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 June 30, 2001
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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 June 30, 2001
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Common Stock, $5 Par Value 1,906,825
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
June 30, September 30,
ASSETS 2001 2000
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----------------- ----------------
Current Assets:
Cash and cash equivalents $ 208,945 $ 721,249
Accounts receivable - (less allowance for
uncollectibles of $1,950,691 and $314,081,
respectively) 8,942,845 6,251,248
Inventories 11,262,122 12,421,327
Prepaid income taxes - 464,299
Deferred income taxes 3,759,587 1,836,581
Underrecovery of gas costs - 888,687
Other 579,950 430,307
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Total current assets 24,753,449 23,013,698
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Property, Plant And Equipment:
Utility plant in service 82,251,644 78,780,014
Accumulated depreciation (31,157,933) (28,765,599)
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Utility plant in service, net 51,093,711 50,014,415
Construction work-in-progress 1,846,223 1,562,138
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Utility Plant, Net 52,939,934 51,576,553
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Nonutility property 17,957,655 16,393,264
Accumulated depreciation (5,987,380) (5,044,294)
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Nonutility property, net 11,970,275 11,348,970
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Total property, plant and equipment 64,910,209 62,925,523
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Other Assets
Intangible assets, net of accumulated amortization 948,728 1,014,509
Other assets 364,993 453,764
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Total other assets 1,313,721 1,468,273
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Total Assets $ 90,977,379 $ 87,407,494
================= ================
See notes to condensed consolidated financial statements.
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2
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
June 30, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
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----------------- ----------------
Current Liabilities:
Accounts payable $ 8,995,753 $ 11,003,592
Current maturities of long-term debt 777,538 26,092
Short-term debt 12,198,000 13,295,000
Dividends payable 534,197 517,827
Income taxes payable 1,455,157 -
Customer deposits 540,493 506,562
Accrued expenses 3,685,754 3,733,320
Refunds due customers 63,954 223,009
Overrecovery of gas costs 1,485,445 -
Other liabilities 1,458,775 -
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Total current liabilities 31,195,066 29,305,402
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Long-term Debt, Excluding Current Maturities 22,539,684 23,310,522
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Deferred Credits and Other Liabilities:
Deferred income taxes 4,575,462 4,431,643
Deferred investment tax credits 345,211 374,056
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Total deferred credits and other liabilities 4,920,673 4,805,699
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Stockholders' Equity:
Common stock, $5 par value; authorized,
10,000,000 shares; issued and outstanding
1,906,825 and 1,881,733 shares, respectively 9,534,125 9,408,665
Preferred stock, no par, authorized, 5,000,000
shares; 0 shares issued and outstanding in
both 2001 and 2000 - -
Capital in excess of par value 10,619,727 10,262,252
Retained earnings 12,236,919 10,314,954
Accumulated comprehensive loss (68,815) -
----------------- ----------------
Total stockholders' equity 32,321,956 29,985,871
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Total Liabilities and Stockholders' Equity $ 90,977,379 $ 87,407,494
================= ================
See notes to condensed consolidated financial statements.
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3
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE-
MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
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Operating Revenues:
Gas utilities $ 11,464,101 $ 10,421,581 $ 78,323,332 $ 46,679,985
Propane operations 1,844,375 1,370,414 13,623,230 9,653,389
Energy marketing 3,390,878 2,269,553 11,517,359 6,305,048
Other 301,768 745,775 1,171,222 1,539,585
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Total operating revenues 17,001,122 14,807,323 104,635,143 64,178,007
------------- ------------- -------------- --------------
Cost of Sales:
Gas utilities 7,868,102 6,619,117 60,440,588 29,973,618
Propane operations 1,105,317 803,347 8,015,387 4,896,869
Energy marketing 3,354,405 2,234,014 11,054,132 6,204,309
Other 181,886 492,681 838,533 990,130
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Total cost of sales 12,509,710 10,149,159 80,348,640 42,064,926
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Operating Margin 4,491,412 4,658,164 24,286,503 22,113,081
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Other Operating Expenses:
Other operations 2,930,556 2,544,436 9,661,662 8,234,541
Maintenance 375,429 302,613 1,043,221 930,646
General taxes 371,014 580,469 2,017,329 2,216,194
Depreciation and amortization 1,239,310 1,135,206 3,713,936 3,388,089
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Total other operating expenses 4,916,309 4,562,724 16,436,148 14,769,470
