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, 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 December 31, 2001
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Common Stock, $5 Par Value 1,922,252
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
December 31, September 30,
ASSETS 2001 2001
- ------ --------------- ------------------
Current Assets:
Cash and cash equivalents $ 1,256,231 $ 885,678
Accounts receivable - (less allowance for
uncollectibles of $928,903 and
and $531,991, respectively) 12,521,793 7,155,930
Inventories 2,424,668 13,473,986
Prepaid gas service 7,188,518 -
Prepaid income taxes - 356,020
Deferred income taxes 4,057,123 3,468,168
Underrecovery of gas costs 1,712,022 1,208,190
Other 691,329 428,113
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Total current assets 29,851,684 26,976,085
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Property, Plant And Equipment:
Utility plant in service 84,181,681 83,570,936
Accumulated depreciation and amortization (32,257,240) (31,559,291)
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Utility plant in service, net 51,924,441 52,011,645
Construction work in progress 2,663,187 2,048,565
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Utility Plant, Net 54,587,628 54,060,210
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Nonutility property 19,252,467 18,149,109
Accumulated depreciation and amortization (6,671,466) (6,311,673)
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Nonutility property, net 12,581,001 11,837,436
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Total property, plant and equipment 67,168,629 65,897,646
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Other Assets:
Intangible assets, net of accumulated amortization 320,150 327,429
Other assets 329,328 369,969
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Total other assets 649,478 697,398
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Total Assets $ 97,669,791 $ 93,571,129
=============== ==================
See notes to condensed consolidated financial statements.
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2
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2001
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Current Liabilities:
Current maturities of long-term debt $ 128,545 $ 803,037
Borrowings under lines of credit 19,188,000 17,707,000
Dividends payable 548,375 536,385
Accounts payable 8,678,298 8,250,618
Income taxes payable 691,065 -
Customer deposits 641,244 531,288
Accrued expenses 3,341,613 3,776,490
Refunds from suppliers - due customers 59,316 116,758
Overrecovery of gas costs 4,207,288 1,539,782
Unrealized losses on marked to market transactions 1,354,976 1,906,171
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Total current liabilities 38,838,720 35,167,529
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Long-term Debt, Excluding Current Maturities 22,475,155 22,507,485
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Deferred Credits and Other Liabilities:
Deferred income taxes 4,892,842 4,836,121
Deferred investment tax credits 326,573 334,922
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Total deferred credits and other liabilities 5,219,415 5,171,043
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Stockholders' Equity:
Common stock, $5 par value; authorized,
10,000,000 shares; issued and outstanding
1,922,252 and 1,914,603 shares, respectively 9,611,260 9,573,015
Preferred stock, no par, authorized, 5,000,000
shares; 0 shares issued and outstanding,
respectively - -
Capital in excess of par value 10,848,617 10,736,536
Retained earnings 10,782,775 10,490,375
Accumulated comprehensive loss (106,151) (74,854)
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Total stockholders' equity 31,136,501 30,725,072
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Total Liabilities and Stockholders' Equity $ 97,669,791 $ 93,571,129
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3
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000
UNAUDITED
Three Months Ended
December 31,
2001 2000
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Operating Revenues:
Gas utilities $ 16,582,414 $ 31,824,069
Propane operations 2,920,708 5,032,544
Energy marketing 3,125,038 3,826,498
Other 226,447 502,052
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Total operating revenues 22,854,607 41,185,163
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Cost of Sales:
Gas utilities 11,174,538 24,593,410
Propane operations 1,429,778 2,935,236
Energy marketing 3,060,324 3,665,661
Other 136,056 366,987
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Total cost of sales 15,800,696 31,561,294
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Operating Margin 7,053,911 9,623,869
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Other Operating Expenses:
Other operations 3,018,429 3,295,052
Maintenance 362,892 298,184
General taxes 399,601 1,142,485
Depreciation and amortization 1,313,371 1,235,311
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Total other operating expenses 5,094,293 5,971,032
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Operating Earnings 1,959,618 3,652,837
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Other Deductions, net (31,285) (29,732)
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Earnings Before Interest and Income Taxes 1,928,333 3,623,105
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Interest Charges 563,518 788,752
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Earnings Before Income Taxes 1,364,815 2,834,353
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Income Taxes 524,040 1,017,493
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Net Income $ 840,775 $ 1,816,860
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Basic and Diluted Earnings Per Common Share $ 0.44 $ 0.96
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See notes to condensed consolidated financial statements.
