RGC Resources Inc.

Good morning from a cold and blustery Roanoke, Virginia. I want to thank you for joining us as we discuss RGC Resources 2024 fourth quarter and full year results. I am Tommy Oliver, Senior Vice President, Regulatory and External Affairs for RGC Resources, Inc. I am joined this morning by Paul Nestor, President and CEO of RGC Resources, and Tim Mulvaney, our Vice President, Treasurer, and Chief Financial Officer. Before we get started, I want to review a few administrative items. 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 of our website at www.rgcresources.com. At the conclusion of the presentation and our remarks, we will take questions. So let's turn to slide one. This presentation contains forecasts and projections Slide one has information about risks and uncertainty, including forward-looking statements that should be understood in the context of our public violence. Slide two contains our agenda. We will discuss our operational and financial highlights, including an update of our rate case and other regulatory activities, how we finished fiscal 2024, and then discuss the outlook for full year fiscal 2025 with time allotted for questions at the end. So moving to slide three, we had a busy fiscal year on the regulatory front. We received favorable commission decisions on a number of routine regulatory matters in the fourth quarter. In addition, we reached the settlement in our general rate case with the SEC staff just after year end. This enabled us to reflect the estimated effect of this settlement in our year end results. The settlement to staff, which is subject to final approval by the Commission, allows for an increase of $4.08 million in annual revenue and is reflective of a ROE of 9.9%. We believe this is a fair outcome and we are pleased to reach agreement in advance of the hearing before the Commission, which took place in early November of this year. We expect to receive final approval and remit a small refund to customers in our second fiscal quarter. Early in the fourth quarter, we reached agreement with the commission staff on new depreciation rates, which are updated every five years. Additionally, in September, we received approval on both our annual save and R&G riders. The revenues associated with these riders began October 1, 2024. Turning now to operations on slide four, main extensions and renewals for the 2024 fiscal year totaled nearly eight miles. and we connected 631 new services, an increase of 79 new services over the prior period. In addition, we renewed 412 services during that same period. As we will discuss later, we continue to invest in rate-based to ensure a safe and reliable distribution system for our customers. Slide five shows our delivered gas volumes for the quarter. Volumes overall were 5 percent lower compared to the fourth quarter of 2023 with the decline attributable to warm fall weather and lower commercial volumes, including a temporary shutdown at a large commercial customer in September. Slide six shows delivered gas volumes for the full fiscal year in 2024. As shown, total volumes have remained steady compared to last year's period. I will now turn it over to Tim to talk about our 2024 CapEx and results. Tim?

Thank you, Tommy. Moving on to slide seven, our capital spending totaled $22.1 million for fiscal 2024 compared to $25.3 million in the full prior fiscal year. The decrease is attributable to the more than $3 million we spent in 2023 related to the RNG facility. In addition to our typical work expanding and renewing our system, We made meaningful investments and finished two interconnects with the MVP, completed a significant expansion for one of our top 10 customers, and initiated service to our first customer in Franklin County. Paul will provide some additional color on our movement to Franklin County as he discusses 2025. Moving to slide eight. We released earnings in mid-November. As we noted, a lower level of earnings from our investment in MVP, along with higher interest costs, resulted in lower net income compared to the same quarter in 2023. Fourth quarter net income was 141,000, or one penny per share, compared to a million dollars, or 10 cents per share, in the fourth quarter of 2023. Equity in earnings of unconsolidated affiliates was 872,000 pre-tax, which reflects our share of MVPs results, including the favorable amortization of the basis difference that we discussed in detail in our September investor report, which can be found on our website. This was down $689,000 compared to a year ago, driven by the AFU DC during the construction phase. Interest expense increased $305,000 compared to the same quarter a year ago due to the higher interest rate environment which is impacting our floating rate debt that supports our investment in the mountain valley pipeline and on the Roanoke gas line of credit. The year to date numbers are also on slide 10. In fiscal 2024, we grew net income by 462,000 to 11.8 million or $1.16 per share compared to 11.3 million or $1.14 per share in fiscal 2023. The company experienced inflationary cost pressures and higher interest rates, but was able to overcome those headwinds with strong earnings from the equity affiliate and growth in other income. The year was also marked with the completion of the MVP and settlement of the rate case as discussed by Tommy earlier in the presentation. Turning to slide nine, Paul is going to take us through our expectations for 2025, including growth, capital, what we expect the drivers for the year to be, and how all of that settles to the bottom line and into EPS. I will now pass the presentation to Paul Nestor. Paul?

