SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2000
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Commission File Number 000-26591
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RGC Resources, Inc.
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(Exact name of Registrant as Specified in its Charter)
VIRGINIA 54-1909697
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
519 Kimball Ave., N.E., Roanoke, VA 24016
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(Address of Principal Executive Offices) (Zip Code)
(540) 777-4427
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(Registrant's Telephone Number, Including Area Code)
None
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding at December 31, 2000
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Common Stock, $5 Par Value 1,887,165
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
December 31, September 30,
ASSETS 2000 2000
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Current Assets:
Cash and cash equivalents $ 348,830 $ 721,249
Accounts receivable - (less allowance for
uncollectibles of $797,733 and $314,081,
respectively) 25,118,806 6,251,248
Inventories 10,299,723 12,421,327
Prepaid income taxes - 464,299
Deferred income taxes 1,868,133 1,836,581
Underrecovery of gas costs 2,366,027 888,687
Other 507,338 430,307
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Total current assets 40,508,857 23,013,698
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Property, Plant And Equipment:
Utility plant in service 79,581,801 78,780,014
Accumulated depreciation (29,529,432) (28,765,599)
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Utility plant in service, net 50,052,369 50,014,415
Construction work-in-progress 1,789,032 1,562,138
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Utility Plant, Net 51,841,401 51,576,553
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Nonutility property 17,657,018 16,393,264
Accumulated depreciation (5,360,623) (5,044,294)
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Nonutility property, net 12,296,395 11,348,970
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Total property, plant and equipment 64,137,796 62,925,523
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Other Assets:
Intangible assets, net of accumulated
amortization 994,359 1,014,509
Other assets 429,291 453,764
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Total other assets 1,423,650 1,468,273
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Total Assets $ 106,070,303 $ 87,407,494
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See notes to condensed consolidated financial statements.
2
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000
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Current Liabilities:
Current maturities of long-term debt $ 726,565 $ 26,092
Borrowings under lines of credit 21,737,000 13,295,000
Dividends payable 528,974 517,827
Accounts payable 18,909,345 11,003,592
Income taxes payable 548,353 -
Customer deposits 604,972 506,562
Accrued expenses 3,733,993 3,733,320
Refunds due customers 348,954 223,009
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Total current liabilities 47,138,156 29,305,402
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Long-term Debt, Excluding Current Maturities 22,603,700 23,310,522
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Deferred Credits and Other Liabilities:
Deferred income taxes 4,479,991 4,431,643
Deferred investment tax credits 364,441 374,056
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Total deferred credits and other liabilities 4,844,432 4,805,699
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Stockholders' Equity:
Common stock, $5 par value; authorized,
10,000,000 shares; issued and outstanding
1,887,165 and 1,881,773 shares, respectively 9,435,825 9,408,665
Preferred stock, no par, authorized, 5,000,000
shares; 0 shares issued and outstanding in
both 2000 and 1999 - -
Capital in excess of par value 10,339,205 10,262,252
Retained earnings 11,602,840 10,314,954
Accumulated comprehensive income 106,145 -
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Total stockholders' equity 31,484,015 29,985,871
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Total Liabilities and Stockholders' Equity $ 106,070,303 $ 87,407,494
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See notes to condensed consolidated financial statements.
3
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE
INCOME FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2000 AND 1999
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UNAUDITED
Three Months Ended
December 31,
2000 1999
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Operating Revenues:
Gas utilities $ 31,824,069 $ 15,277,606
Propane operations 5,032,544 3,142,087
Energy marketing 3,826,498 1,972,655
Other 502,052 179,845
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Total operating revenues 41,185,163 20,572,193
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Cost of Sales:
Gas utilities 24,593,410 9,613,596
Propane operations 2,935,236 1,492,873
Energy marketing 3,665,661 1,937,221
Other 366,987 105,170
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Total cost of sales 31,561,294 13,148,860
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Operating Margin 9,623,869 7,423,333
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Other Operating Expenses:
Other operations 3,295,052 2,773,427
Maintenance 298,184 323,743
General taxes 1,142,485 745,255
Depreciation and amortization 1,235,311 1,115,697
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Total other operating expenses 5,971,032 4,958,122
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Operating Earnings 3,652,837 2,465,211
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Other Deductions, net (29,732) (35,699)
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Earnings Before Interest and Income Taxes 3,623,105 2,429,512
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Interest Charges 788,752 613,865
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Earnings Before Income Taxes 2,834,353 1,815,647
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Income Taxes 1,017,493 656,482
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Net Earnings $ 1,816,860 $ 1,159,165
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Other Comprehensive Income, net of $67,721 in income tax 106,145 -
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Comprehensive Income $ 1,923,005 $ 1,159,165
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Basic and Diluted Earnings Per Common Share $ 0.96 $ 0.63
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See notes to condensed consolidated financial statements.
