ANNUAL REPORT 2011SOLID PERFORMANCE. STEADY SUCCESS. Solid and Steady, RGC embRaCeS a new eRa
At RGC Resources, we’re not rushing into things. Straightforward, solid performance has always been at the heart of our
steady success. But when the time is right to invest in the latest technology to enhance safety and efficiency, we do it right.
It’s been a significant year for financial gains and technological advancement at RGC. As city revitalization projects
multiplied the number of downtown Roanoke residences, we felt it was important to replace the natural gas distribution
system beneath the streets. Some of these pipes – cast iron mains and bare steel service lines — were close to 100
years old. After a monumental, six-month undertaking completed in October, 9,000 feet of modern plastic and coated
steel pipe are now beneath the streets downtown.
RGC is one of the first in the country to remove meters from the basements of old downtown buildings and secure
them in vaults in sidewalks, creating a much safer scenario in the event of an emergency. It’s a proactive move,
incorporating high-tech features such as excess flow automatic cutoff valves. Along with ensuring safety and
reliability, these system upgrades will enhance service to downtown residents and commercial properties by providing
higher operating gas pressure – a vital improvement.
The infrastructure investment of 2011 reflects RGC’s commitment to our customers and to the future of the company.
Earnings, stock prices and dividends continued to rise consistently in 2011 despite the economy, and we were
especially pleased to announce a 100 percent stock dividend to shareholders in September.
It’s all about solid performance and steady success.
Year Ended September 30,
YeaR ended sePTembeR 30,
2011
2011
2010
2010
2009
2009
OPeRaTing Revenue — naTuRal gas
$ 69,483,620
$ 72,426,658
$ 80,786,228
OTheR Revenue
$ 1,315,251
$ 1,397,256
$ 1,398,245
neT incOme
$ 4,653,473
$ 4,445,436
$ 4,869,010
basic eaRnings PeR shaRe
$
1.01
$
0.98
$
1.09
RegulaR dividend PeR shaRe — cash
$
0.68
$
0.66
$
0.64
numbeR Of cusTOmeRs — naTuRal gas
57,684
56,975
56,119
TOTal naTuRal gas deliveRies — dTh
9,544,598
9,314,151
9,260,469
TOTal addiTiOns TO PlanT
$ 7,589,386
$ 5,973,586
$ 5,752,780
Solid and Steady, RGC embRaCeS a new eRa
cash RewaRds. in today’s challenging economic times, investments
that demonstrate strong growth are vitally important to shareholders,
and nothing communicates a company’s financial health better than
cash dividends. RGC Resources has paid quarterly cash dividends
for 270 consecutive quarters — comforting news for our investors for
more than 67 years. Cash dividends paid over the past half-decade,
as illustrated in the bar chart, show a remarkably consistent rise year
after year, an indicator of just how strong and steady a performer
RGC Resources is and plans to be in the future.
Rgc ResOuRces, inc. / 2011 annual RePORT / 1
2 / Rgc ResOuRces, inc. / 2011 annual RePORT
letteR FRom tHe Ceo
To Our Shareholders:
I am pleased to report earnings of $4,653,000, a 4.7 percent improvement over last year. I am also pleased to
report that our Board of Directors approved an annualized dividend increase to $0.70 per share effective
February 1, 2012, following the 100 percent stock dividend to shareholders that was effective September 1, 2011.
In spite of several years of recession and very sluggish national and international economic growth, we have
weathered the economic turmoil and malaise reasonably well. Our level of infrastructure investment, stock
price and dividends, while not immune to the economic cycle and volatility, have improved as follows:
YeaR
neT PlanT
balance
OcTObeR 1 sTOcK
PRice PeR shaRe
annualized
dividend PeR shaRe
2011
$ 85,722,000
$ 18.65
2010
$ 81,455,000
$ 15.10
2009
$ 78,509,000
$ 13.49
$ 0.68
$ 0.66
$ 0.64
2008
$ 75,608,000
$ 15.00
$ 0.625
2007
$ 72,587,000
$ 13.49
$ 0.61
(per share items adjusted for stock split)
JOhn b. williamsOn, iii
RGC Resources, Inc.
Chairman of the Board, President & CEO
sTOcK PRices climb — again. RGC Resources’ stock was trading at more than $18 per share
when this annual Report went to print, another impressive increase over previous years (adjusted for
September’s two-for-one stock split). RGC continues to receive positive performance reviews in various
trade publications, enhancing our national reputation as a company that continues to do the right things
and defy the struggling economy. we’re sticking to basics, staying focused on our core business and
growing the Company’s value year after year — solid strategies that are paying off as evidenced by
2011’s strong stock prices and investor confidence.
Rgc ResOuRces, inc. / 2011 annual RePORT / 3
Operationally, 2011 was a very busy year. We replaced approximately 9 miles of bare steel
and cast iron pipeline, including all of the remaining cast iron and bare steel pipe in
downtown Roanoke. Prior to the 1960s, Roanoke Gas Company installed either cast iron or
We plan to replace the remaining
cast iron and bare steel pipe over the
next few years, continuing to reduce
maintenance costs and further
enhance system reliability and safety.
bare steel pipe to deliver
gas to customers. Twenty
years ago, we began a
program to replace the
cast iron and bare steel
pipe with either plastic
or coated steel pipe. As
a result, bare steel and
cast iron pipe comprise
approximately 5 percent of our distribution system compared to 25 percent in 1991. We plan
to replace the remaining cast iron and bare steel pipe over the next few years, continuing to
reduce maintenance costs and further enhance system reliability and safety.
We are investing in infrastructure to add new customers, currently at a modest rate given
the still depressed new home construction sector. Customers converting to natural gas from
other energy sources for space heating, such as fuel oil and electricity, is a significant portion
easing The Pain Of PROgRess. when RGC Resources embarked on a massive project to
proactively replace the natural gas distribution system beneath the streets of Roanoke, we knew the
construction could cause problems for downtown businesses. So we took measures to make our work
as painless as possible.“while there have certainly been disruptions, Roanoke Gas is bending over
backwards to get people where they need to go,” Sean luther, president of downtown Roanoke inc.,
told The Roanoke Times. while the company scheduled work to avoid peak shopping days and traffic
hours, our workers helped pedestrians through construction areas, carried supplies for merchants and
patronized the local shops and eateries. a cooperative spirit helped make the project a success.
of new customer growth, as natural gas prices in 2011 were at or near historical lows for the
decade. The long-term outlook for domestic natural gas supplies remains strong as development
of natural gas reserves from shale deposits continues in many parts of the country. While I
expect the increasing conversion of electricity generation plants from coal to natural gas for
environmental and EPA compliance reasons to continue, the apparent abundance of gas
supply should help mitigate related upward price pressure. Natural gas should maintain its
4 / Rgc ResOuRces, inc. / 2011 annual RePORT
Rgc ResOuRces, inc. / 2011 annual RePORT / 5
6 / Rgc ResOuRces, inc. / 2011 annual RePORT
While we believe we are ahead of most of the industry as a result of
having already replaced much of our older plant, the new model for
improved risk-based assessment should enhance our already strong
safety and system reliability programs.
price advantage for space and water heating for the
We completed our Distribution Integrity Management
foreseeable future. We feel fortunate to be part of
Plan in 2011 as required by federal regulation.
an industry that provides both the environmentally
The plan is designed to improve our year-to-year
friendly fuel and the most economical option
operating risk assessment, system maintenance and
for customers.
safety programs. While we believe we are ahead of
most of the industry as a result of having already
We had an active year from a regulatory perspective.
replaced much of our older plant, the new model for
The rate case filed in September 2010 was settled with
improved risk-based assessment should enhance our
the Virginia State Corporation Commission (SCC) in
already strong safety and system reliability programs.
