We've adjusted 2022 to the underlying numbers that Jason presented previously. Our 2023 forecast does show a loss in our midstream subsidiary as a result of the financing costs and in particular interest expense related to the higher interest rate environment while we await the Mountain Valley project to get completed. Our fiscal year ending September 30th, we don't expect any operating income from Mountain Valley in our fiscal year. We are, of course, forecasting a strong result from Roanoke Gas with the rate case helping starting in January with January billings and offsetting the inflationary cost pressures that we're still seeing in the utility. We would like to note the dilution effect in fiscal 2023 from the March 2022 equity offering that's approximately 7 cents per share. And finally we're pleased to remind everyone about our slightly increased dividend to an implied annual rate of 79 cents per share. The payout ratio again on that 2023 forecast is in the 85 to 95 percent range and we're pleased with that. That concludes our prepared remarks. If you have any questions, please unmute your individual line, and we'll be happy to entertain those.

Good morning, everyone.

Good morning, Mike. How are you today?

You're doing well, yourself.

We're doing well, too. Thank you.

I think it's cold in Roanoke.

It was a beautiful cold morning, about 25 degrees here today, and the gas is flowing through the pipes and the meters are turning.

Two questions for you gentlemen today. On MVP, do you have a range of what you would expect your carrying costs to be for 2023, your fiscal 2023?

Yeah, I think Jason can chime in here, too, if I'm slightly off. But I think, Mike, we're expecting those pre-tax costs to be in the $2 to $2.2 million range for the fiscal year.

Okay. And then couldn't help but notice on one of the slides the volumes, particularly the industrial customer that we've talked about in the past. Do you expect to have those volumes at least through the winter months?

Yeah, so that was, you may have noticed we indicated that they're a construction materials manufacturer, and we did use that language intentionally, Mike, because obviously construction materials are sensitive to the broader economy, even though this particular manufacturer, by the nature of their materials, seems to be hanging on and doing quite fine. In other words, they're not housing building materials So they normally slow down a little bit in the winter, and that's regardless of economic conditions. They do some plant maintenance in January. But we do expect reasonable volumes from them in the fiscal first quarter, and then certainly as we get back into the warmer construction months, around March or April, for there to be a little bit of a slowdown. hopefully reasonable volume. Probably not quite as high as this year based on what we're seeing, but probably still an okay year.

Okay. Yeah, I was just wondering, I know that they can switch between coal and gas, and I was wondering how that dynamic's playing out at the moment in your market because it's different in every market.

Correct, yeah. Certainly in our fiscal 2022, they made a pretty significant switch from coal to gas, as those commodity prices have levelized and become a little more predictable going into calendar 2023, we think they're probably going to actually blend a little more coal in 2023. All right.

That's all I have for you gentlemen. Thank you.

Well, thank you, Mike. Do we have any other questions from anyone on the call today? Well, if we do not have any more questions, this does conclude our fourth quarter earnings call, and we really appreciate you joining us and look forward to speaking with you again in February as we discuss the first quarter results of fiscal 2023. It is our prayer here that you and your families have a blessed and safe holiday season and a Merry Christmas. Thank you.