RGC Resources Inc

NASDAQ:RGCO

Earnings Call Analysis

RGC Resources Reports Strong Fiscal 2023

In fiscal 2023, RGC Resources experienced a 64% surge in Q4 operating income to $745,000, driven by new base rates and despite rising interest expenses linked to investment in the Mountain Valley Pipeline (MVP). The net income for the quarter was over $1 million, a rebound from the previous year’s $11 million loss primarily due to a $15 million pretax impairment of the MVP investment. With the MVP's completion forecast in Q1 2024, the utility plans to lower its capital spending to about $21 million in 2024, reduced from the $25 million in 2023. Customer count hit an all-time high at 63,500, and the MVP's construction is making solid progress. As for earnings guidance, RGC Resources did not initially expect to achieve its actual $1.14 earnings per share for 2023 and is optimistic about 2024 with a targeted breakeven from its RGC Midstream subsidiary.

Operational Milestones and Regulatory Progress

RGC Resources demonstrated a noteworthy year of customer growth and infrastructure modernization. With a consistent track record of customer expansion, the company added over 550 customers, marking its seventh consecutive year of achieving at least this number of new additions. Further emphasizing their commitment to community improvement, RGC Resources assisted the Roanoke Redevelopment and Housing Authority in updating gas facilities, thereby enhancing safety and reliability for residents. The successful regulatory approval and implementation of a newly operational RNG (renewable natural gas) facility was a significant regulatory milestone for the company, with billing commenced in March 2023.

Financial Performance and Capital Allocation

The company's financial health is on an uptrend, with a 64% increase in operating income to $745,000 for Q4 2023 buttressed by interim base rates effective from January. Despite this positive performance, interest expenses also climbed due to elevated interest rates impacting floating rate debt. Looking ahead to fiscal year 2024, RGC Resources anticipates approximately $21 million in total utility plant expenditure, a return to more traditional spending levels following a significant investment in the RNG facility in the previous year. This disciplined capital allocation supports Roanoke Gas's steady growth in customer numbers, especially given the historic high of 63,500 active customers as of early December 2023.

Mountain Valley Pipeline Development

The strategic investment in the Mountain Valley Pipeline (MVP) remains a pivotal part of RGC Resources' future, with significant construction progress reported, including half of the upland pipe and majority tie-ins and crossings completed. A budget of $7.2 billion is set for the MVP, and RGC Resources eagerly anticipates completion in the first quarter of 2024. This development will not only enhance the company's infrastructure but also catalyze economic expansion in regions like Franklin County, which is set to receive natural gas access for the first time. The LaFayette and Summit View interconnects are progressing in tandem with MVP construction, setting RGC Midstream subsidiary for a projected fiscal 2024 breakeven from an earnings standpoint.

Guidance and Shareholder Returns

Despite unexpected results exceeding projections in 2023 with shares hitting $1.14 each, RGC Resources is cautiously optimistic about the upcoming year. The company acknowledged the tangible threats posed by inflation and rising interest rates but still provided an earnings per share guidance of $1.10 to $1.16 for 2024. Even in the face of this economic headwind, Roanoke Gas is positioning for another robust year, building on the fiscal achievements and operational landmarks of the previous year.

Earnings Call Transcript 2023-Q4

[Lawrence Oliver, executive]

Good morning. I am Tommy Oliver, Senior Vice President, Regulatory and External Affairs for RGC Resources, Inc. Thank you for joining us this morning as we discuss RGC Resources 2023 Fourth Quarter and Full Year Results. I am joined this morning by Paul Nester, President and CEO of RGC Resources; and Tim Mulvaney, our Interim Chief Financial Officer and Treasurer.

Before we get started, I want to review a few administrative items. [Operator Instructions] Second, the link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. And lastly, at the conclusion of the presentation and our remarks, we will take questions. So Slide 1, this presentation contains forecasts and projections. Slide 1 has information about risks and uncertainty, including forward-looking statements that should be understood in the context of our public filings. The agenda is on Slide 2. We will review our quarterly and annual operational and financial results and discuss the outlook for fiscal 2024 with time allotted for questions at the end.

So turning to Slide 3. Our main extensions for the year totaled 4 miles, and we added over 550 new customers, another outstanding year of customer growth and our seventh straight year of adding at least 550 new customers. I'd also like to highlight the work we have done with the Roanoke Redevelopment and Housing Authority. Since 2022, we have helped the housing authority modernize the natural gas facilities within 3 of its apartment complexes. After the authority renewed these facilities, Roanoke Gas assumed ownership and operational control. Not only did this add to our customer count and rate base, it provided the residents within those communities a new safer and more reliable gas system. The housing authority intends to renew 2 additional properties in the coming years.