April 2011 for $814,000. We filed a new rate case in
September 2011 for $1,088,000 and put those rates
National and international weak economic conditions
into effect November 1, 2011 subject to SCC audit and
continue to weigh heavily on U.S. business activity
hearing. Any difference between the SCC final order and
and national unemployment remains stubbornly high
the implemented rates will be refunded to customers
at roughly 9 percent. Unemployment in our service
following receipt of a final order expected in mid
area peaked in 2010 at 7.4 percent, but declined to
2012. Our rate increases, while modest, are necessary
approximately 6.7 percent by the end of fiscal year
to recover increased depreciation expense on added
2011. We experienced significant industrial sales
or replaced plant as well as increased employee,
decline during the recession, however gas deliveries
operational and regulatory compliance costs.
to industrial customers improved in 2011, though
sTOcK sPliT! the two-for-one stock split implemented as a 100 percent stock dividend, was good
news for all concerned as it doubled the number of shares owned by current shareholders while giving
more potential shareholders an economical opportunity to join the RGC Resources ownership family.
the stock split elicited a positive response from the publicly traded markets — while also increasing
the number of shares outstanding. Shareholder ownership was not diluted in the process; it remained
the same with double the number of shares at half the price. the split is yet another indicator of our
solid, growing business.
Rgc ResOuRces, inc. / 2011 annual RePORT / 7
MagazinE hErE
8 / Rgc ResOuRces, inc. / 2011 annual RePORT
We experienced significant industrial sales decline during the
recession, however gas deliveries to industrial customers improved in
2011, though not to pre-recession levels. I expect some continued
softness for fuel demand by our larger industrial customers in 2012.
not to pre-recession levels. I expect some continued
On behalf of our employees and members of the
softness for fuel demand by our larger industrial
Board of Directors, I thank you for your continued
customers in 2012. Space heating sales should be
interest in our operations and for your ongoing
reasonably strong based on long-range weather
decision to invest in RGC Resources.
forecasts. If the forecasts are inaccurate, the
Company does have a regulatory tariff mechanism
to protect heating sales margins against weather that
is more than 3 percent warmer than the long-term
average for our service territory.
Fortunately, interest rates have remained low and
are expected to remain so for at least another year.
Overall 2012 will likely be another anemic year
for the U.S. economy. However, we look forward
to reporting to you at the end of 2012 on what
I anticipate to be another solid performance.
JOhn b. williamsOn, iii
RGC Resources, Inc.
Chairman of the Board, President & CEO
a sOlid PeRfORmeR: again, we maKe The TOP 40. For the second consecutive year,
RGC Resources is listed as one of the 40 best energy companies by Public Utilities Fortnightly magazine.
better yet, we’re climbing in the rankings, moving ahead steadily to no. 33. “operational issues are
becoming more important, as customers and regulators demand greater efficiencies — and as companies
look for new ways to generate returns in a changing market,” the article states. “Ultimately, efforts to
improve operations might distinguish winners from losers.” Public Utilities Fortnightly is known as “the
journal of record for the U.S. utility industry, providing authoritative, in-depth analysis of trends in
generation, transmission and distribution of electricity and natural gas.”
Rgc ResOuRces, inc. / 2011 annual RePORT / 9
oFFiCeRS and boaRd oF diReCtoRS
JOhn b. williamsOn, iii
Chairman of the Board,
President and
Chief Executive Officer (1) (2) (3) (4)
JOhn s. d’ORaziO
Vice President and
Chief Operating Officer (2) (3) (4)
dale P. lee
Vice President and
Secretary (1) (2) (3) (4)
hOwaRd T. lYOn
Vice President,
Treasurer and
Chief Financial Officer (1) (2) (3) (4)
RObeRT l. wells, ii
Vice President,
Information Technology,
Assistant Secretary and
Assistant Treasurer (1) (2) (3) (4)
abneY s. bOxleY, iii
President and
Chief Executive Officer
Boxley Materials Company
Director (1)
fRanK T. elleTT
Chairman of the Board
Virginia Truck Center, Inc.
Director (1) (2)
geORge w. lOgan
Principal
Pine Street Partners
Faculty
University of Virginia
Darden Graduate School
of Business
Director (1) (2)
s. fRanK smiTh
Vice President
Industrial Sales
Alpha Coal Sales
Company, LLC
Director (1) (2)
s
R
e
c
i
f
f
O
s
R
O
T
c
e
R
i
d
f
O
d
R
a
O
b
10 / Rgc ResOuRces, inc. / 2011 annual RePORT
oFFiCeRS and boaRd oF diReCtoRS
JOhn b. williamsOn, iii
Chairman of the Board,
President and
Chief Executive Officer (1) (2) (3) (4)
(1) RGC Resources, Inc.
(2) Roanoke Gas Company
(3) Diversified Energy Company
(4) RGC Ventures of Virginia, Inc.
nancY hOwell agee
President and
Chief Executive Officer
Carilion Clinic
Director (1) (2)
s
R
O
T
c
e
R
i
d
f
O
d
R
a
O
b
maRYellen f. gOOdlaTTe
Attorney and Principal
Glenn Feldmann Darby
& Goodlatte
Director (1) (2)
J. allen laYman
Private Investor
Director (1) (2)
b
O
a
R
d
O
f
d
i
R
e
c
T
O
R
s
RaYmOnd d. smOOT, JR.
Chief Executive Officer
and Secretary-Treasurer
Virginia Tech
Foundation, Inc.
Director (1)
Y
R
a
i
d
i
s
b
u
s
s
R
O
T
c
e
R
i
d
f
O
d
R
a
O
b
JOhn s. d’ORaziO
Vice President and
Chief Operating Officer
Roanoke Gas Company
Director (3) (4)
dale P. lee
Vice President and Secretary
RGC Resources, Inc.
Director (3) (4)
hOwaRd T. lYOn
Vice President, Treasurer
RObeRT l. wells, ii
Vice President,
Information Technology,
and Chief Financial Officer
Assistant Secretary and
RGC Resources, Inc.
Director (3) (4)
Assistant Treasurer
RGC Resources, Inc.
Director (3) (4)
Rgc ResOuRces, inc. / 2011 annual RePORT / 11
s. fRanK smiTh
Vice President
Industrial Sales
Alpha Coal Sales
Company, LLC
Director (1) (2)
SeleCted FinanCial data
YeaR ended sePTembeR 30,
2011
2010
2009
2008
2007
OPeRaTing Revenues
$70,798,871
$ 73,823,914
$ 82,184,473
$ 94,636,826
$ 89,901,301
gROss maRgin
27,269,566
26,440,273
27,075,924
25,913,612
25,221,776
OPeRaTing incOme
9,313,046
8,982,181
9,844,516
8,838,026
7,958,279
neT incOme –
cOnTinuing OPeRaTiOns
neT incOme (neT lOss) –
discOnTinued OPeRaTiOns
basic eaRnings
PeR shaRe –
cOnTinuing OPeRaTiOns
basic eaRnings
PeR shaRe –
discOnTinued OPeRaTiOns
cash dividends
declaRed PeR shaRe
4,653,473
4,445,436
4,869,010
4,257,824
3,765,669
–
–
–
(36,690)
40,540
$
1.01
$
0.98
$
1.09
$
0.97
$
0.87
–
–
–
(0.01)
0.01
$
0.680
$
0.660
$
0.640
$
0.625
$
0.610
bOOK value PeR shaRe
10.55
10.18
10.00
9.89
9.69
aveRage shaRes
OuTsTanding
4,592,713
4,514,262
4,447,454
4,402,527
4,325,607
TOTal asseTs
125,549,049
120,683,316
118,801,892
118,127,714
116,332,455
lOng-TeRm debT
(less cuRRenT PORTiOn)
13,000,000
28,000,000
28,000,000
23,000,000
23,000,000
sTOcKhOldeRs’ eQuiTY
48,785,778
46,309,747
44,799,871
43,723,058
42,365,233
shaRes OuTsTanding
aT sePT. 30
4,624,682
4,548,864
4,477,974
4,418,942
4,372,286
12 / Rgc ResOuRces, inc. / 2011 annual RePORT
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that
and development of natural gas reserves; (ix) changes in
relate to future transactions, events or expectations. In
accounting regulations and practices, which could
addition, RGC Resources, Inc. (“Resources” or the
change the accounting treatment for certain transactions
“Company”) may publish forward-looking statements
and increase the cost of compliance; (x) effect of the
relating to such matters as anticipated financial perfor-
federal budget deficit and its potential impact on
mance, business prospects, technological developments,
corporate taxes; (xi) effect of weather conditions and
new products, research and development activities and
natural disasters on production and distribution facilities
similar matters. These statements are based on manage-
and the related effect on supply availability and price;
ment’s current expectations and information available
(xii) potential effect of health-care legislation on health-
at the time of such statements and are believed to be
care costs; (xiii) increased customer delinquencies and
reasonable and are made in good faith. The Private
conservation efforts resulting from difficult economic
Securities Litigation Reform Act of 1995 provides a safe
conditions and/or colder weather; and (xiv) volatility in
harbor for forward-looking statements. In order to
the actuarially determined benefit costs and asset
comply with the terms of the safe harbor, the Company
performance of the Company’s benefit plans. All of these
notes that a variety of factors could cause the Company’s
factors are difficult to predict and many are beyond the
actual results and experience to differ materially from
Company’s control. Accordingly, while the Company
the anticipated results or expectations expressed in the
believes its forward-looking statements to be reasonable,
Company’s forward-looking statements. The risks and
there can be no assurance that they will approximate
uncertainties that may affect the operations, perfor-
actual experience or that the expectations derived from
mance, development and results of the Company’s
them will be realized. When used in the Company’s
business include, but are not limited to, the following:
documents or news releases, the words “anticipate,”
(i) general economic conditions both locally and nation-
“believe,” “intend,” “plan,” “estimate,” “expect,” “objective,”
ally; (ii) impact of potential increased regulatory
“projection,” “forecast,” “budget,” “assume,” “indicate”
oversight and compliance requirements due to financial,
or similar words or future or conditional verbs such as
environmental, safety or system integrity laws and
“will,” “would,” “should,” “can,” “could” or “may” are
regulations; (iii) impact of potential climate change
intended to identify forward-looking statements.