4
RGC RESOURCES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 2000 AND 1999
UNAUDITED
Three Months Ended
December 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,816,860 $ 1,159,165
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 1,257,189 1,150,414
Loss (gain) on disposal of property (4,025) 16,280
Deferred taxes and investment tax credits 7,181 (341,640)
Changes in assets and liabilities which used cash,
exclusive of changes and noncash transactions shown separately (9,006,122) (3,022,556)
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Net cash used in operating activities (5,928,917) (1,038,337)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (2,468,025) (2,245,863)
Cost of removal of utility plant, net (8,733) (4,890)
Proceeds from sales of assets 11,321 6,441
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Net cash used in investing activities (2,465,437) (2,244,312)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (6,349) (5,907)
Net borrowings under lines of credit 8,442,000 4,244,000
Cash dividends paid (517,828) (495,055)
Proceeds from issuance of stock 104,112 114,193
Net cash provided by financing activities 8,021,935 3,857,231
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (372,419) 574,582
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 721,249 139,501
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 348,830 $ 714,083
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SUPPLEMENTAL INFORMATION:
Interest paid $ 876,285 $ 925,392
Income taxes refunded, net (2,341) (525)
See notes to condensed consolidated financial statements.
5
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly RGC
Resources, Inc.'s financial position as of December 31, 2000 and the
results of its operations and its cash flows for the three months ended
December 31, 2000 and 1999. The results of operations for the three
months ended December 31, 2000 are not indicative of the results to be
expected for the fiscal year ending September 30, 2001.
2. The condensed consolidated financial statements and condensed notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes thereto.
3. Certain reclassifications were made to prior year balances to conform
with current year presentations.
4. Quarterly earnings are affected by the highly seasonal nature of the
business as variations in weather conditions generally result in
greater earnings during the winter months.
5. On October 1, 2000, the Company adopted the provisions of SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
NO. 133, and SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVES AND
CERTAIN HEDGING ACTIVITIES, and as interpreted by the FASB and the
Derivatives Implementation Group through "Statement 133 Implementation
Issues." SFAS No. 133 requires the recognition of all derivative
instruments as assets or liabilities in the Company's balance sheet and
measurement of those instruments at fair value. The adoption of the
standard did not have a material impact on the results of operations or
other comprehensive income.
The Company has entered into futures and swaps, extending through March
2001, for the purpose of hedging the price of propane in order to
provide price stability during the winter months. The Company's hedging
activities are in accordance with established risk management policies.
The hedges qualify as cash flow hedges; therefore, changes in the fair
value are reported in Other Comprehensive Income. No portion of the
hedges were ineffective during the three months ended December 31,
2000. Gains on hedge transactions will be reclassified into earnings as
the transactions are settled.
6. Earnings per common share are based on the weighted average number of
shares outstanding during each period (1,885,336 and 1,835,972 for the
three-month periods ended December 31, 2000 and 1999, respectively) and
the weighted average number of shares outstanding assuming dilution
(1,886,440 and 1,841,890 for the three-month periods ended December 31,
2000 and 1999, respectively). The difference between the weighted
average number of shares for the calculation of basic and diluted
earnings per share relates to the dilutive effect associated with the
assumed issuance of stock options as calculated using the Treasury
Stock method.
6
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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7. RGC Resources, Inc.'s reportable segments are included in the following
table. The segments are comprised of natural gas, propane, energy
marketing and other.
