Q3 2022 RGC Resources Inc Earnings Call
Good morning, Paul Nester, President and CEO of <unk> resources. Thank you for joining us as we discuss <unk> Resources' 2022 third quarter result.
Let's review a few administrative items, we have muted all lines and ask that all participants remain muted at.
At the conclusion of the presentation in 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 Dot <unk> resources Dot com.
Joining me today is Jason <unk>, our Chief Financial Officer, Tommy Oliver Our Vice President of regulatory Affairs, and strategy and count the Davenport, our director of finance.
Okay, Let's go to slide one.
We do have.
Forward looking.
The projections and forecasts and his presentation in this.
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. Tom 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 continued 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 $5. Five miles you may recall that last year was <unk>.
Also a significant increase over historical norms for new customers and nine miles.
Since October 2020, we've installed over 12 miles of new mains. It's just an outstanding result.
We believe the new customer in Maine addition trends should continue through physical year end.
If you reviewed our recently filed 10-Q carefully you may have noticed that from the March quarter to the June quarter, our total customer count receded from 63000 in March.
Approximately 62400 or 600 customers.
This is due to customer turn offs for nonpayment.
And as this change is more pronounced than prior periods, we thought it worth discussing the service disconnection moratorium, which prohibited customer turn offs for nonpayment. During the pandemic was lifted in late summer of 2021. However, we did not begin turning off <unk>.
Customers until the winter season concluded here in March of 2022.
But from March of 2022 to June of 2022, we turned all just over 900 customer accounts for nonpayment.
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 noticeable change in customer behavior from pre pandemic experiences.
Jason will now discuss our delivered volumes financial statements and capital spending.
Thank you Paul we are on slide four our third quarter delivered volumes were strong with $2 million <unk> delivered for the quarter up almost 200000 deck of terms.
Compared to the third quarter of 2021 or an 11% increase this.
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.
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 were 3% higher than the volumes. We delivered through June 30 of last year.
And that's in spite of a 6% decline in heating degree days the decline in weather related deliveries to our residential customers was offset.
And 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 $98000 or six 3%.
The overall net income however for the quarter of $593000 was a decline from the third quarter of 2021, approximately $18000 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 mid.
Dream.
One thing that is common in the quarter. The nine months in the 12 months ending June 30 is increased gas cost and is reflected in the higher revenues and operating it.
In the operating expenses of each period.
As a reminder, gas cost is a pass through with no operating income impact.
non-GAAP operating expenses for the three months of increased primarily due to higher corporate insurance premiums professional services and bad debt expense.
Net of higher capitalized overhead.
For the nine months ending June 32022, operating income, which is mainly from the run out of gas subsidiary was $14 5 million an increase of $238000.
Our net loss for the nine months and 12 months reflected in the reflected the significant impact of the noncash 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 $23 million.
And we had no net income in the fourth quarter of 2021 Thats why those numbers are the same at $23 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 30, we have adjusted our GAAP results for the noncash 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 30, adjusting for the impairment was $9 $3 million for both periods in.
And represented a decline of $847000 and $517000 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 noncash <unk> of over $1 4 million for the nine months and $2 $8 million for the 12 months ending June 32021.
Let's transition to slide eight.
This represents our year to date capital expenditures and investments made by run on gas for utility property for the nine months of fiscal year 2022 totaled $17 million 431000.
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 Tom will describe in greater detail detail later in the presentation.
Paul will now discuss the outlook for the remainder of the fiscal year, yes. Thank you Jason as.
As we've said on previous calls our teams continued to just do an outstanding job the financial results, particularly in our Reno gas.
Subsidiary continues to reflect that we are on slide nine and slide nine contains our.
<unk> of our.
Our renewable natural gas or LNG.
Equipment, and Tommy is going to give us a nice overview of that exciting project Tommy 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 cost associated with that project under.
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 converted into commercial quality natural gas or LNG.
I think 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 costs. So it's a separate mechanism outside of base rates, it's similar to our save rider and that its true 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 a prior rate case, plus an additional 100 basis points to our authorized return on equity if you recall our equity ratio.
Coming to the rate case was about 59, 5%.
The 100 basis points on our 94 four authorized ROE will be 10 four for return on that project if approved the.
The initial rate that we're proposing is four to an average residential customer.
On a monthly charge.
Our consultant has estimated that the greenhouse gas emissions on a carbon equivalent basis will decline by over 13700 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 R&D 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 that we're very proud of that so yeah. Thank you Tommy I'll just like the state my thanks, and appreciation to Tommy and his team in.
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 Young and it's an outstanding.
Achievement in.
In many many ways.
Tommy and his team again are the first two.
File such an application.
By Virginia natural gas utility in the state of Virginia, and outstanding Outstanding Achievement, and we look forward to going through the process with.