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Operating Earnings (Loss) (424,897) 95,440 7,850,355 7,343,611
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Other Deductions, net (24,319) (20,164) (85,534) (81,487)
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Earnings (Loss) Before Interest and Income Taxes (449,216) 75,276 7,764,821 7,262,124
------------- ------------- -------------- --------------
Interest Charges 597,719 557,788 2,158,601 1,784,476
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Earnings (Loss) Before Income Taxes (1,046,935) (482,512) 5,606,220 5,477,648
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Income Taxes (400,334) (182,407) 2,089,446 1,954,881
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Net Earnings (Loss) (646,601) (300,105) 3,516,774 3,522,767
------------- ------------- -------------- --------------
Other Comprehensive Loss, net of $43,904 in income tax (68,815) - (68,815) -
------------- ------------- -------------- --------------
Comprehensive Income (Loss) $ (715,416) $ (300,105) $ 3,447,959 $ 3,522,767
============= ============= ============== ==============
Basic Earnings (Loss) Per Common Share $ (0.34) $ (0.16) $ 1.86 $ 1.90
============= ============= ============== ==============
Diluted Earnings (Loss) Per Common Share $ (0.34) $ (0.16) $ 1.85 $ 1.89
============= ============= ============== ==============
See notes to condensed consolidated financial statements.
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4
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH AND NINE-MONTH
PERIODS ENDED JUNE 30, 2001 AND 2000
UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (646,601) $ (300,105) $ 3,516,774 $ 3,522,767
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,261,186 1,155,719 3,779,563 3,464,204
Loss on disposal of property 6,595 6,765 2,140 24,015
Loss on sale of other assets - - - -
Deferred taxes and investment tax credits (32,504) 408,554 (1,808,032) (354,873)
Changes in assets and liabilities which provided
cash, exclusive of changes and noncash
transactions shown separately 5,391,976 846,967 1,975,536 1,236,177
---------------- ------------- ------------- -----------------
Net cash provided by operating activities 5,980,652 2,117,900 7,465,981 7,892,290
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (1,763,426) (1,658,325) (5,778,006) (5,966,975)
Cost of removal of utility plant, net (15,758) (22,173) (27,716) (41,293)
Proceeds from disposal of equipment 6,423 24,291 39,333 42,793
Net cash used in investing activities (1,772,761) (1,656,207) (5,766,389) (5,965,475)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - - -
Retirement of long-term debt and capital leases (6,580) (6,125) (19,392) (524,631)
Net repayments under lines of credit (4,212,000) (64,000) (1,097,000) (217,000)
Cash dividends paid (531,638) (514,314) (1,578,439) (1,521,334)
Proceeds from issuance of stock 189,180 134,834 482,935 427,574
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Net cash used in financing activities (4,561,038) (449,605) (2,211,896) (1,835,391)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (353,147) 12,088 (512,304) 91,424
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 562,092 218,837 721,249 139,501
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 208,945 $ 230,925 $ 208,945 $ 230,925
================ ============= ============= =================
SUPPLEMENTAL INFORMATION:
Interest paid $ 718,910 $ 694,531 $ 2,256,101 $ 2,111,227
Income taxes paid, net $ 619,000 $ 12,824 $ 1,978,021 $ 541,829
See notes to condensed consolidated financial statements.
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5
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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 the
financial position of RGC Resources, Inc. and its subsidiaries (the
"Company") as of June 30, 2001 and the results of its operations and
its cash flows for the three months and nine months ended June 30, 2001
and 2000. The results of operations for the nine months ended June 30,
2001 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 and interpreted. 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's risk management policy allows management to enter into
derivatives for the purpose of managing commodity and financial market
risks of its business operations. The key market risks that RGC
Resources, Inc. would seek to hedge include the price of natural gas
and propane gas and the cost of borrowed funds.
The Company entered into futures and swaps during the quarter ended
June 30, 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 and nine months
ended June 30, 2001.
During the quarter ended June 30, 2001, the Company also entered into a
no cost collar arrangement for the purchase of natural gas for the
purpose of providing price stability during the winter months. The fair
value of this instrument is recorded in the balance sheet; however, net
income and other comprehensive income are not affected by the change in
market value as any cost incurred or benefit received from the
derivative arrangement is recoverable or refunded through the regulated
natural gas purchased gas adjustment (PGA) mechanism. Both the Virginia
State Corporation Commission (SCC) and the West Virginia Public Service
Commission (PSC) currently allow for full recovery of prudent costs
associated with natural gas purchases, and any additional costs or
benefits associated with the settlement of the derivative contract will
be passed through to customers when realized.
