Q4 2024 RGC Resources Inc Earnings Call
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 Nester, 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 finance.
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 finish 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 a 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 of 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 1st, 2024.
Turning now to operations on slide 4. Main extensions and renewals for the 2024 fiscal year totaled nearly 8 miles and we connected 631 new services.
and increased to 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 5 shows our delivered gas volumes for the quarter. Volumes overall were 5% 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 6 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 7.
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 R&G 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 MVP's 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 AFUDC 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 rape case as discussed by Tommy earlier in the presentation.
Transcription by CastingWords
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 Nester. Paul.
Paul Nester: 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.
Paul Nester: Mountain Valley has the capability of transporting up to 2 billion decatherms a day.
Paul Nester: And that's a tremendous amount of energy that's literally passing right through our service territory.
Paul Nester: and we're excited about that as we've spoken now for many years about that.
Paul Nester: 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
Paul Nester: 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.
Paul Nester: There continues to be steady build out in the medical complex, which is primarily in the downtown or just adjacent to downtown Roanoke.
Paul Nester: The large Carilion expansion that we've been talking about for several years is nearing completion and we expect increased gas usage.
Paul Nester: for what is already a top three customer, that being Carilion.
Paul Nester: 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 $1 million system betterment plan for this year.
Speaker Change: 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.
Speaker Change: We are undergoing plans right now to expand from Summit View Business Park to nearby commercial and residential customers.
Speaker Change: and we're also in conversation with the county seat of Franklin County, Rocky, the town of Rocky Mountain to serve that area with a new
Speaker Change: Mountain Valley Pipeline, Interconnect, and Distribution Systems. 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.
Speaker Change: We're thrilled to be working with them and having the opportunity to serve that community.
Speaker Change: 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.
Speaker Change: 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 it may take some time.
Speaker Change: 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.
Speaker Change: We continue to expect to continue to invest in our existing distribution system here in the greater Roanoke Valley.
Speaker Change: As we just talked about, there are opportunities in Franklin County with which we've allocated.
Speaker Change: Some capital shown in the purple, the purple part of the pie there labeled MVP growth. Moving to slide 12.
Speaker Change: 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
Speaker Change: performance in fiscal 2024. And we're going to continue to be mindful and prudent of our expense side of the income statement.
Speaker Change: 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.
Speaker Change: Sure. Directionally, it's still favorable to where it was a year ago. A year ago, it was in a rising
Speaker Change: Posture. As we came into September, it was probably a little more favorable than it is now.
Speaker Change: The Fed dropped rates 50 base points in September, 25 base points in November.
Speaker Change: 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.
Speaker Change: What's going to happen in 2025? There's I don't think there's a consensus. So 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?
Speaker Change: Yeah, thank you, Tim. Again, there's a lot of moving parts and pieces there, obviously, and it does have 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.
Speaker Change: 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 ASUDC.
Speaker Change: Layton earnings that we had last year due to the construction being completed on the project.
Speaker Change: 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.
Speaker Change: really was a watershed moment for an investment that we started in October of 2015.
Speaker Change: 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.
Speaker Change: That's our best estimate at the moment, and there is a good description of how the RGC midstream, our investment.
Speaker Change: 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.
Speaker Change: Finally, we just announced a few days ago that the board had approved an annual dividend increase of $3.5 million.
Speaker Change: just under 4% to $0.83 annually. We're pleased that we're able to resume what we believe is a more normal dividend growth.
Speaker Change: Relative to the outstanding success of our operation, especially our regulated
Speaker Change: Utility, and as we'll see in just a moment with our forecast earnings, this
Speaker Change: 83 cent implied annual rate fits right within our comfort zone on the payout ratio.
Speaker Change: So with that, moving to slide 13, we do have our earnings forecast range for fiscal 2025. Again, we're just
Speaker Change: Near in 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.
I'm out!
Speaker Change: 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.
Speaker Change: We've had an outstanding year yet again, and I think, you know, at this time of 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.
Speaker Change: and our shareholders and our other business partners for contributing to that success.
Speaker Change: That concludes our prepared remarks. If you have any questions, please dial pound pound to unmute your line.
Pound Pound on Mutraline.
Hey, good morning, everyone.
Good morning. We hope you're doing well.