Energy
Natural Gas Propane Marketing Other Total
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For the Quarter Ended December 31, 2000:
Operating revenues $31,824,069 $5,032,544 $3,826,498 $502,052 $41,185,163
Operating margin 7,230,659 2,097,308 160,837 135,065 9,623,869
Earnings before income taxes 2,119,996 671,951 151,492 (109,086) 2,834,353
As of December 31, 2000:
Total assets $86,060,603 $16,165,475 $1,811,209 $2,033,016 $106,070,303
For the Quarter Ended December 31, 1999:
Operating revenues $15,277,606 $3,142,087 $1,972,655 $179,845 $20,572,193
Operating margin 5,664,010 1,649,214 35,434 74,675 7,423,333
Earnings before income taxes 1,355,757 369,800 32,682 57,408 1,815,647
As of December 31, 1999:
Total assets $68,446,561 $13,021,881 $1,021,488 $712,740 $83,202,670
8. The Company increased the borrowing limits on its line of credit
agreements. The Company's total available line of credit increased from
$23,500,000 to $30,000,000. The Company sought the increase to provide
additional working capital to fund significantly higher inventory and
accounts receivable balances resulting from higher natural gas and
propane prices. The increase in the line of credit availability is
temporary and is currently scheduled to return to the previous level on
June 30, 2001.
9. Both Roanoke Gas Company and Bluefield Gas Company, subsidiaries of RGC
Resources, Inc., operated manufactured gas plants (MGPs) as a source of
fuel for lighting and heating until the early 1950's. A by- product of
operating MGPs was coal tar, and the potential exists for on-site tar
waste contaminants at the former plant sites. The extent of
contaminants at these sites, if any, is unknown at this time. An
analysis at the Bluefield Gas Company site indicates some soil
contamination. The Company, with concurrence of legal counsel, does
not believe any events have occurred requiring regulatory reporting.
Further, the Company has not received any notices of violation or
liabilities associated with environmental regulations related to the
MGP sites and is not aware of any off-site contamination or pollution
as a result of prior operations. Therefore, the Company has no plans
for subsurface remediation at the MGP sites. Should the Company
eventually be required to remediate either site, the Company will
pursue all prudent and reasonable means to recover any related costs,
including insurance claims and regulatory approval for rate case
recognition of expenses associated with any work required. A
stipulated rate case agreement between the Company and the West
Virginia Public Service Commission recognized the Company's right to
defer MGP clean-up costs, should any be incurred, and to seek rate
relief for such costs. If the Company eventually incurs costs
associated with a required clean-up of either MGP site, the Company
anticipates recording a regulatory asset for such clean-up costs to be
recovered in future rates. Based on anticipated regulatory actions and
current practices, management believes that any costs incurred related
to this matter will not have a material effect on the Company's
financial condition or results of operations.
7
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Consolidated net earnings for the three-month period ended December 31, 2000 was
$1,816,860 compared to $1,159,165 for the same period last year.
Total operating revenues for the three months ended December 31, 2000 doubled
last year's revenues as the cold weather lead to increased energy sales volumes
and drove energy costs to significantly higher levels as compared to the same
period last year. Significantly colder temperatures that were 38 percent colder
than the same period last year and 21 percent colder than the 10-year normal
provided the catalyst for the increased energy sales. Total regulated natural
gas deliveries increased by more than 26 percent with non-transporting volumes
reflecting a 36 percent increase in dekatherms sold. Propane gallons delivered
experienced an increase of nearly 18 percent. The greatest impact to revenues
resulted from adjusting retail prices for increases in the cost of gas. The
average cost of a dekatherm of natural gas increased by more than 88 percent
from the same period last year. The average cost of a gallon of propane
increased by 67 percent during the same time.
