RGC RESOURCES INC annual report, FY2011

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RGC Resources, Inc. — Fiscal 2011 Form 10-K Summary

Business Context and Reporting Period

RGC Resources, Inc. filed its annual report for the fiscal year ended September 30, 2011. The company is a Virginia-based holding company whose principal subsidiary, Roanoke Gas Company, distributes and sells natural gas to residential, commercial, industrial, and transportation customers in and around Roanoke, Virginia. Approximately 98% of consolidated revenue came from the regulated natural gas distribution business in fiscal 2011 and 2010.

  • Natural gas customers: 57,684 at fiscal year-end; 91.1% residential, 8.8% commercial, and 0.1% large industrial or transportation.
  • Fiscal 2011 deliveries: approximately 9.5 million DTH, compared with 9.3 million DTH in fiscal 2010.
  • Fiscal 2011 maximum one-day customer demand: 82,322 DTH.
  • Employees: 124 total, including 119 full-time employees.
  • Common shares outstanding at November 30, 2011: 4,632,584.

Financial Metrics and Liquidity

The filing incorporates the consolidated financial statements and Management’s Discussion and Analysis from the 2011 Annual Report to Shareholders by reference. The supplied filing text does not provide clear consolidated values for revenue, net income, earnings per share, operating cash flow, capital expenditures, margins, total debt, cash, or liquidity ratios.

  • The company maintains debt agreements and promissory notes, including a $15.0 million original-principal note, a $5.0 million note dated October 31, 2008, and another $5.0 million note dated March 14, 2011. The filing text does not clearly state the balances outstanding at September 30, 2011.
  • RGC Resources guarantees certain subsidiary obligations, including obligations associated with Roanoke Gas Company.
  • The company has access to interstate pipeline transportation and storage capacity exceeding 2.6 million DTH, in addition to an LNG facility with storage capacity of up to 220,000 DTH.
  • Combined pipeline and LNG delivery capacity exceeds 111,000 DTH on a single winter day.

Material Changes Versus the Prior Comparable Period

  • Natural gas deliveries increased to approximately 9.5 million DTH from 9.3 million DTH in fiscal 2010.
  • The company formed The Utility Consultants in 2011 to provide utility and regulatory consulting services. These operations contributed less than 5% of other revenues.
  • Application Resources and other RGC Ventures operations remained immaterial, and Diversified Energy Company had no active operations.
  • The filing states that no material changes occurred in the previously disclosed West Virginia propane-related lawsuits.
  • The company issued 1,447 shares of restricted stock to outside directors during the quarter ended September 30, 2011.
  • The company reported no changes during the fourth fiscal quarter that materially affected, or were reasonably likely to materially affect, internal control over financial reporting.

Outlook, Risks, Contingencies, and Unusual Items

Management expects existing firm natural gas supply agreements to be sufficient to meet customer demand during their terms and anticipates renewing pipeline contracts that expire at various times from 2012 through 2019. Management also intends to complete replacement of the remaining cast iron and bare steel pipeline within the next 10 years.

  • Key operating sensitivities include weather, customer consumption, natural gas prices and availability, conservation, customer delinquencies, industrial customer fuel switching, and economic conditions affecting construction and customer growth.
  • Regulatory risks include delayed or insufficient rate relief, increased environmental and safety requirements, climate-change legislation, pipeline and system-integrity requirements, and franchise renewal conditions.
  • Capital access and availability of debt or equity financing could affect future capital expenditures.
  • The company faces workforce risks related to attracting and retaining technical employees and an aging workforce. Its collective bargaining agreement expires July 31, 2015.
  • Two civil lawsuits relate to a November 2009 propane explosion and fire in West Virginia involving assets sold in 2004. No damages were specified. The company recorded no liability because management did not consider an adverse outcome probable or damages reasonably determinable; management also believes insurance would cover any adverse damages.
  • Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2011. The company was exempt from an external auditor attestation because it was a smaller reporting company and non-accelerated filer.

Important Facts for Investors to Verify

  1. Obtain the incorporated 2011 Annual Report to Shareholders and verify fiscal 2011 and fiscal 2010 revenue, earnings, cash flow, capital expenditures, debt, cash, and margin data.
  2. Review debt maturities, interest rates, covenant compliance, guarantees, and the September 30, 2011 outstanding balances under the disclosed loan agreements.
  3. Assess the effect of weather, gas-cost pass-throughs, rate cases, customer conservation, and industrial demand on earnings and cash flow.
  4. Monitor pipeline contract renewals beginning in 2012 and the company’s ability to fund planned pipeline replacement and other capital expenditures.
  5. Track the West Virginia litigation and confirm insurance coverage, potential exposure, and any subsequent developments.
  6. Review franchise renewals, particularly the Roanoke, Salem, and Vinton franchises that expire December 31, 2015.