legislation regarding limitations on carbon dioxide
emissions; (iv) failure to obtain timely rate relief from
Forward-looking statements reflect the Company’s
regulatory authorities for increased operating or gas
current expectations only as of the date they are made.
costs including a reasonable return on invested capital;
The Company assumes no duty to update these state-
(v) the potential loss of large-volume industrial customers
ments should expectations change or actual results
to alternative fuels, facility closings or production
differ from current expectations except as required by
changes; (vi) ability to attract and retain professional
applicable laws and regulations.
and technical employees to replace an aging workforce;
(vii) access to capital markets and the availability of debt
and equity financing to support future capital expendi-
tures; (viii) volatility in the price and availability of
natural gas, including restrictions on the exploration
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 13
MANAGEMENT’S DIScuSSION AND ANALySIS
oVeRVIeW
RGC Resources is an energy services company primarily
engaged in the regulated sale and distribution of natural
gas to approximately 57,700 residential, commercial and
industrial customers in Roanoke, Virginia and the
surrounding localities through its Roanoke Gas Company
(“Roanoke Gas”) subsidiary. Resources also provides
certain unregulated services through Roanoke Gas
and utility consulting and information system services
through RGC Ventures of Virginia, Inc., which operates
as The Utility Consultants and Application Resources.
The unregulated operations represent less than 3% of
revenues and margins of Resources.
The utility operations of Roanoke Gas are regulated by
the Virginia State Corporation Commission (“SCC”)
which oversees the terms, conditions, and rates to be
charged to customers for natural gas service, safety
standards, extension of service, accounting and
depreciation. The Company is also subject to federal
regulation from the Department of Transportation in
regard to the construction, operation, maintenance,
safety and pipeline integrity of its transmission and
distribution pipelines. The Federal Energy Regulatory
Commission regulates the prices for the transportation
and delivery of natural gas to the Company’s distribu-
tion system and underground storage services. The
Company is also subject to other regulations which are
not necessarily industry specific.
The SCC authorizes the rates and fees that the Company
charges its customers for regulated natural gas service.
These rates are designed to provide the Company with
the opportunity to recover its gas and non-gas expenses
and to earn a reasonable rate of return for shareholders.
The Company’s business is seasonal in nature and
weather dependent as a majority of natural gas sales are
for space heating during the winter season. Volatility in
winter weather and the commodity price of natural gas
can impact the effectiveness of the Company’s rates in
recovering its costs and providing a reasonable rate of
return for its shareholders. Over the past several years,
the Company has implemented certain approved rate
mechanisms that reduce some of the volatility in
14 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
earnings associated with variations in winter weather
and the cost of natural gas.
Since 2003, Roanoke Gas has had in place a weather
normalization adjustment mechanism (“WNA”) based
on a weather measurement band around the most
recent 30-year temperature average. Because the SCC
authorizes billing rates for the utility operations of
Roanoke Gas based on normal weather, warmer than
normal weather may result in the Company failing to
earn its authorized rate of return. Therefore, the WNA
provides the Company with a level of earnings protec-
tion when weather is significantly warmer than normal
and provides its customers with price protection when
the weather is significantly colder than normal. The
WNA mechanism provides for a weather band of 3%
above and below the 30-year average, whereby the
Company would bill its customers for the lost margin
(excluding gas costs) for the impact of weather that was
more than 3% warmer than normal or refund customers
the excess margin earned for weather that was more
than 3% colder than normal. The annual WNA period
extends from April to March. The total number of
heating degree days during both the current and the
prior WNA periods fell within the weather band. As
a result, the WNA mechanism was not triggered for
either period.
The Company also has an approved rate structure in
place that mitigates the impact of financing costs of its
natural gas inventory. Over the past four years, the
commodity price of natural gas has fluctuated signifi-
cantly from a price of more than $13 a decatherm in
July 2008 to around $4 a decatherm in 2011. Under this
rate structure, Roanoke Gas recognizes revenue for the
financing costs, or “carrying costs”, of its investment
in natural gas inventory. The carrying cost revenue
factor applied to inventory is based on the Company’s
weighted-average cost of capital including interest rates
on short-term and long-term debt and the Company’s
authorized return on equity. During times of rising gas
costs and rising inventory levels, the Company recog-
nizes revenues to offset higher financing costs associ-
ated with higher inventory balances. Conversely, during
times of decreasing gas costs and lower inventory
balances, the Company recognizes less carrying cost
revenue as financing costs are lower. As a result of the
customer growth and natural gas utilization. The
lower commodity price of natural gas, the average price
economic downturn that began in 2008 continued into
of gas in storage during fiscal 2011 has declined 10%
2011. However, the impact on industrial production in
from last year’s levels from $5.75 to $5.16. Correspond-
the Company’s service area appears to have stabilized
ingly, carrying cost revenues declined by $151,000 from
and improved as transportation and industrial gas
$1,547,000 in fiscal 2010 to $1,396,000 in fiscal 2011.
deliveries increased by 10% in fiscal 2011 compared to a
Carrying cost revenues are expected to be less during
5% increase in fiscal 2010 and a 12% decline in fiscal
the next fiscal year due to lower average price of gas
2009. Nevertheless, uncertainty continues to be an issue
in storage.
Generally, as investment in natural gas inventory
increases so does the level of borrowing under the
Company’s line-of-credit. However, as the carrying cost
factor used in determining carrying cost revenues is
based on the Company’s weighted-average cost of
capital, carrying cost revenues do not directly corre-
spond with incremental short-term financing costs.
Therefore, when inventory balances decline due to a
reduction in commodity prices, net income will decline
as carrying cost revenues decrease by a greater amount
than short-term financing costs decrease. The inverse
occurs when inventory costs increase. Due to its strong
cash position related to lower gas costs and other
factors, the Company has not accessed its line-of-credit
facility since early 2009 to finance its natural gas inventory.
The economic environment generally has a direct
correlation on business and industrial production,
as three transportation customers have notified the
Company of their anticipated reduction in natural gas
consumption during the first quarter or portions of the
second quarter of fiscal 2012 due to production cut-
backs. Currently, the Company does not expect these
reductions to have a significant impact on the overall
transportation and interruptible sales in fiscal 2012. The
economic issues have also directly impacted residential
construction with housing starts remaining well below
historical levels thereby limiting the opportunity to
expand the Company’s customer base. As a result, the
Company has increased its total customer count through
conversions where homeowners along the Company’s
distribution system are electing to convert their heating
systems or other appliances to natural gas. The Company
has also benefited from the conversion of certain
apartment complexes from master meter configurations
to individual metered apartments as discussed in
further detail below.