Thank you, Tim. Good morning. We are on slide 10, and let's take a moment just to discuss, we believe, some of the opportunities to accelerate our growth now that Mountain Valley Pipeline is operational. Mountain Valley has the capability of transporting up to 2 billion deca-therms a day. And that's a tremendous amount of energy that's literally passing right through our service territory. And we're excited about that as we've spoken now for many years about that transportation capacity and that energy availability. That's the big picture. So let's maybe drill down from that into our service territory and our distribution system where we continue to see strong housing growth. We've got several new residential neighborhoods either breaking ground or moving from the planning to construction stage. Tommy reviewed our customer additions just a few moments ago. And for 2025, we see a similar number of new service connections in particular. So we're excited about that. There continues to be steady build out in the medical complex, which is primarily in the downtown or just adjacent to downtown Roanoke vicinity. The large Carilion expansion that we've been talking about for several years is nearing completion, and we expect increased gas usage for what is already a top three customer, that being Carilion. You may recall that we implemented a $1 million system betterment to support this expansion, and based on future plans at the medical complex, we have another million-dollar system betterment planned for this year. As Tim mentioned, we did serve or are now serving gas to our first customer in the Summit View Business Park and we're actively in business development, economic development discussions with the county and the Roanoke Regional Partnership about opportunities in Franklin County now that Mountain Valley Pipeline Gas is available there. We are undergoing plans right now to expand from Summit View Business Park to nearby commercial and residential And we're also in conversation with the county seat of Franklin County, the town of Rocky Mount, to serve that area with a new Mountain Valley Pipeline interconnect and distribution system. So very excited. As we've talked about in past calls and investor meetings, Franklin County has not had the opportunity for natural gas to this point in time. We're thrilled to be working with them and having the opportunity to serve that community. Just a note, though, some of that work does require action at a local government level, and we've had conversations and planning with the key decision makers, and we've accelerated those conversations following Mountain Valley Go Live in June. And our company is positioned to move forward as these opportunities are approved or available, but just a little caution here, they are not completely within our control and may take some time. Moving on to slide 11, our capital spending plan of $21.6 million for fiscal 2025 is in line with what Tim reviewed for 2024. We continue to expect to continue to invest in our existing distribution system here in the Greater Roanoke Valley. As we just talked about, there are opportunities in Franklin County with which we've allocated some capital shown in the purple the purple part of the pie there, labeled MVP growth. Moving to slide 12, the drivers that we think are going to influence this fiscal year are noted, at least the primary drivers. We've been addressing inflation, as Tim mentioned, with our rate making, and Tommy also covered that with the outstanding regulatory performance in fiscal 2024. and we're going to continue to be mindful and prudent of our expense side of the income statement, and we still believe there's some inflation in the economy, and we're seeing that. We're hopeful that that tempers a little bit, tempers down, of course, particularly in the area of professional services and IT expenses and labor costs. Interest rates as we all are seeing in the popular press, is an item that is moving around, if you will, very much in flux now, certainly since the November election. Tim, what are you hearing from our lenders and other folks about the interest rate environment?

Sure. Directionally, it's still favorable to where it was a year ago. A year ago, it was in a rising interest. As we came into September, it was probably a little more favorable than it is now. The Fed dropped rates 50 basis points in September, 25 basis points in November. General consensus seems to be 25 more basis points in December. And then it gets a bit murky from there with the election having passed, as you mentioned. what's going to happen in 2025, I don't think there's a consensus. Right now, I think there's a little bit of look to see how inflation is doing and the Fed is evaluating that as well as with the election, what will the Fed look like in the long term.

Thank you, Tim. Again, there's a lot of moving parts and pieces there, obviously. It does have an impact to our bottom line. Tim talked about interest expense impact in 2024. Again, we still have some floating rate debt in 2025 that will be influenced by what happens with interest rates. Thank you. Bullet number four, RGC midstream. We do expect a modest contribution to earnings in 2025 from RGC midstream. It will be lower than 2024. Tim mentioned the AFUDC laden earnings that we had last year due to the construction being completed on the project. I think the good news this year is we are going to be receiving cash from the joint venture, and in fact, we received our first distribution in October of approximately $800,000. That really was a watershed moment for an investment that we started in October of 2015. Tim, anything you want to add about midstream and what we see there potentially going forward?