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4
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000
UNAUDITED
Three Months Ended
December 31,
2001 2000
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Net Income $ 840,775 $ 1,816,860
Reclassification of loss transferred to net income 43,846 -
Unrealized gain (loss) on derivative financial instruments (75,143) 106,145
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Other Comprehensive Income (Loss), net of tax: (31,297) 106,145
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Comprehensive Income $ 809,478 $ 1,923,005
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See notes to condensed consolidated financial statements.
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5
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS
ENDED DECEMBER 31, 2001 AND 2000
UNAUDITED
Three Months Ended
December 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 840,775 $ 1,816,860
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,350,294 1,257,189
Gain on asset disposition (1,613) (4,025)
Deferred taxes and investment tax credits (520,615) 7,181
Changes in assets and liabilities which provided (used)
cash, exclusive of changes and noncash transactions
shown separately 933,257 (9,006,122)
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Net cash provided by (used in) operating activities 2,602,098 (5,928,917)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (2,621,045) (2,468,025)
Cost of removal of utility plant, net (16,345) (8,733)
Proceeds from sales of assets 17,726 11,321
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Net cash used in investing activities (2,619,664) (2,465,437)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (706,822) (6,349)
Net borrowings under lines of credit 1,481,000 8,442,000
Cash dividends paid (536,385) (517,828)
Proceeds from issuance of stock 150,326 104,112
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Net cash provided by financing activities 388,119 8,021,935
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 370,553 (372,419)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 885,678 721,249
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,256,231 $ 348,830
================ ===============
SUPPLEMENTAL INFORMATION:
Interest paid $ 948,844 $ 876,285
Income taxes refunded, net (2,432) (2,341)
Noncash Transactions:
In 2001 and 2000, the Company entered into derivative price swaps, caps and
collar arrangements for the purpose of hedging the cost of natural gas and
propane. In accordance with hedge accounting requirements, the derivatives were
marked to market at December 31, 2001 for an unrealized loss of $1,354,976 with
corresponding net underrecovery of gas cost of $1,181,100 and a deferred tax
asset of $67,725. At December 31, 2000, the derivatives were marked to market
for an unrealized loss of $173,866 with a deferred tax asset of $67,721.
See notes to condensed consolidated financial statements.
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6
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 necessary to
present fairly RGC Resources, Inc.'s financial position as of December
31, 2001 and the results of its operations and its cash flows for the
three months ended December 31, 2001 and 2000. The results of
operations for the three months ended December 31, 2001 are not
indicative of the results to be expected for the fiscal year ending
September 30, 2002.
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. Effective November 1, 2001, Roanoke Gas Company and Bluefield Gas
Company (the Companies) entered into a contract with a third party,
Duke Energy Trading and Marketing (Duke Energy), to provide future gas
supply needs. Duke Energy has also assumed the management and
financial obligation of the Companies' firm transportation and storage
agreements. In connection with the agreement, the Companies exchanged
gas in storage at November 1, 2001 for the right to receive an equal
amount of gas in the future as provided by the agreement. As a result
of this arrangement, natural gas inventories on the balance sheet are
replaced with a new classification called "prepaid gas service". This
contract expires on October 31, 2004.
