RGC Resources Inc (RGCO) 2020 Q3 法說會逐字稿

Good morning. I am Paul Nester, President and CEO of RGC Resources, Inc. Welcome, and thank you for joining us as we discuss RGC Resources' Third Quarter 2020 results.

First, I would like to go over a few administrative items. We have muted all lines and asked that all participants remain muted. (Operator Instructions). The link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com.

Let's begin our presentation. Slide 1 presents our forward-looking statements disclaimer. This presentation contains forecasts and projections.

As outlined on Slide 2, we will begin with a review of third quarter results, followed by the outlook for the fourth quarter of fiscal 2020 and which ends September 30.

As noted on Slide 3, our customer count and additions are in line with expectations for the first month -- first 9 months of fiscal 2020, despite the COVID-19 pandemic. We expect this trend to continue through the fourth quarter. The 54% increase in total volumes on Slide 4 is not a misprint. We have had 1 of the most interesting quarters in the company's history. The third quarter was 1 of the coolest and recent memory with a 141% increase in heating degree days over 2019. This weather was 41% colder than normal. Commensurate with this cool weather, residential volumes increased 50%. Despite the pandemic, certain commercial customers, for example, a food can manufacturer and CNG fuel delivery fleet experienced significant volume increases that offset the customers most negatively impacted by the pandemic in our service territory, the hotels, restaurants and schools, for example.

Finally, a large multi-fuel manufacturer also mentioned on the last call, switched to 100% natural gas beginning in late March, adding 0.5 Bcf to the industrial throughput for the quarter. They are now our #1 customer based on delivered volumes with approximately 1 Bcf used June year-to-date. This customer had immaterial usage in 2019.

As shown on Slide 5, fiscal 2020 year-to-date total volumes delivered increased 3% compared to last year. Unlike the cooler weather experienced in the third quarter, the first 6 months or 9 months of 2020 was 6% warmer than the prior year. Again, the increase in industrial volumes offset the decrease in our residential and commercial classes and were primarily attributable to the customer previously mentioned.

Moving on to Slide 6. $17 million of capital spending for fiscal 2020 year-to-date is slightly ahead of the prior year. Through the SAVE infrastructure Rider, we have invested approximately $7 million to continue modernizing our system renewing over 5 miles of main year-to-date. As we have discussed over recent years, the SAVE Rider continues to provide the company with a regulatory mechanism that allows us to make our distribution system safer and more reliable. I might add that our current application for the 2021 SAVE program is pending before the SEC, and we expect approval by fiscal year-end.

Additionally, we have invested almost $6 million in growth and expansion of our system. I would like to update you on the Blue Ridge main extension project mentioned on our last call. This project extends our system to unserved customers and is 1 of the largest capital projects by dollar value in Roanoke Gas history. It is on schedule. We have completed the installation of the 7,000 feet of 6-inch steel main, should complete the remaining plastic mains and services by the end of the fiscal year.

Randy Burton, our CFO, will now walk us through our earnings highlights. Randy?

Thanks, Bob. Good morning, everyone. As indicated on Slide 7, Resources had a strong first 9 months of fiscal 2020, with diluted EPS increasing 31% over the prior year to $1.34 per diluted share. Performance significantly improved due to favorable utility margins and earnings on our MVP investment.

Now let's turn to an overview of our operating results. To aid in this discussion, we have included our condensed consolidated statement of income on Slide 8. Let's start with our quarter-over-quarter results.

In spite of the pandemic, Roanoke Gas utility had a strong quarter with increased volumes and improved gas utility margins net of prior year rate case estimates. As addressed in our 10-Q, gas utility margin is a non-GAAP measure defined as gas utility revenue less cost of gas. 2019 Q3 margins were abnormally high as a result of update in rate case assumptions prompted by FCC staff report. Excluding these effects, gas utility margins for the quarter would have increased approximately 4.3%. As you will see, on a year-to-date basis, this had a minimal impact. Non-gas operating expenses increased approximately $115,000.

This was primarily driven by an increased professional services, bad debt expense as well as higher general taxes and depreciation related to the continued investment in Roanoke Gas infrastructure.

Noncash equity earnings from RGC Midstream's investment in the Mountain Valley pipeline increased 55% to approximately $1.2 million due to construction spending to date. The increase in the other income reflects the recognition of AFUDC related to capital spending on the 2 MVP interconnect projects discussed on prior calls.

Interest expense increased during the quarter due to the higher overall borrowings related to investment in the MVP. The increase in expense was offset by the recognition of the financing component of AFUDC. Income tax increased $57,000 for the third quarter, primarily as a result of the increases in taxable income. Overall, the net income for the quarter increased to $1.2 million or $0.15 per diluted share compared to $1.1 million or $0.14 per diluted share for the prior quarter.