So, yeah, we are going to get probably, we estimate, three more $800,000 quarterly contributions for a total of $3.2 million for the year. That's our best estimate at the moment. And there is a good description of how the RGC midstream, our investments, in that September deck on how the accounting will work, but we're very excited to have the cash flowing this direction at this time.

And we indicate on the slide, we believe in 2025, that'll be just north of $3 million of cash. Finally, we just announced a few days ago that the board had approved an annual dividend increase of just under 4% to 83 cents annually. We're pleased that we're able to resume what we believe is a more normal dividend growth relative to the outstanding success of our operation, especially our regulated utility. And as we'll see in just a moment with our forecasted earnings, this 83 cent implied annual rate fits right within our comfort zone on the payout ratio. With that, moving to slide 13, we do have our earnings forecast range for fiscal 2025. Again, we're just nearing the end of physical Q1 there, but we certainly expect to grow off of 2024 modestly, and we believe we can be in the $1.18 to $1.25 per share range. just summarize all of our comments today to say that we just continue to be optimistic about our service territory, the Roanoke Valley and Franklin County, and the growth potential in our service territory generally, and then the other opportunities that we think our company has more specifically. We've had an outstanding year yet again, and I think, you know, at this time of the year, it's natural to reflect back on the calendar year, and we really have had a great 2024. I want to thank our employees and our customers and our shareholders and our other business partners for contributing to that success. That concludes our prepared remarks. If you have any questions, please dial

pound pound to unmute your line pound pound to unmute your line hey good morning everyone mike good morning we hope you're doing well i am i see you gentlemen are doing well given the the previous weather and what's what they're calling for over the next couple of days And that kind of leads into my question here with MVP. I'm wondering what the flows are looking like right now, given we've had this extended cold snap.

Yeah, that's a good question, Mike, and I can only answer that somewhat unofficially. And I'll answer from what I think we can see through the public. nomination process as we nominate our daily gas volumes. I think the pipe is mostly full, if you will, which I think one would expect with what the temperatures are in the greater mid-Atlantic area in the eastern seaboard. So I believe it's between one and a half to two BCF a day.

Okay. And that will roll right into my next question. So now that we're here post-election and things look like they may be a little better from an infrastructure standpoint, any changes going on with the expansion? And by that I mean perhaps speeding the process up a little bit.

Yeah, it ties into your question, I think, relates back to the interest rate discussion. There was a prevailing wisdom on interest rates before the election, and that wisdom, as Tim alluded to, is... is bouncing around. I think, Mike, energy policy is similar, certainly with President-elect Trump when he takes office in mid-late January, and based on some of his nominations for energy and environmental-related positions, there seems to be a bullishness, if you will, about America's energy in the next certainly four years of his term. How that translates to the potential MVP expansion, we think it can only be favorable. Again, it's just a conjecture at this point. At the end of the day, to do a new pipeline or a pipeline expansion, there has to be market demand, and in this case, demand for the natural gas. I believe, and certainly our company believes, we're not speaking for the joint venture here, but we believe there will be sufficient demand to drive that expansion over time. So to be more precise with your question, the exact timing of that, at least from our seat, is still unknown. EQT or NextEra may have a slightly different answer.

Okay. One last one. Assuming there are expansions, you know, Southgate, et cetera, now that the cash is flowing your direction, would your thought be to just take the cash that's coming in from MVP and reinvest it in the expansions?

Yeah, Tim, you want to answer that? Sure.

So, Mike, as you're aware, we have some debt that supports our investments. And so we're going to cover our interest costs to begin with, but there is a little bit of excess there, depending on what interest rates do. We do have opportunities both with a compression and or Southgate, and so we'll be looking very closely at opportunities that will enhance the cash flow coming off the pipe with those kind of investments, as well as some other opportunities that MVP is looking at.

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

Thank you, Mike. Thank you for being on the call today. Do we have any other questions?

If so, you can unwind with... Paul, this is Tim Winter with Gabelli Funds. Can you hear me?

I can, Tim. Good morning. How are you today?