On the right side of the graph, our total customer count represents a steady increase in the total customer since 2020. The customer count for 2021 and 2022 were impacted by the state-mandated service [ disconnection ] moratorium that occurred during parts of 2020 and 2021. At the end of fiscal 2023, our customer count was 62,740 customers. This figure doesn't really reflect true customer growth as some customers disconnect service during the spring and reconnect once cold weather sits in. To that end, our active customer count as of December 1 was 63,599.

Transition over to Slide 4, 2023 was a busy year on the regulatory front. As we've discussed in prior earnings call, we received approval from the State Corporation Commission in January to rate base an RNG facility. This facility became operational, and we began billing customers in March of this year. We also filed for a new 5-year SAVE Plan. The SAVE Plan was approved by the commission in August. The plan included a $50 million spending cap over the life of the plan with $8.55 million allowed for fiscal 2024. We began billing the new SAVE rate October 1, 2023.

During the past year, we also had a rate case working its way through the SEC. We did reach a settlement with the SEC staff in September, in which we agreed to a revenue requirement increase of $7.45 million. The hearing examiner assigned to the case issued his report in November accepting the stipulated revenue requirement and essentially all other terms and conditions of the stipulation. We expect the final order from the commission in the next 30 to 60 days.

Lastly, we received an extension of our certificate to serve Franklin County. The original certificate issued in February of 2020 -- I'm sorry, 2019 contained a 5-year sunset provision, which would have voided our certificate had we not begun serving customers within that 5-year window. The commission extended the sunset provision for 3 years for the February of 2027.

Slide 5 shows our delivered gas volumes, which were higher compared to last year, attributable to higher industrial usage.

Slide 6 shows for the fiscal year, gas volumes were down slightly. Residential and commercial volumes were down as result of fewer heating degree days, offset by a small year-over-year industrial utilization increase.

We're on Slide 7. We executed our 2023 Roanoke Gas capital investment plan with over $25 million of investment in utility plants, which is down nominally from a year ago. A significant part of our investment for the year related to the RNG facility I discussed earlier. And it's worth noting that this capital is fully embedded in our current rates as a result of the rate case and the RNG rider. I'm now going to turn it over to Tim Mulvaney, our interim CFO and Treasurer, who will discuss our financial results. Tim?

[Timothy Mulvaney, executive]

Thank you, Tommy. We are on Slide 8 now. For the fourth quarter, operating income increased $290,000 or 64% to $745,000 compared to the fourth quarter of 2022. The increase was primarily driven by interim base rates implemented on January 1. Interest expense up $242,000 continues to be pressured due to the higher interest rate environment, which is impacting our floating rate debt, supporting the investment in the Mountain Valley Pipeline. Our net income for the quarter was just over $1 million compared to an $11 million loss due to a $15 million pretax impairment taken on our investment in MVP in the fourth quarter last year. The fourth quarter of this year included $1.5 million of noncash AFUDC pretax, which resulted from our investment in the MVP resuming construction.

Moving on to Slide 9. To aid in the comparison of our fiscal year results, excluding impairments recorded on our MVP investment in 2022, we have represented our financial results for the quarter and the year on an underlying basis on Slide 9. I will now turn the presentation over to Paul Nester, RGC Resources President and CEO, for an outlook on 2024. Paul?

[Paul Nester, executive]

Thank you, Tim, and good morning. We are on Slide 10. We're going to take a few minutes and review the 2024 Roanoke Gas capital spending forecast, we're also going to try to provide an update on Mountain Valley Pipeline, and then we'll share our initial guidance for our 2024 earnings per share.

Moving on to Slide 11. We're projecting a total spend on utility plan for fiscal year 2024 of approximately $21 million. This is down from the 2023 capital spending primarily due to the $4.1 million we invested in the RNG facility in 2023. But this is a resumption of a more normal level of annual capital spending in the utility. I would like to take one minute and just comment on the customer growth numbers that Tommy shared with us a few moments ago. And in particular, the 63,500 customers that is certainly an all-time high for our company. And I want to certainly thank our customer experience and our operations personnel for getting well over 1,500 customers turned on since October 1. For a small company like ours, it's a noteworthy achievement due to a lot of dedication and hard work by many folks.

So thank you. Moving on to Slide 12. Many of you may have seen the Equitrans 8-K that was filed last week where they provided an update on some of the statistics related to Mountain Valley construction. It's a good update. We'll try to interpret a little bit of that for you. Of the remaining scope work when construction resumed this summer, approximately 50% of the upland pipe, 65% of the tie-in, 75% of the crossing and over -- or approximately 104 miles of hydrostatic testing have occurred. So again, the progress has been very good.