6. 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 had entered into futures and swaps 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. For the three months ended December 31, 2001, the
Company recorded an unrealized loss of $75,144 related to hedging
activities and reclassified $43,846 in losses from Other Comprehensive
Income to net income as the hedges settled during the quarter. For the
three months ended December 31, 2000, the Company recorded an
unrealized gain of $106,145 related to propane derivative contracts. No
portion of the hedges were ineffective during the three months ended
December 31, 2001 and 2000.
7
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The Company also had entered into no-cost collar and price-cap
arrangements for the purchase of natural gas for the purpose of
providing price stability during the winter months. The fair value of
these instruments is recorded in the balance sheet with the offsetting
entry to under-recovery of gas costs. Net income and other
comprehensive income are not affected by the change in market value as
any cost incurred or benefit received from these instruments 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 these instruments will be passed through to
customers when realized.
The unrealized losses on these marked to market derivatives at December
31, 2001 are composed of $1,181,100 of natural gas derivative hedges
that are subjected to recovery through the PGA mechanism and $173,876
of propane hedges that will flow through income when realized.
Approximately $85,000 of the unrealized loss on propane hedges at
December 31, 2001 is expected to be realized during the next twelve
months.
7. Earnings per common share are based on the weighted average number of
shares outstanding during each period (1,919,688 and 1,885,336 for the
three-month periods ended December 31, 2001 and 2000, respectively) and
the weighted average number of shares outstanding assuming dilution
(1,923,821 and 1,888,560 for the three-month periods ended December 31,
2001 and 2000, 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.
8. RGC Resources, Inc.'s reportable segments are included in the
following table. The segments are comprised of natural gas, propane,
energy marketing and other.
Natural Energy
Gas Propane Marketing Other Total
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FOR THE THREE MONTHS ENDED DECEMBER 31, 2001:
Operating revenues $16,582,414 $2,920,708 $3,125,038 $226,447 $22,854,607
Operating margin 5,407,876 1,490,930 64,714 90,391 7,053,911
Income (loss) before income taxes 1,309,771 70,615 56,884 (72,455) 1,364,815
As of December 31, 2001:
Total assets $79,712,538 $14,769,341 $1,538,141 $1,649,771 $97,669,791
8
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
FOR THE THREE MONTHS 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
Income (loss) before income taxes 2,119,996 671,951 151,492 (109,086) 2,834,353
As of December 31, 2000:
Total assets $86,060,103 $16,271,620 $1,811,209 $1,927,371 $106,070,303
9. The Company increased the borrowing limits on its line of credit
agreements. Effective October 1, 2001, the Company's total available
line of credit increased from $23,500,000 to $30,000,000. The Company
obtained the increase to provide additional working capital to fund
inventory and accounts receivable balances and provide temporary
financing for capital projects. The line of credit agreements will
expire March 31, 2002, unless extended.
10. 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.
9
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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RESULTS OF OPERATIONS
Consolidated net income for the three-month period ended December 31, 2001 was
$840,775 compared to $1,816,860 for the same period last year.
Total operating revenues for the three months ended December 31, 2001 fell by
nearly half compared to last year's revenues as a combination of much lower
energy costs and significantly warmer weather served to reduce both the price
customers pay for energy and their consumption as compared to last year.
Temperatures were much warmer during the three months ended December 31, 2001,
as the total number of heating degree-days (an industry measure by which the
average daily temperature falls below 65 degrees Fahrenheit) declined nearly 34
percent compared to the same period last year. Heating degree-days for the
current three-month period declined by 22 percent when compared to the current
10-year rolling average for degree days; however, the same three-month period
last year encountered 21 percent more heating degree-days than last year's
10-year rolling average. The swing in degree-days from colder to warmer than the
10-year average magnified the impact to the comparative financial statements.
Total regulated natural gas deliveries decreased by more than 27 percent with,
non-transporting volumes reflecting a 32 percent decline in dekatherms sold.