Total operating margin increased $2,200,536, or 30 percent, for the quarter
ended December 31, 2000 from the same period last year. Regulated natural gas
margins increased by $1,566,649, or 28 percent, on a total delivered volume
(transporting and non-transporting) increase of 897,264 dekatherms, or 27
percent. Propane margins increased by $448,094, or 27 percent, on a 508,263, or
18 percent, gallon increase in deliveries over the same period last. Propane
deliveries did not obtain the same level of increases as the natural gas side,
due to end of year fill-ups conducted in September 2000 that caused customer
inventories to begin the year at a higher level. The unregulated energy
marketing company experienced a significant rise in margin on flat sales for the
month. The average margin obtained from the energy marketing sales increased by
$0.198 per dekatherm, or 359 percent. The tremendous boost in margins resulted
from the Company entering into a fixed price contract for natural gas during the
summer that locked in prices at that time. This contract will expire on February
28, 2001. Other margins increased as compared to last year due to the activities
of the Company's two acquisitions last winter, Highland/Cox Heating and Cooling,
Inc. and GIS Resources, Inc.
Other operations expenses increased by $521,625, or 19 percent, for the
three-month period ended December 31, 2000 compared to the same period last
year. Nearly half of the increase resulted from increases in bad debt reserves
related to the rise in revenues. Bad debt expense and customer delinquencies
are, and will be, an area of increased focus for the current year as higher
energy prices are expected to impact collectibility of customer accounts. Most
of the remaining increase in other operating expenses results from the
activities of the Company's newest business ventures that began operations in
January 2000. General taxes increased $397,230, or 53 percent. State and local
gross receipts taxes comprise the major items in the general tax category. These
taxes are based upon gross receipts and increased 88 percent over last year's
levels. The increases in these taxes corresponds to the 100 percent rise in
gross revenues of the natural gas companies. Capital expenditures for adding new
customers to the natural gas and propane business, replacing older portions of
the natural gas distribution system, and adding the assets of GIS Resources,
Inc. and Highland/Cox Heating and Cooling, Inc. have resulted in depreciation
expense increasing by $119,614, or 11 percent. Interest charges increased by
more than 28 percent as the Company's average total debt position for the
current quarter rose by nearly 26 percent. The additional debt was required to
finance significantly higher balances in accounts receivable and inventories
related to higher gas prices as well as increased sales, and to a lesser extent
for financing propane operations and the Company's renewal program in the
natural gas operations.
8
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The three-month earnings presented herein should not be considered as reflective
of the Company's consolidated financial results for the fiscal year ending
September 30, 2001. The total revenues during the first three months reflect
higher billings due to the weather sensitive nature of the gas business and
higher energy costs. Improvement or decline in earnings depends primarily on
weather conditions during the remaining winter months.
LINE OF CREDIT
The Company increased the borrowing limits on its line of credit agreements. The
Company's total available line of credit increased from $23,500,000 to
$30,000,000. The Company sought the increase to provide additional working
capital to fund significantly higher inventory and accounts receivable balances
resulting from higher energy prices. The increase in the line of credit
availability is temporary and is currently scheduled to return to the previous
level on June 30, 2001.
ENERGY COSTS
A combination of several factors accounts for the significantly higher energy
prices. For the last several years, warmer than normal winter weather has served
to mask the underlying growth in energy demand and keep energy prices low. The
low prices led to a reduction in natural gas exploration and production. Also
during this time period, virtually all new electric generation plants being
built to meet growing electric demand were designed to use natural gas as the
primary energy source.
The convergence of growing electric demand, reduced production and storage of
natural gas, limitations on oil production both domestically and
internationally, and near record cold weather in November and December have all
contributed to the dramatic increase in energy prices. The NYMEX price, an
industry standard for measuring gas prices, for January 2001 natural gas futures
contracts was $10.10 per dekatherm December 2000. At the same time last year the
January 2000 NYMEX price for natural gas futures contracts was $2.72. Propane
price swings have been significant as well.
The impact of these dramatic increases in energy prices has been mitigated to
our customers by a variety of factors. A portion of our winter deliveries are
provided from gas purchased during the summer at lower prices and stored for
winter usage. In addition, other natural gas supplies were purchased under fixed
price contracts put into effect prior to the full impact of the price
escalation.
The higher prices for natural gas have translated into increased exploration
activity by producers, which should lead eventually to increased supply.
However, in the near future, prices are expected to remain at higher levels than
has been experienced over the last few years.