Results of opeRAtIons
Fiscal Year 2011 Compared with Fiscal Year 2010
opeRAtInG ReVenues
Year Ended September 30,
2011
2010
(Decrease)
Percentage
Gas Utilities
Other
$ 69,483,620 $ 72,426,658 $ (2,943,038)
1,315,251
1,397,256
(82,005)
Total Operating Revenues
$ 70,798,871 $ 73,823,914 $ (3,025,043)
- 4%
- 6%
- 4%
The table below reflects volume activity and heating degree days.
delIVeRed Volumes
Year Ended September 30,
2011
2010
(Decrease)
Percentage
Increase/
Regulated Natural Gas (DTH)
Residential and Commercial
Transportation and Interruptible
Total Delivered Volumes
6,582,487
2,962,111
9,544,598
6,623,331
2,690,820
9,314,151
(40,844)
271,291
230,447
-1%
10%
2%
Heating Degree Days (Unofficial)
4,091
4,047
44
1%
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 15
Total gas utility operating revenues for the year ended
volumes resulted from a large commercial customer
September 30, 2011 (“fiscal 2011”) decreased by 4% from
Results of opeRAtIons
the year ended September 30, 2010 (“fiscal 2010”) even
switching to firm transportation service at the beginning
of the year combined with the continuing slow, steady
though total delivered volumes increased by 2% over
decline in residential usage per customer as a result of
fiscal 2010. The decrease in gas revenues is due to the
installation of more efficient equipment, better insula-
continued downward trend in gas costs. Natural gas
tion of homes and greater customer awareness regarding
commodity prices were approximately $4 a decatherm
conservation. Transportation and interruptible volumes
as of the end of September 2011. For the year, the
increased by 10% mainly due to additional consumption
average per unit cost of natural gas reflected in cost of
with the balance of the increase attributed to volumes
sales decreased by 10% compared to last year. Residen-
associated with the previously discussed commercial
tial and commercial volumes declined by 1% from fiscal
customer switching to firm transportation service. Other
2010 even though total heating degree days increased
revenues declined by 6% due to the decline in certain
by 1%. The decline in residential and commercial
contract services from last year’s levels.
GRoss mARGIn
Year Ended September 30,
2011
2010
(Decrease)
Percentage
Increase/
Gas Utility
Other
Total Gross Margin
$ 26,667,821 $ 25,736,411 $
931,410
601,745
703,862
(102,117)
$ 27,269,566 $ 26,440,273 $
829,293
4%
-15%
3%
Gas utility margins increased by 4% primarily due to the
Other margins, consisting of non-utility related services,
implementation of a non-gas base rate increase and the
decreased by $102,117 due to a reduction in certain
completion of master meter conversion projects during
contract services. Some of these non-utility services
the prior year, which combined to more than offset a
are subject to annual contract renewals. A significant
reduction in carrying cost revenues. The increase in
contract for services is subject to rebidding in 2012. If the
non-gas billing rates accounted for approximately
Company is unable to retain this contract, other margins
$800,000 in higher margins with approximately $330,000
would be significantly impacted. The Company intends to
attributable to customer base charges, a flat monthly fee
provide a competitive bid to retain this contract. The
billed to each natural gas customer, with the balance
Company anticipates being able to extend or renew the
related to volumetric sales. The remaining increase in
other contracts for 2012; however, any continuation
customer base charges was primarily attributable to the
beyond 2012 is uncertain.
conversion of six apartment complexes from a single
master meter for each building to individual meters
The changes in the components of the gas utility margin
located at each apartment during 2010 and the higher
are summarized below:
customer fee associated with a customer switching to
firm transportation service as discussed above. As a
net utIlIty mARGIn InCReAse
result of the master meter program, the Company added
Customer Base Charge
more than 1,000 meters subject to the monthly customer
base charge. The balance of the increase in volumetric
revenue was attributable to the increase in total deliv-
ered volumes. Carrying cost revenues declined by
$151,000 due to lower average price of gas in storage
combined with lower inventory balances as discussed in
more detail above.
Volumetric
Carrying Cost
Other
Total
16 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
$ 602,697
509,916
(150,667)
(30,536)
$ 931,410
opeRAtIons And mAIntenAnCe expense -
Operations and maintenance expenses increased
$308,502, or more than 2%, in fiscal 2011 compared with
fiscal 2010 as a result of increases in employee benefit
costs, labor and contracted services, partially offset by
reductions in bad debt expense and a greater level of
capitalized expenses. Employee benefit expenses
increased $325,000 due to higher medical insurance
premiums and increases in pension and postretirement
medical costs attributable to the amortization of larger
actuarial losses in fiscal 2011. The Company expects
medical insurance, pension costs and postretirement
medical costs to increase again in fiscal 2012. Labor and
contracted services increased by $257,000 primarily due
fiscal 2011 was 38.0 % compared to 37.7% in
fiscal 2010.
net InCome And dIVIdends - Income from
continuing operations for fiscal 2011 was $4,653,473
compared to $4,445,436 for fiscal 2010. Basic and diluted
earnings per share were $1.01 in fiscal 2011 compared
to $0.98 in fiscal 2010. Dividends declared per share of
common stock were $0.68 in fiscal 2011 and $0.66 in
fiscal 2010 as adjusted on a post stock split basis.
Asset mAnAGement
to brush removal along pipeline right-of-ways, a public
Roanoke Gas uses a third-party asset manager to
awareness campaign to educate local residents and
manage its pipeline transportation, storage rights and
businesses regarding pipeline safety and general cost
gas supply inventories and deliveries. In return for
increases. Bad debt expense declined by $72,000 as total
being able to utilize the excess capacities of the transpor-
utility revenues decreased by 4% associated with lower
tation and storage rights, the third party pays Roanoke
gas costs. Low natural gas prices and a continued
Gas a monthly utilization fee, which is used to reduce
emphasis on customer delinquencies contributed to the
the cost of gas for customers. Under the provision of the
reduction in bad debt expense. The Company capitalized
asset management contract, the Company has an
an additional $244,000 in overheads primarily due to
obligation to purchase its winter storage requirements
increased capital expenditures and higher employee
during the spring and summer injection periods at the
benefit costs. The remaining difference in operation and
market price in place at the time of purchase. This
maintenance expenses resulted from a variety of other
commitment amounts to approximately 2,225,000
minor expense variances.
GeneRAl tAxes - General taxes were nearly
unchanged as higher property taxes were offset by
greater capitalization of payroll taxes.
depReCIAtIon - Depreciation expense increased
by $185,784, or 5%, due to a higher natural gas plant
investment, primarily the result of completing several
distribution pipeline renewal projects.
otheR InCome (expense) - This line item
moved from a net other expense to a net other income
primarily due to greater investment earnings on higher
available cash balances.
InteRest expense - Total interest expense for
fiscal 2011 remained virtually unchanged from fiscal
2010 as the Company did not access its line-of-credit
facility during 2011 or 2010.
InCome tAxes - Income tax expense increased by
$156,110, or 6%, from fiscal 2010 corresponding to a 5%
decatherms per year or approximately one-third of the
Company’s total annual purchases. The current agree-
ment expires in October 2013.
CApItAl ResouRCes And lIquIdIty
Due to the capital intensive nature of the utility business,
as well as the related weather sensitivity, the Company’s
primary capital needs are for the funding of its continu-
ing construction program, the seasonal funding of its
natural gas inventories and accounts receivable and
payment of dividends. To meet these needs, the Company
relies on its operating cash flows, line-of-credit agree-
ment, long-term debt and capital raised through the
Company’s Dividend Reinvestment and Stock Purchase
Plan (“DRIP”).
Cash and cash equivalents increased by $1,205,799 in
fiscal 2011 compared to a $676,730 decrease in fiscal
2010. The following table summarizes the categories of
increase in pre-tax earnings. The effective tax rate for
sources and uses of cash:
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 17
CAsh floW summARy
2011
2010
ber 30, 2011 resulting in approximately a $920,000
September 30, 2010 to $4.92 per decatherm at Septem-
Provided by
operating activities
$ 10,683,344 $ 7,118,804
Used in investing activities
(7,589,102)
(5,963,321)
Used in financing activities
(1,888,443)
(1,832,213)
Increase (decrease) in cash
and cash equivalents
$ 1,205,799 $
(676,730)
The seasonal nature of the natural gas business causes
operating cash flows to fluctuate significantly during the
year as well as from year to year. Factors, including
weather, energy prices, natural gas storage levels and
customer collections, all contribute to working capital
levels and related cash flows. Generally, operating cash
flows are positive during the second and third quarters
as a combination of earnings, declining storage gas
levels and collections on customer accounts all contribute
to higher cash levels. During the first and fourth quar-
ters, operating cash flows generally decrease due
to the combination of increases in natural gas storage
levels, rising customer receivable balances and
construction activity.