Propane gallons delivered fell by 31 percent. Revenues were affected from the
Company's 29 percent reduction in sales price of natural gas and the 32 percent
reduction in non-transported volumes sold. The average cost of a dekatherm of
natural gas decreased by nearly 34 percent from the same period last year. The
average cost of a gallon of propane decreased by 29 percent during the same
time. Energy marketing revenues declined by 18 percent on volumes comparable
with last year due to the decline in energy prices. Other revenues declined by
55 percent due to the significant scale-back in the heating and air conditioning
operations as a result of the Company's restructuring plan implemented during
the last fiscal year.
Total operating margin decreased by $2,569,958, or 27 percent, for the quarter
ended December 31, 2001 from the same period last year. Regulated natural gas
margins decreased by $1,822,783, or 25 percent, on a total delivered volume
(transporting and non-transporting) decrease of 1,152,694 dekatherms, or 27
percent. Propane margins decreased by $606,378, or 29 percent, on a 1,059,373,
or 31 percent, gallon decline in deliveries from the same period last year. To a
lesser extent, natural gas and propane margins have been affected by slower
customer growth due to last year's higher energy prices and the effect of the
economic recession on the Company's industrial customers. The unregulated energy
marketing company experienced a significant reduction in margin on comparable
sales volume for the quarter. The average margin generated from the energy
marketing sales decreased by $0.152 per dekatherm, or 60 percent. The reduction
in margins resulted from a fixed price natural gas contract that expired at the
end of March 2001. This contract locked in prices at levels much lower than the
market prices in place last year. The lower prices allowed the Company to sell
natural gas to its transportation customers last year at a lower price as well
as boost margins for the non-regulated energy marketing company. With the
expiration of this contact and the much lower market prices for natural gas, the
energy marketing margins returned to levels experienced prior to last year.
Other margins decreased by 33 percent due to the significant scale-back in the
heating and air conditioning operations.
10
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
The table below reflects volume activity and heating degree-days.
Quarter Quarter Increase/
Delivered Volumes 12/31/01 12/31/00 (Decrease) Percentage
---------------- --------------- --------------- --------------
Regulated Natural Gas (DTH) 3,090,216 4,242,910 (1,152,694) -27%
Propane (Gallons) 2,312,290 3,371,663 (1,059,373) -31%
Highland Energy (DTH) 635,182 634,168 1,014 0%
Heating Degree Days 1,230 1,851 (621) -34%
(Unofficial)
Other operations expenses decreased by $276,623 or 8 percent for the three-month
period ended December 31, 2001 compared to the same period last year. Nearly
three quarters of the decrease was related to the decline in bad debt expense as
total gross revenues fell by nearly 45 percent from last year's levels. Most of
the remaining reduction in other operations expenses related to reduced
operating expenses in the heating and air conditioning operations as a result of
the restructuring of this line of business. Maintenance expenses increased
$64,708, or 22 percent, as the warmer weather allowed for more gas distribution
system maintenance work to be completed.
General taxes decreased $742,884, or 65 percent, for the three-month period
ended December 31, 2001 compared to the same period last year primarily as a
result of the elimination of state and local gross receipts taxes on Virginia
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. Virginia gross receipts taxes 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.
Bluefield Gas Company, which operates in the state of West Virginia, continues
to have a gross receipts tax in the form of a business and occupation tax.
Capital expenditures for adding new customers to the natural gas and propane
business and replacing older portions of the natural gas distribution system
have resulted in depreciation expense increasing by $78,060, or 6 percent.
Interest charges decreased by nearly 29 percent as the Company's average total
debt position for the current quarter increased by 2 percent. The increase in
average total debt for the quarter was attributable to short- term borrowings
under the Company's line-of-credit agreements. As the line-of-credit agreements
are variable-rate instruments indexed to the 30 day LIBOR rate, 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 454 basis points,
or 64 percent, from the same period last year. The additional debt was required
to finance capital expenditures in the natural gas and propane operations.