6
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
6. In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, BUSINESS COMBINATIONS. SFAS No. 141 requires the
purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS No. 141 will
have a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which is effective for fiscal years beginning after
December 15, 2001 with earlier adoption permitted. SFAS No. 142
requires, among other things, the discontinuance of goodwill
amortization and the implementation of an impairment test to determine
any devaluation and resulting adjustment to goodwill. SFAS No. 142
requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption and at least annually
thereafter. The Company is currently assessing but has not determined
the impact of SFAS No. 142 on its financial position and results of
operations.
7. Basic earnings per common share are based on the weighted average
number of shares outstanding during each period. The weighted average
number of shares outstanding for the three-month and nine-month
periods ended June 30, 2001 were 1,903,562 and 1,894,189 compared to
1,873,076 and 1,857,796, respectively, for the same periods last year.
The weighted average number of shares outstanding assuming dilution
were 1,903,562 and 1,897,741 for the three-month and nine-month
periods, respectively, ended June 30, 2001 compared to 1,873,076 and
1,862,035, respectively, for the same periods last year. 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.
8. RGC Resources, Inc.'s reportable segments are included in the following
table. The segments are composed of regulated natural gas sales and
distribution, propane sales, energy marketing and other. The other
segment is composed of the heating and air conditioning business,
mapping services, information system services and certain corporate
adjustments.
Energy
Natural Gas Propane Marketing Other Total
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FOR THE THREE MONTHS ENDED JUNE 30, 2001
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Operating revenues $11,464,101 $1,844,375 $3,390,878 $301,768 $17,001,122
Operating margin 3,595,999 739,058 36,473 119,882 4,491,412
Earnings before income taxes (444,139) (474,618) 29,144 (157,322) (1,046,935)
FOR THE THREE MONTHS ENDED JUNE 30, 2000
Operating revenues $10,421,581 $1,370,414 $2,269,553 $745,775 $14,807,323
Operating margin 3,802,464 567,067 35,539 253,094 4,658,164
Earnings before income taxes (126,183) (441,094) 32,490 52,275 (482,512)
7
Energy
Natural Gas Propane Marketing Other Total
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FOR THE NINE MONTHS ENDED JUNE 30, 2001
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Operating revenues $78,323,332 $13,623,230 $11,517,359 $1,171,222 $104,635,143
Operating margin 17,882,744 5,607,843 463,227 332,689 24,286,503
Earnings before income taxes 4,117,285 1,460,443 438,222 (409,730) 5,606,220
As of June 30, 2001:
Total assets $73,707,772 $13,539,616 $1,859,613 $1,870,378 $90,977,379
FOR THE NINE MONTHS ENDED JUNE 30, 2000
Operating revenues $46,679,985 $9,653,389 $6,305,048 $1,539,585 $64,178,007
Operating margin 16,706,367 4,756,520 100,739 549,455 22,113,081
Earnings before income taxes 4,117,592 1,116,497 92,094 151,465 5,477,648
As of June 30, 2000:
Total assets $65,270,095 $11,920,011 $1,298,434 $1,937,987 $80,426,527
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.
8
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
RESULTS OF OPERATIONS
Consolidated net earnings (loss) for the three-month and nine-month periods
ended June 30, 2001 were $(646,601) and $3,516,774, respectively, compared to
$(300,105) and $3,522,767 for the same periods last year.
Total operating revenues for the three months ended June 30, 2001 increased
$2,193,799, or 14.8 percent, as energy prices declined from their winter highs
but remained at higher levels than for the same period last year. The weather
for the quarter ended June 30, 2001 was 18 percent warmer than the same period
last year, resulting in the decline of total natural gas deliveries by nearly 10
percent. However, average price per non-transporting dekatherm (DTH) delivered
increased by nearly 22 percent over last year's price. High energy prices may
have prompted some consumers to conserve energy or seek lower-cost alternative
fuel sources. Propane deliveries increased by 274,752 gallons, or 21 percent,
over the same period last year, even though weather was 18 percent warmer. The
growth in propane sales resulted from a combination of two factors. First,
special price promotions were offered during the Spring to bolster sales.