In fiscal 2011, cash provided by operating activities
increased by approximately $3,564,000, from $7,119,000
in fiscal 2010 to $10,683,000 in fiscal 2011.
Cash provided by operations in fiscal 2011 was primarily
derived from a combination of net income and deprecia-
tion. In addition, the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010, which was
signed into law in December 2010, extended the 50%
bonus depreciation that expired December 31, 2009 and
provided for 100% bonus depreciation for qualified
investments from September 2010 through December
2011. As a result of the Act, the Company’s deferred
income tax liability associated with its utility property
increased by more than $2,300,000, thereby contributing
to the positive operating cash flow. The Company also
recorded a net refund of income taxes in the amount of
$705,000. The Company has more than $12,000,000 in
deferred tax liabilities related to accelerated and bonus
depreciation on its utility plant that will begin to reverse
at some point in the future resulting in additional cash
outflows. The commodity price of natural gas remained
stable during fiscal 2011; however, the price of natural
gas in storage declined from $5.26 per decatherm at
18 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
decline in gas in storage. In fiscal 2011, the Company
utilized operating cash to refund $2,300,000 in prior
year over-collections balance. Fiscal 2010 had less cash
generated from operating activities primarily due to the
level of refunding of over-collected balances and
customer credit balances compared to fiscal 2011.
Investing activities are generally composed of expendi-
tures under the Company’s construction program, which
involves a combination of replacing aging bare steel and
cast iron pipe with new plastic or coated steel pipe and
expansion of its natural gas system to meet the demands
of customer growth. Cash flows used in investing
activities increased by approximately $1,615,000 due to
higher capital expenditures. Total capital expenditures
were approximately $7,589,000 and $5,974,000 for the
years ended September 30, 2011 and 2010, respectively.
The ongoing economic climate has continued to limit
system expansion and customer growth. With limited
new business opportunities and a strong cash position,
the Company placed an increased emphasis on its
pipeline renewal program in fiscal 2011. The Company
renewed 8.9 miles of bare steel and cast iron natural gas
distribution main and replaced 720 services in fiscal
2011 compared to 6.4 miles of gas main and 420 services
replaced in fiscal 2010. There are approximately 60 miles
9
5
.
4
1
5
.
4
5
4
.
4
0
4
.
4
3
3
.
4
2007
2008
2009 2010 2011
AVERAGE SHARES OUTSTANDING
(IN MILLIONS)
of cast iron and bare steel pipe remaining to be
On October 20, 2010, the Company executed a modifica-
replaced. The Company plans to continue its focus on
tion to its $15,000,000 unsecured variable rate note with
pipeline renewals in 2012 and expects such expendi-
the current lender under the same terms and covenants
tures to continue at comparable or higher levels as it
providing for the extension of the maturity date until
anticipates completing the replacement of the remaining
March 31, 2012 to coincide with the expiration of the
cast iron and bare steel pipe within the next 10 years.
Company’s line-of-credit agreement. Due to the economic
Depreciation provided 55% of the current year’s capital
climate and its effect on the credit markets and credit
expenditures compared to 66% for the prior year. With
spreads, the Company was unable to extend the note at
future capital expenditures expected to remain at or
this time beyond the current 16-month extension
near these levels, the balance of the funding will
without incurring a higher interest rate than is currently
come from net income, available cash and corporate
in place. The Company anticipates being able to extend
borrowing activity.
this note prior to its maturity on a yearly basis under
comparable terms to those currently in place until such
Financing activities generally consist of long-term and
time the corresponding swap on the note matures on
short-term borrowings and repayments, issuance of
December 1, 2015.
stock and the payment of dividends. As discussed above,
the Company uses its line-of-credit arrangement to fund
As mentioned above, the Company has not accessed its
seasonal working capital needs as well as provide tem-
line-of-credit facility during the last two years and has
porary financing for capital projects as needed.
been able to finance operations with its operating cash
During fiscal 2011 and 2010, the Company did not access
flow. The key factor behind the improved cash position
its line-of-credit because of its strong cash position
of the Company is the reduction in the commodity price
primarily attributable to low natural gas prices. Cash
of natural gas from more than $13 in 2008 to under $4
flows used in financing activities were $1,888,000, com-
in 2011. As a result of the lower commodity price of
posed of approximately $1,119,000 of proceeds related to
gas, the average balance of gas in storage declined from
stock issuances, $87,000 receipt on the note with ANGD,
$18,300,000 in fiscal 2008 to $10,000,000 during fiscal
LLC and approximately $3,094,000 in dividends paid.
2011. Likewise, the average balance in accounts receiv-
able experienced a similar decline from an average
On March 14, 2011, the Company renewed its line-of-
balance during fiscal 2008 of $9,300,000 to $6,900,000
credit agreement. The new agreement maintained the
in fiscal 2011. If natural gas prices remain at the levels
same terms and rates as provided for under the expired
experienced in fiscal 2011, the Company anticipates
agreement. The interest rate is based on 30-day LIBOR
that it will be able to finance its operations, including its
plus 100 basis points and includes an availability fee of
pipeline renewal program, over the next few years with
15 basis points applied to the difference between the
its operating cash flows and line-of-credit.
face amount of the note and the average outstanding
balance during the period. The Company maintained the
The Company’s consolidated long-term capitalization,
multi-tiered borrowing limits to accommodate seasonal
including current maturities, was 64% equity and 36%
borrowing demands and minimize overall borrowing
debt at September 30, 2011 and 62% equity and 38%
costs. Under the new agreement, total available limits
debt at September 30, 2010.
during its term were reduced from the prior agreement
due to the expected reduced funding requirements. The
new agreement provides for available limits ranging
from $1,000,000 to $5,000,000. The line-of-credit agree-
ment will expire March 31, 2012, unless extended. The
ReGulAtoRy AffAIRs
Company anticipates being able to extend or replace
On November 1, 2010, Roanoke Gas Company placed
the line-of-credit upon expiration; however, there is no
into effect new base rates, subject to refund, that
guarantee that the line-of-credit will be extended or
provided for approximately $1,400,000 in additional
replaced under the same or equivalent terms currently
annual non-gas revenues. On April 6, 2011, the SCC
in place.
issued a final order granting the Company a rate award
in the amount of $814,000 in additional non-gas revenues.
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 19
In June 2011, the Company completed its refund for
the difference between the rates placed into effect on
November 1 and the final rates approved in the
Commission order.
On September 15, 2011, the Company filed a request
for an expedited increase in rates with the SCC. The
request was for an increase of approximately $1,100,000
in annual non-gas revenues. As provided for under this
expedited rate request, the Company was able to place
the increased rates into effect for service rendered on
and after November 1, 2011, subject to refund pending a
final order by the SCC. The public hearing on the request
for this rate increase is scheduled for March 27, 2012,
with a final order expected some time after that date.
During 2011, the Company completed its Distribution
Integrity Management Plan (“DIMP”) as required by
federal regulations issued by the Pipeline and Hazard-
ous Materials Safety Administration (PHMSA). Under
these regulations, distribution operators are required
to develop and implement a written DIMP plan that
includes the following elements: (i) an operator must
demonstrate an understanding of the gas distribution
CRItICAl ACCountInG polICIes
And estImAtes
The consolidated financial statements of Resources are
prepared in accordance with accounting principles
generally accepted in the United States of America. The
amounts of assets, liabilities, revenues and expenses
reported in the Company’s financial statements are
affected by accounting policies, estimates and assump-
tions that are necessary to comply with generally
accepted accounting principles. Estimates used in the
financial statements are derived from prior experience,
statistical analysis and professional judgments. Actual
results may differ significantly from these estimates
and assumptions.