We've had a nice dry fall here, which has been conducive to construction and good progress. The total budget for the project remains $7.2 billion with projected completion in the first quarter of calendar 2024. I would like to also mention that Roanoke Gas has resumed construction on both our Lafayette and Summit View interconnects. You may remember that Roanoke Gas has 2 taps off the Mountain Valley to bring the much-needed supply of natural gas to this region, including at the Summit View Business Park in Franklin County, which will be Franklin County's first opportunity for natural gas. We're on track for both stations to be complete, commensurate with the Mountain Valley construction being completed in the Mountain Valley flow in gas. We're really excited to finally see the Mountain Valley be completed, and we're really excited about having Marcellus and Utica Basin natural gas flowing into the Roanoke Valley.

Summing the MVP schedule of first quarter calendar 2024, studies are on track, and we believe that to be the case right now. We expect that our RGC Midstream subsidiary to essentially have a breakeven fiscal 2024 from an earnings standpoint.

Moving on to Slide 13 with our earnings per share guidance. Again, we had a tremendous 2023. We filed our 10-K this past Friday, it provides many of the details of 2023. And again, I would just like to thank our customers and our employees for an outstanding year. If you were on these calls, as we went through 2023, we did not expect to hit $1.14 earnings per share. But through a lot of hard work, we were able to achieve that. Thank you. 2024, we do believe Roanoke Gas is going to have another solid year. Tim mentioned inflationary pressures and the rising interest rate environment. That is still very real, and we do expect that to challenge 2024 earnings in the Roanoke Gas utility. Our range, as you can see, we think right now, we can be in the $1.10 to hopefully $1.16, again with a breakeven RGC Midstream. That concludes our prepared remarks. [Operator Instructions].

[Michael Gaugler, analyst]

You're getting some good weather this quarter?

[Paul Nester, executive]

We've had incredible weather. It's not been a great heating load weather, if you will, but it's been great construction weather. It's been very dry, which, again, ordinarily you don't care for, but we're happy about that this year.

[Michael Gaugler, analyst]

Okay. You had mentioned the Franklin County tie-in and the Business Park there. I think that's what we toured the last time I was down. Just wondering, are there any tenants? Is there anybody waiting in Franklin County for the gas?

[Paul Nester, executive]

So we can't comment on very specific opportunities from an economic development standpoint, but there is a lot of potential and excitement, Michael. In fact, Tommy and Jim Shockley are meeting this afternoon in Franklin County with some of the folks down there to discuss some of these matters. So there's a lot again, we'll be excited about [indiscernible] natural gas in that park is a wonderful opportunity.

[Michael Gaugler, analyst]

Okay. And then I would assume earnings from -- we'll say, cash flow from Mountain Valley that will be used to just reduce debt?

[Paul Nester, executive]

Yes. Tim, I think we talked a little bit about cash flow in the 10-K. Would you like to comment on that to Michael.

[Timothy Mulvaney, executive]

So we have certain pieces of our Mountain Valley debts that are coming due in 2024, and we're working with banks to replace that in the short term. But as the Mountain Valley pipeline does begin to flow, there are provisions in the agreement that they will pass excess cash flow as we signed in those agreements on to the company, and we would expect to use those.

[Michael Gaugler, analyst]

Okay. And then last question. Any idea -- if you had to take a guess, Paul, what month you could actually start seeing some of that gas flow into Roanoke?

[Paul Nester, executive]

Yes. I think the public guidance from the JV, Michael, is still calendar first quarter, and they haven't gotten more precise than that. As you know, in other words, there's not a month or a day at this point. And a lot of it, of course, does depend on the ability to do field construction over the coming days and weeks as we are in the winter time with some shorter days. So we are still planning and operationally planning for first quarter 2024. So hypothetically, if that were March 1, we'll be ready; if that's March 31, we will be ready as Roanoke Gas to receive that gas.

[Michael Gaugler, analyst]

Okay. And I was just wondering if that lower cost gas could be flowing in January or February when you need it the most.

[Paul Nester, executive]

Yes, it's a great question. We're not making plans for January at this point in time. That would be wonderful, but we don't know that, that maybe physically possible.

[Timothy Mulvaney, executive]

Okay. Well, I guess we'll wait for the next Equitrans 8-K.

[Paul Nester, executive]

Yes. Yes. Yes. That will hopefully be informational in that regard. But again, we can see it coming from here. That's the good news. Do we have any other questions from the audience. [Operator Instructions] Any other questions? We'll pause for just a few seconds in case someone would like to ask a question.

Okay. Well, if there are no more questions today. This does conclude our fourth quarter and fiscal year 2023 earnings call. Thank you so much for joining us, and we look forward to speaking with you again in February to review the first quarter of 2024. We certainly wish you and your families a Merry Christmas and a happy New Year. Thank you.