Now let's review results for the 9 months ended June 30, 2020. Operating income increased approximately $2.3 million to a total of $13.4 million. Primary drivers were the increased non-gas rates and a positive W&A adjustment to revenue due to the warmer weather. The increases were offset by higher expenses from the amortization and first quarter write-down of regulatory assets, accelerated vesting of restricted stock and, to a lesser extent, increases in professional services, bad debt expense, general taxes and depreciation.

Equity earnings on the MVP investment increased by approximately $1.4 to $3.5 million, again related to the construction spend to date. Like the quarter-over-quarter analysis, the other income increase reflects the recognition of AFUDC related to the 2 MVP interconnect project as discussed earlier.

Increased borrowings resulted in a 18% increase in interest expense. Borrowing levels increased over the same period of the prior year due to the combined -- continued sorry, funding of our MVP investment as well as funding of our Roanoke Gas capital projects. Income tax expense increased due to the company's growth in taxable income.

In combination, all of these factors resulted in a $2.7 million or 32% increase in net income for the first 9 months fiscal 2020 as compared to the same period in fiscal 2019. This concludes our review of financial results.

I will now hand the presentation back over to Paul.

Thank you, Randy. As we near the end of fiscal 2020, let's review our outlook on Slide 9. We are in prime construction season. We anticipate investing $5 million in the fourth quarter, bringing total 2020 Roanoke Gas investment to approximately $22 million. Investment in SAVE infrastructure Rider projects and the Blue Ridge project will lead the way.

The MVP is targeting an early calendar 2021 in-service date, though the project has not yet returned to construction and is still working through various permit issues. Accordingly, our required fiscal 2020 cash investment will be lower than previously disclosed.

We wanted to give you a quick update regarding the effects of the pandemic. The pandemic continues to create significant uncertainty for the foreseeable future. As Randy discussed earlier, so far, there have been minimal impacts on operational and financial results. We are still monitoring the possible impacts of COVID-19 on the safety of our employees and customers, certainly, the broader economy. And we're taking the possible effects of the pandemic into consideration during our fiscal 2021 planning. I would like to reemphasize what we talked about on the prior call, the dedication of our [employees] and our partners here at the company have been outstanding over these last several weeks and months and responding to the pandemic and keeping the gas flowing. I just would like to say thank you to them again.

That concludes our prepared remarks.

(Operator Instructions)

Congrats on the quarter, much better than I expected.

Well, thank you. I think, as you recall, at the end of the last call in our outlook discussion, we stated there was a lot of uncertainty. And of course, everyone, I think, is dealing with the uncertainty. And we have been fortunate, as we mentioned in today's call, some things have fallen our way, if you will, and our customers' way and that's been helpful.

Yes. Just the only question I have, certainly a lot of news since your last call. Atlantic Coast being taken off the boards certainly makes MVP just that much more valuable. So maybe you could share with us what you can on kind of where we are with MVP? I think last time, it was 91%, 92% complete. Are they back in the field? Is there construction going on? Is the time line still in place? And maybe any chatter about future expansions of MVP now that ACP is off the boards.

Yes. I'd be glad to talk through that a little bit. And certainly, we can share with you what Equitrans Midstream, the managing partner, has shared in their earnings release earlier this week on August 4. I think they stated, Mike, they expect the biological opinion from the Fish and Wildlife Service to be issued shortly, and they hope to at that point receive a fairly quick approval from the FERC to get back into the field and resume construction. So they're not -- obviously, not in the field at the moment. But again, pending those 2 steps, hopefully very, very soon, they can get back in the field. I think they also disclosed in that earnings release, Mike, that they expect the Army Corps to reissue the Nationwide 12 Permit, which is a big deal, too. And that's going to allow waterbody crossings to resume. So hopefully, a lot of things to come here in the very near future.

As to the Atlantic Coast being canceled, that was frankly, a surprise development to a lot of us, I think, in the industry, and it does have ramification to the Mountain Valley. I think there's been quite a bit of press on EQT, who is the largest shipper on the Mountain Valley and what they're doing with some of their capacity, possibly with Duke and Dominion, who, of course, were the primary partners in the Atlantic Coast pipeline. So a lot of market dynamics happening now around that, which we think are positive to the Mountain Valley.

Expansion, I think there's been some press on expansion. I'm not sure that Equitrans has made any public comments on expansion at this point. But hopefully, down the road, there'll be more discussion about that.

Yes. I would think -- I mean, you have the capability to up compression on the pre-existing line, correct?

Yes. I think that's right. The pipe is engineered as it was presented to FERC to allow for more natural gas to flow through the pipe, right.

Congratulations on the quarter.

Well, thank you very much for joining today and asking your questions. (Operator Instructions)

Well if there are no more questions, this concludes our third quarter earnings call for fiscal 2020. We look forward to speaking with you again in December to review our full fiscal 2020 results. Thank you again for joining us, and please stay safe and healthy, as we all try to work to reduce the spread of the virus. We hope you have a great day and a great weekend. Thank you.

Thanks.