The Company considers an estimate to be critical if it
is material to the financial statements and it requires
assumptions to be made that were uncertain at the time
the estimate was made and changes in the estimate are
reasonably likely to occur from period to period. The
Company considers the following accounting policies
system, (ii) an operator must define the potential threats
and estimates to be critical.
to the gas distribution pipeline and determine the
relative probability of each threat (a risk based ap-
proach), (iii) an operator must determine and imple-
ment measures designed to reduce the risks of failure of
its gas distribution system, (iv) an operator must develop
and monitor performance measures to evaluate the
effectiveness of its plan, and (v) an operator must con-
tinually re-evaluate threats and risks on its entire system
and update its plan as necessary.
The Company has been proactive in the area of pipeline
safety well before the DIMP regulations. Over the past
20 years, the Company has replaced much of its cast iron
and bare steel pipe. As all of this pipe has been under-
ground for well over 40 years, the leak potential from
such pipe is much higher than the plastic or coated steel
pipe currently being installed. The Company prioritized
its replacement program using a risk based evaluation
that included leak history, population density and
other factors. During this time period the Company has
replaced approximately 135 miles of bare steel and cast
iron distribution main. The Company expects to replace
the remaining 60 miles of pipe within the next 10 years.
20 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
ReGulAtoRy ACCountInG - The Company’s
regulated operations follow the accounting and reporting
requirements of FASB ASC No. 980, Regulated Operations.
The economic effects of regulation can result in a
regulated company deferring costs that have been or are
expected to be recovered from customers in a period
different from the period in which the costs would be
charged to expense by an unregulated enterprise. When
this occurs, costs are deferred as assets in the consoli-
dated balance sheet (regulatory assets) and recorded as
expenses when such amounts are reflected in rates.
Additionally, regulators can impose liabilities upon a
regulated company for amounts previously collected
from customers and for current collection in rates of
costs that are expected to be incurred in the future
(regulatory liabilities).
If, for any reason, the Company ceases to meet the
criteria for application of regulatory accounting treat-
ment for all or part of its operations, the Company
would remove the applicable regulatory assets or
liabilities from the balance sheet and include them
in the consolidated statement of income and
the plan, return on plan assets and various actuarial
comprehensive income for the period in which the
calculations, assumptions and accounting requirements.
discontinuance occurred.
ReVenue ReCoGnItIon - Regulated utility
sales and transportation revenues are based upon rates
approved by the SCC. The non-gas cost component of
rates may not be changed without a formal rate increase
application and corresponding authorization by the
SCC in the form of a Commission order; however, the
gas cost component of rates may be adjusted quarterly
through the purchased gas adjustment (“PGA”) mecha-
nism with administrative approval from the SCC. When
the Company files a request for a non-gas rate increase,
the SCC may allow the Company to place such rates into
effect subject to refund pending a final order. Under
these circumstances, the Company estimates the amount
of increase it anticipates will be approved based on the
best available information.
The Company bills its regulated natural gas customers
on a monthly cycle. The billing cycle for most customers
does not coincide with the accounting periods used for
financial reporting. The Company accrues estimated
revenue for natural gas delivered to customers but not
yet billed during the accounting period based on
weather during the period and current and historical
data. The financial statements include unbilled revenue
of $1,088,611 and $1,070,062 as of September 30, 2011
and 2010.
In regard to the pension plan, specific factors include
assumptions regarding the discount rate used in deter-
mining future benefit obligations, expected long-term
rate of return on plan assets, compensation increases
and life expectancies. Similarly, the postretirement
medical plan also requires the estimation of many of
the same factors as the pension plan in addition to
assumptions regarding the rate of medical inflation
and Medicare availability. Actual results may differ
materially from the results expected from the actuarial
assumptions due to changing economic conditions,
volatility in interest rates and changes in life expectancy.
Such differences may result in a material impact on the
amount of expense recorded in future periods or the
value of the obligations on the balance sheet.
In selecting the discount rate to be used in determining
the benefit liability, the Company evaluated the IRS yield
curves and the Citigroup yield curves which incorpo-
rates the rates of return on high-quality, fixed-income
investments that corresponded to the length and timing
9
7
.
6
7
1
3
.
4
7
0
8
.
2
7
AlloWAnCe foR doubtful ACCounts -
The Company evaluates the collectibility of its accounts
receivable balances based upon a variety of factors
including loss history, level of delinquent account
balances, collections on previously written off accounts
and general economic climate.
7
3
.
0
7
pensIon And postRetIRement
benefIts - The Company offers a defined benefit
pension plan (“pension plan”) and a postretirement
medical and life insurance plan (“postretirement plan”)
to eligible employees. The expenses and liabilities
associated with these plans, as disclosed in Note 7 to the
consolidated financial statements, are based on numer-
ous assumptions and factors, including provisions of the
plans, employee demographics, contributions made to
2
7
.
6
6
2007
2008
2009
2010
2011
TOTAL CAPITALIZATION
(IN MILLIONS)
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 21
of benefit streams expected under both the pension plan
described above and in Note 7, pension expense is
and postretirement plan. The Company used a discount
expected to increase from approximately $787,000 in
rate of 5.04% and 4.96% for valuing its pension benefit
fiscal 2011 to $991,000 in fiscal 2012 and postretirement
liability and postretirement plan liability at September
expense is expected to rise from approximately $808,000
30, 2011, representing a decrease of 0.21% and 0.04% in
in fiscal 2011 to $849,000 in fiscal 2012. The Company
the respective discount rates from the prior year. The
expects to contribute approximately $1,000,000 to its
decrease in the discount rates combined with lower
pension plan and $850,000 to its postretirement plan in
asset balances at September 30, 2011, due to a significant
fiscal 2012. Funding levels are expected to remain at this
decline in the equity markets, were the primary factors
level or higher over the next several years. The Company
in the overall increase in the benefit plan liabilities on
anticipates being able to meet the funding needs of these
the balance sheet and increase in expense in fiscal 2012.
plans and recover benefit plan expenses through its
The Company also used an asset/liability model to
non-gas rates. The Company will continue to evaluate its
evaluate the probability of meeting the returns on its
benefit plan funding levels in light of the requirements
targeted investment allocation model. The investment
under the Pension Protection Act of 2006 and ongoing
policy as of the measurement date in September reflected
investment returns and make adjustments as necessary
a targeted allocation of 60% equity and 40% fixed
to avoid benefit restrictions and to manage the cost of
income for an assumed long-term rate of return of
the benefit plans.
7.25% on the pension plan and a targeted allocation of
50% equity and 50% fixed income for an assumed
The following schedule reflects the sensitivity of pen-
long-term rate of return of 5.09% (net of income taxes)
sion costs to changes in certain actuarial assumptions,
for the postretirement plan. Based on the assumptions
assuming that the other components of the calculation
remain constant.
ACtuARIAl AssumptIon
ChAnGe In
AssumptIon pensIon Cost benefIt oblIGAtIon
ImpACt on
ImpACt on
pRojeCted
Discount rate
Rate of return on plan assets
Rate of increase in compensation
-0.25%
-0.25%
0.25%
$ 90,000
$ 804,000
33,000
48,000
N/A
255,000
The following schedule reflects the sensitivity of postretirement benefit costs from changes in certain actuarial
assumptions, while the other components of the calculation remain constant.
ACtuARIAl AssumptIon
ChAnGe In postRetIRement
AssumptIon benefIt Cost benefIt oblIGAtIon
ImpACt on
ImpACt on
ACCumulAted
postRetIRement
Discount rate
Rate of return on plan assets
Health care cost trend rate
-0.25%
-0.25%
0.25%
$ 34,000
$ 443,000
18,000
69,000
N/A
464,000
22 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
deRIVAtIVes - The Company may hedge certain
risks incurred in its operation through the use of
derivative instruments. The Company applies the
requirements of FASB ASC No. 815, Derivatives and
Hedging, which requires the recognition of derivative
instruments as assets or liabilities in the Company’s
balance sheet at fair value. In most instances, fair value
is based upon quoted futures prices for natural gas
commodities and interest rate futures for interest rate
swaps. Changes in the commodity and futures markets
will impact the estimates of fair value in the future.