Income tax expense decreased by $493,453, or 48 percent, as pre-tax income
decreased by nearly 52 percent.
11
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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, 2002. The total revenues and margins during the first three months
reflect higher billings due to the weather sensitive nature of the gas business.
Improvement or decline in earnings depends primarily on weather conditions
during the remaining winter months.
ASSET MANAGEMENT
Effective November 1, 2001, Roanoke Gas Company and Bluefield Gas Company (the
Companies) entered into a contract with a third party, Duke Energy Trading and
Marketing (Duke Energy), to provide future gas supply needs. Duke Energy has
also assumed the management and financial obligation of the Companies' firm
transportation and storage agreements. In connection with the agreement, the
Companies exchanged gas in storage at November 1, 2001 for the right to receive
an equal amount of gas in the future as provided by the agreement. As a result
of this arrangement, natural gas inventories on the balance sheet are replaced
with a new classification called "prepaid gas service." This contract expires on
October 31, 2004.
ENERGY COSTS
Energy prices have declined significantly from last year's levels. The average
of the NYMEX close for natural gas, an industry standard for measuring gas
prices, for the months of October, November and December 2001 was $2.449 per
dekatherm compared to $5.290 per dekatherm for the same period last year.
Propane prices responded similarly as the average NYMEX close for October,
November and December 2001 was $0.3595 per gallon compared to $0.6103 per gallon
average for the same period last year. Furthermore, the average close for both
natural gas and propane were below the October though December average for the
previous five years.
A combination of three factors fueled the decline in commodity prices for
natural gas and propane. These factors included increased exploration, warmer
than normal weather and a weakening economy. Last year's high energy prices
prompted increases in exploration and production. According to the Energy
Information Administration (EIA), more than 8,000 more gas wells were drilled in
the 11 months ended November 2001 than in the entire calendar year of 1999.
Furthermore, EIA reported dramatic increases in storage gas with an estimated
2,858 BCF of working gas in storage at December 31, 2001 compared to 1,719 BCF
of working gas in storage at the same time last year. Warmer weather also
contributed to the reduction in energy prices. According to the National
Climatic Data Center, October through December 2001 ranked as the second warmest
such period for the United States since records have been maintained. The warmer
weather and the economic downturn both contributed to a decline in demand for
energy. The combination of additional supply and lower demand provided
significant downward pressure on energy prices.
12
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
- ----------
REGULATORY AFFAIRS
In late 1998 and early 1999, the regulated natural gas companies of RGC
Resources (Roanoke Gas Company, Bluefield Gas Company and Commonwealth Public
Service Company) were each involved in rate proceedings before their respective
regulatory commissions. All of these proceedings included a moratorium on
filings seeking rate increases in non-gas rates for a period of three years. The
offset to the moratorium periods was the implementation of the Distribution
Renewal Surcharge (DSR) in the Virginia companies and a stepped in rate increase
for each of three years in West Virginia. Both the DSR in Virginia and the
stepped-in-rate increase for West Virginia provided rate relief for the
regulated companies' pipeline renewal program without the formalities of filing
full rate cases each year.
The rate-filing moratoriums end in both jurisdictions on December 1, 2002.
Bluefield Gas Company has filed a notice of intent with the Public Service
Commission of West Virginia indicating that a rate case will be filed in early
February with an effective date to correspond with the December 1, 2002
termination date for the moratorium. Roanoke Gas Company, now combined with
Commonwealth Public Service Company, will file a notice of intent to file in the
Spring of 2002.
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.
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 and accounts receivable. The Company's construction program is
comprised of a combination of replacing old bare steel and cast iron pipe with
new plastic or coated steel pipe and expansion of natural gas and propane
service to new customers. Total capital expenditures were $2,621,045 and
$2,468,025 for the three-month periods ended December 31, 2001 and 2000,
respectively.