Second, the number of customers continued to grow, though not at the same rate
as during the last few years. The unregulated energy marketing division
experienced an increase in revenues of $1,121,325, or 49 percent, as increases
in gas costs more than offset a reduction in natural gas volumes of 41,742 DTH
from the same period last year. The decline in volumes is attributed to reduced
industrial production due to the slowing economy and certain industrial
customers continuing to use lower-cost alternative energy sources. Other
revenues declined by $444,007, or nearly 60 percent, as the heating and air
conditioning business was affected by a change in management personnel, reduced
demand for equipment and a highly competitive market.
Total operating margin decreased by $166,752, or 3.6 percent, for the quarter
ended June 30, 2001 compared to the same period last year. Natural gas margins
declined $206,465, or 5.4 percent, as total delivered natural gas volumes
declined by 9.7 percent from last year's levels. The reduction in the natural
gas margin was primarily caused by a combination of reduced natural gas volumes
and the elimination of the gross receipts tax component from revenues beginning
January 1, 2001. The elimination of the gross receipts tax is discussed in more
detail below. Propane margins increased by $171,991, or 30 percent, compared to
the same period last year. Propane margins benefitted from a 21 percent increase
in gallons delivered and an 8 percent increase in per-gallon margin. The energy
marketing division margin returned to normal levels as the fixed-price natural
gas contract the Company entered into during last Summer expired in March.
Energy marketing margins increased $934, or 2.6 percent, over the same period
last year on a 6 percent decline in volume. Other margins declined by $133,212,
or 53 percent, as significantly lower margins were experienced in the heating
and air conditioning division because of a slow down in the heating and air
conditioning business and strong competition in the West Virginia markets.
Other operations expenses increased by $386,120, or 15 percent, for the
three-month period ended June 30, 2001 compared to the same period last year.
More than 94 percent of the increase was attributable to additions to bad debt
reserves due to concerns over collectibility of high customer balances. Past due
balances are more the double last year's amounts as total revenues have
increased by 63 percent for the year. The combination of high energy costs,
which affected more customers than in prior years, and regulatory requirements
in the natural gas operations, which limited the Company's ability to disconnect
customers for non payment in the winter months, intensified the delinquency
problem. Reducing customer delinquencies will continue to be a primary focus for
the balance of the current year and next year, as energy prices are expected to
remain at higher levels than in recent years. Maintenance activities exceeded
last year's levels because of the continued maintenance on the natural gas
distribution system necessary from the impact of the colder Winter on regulation
equipment and facilities.
9
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
General taxes decreased $209,455, or 36 percent, for the three-month period
ended June 30, 2001 compared to the same period last year primarily as a result
of the elimination of state and local gross receipts taxes on public utilities
by the Commonwealth of Virginia that became effective January 1, 2001. A
consumption tax and a state income tax replaced the gross receipts tax. Gross
receipts taxes totaled $194,992 for the three-month period ended June 30, 2000
and were included in the Company's billing rates and recorded as both operating
revenues and general tax expense. The new consumption tax is added to customer
bills based on the volume of natural gas consumed. The Company does not include
the consumption tax in either operating revenues or general tax expense. This
tax is a pass-through from the customer to the Commonwealth of Virginia and the
localities in which the utility operates within Virginia. The state income tax
is included in the income tax amount.
Continued growth in the Company's utility property, related to the addition of
new customers to the distribution system and the Company's renewal program for
replacement of older facilities, and the addition of new propane customers have
increased depreciation expense $104,104, or 9 percent. Interest charges
increased $39,931, or 7 percent, from the same period last year as the Company's
average total debt position for the current quarter rose by nearly 22 percent.
The increase in average total debt for the quarter was attributable to
short-term borrowings under the Company's lines-of-credit. As the
lines-of-credit are variable-rate instruments, the Company was able to benefit
from reductions in the prime lending rate. The effective interest rate for the
quarter on short-term debt declined by 216 basis points, or 31 percent, from the
same period last year. The additional debt was required to finance significantly
higher balances in accounts receivable and inventories related to higher gas
prices and, to a lesser extent, the financing of capital expenditures in the
natural gas and propane operations. Income tax benefit increased by 217,927, or
119 percent, as loss before income taxes increased by more than 117 percent.