The SEC staff.
We are on slide 11.
We look ahead to the remainder of our fiscal year.
We believe our full year capital spending will be approximately $23 5 million 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 $750000 for are the completion of our last gates station renewable Brown 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 stepped down from transmission to distribution price pressure and Brown farm is the last of those stations.
Fantastic result, the R&D project.
That Tommy just so eloquently described will require about another $2 $7 million to complete thats going to straddle.
This fiscal year end of 2023, but $750000 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 Theyre. There has not been any there is still not in the field working the projects continuing to pursue the re issuance.
The buy up in the four service permits and of course continuing to work on the Army Corps of engineers.
Permit.
The PRC 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 utilities in Virginia, and North Carolina, and South Carolina.
Also submitted comments about the need for the project.
All of those are publicly available on the FERC website, but it was really really really a strong demonstration of support.
Theres, obviously been a little bit of news.
About proposed energy permitting reform and.
Senator mansion 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 is an article in today's Wall Street Journal about.
I guess the.
Ill, let taking going on around that.
Again more to come on that process and it seems like they're just getting started.
And Ernesto on that this week.
So let's conclude by discussing our earnings guidance on slide 13.
This slide depicts the underlying earnings from our two operating segments to run our gas utility and RGB midstream after adjusting for the noncash impairment loss, we expect underlying earnings for fiscal 2022 to be in the range of 96 to $1 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 and.
In the midstream subsidiary.
That concludes our prepared remarks.
If you have questions, we'd be happy to entertain those please dial star six.
The unused your line star sixth on mute your line.
Yeah.
Good morning, everyone.
Hi, good morning, how are you.
Good Sir yourselves.
We are doing just fine. Thank you for joining us today.
Pleasure.
Well two questions.
The industrial customer.
Is this the same one that was switching between coal and gas in the past.
It is and most notably in <unk>.
<unk> 'twenty as you may recall it is the same same customer.
Okay, and just kind of curious.
You said you expect them to use.
Elevated gas volumes through the rest of this year.
Has.
I think in the way you asked the.
Question. So is gas now cheaper than coal or are they using both coal and gas.
Yes, I'll try to maybe answer that from a sort of broader market perspective, because we're obviously not privy to their.
<unk>.
Coal contracts or even how there.
Purchasing gas through 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 850 of Deca firm.
At the Henry hub.
Very high and it's been very volatile this summer as you are probably Delaware.
Certainly last year natural gas was.
About $3 at the Henry hub, plus or minus so there has been a big change there coal.
And particularly central Appalachian.
Basing coal.
Similarly elevated.
Obviously, some of the powder River basin and some of the coal.
Spot prices out West are also higher there is a tremendous <unk>.
Export demand for coal right now and our understanding is sort of at the national level, it's hard to domestically.
Take our coal shipment because most of them are headed to the port so.
We believe our customers experiencing some of that.
So even though the prices on a.
Per btu basis, maybe.
Really close I think we would say.
It's probably more of a supply availability consideration.
Okay.
Do you think.
We will continue with that through the winter doesn't look that way or.
Yeah, we try to stay in communication regular communication with them like because of the volume of gas that they have.
Capacity or ability to consume.
It's conducive in the summer time for them to sell.
US high volumes of gas.
We like that and appreciate that from our system load standpoint, the wintertime.
Again back to the Mountain Valley without the Mountain Valley, the winter times, a little bit of a different consideration and we try to balance that out there in the construction materials.
Business. So typically the winter is a little bit.
Slower for them, if you will which also.
Health.
As Jason said, a little more to come on that as we continue to stay in touch with them.
Okay.
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 our sentiment on the project.
Yeah, that's a great question.
Certainly this FERC extension is as we said in progress.
I don't believe there are at this moment firm dates on.
When the FERC May Act and.
In terms of their response to the request for the extension that's very.
Very important item obviously.
We're hopeful that it's it's in the near term.
Certainly that's one to keep keep an eye on.
The Ah <unk>.
Biological assessment and I think the project publically disclosed as of few days ago.
Was provided to the fish and wildlife service.
Was an incredibly comprehensive and thorough document we believe as comprehensive and as thorough as any thats ever been prepared in this country.
So that that was important.
It's a key piece to the biological opinion.
Permit ultimately being.
<unk> issued by the fish and Wildlife service again, there is not a definitive.
Timetable on that at this point, but things are moving they are making making forward progress.
Alright, well. Thank you for the time, that's that's all I've got for this morning.
Thank you, Mike Thanks, again for being with us.
Do we have any other questions. So our sixth on mute your line Star six.
Well if there are no more questions. This concludes our third quarter.
Our earnings call and thank you again for joining us and we.
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 fiscal 2022.
Have a great day.
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