REGULATORY AFFAIRS
As a result of increasing energy prices, the Company has purchased gas
adjustment proceedings active in both Virginia and West Virginia in an effort to
keep customer billing rates current with actual gas costs. The Company has also
filed in both states for the option of using financial hedges as a way to reduce
the volatility in natural gas prices. The Company is also participating in a
variety of regulatory proceedings related to underground utility damage
prevention, special area development rates, rules of conduct in customer choice
programs and other deregulation issues.
9
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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ENVIRONMENTAL ISSUES
Both Roanoke Gas Company and Bluefield Gas Company, subsidiaries of RGC
Resources, Inc., operated manufactured gas plants (MGPs) as a source of fuel for
lighting and heating until the early 1950's. A by-product of operating MGPs was
coal tar, and the potential exists for on-site tar waste contaminants at the
former plant sites. The extent of contaminants at these sites, if any, is
unknown at this time. An analysis at the Bluefield Gas Company site indicates
some soil contamination. The Company, with concurrence of legal counsel, does
not believe any events have occurred requiring regulatory reporting. Further,
the Company has not received any notices of violation or liabilities associated
with environmental regulations related to the MGP sites and is not aware of any
off-site contamination or pollution as a result of prior operations. Therefore,
the Company has no plans for subsurface remediation at the MGP sites. Should the
Company eventually be required to remediate either site, the Company will pursue
all prudent and reasonable means to recover any related costs, including
insurance claims and regulatory approval for rate case recognition of expenses
associated with any work required. A stipulated rate case agreement between the
Company and the West Virginia Public Service Commission recognized the Company's
right to defer MGP clean-up costs, should any be incurred, and to seek rate
relief for such costs. If the Company eventually incurs costs associated with a
required clean-up of either MGP site, the Company anticipates recording a
regulatory asset for such clean-up costs to be recovered in future rates. Based
on anticipated regulatory actions and current practices, management believes
that any costs incurred related to this matter will not have a material effect
on the Company's financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: (i) frozen rates in both regulated jurisdictions; (ii)
earning on a consistent basis an adequate return on invested capital; (iii)
increasing expenses and labor costs and availability; (iv) price competition
from alternative fuels, especially in light of higher gas prices; (v)
volatility in the price of natural gas and propane; (vi) uncertainty in the
projected rate of growth of natural gas and propane requirements in the
Company's service area; (vii) general economic conditions both locally and
nationally; and (viii) developments in electricity and natural gas deregulation
and associated industry restructuring. In addition, the Company's business is
seasonal in character and strongly influenced by weather conditions. Extreme
changes in winter heating degree days from normal or mean can have significant
short-term impacts on revenues and gross margin.
10
Part II - Other Information
Item 2. Changes in Securities.
Pursuant to the RGC Resources Restricted Stock Plan for Outside
Directors (the "Restricted Stock Plan"), 40% of the monthly retainer
fee of each non-employee director of the Company is paid in shares of
unregistered common stock and is subject to vesting and transferability
restrictions ("restricted stock"). A participant can, subject to
approval of the Board, elect to receive up to 100% of his retainer fee
in restricted stock. The number of shares of restricted stock is
calculated each month based on the closing sales price of the Company's
common stock on the Nasdaq-NMS on the first day of the month. The
shares of restricted stock are issued in reliance on section 3(a)(11)
and section 4(2) exemptions under the Securities Act of 1993 (the
"Act") and will vest only in the case of the participant's death,
disability, retirement or in the event of a change in control of the
Company. Shares of restricted stock will be forfeited to the Company by
the participant's voluntary resignation during his term on the Board or
removal for cause as a director. During the quarter ended December 31,
2000, the Company issued a total of 406 shares of restricted stock
pursuant to the Restricted Stock Plan as follows:
Investment Date Price Number of Shares
--------------- ----- ----------------
10-1-2000 $19.188 136
11-1-2000 $19.000 137
12-1-2000 $19.500 133
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 2000.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
RGC Resources, Inc.
Date: February 14, 2001 By: s/Roger L. Baumgardner
---------------------------------
Roger L. Baumgardner
Vice President/Secretary and Treasurer
12