For the nine-month period ended June 30, 2001, total operating margin increased
$2,173,422, or 9.8 percent, from the same period last year. The natural gas
margin increased $1,176,377, or 7 percent, as total natural gas deliveries
increased by 619,664 DTH, or 6 percent, from the same period last year, on
weather that was 17 percent colder. Non-transporting sales increased 13 percent,
while transportation deliveries declined by 14 percent. Conservation efforts and
energy switching during the Winter mitigated the increase in margin. Propane
margins increased $851,323, or 18 percent, as gallons delivered increased by
nearly 9 percent. As with natural gas activity, propane was affected by customer
conservation efforts and use of alternative fuels. The energy marketing division
benefitted from the fixed-price natural gas contract the Company entered into
during last Summer. The contract locked-in the purchase price of natural gas
significantly below the high winter spot-market prices. As a result, energy
marketing margins increased $362,488, or 360 percent, over the same period last
year on a 6 percent decline in volume. The fixed-price contract expired at March
31, 2001, and energy marketing margins have returned to prior year levels.
For the nine-month period ended June 30, 2001, other operations expenses
increased $1,427,121 or 17 percent, from the same period last year.
Approximately two-thirds of the increase was attributable to higher bad debt
expense associated with the significantly higher billings due to high gas costs
and colder weather, causing a greater number of customers to be unable to pay
their bills. The balance of the increase derived from the activities of the
Company's newest business ventures that began operations in January 2000 and
from higher payroll, insurance and post-retirement benefit costs. General taxes
declined by 9 percent, as the elimination of gross receipts tax beginning
January 1, 2001 more than offset the significantly higher gross receipts tax
incurred in the first quarter due to greater sales volumes and significantly
higher billing rates from high gas costs. Depreciation increased $325,847, or 10
percent, on the greater utility and non-utility plant balances. Interest charges
grew by $374,125, or 20 percent, for the nine-month period ended June 30, 2001,
compared to the same period last year as short-term debt levels increased to
finance significantly higher accounts receivable and inventory balances
attributable to the high natural gas and propane costs. The overall increase in
interest expense was mitigated by a reduction in
10
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
average short-term interest rates from last year's levels. The effective
short-term rate declined from 6.51 percent to 6.13 percent between the two
periods. The implementation of state income tax on the Virginia natural gas
operations combined with higher pre-tax earnings to result in an increase in
income tax expense of 7 percent over the same nine-month period last year.
The nine-month earnings presented herein should not be considered as indicative
of the Company's consolidated financial results for the fiscal year ending
September 30, 2001. The total revenues during the first nine months reflect
higher billings due to the weather sensitive nature of the gas business and
higher energy costs. The last three months of the fiscal year are generally loss
months as process fuel and not heating is the primary demand during this time.
ENERGY COSTS
Natural gas and propane prices have returned closer to normal levels. The
settlement price of the April, May and June 2001 NYMEX natural gas contracts, an
industry standard for measuring energy prices, averaged $4.671 compared to an
average of $3.465 for the same period last year and an average of $7.093 for the
first quarter of 2001. The NYMEX propane contracts for April, May and June of
2001 averaged $0.520 compared to $0.494 for the same period last year and $0.672
for the previous quarter.
The number of active natural gas wells has increased more than 250 percent since
April 1999. Increased exploration activity has made an impact on natural gas
prices by increasing supply and storage levels. According to the American Gas
Association, for the week ending July 13, 2001, total US underground natural gas
storage amounted to 2,042 BCF (billion cubic feet) of working gas compared to
1,803 BCF for the same week last year. Propane inventories have experienced
similar increases over last year's levels.
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.
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RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary capital needs are for the funding of its continuing
construction program and the seasonal funding of its stored natural gas
inventories. The Company's construction program is comprised of a combination of
replacing old bare steel and cast iron pipe with new plastic pipe and expansion
of natural gas and propane service to new customers. Total capital expenditures
for the three-month and nine-month periods ended June 30, 2001 were $1,763,426
and $5,778,006, respectively.
The Company also is funding seasonal levels of natural gas inventories. From
April through October, natural gas is purchased and stored for sale in the
colder winter months. Due to increased wholesale gas costs, natural gas
inventory values have increased more than 50 percent over the same period last
year on comparable storage volumes. Furthermore, accounts receivable balances
have increased over last year due to the higher gas costs and increased
delinquent balances due to the cold winter and high prices. As a result of the
higher delinquency levels, the Company has increased its reserve for
uncollectibles.