Speaker Change: I am. I see you gentlemen are doing well given the previous weather and what they're calling for in the next couple of days.
And that kind of leads into my question here.
with MVP.
Speaker Change: I'm wondering what the flows are looking like right now given we've had this extended cold snap.
Speaker Change: 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.
Speaker Change: 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 it's, I believe it's between 1.5 to 2 BCF a day.
Okay.
And that will roll right into my next question.
Speaker Change: 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 that wisdom as Tim alluded to is bouncing around. I think
Mike, energy policy is similar, certainly with President-elect Trump.
Speaker Change: When he takes office in mid late January and based on some of his nominations for
Speaker Change: and environmental-related positions, there seems to be a bullishness, if you will, about America's energy and the next...
Speaker Change: 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, it's conjecture at this point.
Speaker Change: 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.
Speaker Change: I believe, and certainly our company believes, we're not speaking for the joint venture here, but we believe there will be
Speaker Change: 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, then last one.
oh
Assuming there are expansions, you know, Southgate, etc.
Now that the cash is flowing your direction.
Speaker Change: You know 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.
Speaker Change: 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 to be peaceful.
Transcription by CastingWords
All right, that's all I have, gentlemen. Thank you.
Speaker Change: Thank you, Mike. Thank you for being on the call today.
Speaker Change: Do we have any other questions? If so, you can go on with.
Speaker Change: Paul, this is Tim Winter with Cabeli Funds. Can you hear me?
Paul Nester: I can Jim. 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 base number contemplated for the Roanoke rate order?
Speaker Change: Sure, Tom, you want to answer that? The rate order, the rate base was around 200 million dollars and...
Speaker Change: Then we've got some, say, rate-based, R&G rate-based, so a total of maybe $210 to $220, that range. Net rate-based, right? Net rate-based, correct. So you take out the depreciation, accumulated depreciation, deferred taxes, some of those items that don't earn a return.
Speaker Change: 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...
Speaker Change: Extremely valuable pipeline, and I'm sure it is to to others as well
Speaker Change: I'm just, you know, wondering if, if there were to be.
Speaker Change: a bigger party interested in buying your interest, what the considerations would be, you know, from your end as to holding it versus selling it.
Yeah, it's a significant tax cut.
Speaker Change: Yeah, that's a that's a great question and it does have a complicated answer especially with what you Added there at the end the tax considerations
Speaker Change: 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
Speaker Change: contributed approximately 58 million dollars 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.
Speaker Change: I believe today our balance sheet investments at approximately 20 million dollars. 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
relative, we believe, to the value of the assets.
Speaker Change: 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.
Speaker Change: if you will, that we reported to the impairment. But it's 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.
Speaker Change: The actual value, if you will, and certainly the fair market value of any asset that we have on our balance sheet. Not sure if that answered your question, but
Speaker Change: No, I appreciate it. Thank you. That's, that's, that's very helpful. And then just one more since I, I got the mic. Can you talk a little bit about your equity needs going, you know, going forward, how much you're thinking about?
Speaker Change: Sure, I may start with that and then let Tim and Tommy add, too, if they would like, Tim.
Speaker Change: 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 a capital structure that contained about 59% equity.
I think that's a fair and reasonable balance of equity.
Speaker Change: 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.
Tim made some comments and I may flip it back.
made some comments about.
Speaker Change: Our 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 will come back to your question about equity at the holding company from there.
Tim Winter: Sure. So, at the midstream level, we do have debt that supports the investments that we have made.
Tim Winter: None of that debt is coming due in fiscal 2025. We do have 800,000 of amortization on it, but 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
Tim Winter: and then one tranche from Roanoke Gas that in Fiscal 26 matures. So we're looking at that. We've already started those conversations.
Tim Winter: but we don't have anything to report right at this point.
Speaker Change: Yeah, that's right. And certainly, if this comes back full circle to the interest rate environment, we would
We would actually
Speaker Change: be happy to see some lower interest rate environment so we could term out some of that debt whether it's in the RDC midstream subsidiary or in fact in
Speaker Change: Rono Gas, you know, go a little bit longer on on some debt. All that to say, Tim, our equity plans for 2025 are 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.
Okay, great. Thank you so much.
Thank you.
Speaker Change: 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