RGC Resources, Inc. Form 10-K Summary
Business Context and Reporting Period
RGC Resources, Inc. is a Virginia-based energy services holding company whose principal subsidiary, Roanoke Gas Company, distributes and sells natural gas to residential, commercial and industrial customers in and around Roanoke, Virginia. The company also provides limited information technology and utility consulting services; Diversified Energy Company had no active operations.
This Form 10-K covers the fiscal year ended September 30, 2012. Approximately 98% of consolidated revenue and gross margin came from the regulated natural gas distribution business. The company reported 57,941 customers, 117 full-time employees and 120 total employees at September 30, 2012.
Key Financial and Operating Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Customers | 57,941 | 57,684 | Up 0.4% |
| Natural gas deliveries | 8,317,496 DTH | 9,544,598 DTH | Down 12.9% |
| Total revenue | $58,799,687 | $70,798,871 | Down 16.9% |
| Gross margin | $26,933,097 | $27,269,566 | Down 1.2% |
| Gross margin as a percentage of revenue | 45.8% | 38.5% | Up approximately 7.3 percentage points |
Residential customers represented 91.2% of customers, 36% of delivered volume, 56% of revenue and 56% of margin. Commercial customers represented 33% of revenue and 25% of margin, while industrial customers represented 36% of delivered volume but only 7% of revenue and 12% of margin, largely because many industrial customers purchase gas directly from suppliers and pay Roanoke Gas primarily for transportation.
The filing text supplied does not provide clear consolidated values for net income, earnings per share, operating cash flow, capital expenditures, total assets, total equity, current ratio or liquidity ratios. Those financial statements are incorporated by reference from the 2012 Annual Report to Shareholders.
Debt, Liquidity and Market Risk
- At September 30, 2012, the company had a $15.0 million variable-rate note due March 31, 2013 and a $5.0 million intermediate-term variable-rate note due December 1, 2015.
- Both notes were hedged with fixed-rate interest-rate swaps. The swaps had an aggregate unrealized loss of $2,916,718 at September 30, 2012.
- The company had a variable-rate bank line of credit, but no outstanding balance under that facility at year-end.
- The company held approximately 2,695,000 DTH of gas in storage at an average cost of $3.51 per DTH, compared with 2,622,000 DTH at $4.92 per DTH in 2011.
- Natural gas commodity costs are generally recovered from customers through the purchased gas adjustment mechanism. The company had no outstanding natural gas derivative instruments at year-end.
Material Changes Versus the Prior Comparable Period
- Natural gas deliveries declined 12.9%, primarily because fiscal 2012 had 22% fewer heating degree-days. Deliveries during the November-March heating period declined 6%.
- Revenue decreased $12.0 million, or 16.9%, largely reflecting lower gas volumes and gas costs.
- Gross margin decreased $0.3 million, or 1.2%, but margin as a percentage of revenue increased because lower gas costs passed through to customers reduced revenue without a comparable reduction in margin.
- The weather normalization adjustment mechanism mitigated most of the lost margin associated with the unusually warm weather.
- The company entered into a new $15.0 million term note and a $5.0 million revolving line of credit in March 2012, as reflected in the filing’s exhibits and debt disclosures.
- The company formed The Utility Consultants in 2011 to provide utility and regulatory consulting services. Operations of RGC Ventures contributed less than 6% of other revenues.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified earnings or revenue guidance in the supplied filing text. Management expects existing firm gas supply agreements to meet customer demand during their terms, and expects to renew or replace pipeline contracts expiring between 2013 and 2019. Management also expects to renew the exclusive municipal franchises in Roanoke, Salem and Vinton, which expire December 31, 2015, although renewal is not assured.
- Weather remains a principal earnings risk because residential and commercial demand is seasonal and temperature-sensitive. The weather normalization mechanism limits exposure around a band of approximately 3% above or below the 30-year average for heating degree-days.
- Roanoke Gas relies on two directly connected interstate pipelines for 100% of transported gas supply. A disruption to either or both could affect customer service and earnings.
- The company faces competition from electricity, propane, coal and fuel oil, particularly where industrial customers can switch fuels.
- Operations are concentrated in the Roanoke Valley, increasing exposure to local economic, regulatory and weather conditions.
- Key regulatory risks include delayed rate relief, inadequate recovery of costs or return on investment, pipeline safety requirements and approval requirements for debt and equity financings.
- Other stated risks include natural gas price volatility, environmental and greenhouse-gas regulation, cyberattacks, staffing constraints, catastrophic pipeline or LNG-facility events and limited access to capital.
- The company is a defendant in two civil lawsuits related to a November 2009 propane explosion and fire. Management believes insurance coverage is adequate and has recorded no liability; a trial was tentatively scheduled for late 2014.
- The company intends to replace its remaining cast-iron and bare-steel pipeline within six years.
Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2012. Brown, Edwards & Company, LLP issued an unqualified audit opinion.
Important Facts for Investors to Verify
- Review the incorporated 2012 Annual Report to Shareholders for net income, earnings per share, operating cash flow, capital expenditures, balance-sheet liquidity and dividend information.
- Verify the maturity, refinancing status and covenants of the $15.0 million note due in March 2013 and the related interest-rate swap exposure.
- Assess the sustainability of gross margin after the significant decline in gas volumes and the unusually warm 2012 heating season.
- Review the company’s rate cases, weather normalization adjustment, purchased gas adjustment and regulatory assets and liabilities.
- Monitor renewal of municipal franchises expiring in 2015 and pipeline transportation contracts expiring from 2013 through 2019.
- Review subsequent disclosures concerning the two propane-related lawsuits, insurance coverage and any pipeline replacement obligations or environmental requirements.