Short-term borrowings, together with internally generated funds and the sale of
Common Stock through the Company's Dividend Reinvestment and Stock Purchase
Plan, have been adequate to cover construction costs, debt service, dividend
payments and inventories. Total outstanding balances on the Company's
lines-of-credits at June 30, 2001 were $12,198,000 compared to $6,146,000 for
the same period last year. Furthermore, the Company's temporary increase in
borrowing limits expired June 30, 2001, and total available lines-of-credit
decreased from $30,000,000 to $23,500,000. The Company sought the increase to
provide additional working capital to fund the higher inventory and accounts
receivable balances generated by higher gas costs during the Winter.
At June 30, 2001, the Company's capitalization consisted of 42 percent in
long-term debt and 58 percent in common equity.
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 ones: (i) temporary rate freezes in both regulated
jurisdictions; (ii) failure to earn on a consistent basis an adequate return on
invested capital; (iii) increasing expenses and labor costs and labor
availability; (iv) price competition from alternative fuels; (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; (viii) increases
in interest rates; (ix) increased customer delinquencies and conservation
efforts resulting from high fuel costs; (x) developments in electricity and
natural gas deregulation and associated industry restructuring; and (xi) new
accounting standards issued by the Financial Accounting Standards Board, which
could change the accounting treatment for certain transactions. In addition, the
Company's business is seasonal in character and strongly influenced by weather
conditions. Substantial changes in winter heating-degree days from normal or
mean can have significant short-term impacts on revenues and gross margin.
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RGC RESOURCES, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company is exposed to market risks associated with interest rates and
commodity prices. Interest rate risk is related to the Company's outstanding
long-term and short-term debt. Commodity price risk is experienced by the
Company's regulated natural gas operations, propane operations and energy
marketing business. The Company uses derivative commodity instruments to hedge
price exposures for these operations. The Company's risk management policy, as
authorized by the Company's Board of Directors, allows management to enter into
derivatives for the purpose of managing commodity and financial market risks of
its business operations.
The Company is exposed to market risk related to changes in interest rates
associated with its borrowing activities. A hypothetical 10 percent increase in
market interest rates applicable to the Company's variable rate debt outstanding
at June 30, 2001 would have resulted in a decrease in annual earnings of
approximately $45,000.
The Company manages the price risk associated with purchases of natural gas and
propane by using a combination of fixed price contracts, spot market purchases
and derivative commodity instruments, including futures, swaps and collars. With
respect to propane gas, a hypothetical 10 percent reduction in market price
would result in a decrease in fair value for the Company's propane gas
derivative contracts of approximately $53,000.
With respect to the Company's hedging activities for the price of natural gas,
during the quarter ended June 30, 2001, the Company entered into a no cost
collar arrangement for the purchase of natural gas. In this arrangement, the
Company has purchased index-related puts and sold index-related calls in order
to set "floor" and "ceiling" prices for natural gas for the period October 2001
through March 2002. Any cost incurred or benefit received from the derivative
arrangement is recoverable or refunded through the regulated natural gas
purchased gas adjustment (PGA) mechanism. Both the Virginia State Corporation
Commission and the West Virginia Public Service Commission currently allow for
full recovery of prudent costs associated with natural gas purchases, and any
additional costs or benefits associated with the settlement of the derivative
contract will be passed through to customers when realized. A hypothetical 10
percent reduction in the market price of natural gas would result in a decrease
in fair value of approximately $218,000 for its natural gas derivative
contracts.
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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 Directors of the Company (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 upon (i) the participant's voluntary resignation during his
term on the Board or (ii) removal for cause. During the quarter ended
June 30, 2001, the Company issued a total of 512.618 shares of
restricted stock pursuant to the Restricted Stock Plan as follows:
Investment Date Price Number of Shares
--------------- ----- ----------------
4-1-2001 $20.000 166.000
5-1-2001 $18.510 179.362
6-1-2001 $19.850 167.256
On April 1, 2001, May 1, 2001 and June 1, 2001, the Company issued a
total of 606.803 shares of its common stock as bonuses to certain
employees and management personnel as rewards for performance. The
606.803 shares were not issued in a transaction constituting a "sale"
within the meaning of section 2(3) of the Act.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended June 30, 2001.
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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: August 14, 2001 By: s/Roger L. Baumgardner
Roger L. Baumgardner
Vice President/Secretary and
Treasurer
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