Furthermore, the actual market value at the point of
realization of the derivative may be significantly
different from the values used in determining fair
value in prior financial statements.
mARket RIsk
for any 12-month period shall not exceed a total hedged
volume of 90% of projected volumes. Finally, the policy
specifically prohibits the utilization of derivatives for the
purposes of speculation.
The Company manages the price risk associated with
purchases of natural gas by using a combination of liq-
uefied natural gas (LNG) storage, storage gas, fixed price
contracts, spot market purchases and derivative com-
modity instruments including futures, price caps, swaps
and collars.
At September 30, 2011, the Company had no outstanding
derivative instruments to hedge the price of natural gas.
The Company had approximately 2,622,000 decatherms
of gas in storage, including LNG, at an average price of
$4.92 per decatherm compared to 2,626,000 decatherms
at an average price of $5.26 per decatherm last year. In
addition to the gas in storage, the Company had collar
agreements outstanding at September 30, 2010 for the
The Company is exposed to market risks through its
purpose of hedging the price of natural gas for 1,300,000
natural gas operations associated with commodity
decatherms. The SCC currently allows for full recovery
prices. The Company’s hedging and derivatives policy, as
of prudent costs associated with natural gas purchases,
authorized by the Company’s Board of Directors, allows
and any additional costs or benefits associated with the
management to enter into both physical and financial
settlement of the derivative contracts and other price
transactions for the purpose of managing commodity
hedging techniques are passed through to customers
risk of its business operations. The policy also specifies
when realized through the regulated natural gas
that the combination of all commodity hedging contracts
PGA mechanism.
%
5
.
5
6
%
2
.
0
6
%
5
.
1
6
%
3
.
2
6
%
5
.
3
6
%
8
.
9
3
%
5
.
4
3
%
5
.
8
3
%
7
.
7
3
%
5
.
6
3
2007
2008
2009
2010
2011
CAPITALIZATION RATIOS
(IN PERCENTAGES)
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 23
The Company also has a variable rate line-of-credit
In 2009, the U. S. House of Representatives approved
with a bank with the interest rate based on the London
H.R. 2454, “The American Clean Energy and Security
Interbank Offered Rate (“LIBOR”). As of September 30,
Act of 2009”, referred to as the Waxman-Markey Climate
2011, the Company had no outstanding balance under
Change Bill. A companion bill, “The American Power
its line-of-credit.
otheR RIsks
Act”, referred to as the Kerry-Lieberman Bill, was intro-
duced in the U. S. Senate in 2010, but was not approved.
Both bills were designed to reduce the level of carbon
dioxide emissions from burning fossil fuels such as coal,
oil and natural gas. Limits on carbon emissions could
lead to a gradual reduction in the use of fossil fuels,
The Company is exposed to risks other than commodity
including natural gas, in the U. S. economy. A federally
and interest rates. Such events, situations or conditions
mandated reduction in natural gas consumption would
have or potentially could have an impact on the future
likely negatively impact Company operations if legisla-
results of operations of the Company. For most of the
tion does not adequately reflect the lower emissions
items described below, Roanoke Gas has a means to
generated by natural gas consumption. The election held
recover increased costs through formal rate application
on November 2, 2010 materially changed the makeup
filings, as well as the ability to pass along increases in
of the U. S. House of Representatives and U. S. Senate,
natural gas costs.
ReGulAtoRy And GoVeRnmentAl
ACtIons - As discussed above, Virginia has a means
to allow the regulated operations of the Company to
recover increased costs and earn a reasonable rate of
return on equity. The SCC is the state agency respon-
sible for regulating the operations of Roanoke Gas and
lessening the likelihood of passage of carbon emissions
reduction legislation by the current Congress. Neverthe-
less, carbon emissions legislation could be reintroduced
in the future. The Company will continue to monitor
legislative activity and evaluate any potential impact.
eneRGy pRICes And InflAtIon - Energy
costs represent the single largest expense of the Com-
approves the rates charged to its customers. If the SCC
pany with the cost of natural gas representing approxi-
were to impose limitations that delayed or prohibited
mately 71% and 73% for fiscal 2011 and 2010 of the total
the Company from placing rates into effect to timely
operating expenses of the Company’s natural gas utility
recover costs and earn its authorized rate of return, the
operations. Increases or decreases in natural gas costs
earnings of the Company could be negatively impacted.
are passed through to customers under the present PGA
Furthermore, legislation at the state or federal level
mechanism. The Company may adjust its gas cost billing
could result in increased costs and place additional
rate quarterly through the PGA with administrative
burdens on the Company.
enVIRonmentAl leGIslAtIon - The passage
of environmental legislation that mandates reductions
in carbon emissions or other similar restrictions could
have a negative effect on the Company over the long-
term as it relates to the Company’s core operations.
Natural gas is a clean and efficient energy source; how-
ever, the combustion of natural gas results in carbon
related emissions. The extent to which carbon emissions
would be restricted under any such legislation and the
ability of technological improvements to minimize such
emissions would be critical in determining any potential
impact to the Company.
approval from the SCC. Increases in the commodity
price of natural gas may cause existing customers to
conserve, switch to alternate sources of energy or be
unable to pay their natural gas bills. On the other side,
declining natural gas prices reduce the level of inven-
tory carrying cost revenues that the Company realizes.
Rising costs affect the Company through increases in
non-gas costs such as property and liability insurance,
labor costs, employee benefits, supplies, contracted
services and the replacement cost of plant and equip-
ment. The rates charged to natural gas customers to
cover these costs may only be increased through the
regulatory process with a non-gas cost rate increase
application. Because of the inherent lag in the rate
application process for increases in the non-gas cost
24 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
portion of rates, approved Company billing rates may
not fully keep pace with costs during high inflationary
periods; however, timely non-gas rate filings should
allow the Company to cover its reasonable and expected
costs. Management must continually review operations
and economic conditions to assess the need for filing
and receiving adequate and timely rate relief from
the SCC.
pIpelIne RelIAbIlIty - Roanoke Gas is
served directly by two primary pipelines. These two
pipelines provide 100% of the natural gas supplied to
the Company’s customers. Depending upon weather
conditions and the level of customer demand, failure of
one or both of these transmission pipelines could have a
major adverse impact on the Company.
CustomeR CRedIt - Gas costs represent a major
portion of the total customer bill. The Company has
worked diligently at minimizing bad debts and bad debt
write offs. However, significant increases or spikes in
natural gas prices could result in an increased rate of
delinquencies as customers face higher natural gas bills
as well as other higher energy costs. Furthermore,
adverse economic conditions and rising unemployment
could also lead to an increase in delinquency of custom-
er payments and higher bad debts. In addition, the SCC
has specific notice requirements that the Company must
first comply with before disconnecting natural gas
service for customer nonpayment. The Company has
benefited from declining natural gas prices as reflected
in the low bad debt expense during the last few years.
WeAtheR - The nature of the Company’s business is
highly dependent upon weather – specifically, winter
weather. Cold weather increases energy consumption
by customers and therefore increases revenues and
margins. Conversely, warm weather reduces energy
consumption and ultimately revenues and margins.
Roanoke Gas Company’s rate structure has a weather
normalization adjustment factor that operates around a
weather band of approximately 3% above and below the
30-year average for heating degree-days. This weather
band significantly reduces the exposure to weather risk
by limiting the impact of warmer than normal weather to
no more than 3% from the 30-year average. Conversely,
the protection provided by the weather band to the
downside risk also limits the upside potential from colder
than normal weather by the same 3%.
CRedIt And CApItAl AVAIlAbIlIty -
The capital intensive and seasonal nature of the utility
operations requires the access to sufficient levels of debt
and equity capital. The ongoing economic issues on the
local and national levels have impacted the cost and
availability of short-term and long-term credit funding.
The inability to obtain funding when needed, or obtain
funding only on less than favorable terms, could have a
significant negative impact to the Company.