I'm doing well. I'm doing well. Thanks for the call, and thanks for taking my question. I had a couple of questions. One simple. What is the rate-based number contemplated for the Roanoke rate order?

Sure.

Tom, you want to answer that? The rate order, the rate base was around $200 million, and then we've got some save rate base, RNG rate base, so a total of maybe 210 to 220, that range? Net rate base, right? Net rate base, correct. You take out the depreciation, accumulated depreciation, deferred tax, and some of those items that don't earn a return.

Okay, okay, thank you. And then on Mountain Valley, you've written that down. What would be, like, the rate base number there? And I know it's an extremely valuable pipeline, and I'm sure it is, too. to others as well. I'm just wondering if there were to be a bigger party interested in buying your interest, what the considerations would be from your end as to holding it versus selling it?

Yeah, Tim.

Significant tax cuts?

Yeah, that's a great question, and it does have a complicated answer, especially with what you added there at the end, the taxes. And just as a reminder to those on the call, we did impair approximately 80% of our investment in 2022. So our RGC midstream subsidiary has contributed approximately $58 million in cash to the construction of the pipeline, Tim, And we, of course, have had some AFUDC or equity earnings that added to the balance sheet investment. I believe today our balance sheet investment at approximately $20 million. Does that sound right, Tim? That's correct. Yeah, after the impairment and with the recent equity and earnings. So it is a very $21 million. Thank you, Kelsey. It is a very low number relative, we believe, to the value of the assets. You're a good comment there. So the short answer is yes, if there were to be a transaction with the asset, there are, of course, tax consequences. It is a little more complicated because of the non-cash loss, if you will, that we reported to the impairment. But it is an item that we do think about, again, as we should as a management team with respect to all of our assets, right? What is the actual value, if you will, and certainly the fair market value of any asset that we have on our balance sheet. I'm not sure if that answered your question, but... No, I appreciate it.

Thank you. That's very helpful. Then just one more since I got the mic. Can you talk a little bit about your equity needs going forward, how much you're thinking about

Sure, I may start with that and then let Tim and Tommy add, too, if they would like, Tim. But certainly, we feel like we're well capitalized in the regulated utility. And maybe, Tommy, you can talk a little bit about the equity structure at the regulated utility.

Sure. Just coming out of the rate case, the commission approved capital structure that contained about 59% equity. think that's a fair and reasonable balance of equity.

Yeah, especially for a utility our size. And certainly with the uptick to the 9.9% ROE, we like that 59% equity layer at the utility. Correct. Tim made some comments, and I may flip it back. Tim Mulvaney made some comments about our utility debt in RGC midstream. It's got a different capital structure. Maybe Tim can talk a little bit about how we're thinking about some of that debt. And Tim Winter, we'll come back to your question about equity at the holding company from there.

Sure. So at the midstream level, we do have debt that supports the investments that we have made. None of that debt is coming due in fiscal 2025. We do have $800,000 of amortization on it, but none of that debt is coming due. So we're working with banks and other partners on what the long-term capital structure, now that the pipe is operational. We do have several parts, both at midstream and then one tranche from run-up gas that in fiscal 26 matures. So we're looking at that. We've already started those conversations, but we don't have anything to report right at this point.

Yeah, that's right. And certainly... this comes back full circle to the interest rate environment we would we would actually uh be happy to see some lower interest rate uh environment so we could term out some of that debt whether it's in the rgc midstream subsidiary or in fact in renault gas you know go a little bit longer on on some debt uh all that to say kim our our equity plans for 2025 are uh uh very light at the moment again we're always monitoring capital market conditions and business conditions, and that could change based on those conditions. But our earnings per share estimate doesn't have a large equity infusion built into it.

Okay, great. Thank you so much.

Thank you. Do we have any other questions? If we do, please dial pound pound to unmute your lines. We'll pause for just a moment more to see if anyone else has a question. Okay, well, hearing none, this does conclude our fourth quarter fiscal 2024 earnings call. I would just like to thank you for being with us today, and again, a special thanks to our customers and employees and shareholders and business partners who, again, help make this company so successful. And from all of us here at RGC Resources and Renault Gas Company, we certainly wish you a very Merry Christmas and a Happy New Year. And we look forward to holding this call again in February of 2025 to discuss the first quarter results. Thank you.