RGC Resources, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
RGC Resources, Inc. is a Virginia holding company whose principal subsidiary, Roanoke Gas Company, distributes and sells regulated natural gas to residential, commercial and industrial customers in the Roanoke, Virginia region. The company also provides limited non-regulated information technology and utility consulting services. Diversified Energy Company had no active operations. The filing covers the fiscal year ended September 30, 2014, with comparisons to fiscal 2013 and 2012.
- Roanoke Gas accounted for approximately 98% of consolidated revenue and gross margin in each of fiscal 2014, 2013 and 2012.
- The company had 58,553 customers and 138 total employees at September 30, 2014.
- Residential customers represented 91.2% of customers, 40% of delivered volume and 57% of revenue.
Revenue, profit, cash flow, margins, debt and liquidity
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Total reported customer and service revenue in operating table | $75.0 million | $63.2 million | Up approximately 18.7% |
| Reported margin in operating table | $29.3 million | $27.6 million | Up approximately 6.3% |
| Natural gas deliveries | 10.1 million DTH | 9.4 million DTH | Up approximately 7.2% |
| Customers | 58,553 | 58,238 | Up approximately 0.5% |
| Variable-rate line of credit outstanding at year-end | $9.0 million | Not provided in the filing text | Not determinable |
| Gas in storage | 2.424 million DTH at $4.71/DTH | 2.529 million DTH at $4.08/DTH | Volume down; average cost up |
The filing text incorporates the consolidated statements of income, balance sheets and cash flows from the 2014 Annual Report to Shareholders, but does not reproduce their net income, earnings per share, operating cash flow, capital expenditures, total assets, cash balance, total debt or liquidity amounts. Accordingly, the filing text does not provide clear values for those metrics.
- The company had $9.045 million outstanding under its variable-rate line of credit at September 30, 2014. A 100-basis-point increase in applicable interest rates would have increased annual interest expense by approximately $13,600 based on year-end variable-rate debt.
- The company issued $30.5 million of 4.26% senior guaranteed notes due September 18, 2034. The filing also states that the remaining debt was fixed-rate, but does not provide a clear total debt balance in the supplied text.
- No natural-gas derivative instruments were outstanding at year-end. The company manages commodity exposure through storage, fixed-price contracts, market purchases and permitted hedging activities.
- The SCC permits recovery of prudent gas-purchase costs through the purchased gas adjustment mechanism, subject to regulatory treatment.
Material changes versus the prior comparable period
- Heating degree days increased 9%, contributing to higher demand. Total deliveries rose from 9.4 million DTH to 10.1 million DTH.
- Residential and commercial deliveries increased as a proportion of annual activity; 67% of total deliveries and 77% of residential and commercial deliveries occurred from November through March.
- Reported revenue increased substantially, while reported margin increased at a slower rate, reflecting the pass-through nature of gas costs and the effect of regulated pricing.
- The company entered into new long-term fixed-rate debt financing through $30.5 million of 4.26% senior guaranteed notes due 2034.
- Gas storage decreased by approximately 105,000 DTH, while the average carrying price increased from $4.08 to $4.71 per DTH.
- John S. D’Orazio became president and chief executive officer in February 2014; John B. Williamson III became chairman.
Guidance, outlook, management commentary, risks and unusual items
- No specific earnings, revenue or cash-flow guidance is provided in the supplied filing text.
- Management expects existing firm supply agreements, which run through March 31, 2017, to be sufficient to meet customer demand during their term. Pipeline and LNG capacity exceeded the company’s maximum one-day demand in fiscal 2014.
- The company expects to renew municipal franchises in Roanoke, Salem and Vinton, Virginia, which expire December 31, 2015, although renewal is not guaranteed.
- Management intends to complete replacement of remaining cast-iron and bare-steel pipeline within three years.
- The business is highly seasonal and weather-sensitive, although its rate structure includes a weather-normalization adjustment intended to reduce earnings volatility.
- Key risks include dependence on two interstate pipelines, severe weather and supply disruptions, pipeline and LNG operational incidents, regulatory and pipeline-safety requirements, cybersecurity, natural-gas price volatility, competition from alternative fuels, economic weakness, pension and retiree-benefit funding obligations, access to capital and debt-covenant compliance.
- The company is a defendant in two civil lawsuits related to a 2009 explosion and fire involving a propane tank formerly associated with Highland Propane. A trial was tentatively scheduled for early 2015. Management does not expect the ultimate liability, if any, to materially affect financial position, results of operations or liquidity.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of September 30, 2014. The auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Net income, earnings per share, operating cash flow, capital expenditures, cash, total debt and year-end liquidity from the incorporated Annual Report to Shareholders.
- The complete debt schedule, including the $30.5 million senior notes, the $9.045 million line-of-credit balance, maturities, covenants and borrowing availability.
- Details of the rate structure, weather-normalization adjustment and the regulatory treatment of gas costs and infrastructure investment.
- Status and potential exposure of the two propane-related lawsuits and any subsequent developments after the filing date.
- Renewal status of the municipal franchises expiring December 31, 2015 and the company’s progress on replacing remaining cast-iron and bare-steel pipeline.