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 25
CApItAlIzAtIon stAtIstICs
Revised for Stock Split
Common stoCk
Year Ended September 30,
2011
2010
2009
2008
2007
Shares Issued
4,624,682
4,548,864
4,477,974
4,418,942
4,372,286
Continuing Operations:
Basic Earnings Per Share
Diluted Earnings Per Share
Discontinued Operations:
Basic Earnings Per Share
Diluted Earnings Per Share
$
$
$
$
1.01
1.01
0.00
0.00
$
$
$
$
0.98
0.98
0.00
0.00
$
$
$
$
1.09
1.09
0.00
0.00
$
$
$
$
0.97 $
0.96 $
(0.01) $
(0.01) $
0.87
0.87
0.01
0.01
Dividends Paid Per Share (Cash) $
0.680
$
0.660
$
0.640
$
0.625 $
0.610
Dividends Paid Out Ratio
67.3%
67.3%
58.7%
65.1%
69.3%
CApItAlIzAtIon RAtIos
Year Ended September 30,
Long-Term Debt, Including
Current Maturities
Common Stock And Surplus
Total
Long-Term Debt, Including
2011
2010
2009
2008
2007
36.5
63.5
100.0
37.7
62.3
38.5
61.5
34.5
65.5
39.8
60.2
100.0
100.0
100.0
100.0
Current Maturities
$ 28,000,000
$ 28,000,000
$ 28,000,000
$ 23,000,000 $ 28,000,000
Common Stock And Surplus
48,785,778
46,309,747
44,799,871
43,723,058
42,365,233
Total Capitalization Plus
Current Maturities
$ 76,785,778
$ 74,309,747
$ 72,799,871
$ 66,723,058 $ 70,365,233
26 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
mARket pRICe And dIVIdend InfoRmAtIon
RGC Resources’ common stock is listed on the Nasdaq National Market under the trading symbol RGCO. Payment
of dividends is within the discretion of the Board of Directors and will depend on, among other factors, earnings,
capital requirements, and the operating and financial condition of the Company. The Company’s long-term indebt-
edness contains restrictions on dividends based on cumulative net earnings and dividends previously paid. The
amounts presented below have been adjusted to reflect the stock split effected in the form of a 100% stock dividend.
2011
Fiscal Year Ended September 30,
RAnGe of bId pRICes
hIGh loW
CAsh dIVIdends
deClARed
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 16.77
$ 14.95
$
17.82
14.64
17.23
15.54
19.50
15.01
0.170
0.170
0.170
0.170
2010
Fiscal Year Ended September 30,
RAnGe of bId pRICes
hIGh loW
CAsh dIVIdends
deClARed
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 15.28
$ 12.96
$
16.00
14.50
16.03
15.14
16.05
15.01
0.165
0.165
0.165
0.165
RGC ResouRCes, InC. / 2011 AnnuAl RepoRt / 27
55,438
124,579
725,640
summARy of GAs sAles And stAtIstICs
Year Ended September 30,
2011
2010
2009
2008
2007
ReVenues:
Residential Sales
Commercial Sales
Interruptible Sales
$ 40,051,923
$ 42,277,903
$ 46,215,441
$ 51,634,728 $ 49,837,765
23,463,529
25,166,672
28,936,307
35,496,410
33,637,831
1,572,270
573,946
609,698
1,462,174
1,306,447
Transportation Gas Sales
2,843,115
2,674,151
2,506,958
2,428,656
2,254,594
Backup Services
–
–
300
3,600
3,600
Inventory Carrying Cost Revenues 1,395,877
1,546,544
2,327,508
2,350,968
1,955,407
Late Payment Charges
44,252
Miscellaneous Gas Utility Revenue
112,654
63,949
123,493
56,718
133,298
55,410
174,647
Other
Total
net InCome
Continuing Operations
1,315,251
1,397,256
1,398,245
1,030,233
$ 70,798,871
$ 73,823,914
$ 82,184,473
$ 94,636,826 $ 89,901,301
$ 4,653,473
$ 4,445,436
$ 4,869,010
$ 4,257,824 $ 3,765,669
Discontinued Operations
–
–
–
(36,690)
40,540
Net Income
$ 4,653,473
$ 4,445,436
$ 4,869,010
$ 4,221,134 $ 3,806,209
dth delIVeRed
Residential
Commercial
Interruptible
3,866,489
3,910,639
3,866,956
3,557,249
3,778,194
2,715,998
2,712,692
2,830,782
2,785,701
2,886,403
263,851
79,858
75,061
128,875
138,176
Transportation Gas
2,698,260
2,610,962
2,487,670
2,779,429
2,735,456
Total
9,544,598
9,314,151
9,260,469
9,251,254
9,538,229
heAtInG deGRee dAys
4,091
4,047
3,914
3,624
3,735
numbeR of CustomeRs
Natural Gas
Residential
Commercial
Interruptible and Interruptible
Transportation Service
Total
GAs ACCount (dth):
Natural Gas Available
52,579
5,073
32
57,684
51,922
5,020
33
56,975
51,069
5,018
32
56,119
50,630
5,026
33
55,689
50,371
5,017
32
55,420
9,772,756
9,561,029
9,549,231
9,528,890
9,744,431
Natural Gas Deliveries
9,544,598
9,314,151
9,260,469
9,251,254
9,538,229
Storage - LNG
Company Use And Miscellaneous
System Loss
114,670
42,147
71,341
136,972
47,759
62,147
124,925
39,697
124,140
122,874
45,180
109,582
65,279
28,862
112,061
Total Gas Available
9,772,756
9,561,029
9,549,231
9,528,890
9,744,431
totAl Assets
$ 125,549,049
$ 120,683,316
$ 118,801,892
$ 118,127,714 $ 116,332,455
lonG-teRm oblIGAtIons $ 13,000,000
$ 28,000,000
$ 28,000,000
$ 23,000,000 $ 23,000,000
28 / RGC ResouRCes, InC. / 2011 AnnuAl RepoRt
cORpORATE INFORMATION
CoRpoRAte offICe
dIReCt deposIt
RGC ResouRCes, InC.
519 Kimball Avenue, N.E.
P.O. Box 13007
Roanoke, VA 24030
Tel (540) 777-4GAS (4427)
Fax (540) 777-2636
Independent ReGIsteRed
of dIVIdends And
sAfekeepInG of
stoCk CeRtIfICAtes
Shareholders can have their cash
shAReholdeR InquIRIes
Questions concerning shareholder
accounts, stock transfer
requirements, consolidation of
accounts, lost stock certificates,
safekeeping of stock certificates,
dividends deposited automatically
replacement of lost dividend
into checking, savings or money
checks, payment of dividends, direct
market accounts. The shareholder’s
deposit of dividends, initial cash
financial institution must be a
payments, optional cash payments
ACCountInG fIRm
Brown Edwards & Company, L.L.P.
member of the Automated Clearing
and name or address changes
House. Also, RGC Resources offers
should be directed to the Transfer
319 McClanahan Street, S.W.
safekeeping of stock certificates
Roanoke, VA 24014
for shares enrolled in the
dividend reinvestment plan. For
Agent, American Stock Transfer
& Trust Company, LLC. All other
shareholder questions should be
Common stoCk tRAnsfeR
AGent, ReGIstRAR,
dIVIdend dIsbuRsInG
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(866) 673-8053
Common stoCk
RGC Resources’ common stock is
listed on the NASDAQ/ National
Market under the trading symbol
RGCO.
more information about these
directed to:
shareholder services, please contact
RGC Resources, Inc.
the Transfer Agent, American Stock
Vice President and Secretary
Transfer & Trust Company, LLC.
10-k RepoRt
A copy of RGC Resources, Inc.’s
latest annual report to the Securities
& Exchange Commission on Form
10-K will be provided without
charge upon written request to:
Dale P. Lee
Vice President and Secretary
RGC Resources, Inc.
P.O. Box 13007
Roanoke, VA 24030
(540) 777-3846
P.O. Box 13007
Roanoke, VA 24030
(540) 777-3846
fInAnCIAl InquIRIes
All financial analysts and
professional investment
managers should direct their
questions and requests for financial
information to:
RGC Resources, Inc.
Vice President and Secretary
P.O. Box 13007
Roanoke, VA 24030
Access all of RGC Resources Inc.’s
(540) 777-3846
Securities and Exchange filings
through the links provided on our
website at www.rgcresources.com.
Access up-to-date information on
RGC Resources and its subsidiaries
at www.rgcresources.com.
519 Kimball avenue, n.e.
P.O. bOx 13007
ROanOKe, viRginia 24030
www.RgcResOuRces.cOm
TRading On nasdaQ as RgcO