RGC Resources, Inc. 2013 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 filing covers the fiscal year ended September 30, 2013; it is an annual report rather than a standalone fourth-quarter filing.
- Regulated natural gas distribution accounted for approximately 98% of consolidated revenue and gross margin in fiscal 2013, 2012 and 2011.
- The company served approximately 58,238 customers in fiscal 2013 and operated approximately 1,056 miles of transmission and distribution pipeline.
- Roanoke Gas owns an LNG facility with storage capacity of up to 220,000 decatherms and maintains more than 2.4 million decatherms of additional contracted storage capacity.
- RGC Resources had 127 total employees at September 30, 2013, including 35 represented by a labor union.
Financial and Operating Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Customers | 58,238 | 57,941 | Up approximately 0.5% |
| Natural gas deliveries | 9,408,894 DTH | 8,317,496 DTH | Up approximately 13.1% |
| Revenue | $63,205,666 | $58,799,687 | Up approximately 7.5% |
| Gross margin | $27,602,891 | $26,933,097 | Up approximately 2.5% |
- Residential customers represented 91.2% of customers, 41% of delivered volume, 57% of revenue and 58% of margin in 2013.
- Commercial customers represented 8.7% of customers, 28% of volume, 33% of revenue and 25% of margin.
- Industrial customers represented 31% of volume but only 6% of revenue and 12% of margin, primarily because many are transportation customers that purchase gas from third parties.
- Approximately 66% of total deliveries and 75% of residential and commercial deliveries occurred from November through March. Fiscal 2013 had 25% more heating degree-days than the prior year.
- The provided filing text does not include clear values for consolidated net income, earnings per share, operating cash flow, capital expenditures, total assets, cash, current liabilities or liquidity ratios.
Debt, Liquidity and Market Risk
- At September 30, 2013, the company had a $15 million variable-rate note due March 31, 2014 and a $5 million intermediate-term variable-rate note due December 1, 2015.
- Both notes were hedged with fixed-rate interest swaps. The swaps had an unrealized fair-value loss of $1,986,695 at September 30, 2013.
- The company had no outstanding balance under its variable-rate bank line of credit at September 30, 2013.
- Natural gas inventory was approximately 2,529,000 DTH at an average cost of $4.08 per DTH, compared with 2,695,000 DTH at $3.51 per DTH in 2012.
- The company had no outstanding natural gas derivative instruments at year-end. Its regulatory framework permits recovery of prudent gas-purchase costs through the purchased gas adjustment mechanism.
Material Changes, Outlook and Risks
- Fiscal 2013 operating performance benefited from colder weather and materially higher deliveries versus fiscal 2012. Revenue and gross margin increased, although the filing text does not provide sufficient income-statement detail to assess changes in net profit or margins.
- Effective November 1, 2013, Sequent Energy Management, L.P. replaced ConocoPhillips as Roanoke Gas’s asset manager and primary natural gas supplier under generally similar terms.
- Pipeline transportation contracts expire at various times from 2014 through 2020. Management expects to renew or replace them and believes existing firm supply agreements are sufficient for customer demand during their terms.
- Exclusive municipal franchises in Roanoke, Salem and Vinton expire December 31, 2015. Management expects renewal but cannot assure that renewals will occur without adverse conditions.
- Management intends to complete replacement of remaining cast-iron and bare-steel pipeline within four years.
- Key risks include weather-driven volume volatility, dependence on two interstate pipelines, natural gas price and supply volatility, regulatory rate relief and franchise renewals, pipeline safety and environmental compliance, infrastructure funding, pension and retiree-benefit obligations, cybersecurity, competition from alternative fuels and concentration in the Roanoke Valley.
- The company is defending two civil lawsuits related to a November 2009 West Virginia explosion and fire involving a propane tank sold with former Highland Propane assets. A trial was tentatively scheduled for late 2014. Management believes any ultimate liability will not materially affect financial position, results or liquidity.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2013. The independent auditor issued an unqualified opinion.
Important Facts for Investors to Verify
- Review the incorporated 2013 Annual Report to Shareholders for consolidated net income, earnings per share, cash flow, capital expenditures, balance-sheet liquidity and dividend information, which are not included clearly in the supplied filing text.
- Confirm the refinancing or repayment status of the $15 million note that matured on March 31, 2014.
- Monitor renewal terms for municipal franchises expiring December 31, 2015 and interstate pipeline contracts expiring from 2014 through 2020.
- Assess the cost, timing and regulatory treatment of replacing remaining cast-iron and bare-steel pipeline.
- Track weather-normalization provisions, heating degree-days and changes in gas volumes because fiscal 2013 results benefited substantially from colder weather.
- Review developments, insurance coverage and reserves associated with the pending propane-related litigation.