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RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
The Company also funds seasonal levels of natural gas inventories and accounts
receivables. From April through October, natural gas is purchased and stored for
sale in the colder winter months. A majority of the Company's sales and billings
occur during the winter. As a result, accounts receivable balances increase
during these months and decrease during the summer months. Due to the decline in
wholesale gas costs and warmer weather, accounts receivable balances and
accounts payable balances at December 31, 2001 are well below the levels at
December 31, 2000.
The Company increased the borrowing limits on its line of credit agreements.
Effective October 1, 2001, the Company's total available lines of credit
increased from $23,500,000 to $30,000,000. The Company obtained the increase to
provide additional working capital to fund inventory and accounts receivable
balances and provide temporary financing for capital projects. The line of
credit agreements will expire March 31, 2002, unless extended.
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 used to cover construction costs, debt service, dividend
payments and inventories. Total outstanding balances on the Company's
lines-of-credits at December 31, 2001 were $19,188,000 compared to $21,737,000
for the same period last year. Reductions in energy costs have reduced the
funding requirements for inventory, accounts receivable and accounts payable.
Furthermore, the Company's construction program has been funded in part by the
Company's lines-of-credit over the past few years. As a result, the Company will
be evaluating the need for longer-term financing in the upcoming months.
At December 31, 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: (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 and availability 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; (xi) significant variations in winter heating degree-days from
normal; (xii) changes in environmental requirements and cost of compliance;
(xiii) impact of potential increased governmental oversight due to the financial
collapse of Enron; and (xiv) new accounting standards issued by the Financial
Accounting Standards Board, which could change the accounting treatment for
certain transactions. All of these factors are difficult to predict and many are
beyond the Company's control. Accordingly, while the Company believes its
forward-looking statements to be reasonable, there can be no
14
RGC RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
- ----------
assurance that they will approximate actual experience or that the expectations
derived from them will be realized. When used in the Company's documents or news
releases, the words, "anticipate," "believe," "intend," "plan," "estimate,"
"expect," "objective," "projection," "forecast" or similar words or future or
conditional verbs such as "will," "would," "should," "could" or "may" are
intended to identify forward-looking statements.
Forward-looking statements reflect the Company's current expectations only as of
the date they are made. We assume no duty to update these statements should
expectations change or actual results differ from current expectations.
15
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
December 31, 2001, the Company issued a total of 459.344 shares of
restricted stock pursuant to the Restricted Stock Plan as follows:
Investment Date Price Number of Shares
- --------------- ----- ----------------
10-1-2001 $19.250 155.325
11-1-2001 $19.740 151.469
12-1-2001 $19.600 152.550
On October 1, 2001 and December 1, 2001, the Company issued a total of
301.706 shares of its common stock as bonuses to certain employees and
management personnel as rewards for performance and length of service.
The 301.706 shares were not issued in a transaction constituting a
"sale" within the meaning of section 2(3) of the Act.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 December 31, 2001 would have resulted
in a decrease in quarterly earnings of approximately $9,000.
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 $72,000.
With respect to the Company's hedging activities for the price of
natural gas, the Company had entered into a no cost collar arrangement
for the purchase of natural gas. In this arrangement, the Company
16
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 $96,000 for its natural gas derivative
contracts.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
10(k)(k)(k) Natural Gas Asset Management Agreement
between Roanoke Gas Company and Duke
Energy Trading and Marketing, L.L.C. dated
November 1, 2001.
10(l)(l)(l) Natural Gas Asset Management Agreement
between Bluefield Gas Company and Duke
Energy Trading and Marketing, L.L.C. dated
November 1, 2001.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 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: February 14, 2002 By: s/Howard T. Lyon
Howard T. Lyon
Controller and Treasurer
Principal Financial
Officer
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EXHIBIT INDEX
Number Description
10(k)(k)(k) Natural Gas Asset Management Agreement between
Roanoke Gas Company and Duke Energy Trading and
Marketing, L.L.C. dated November 1, 2001.
10(l)(l)(l) Natural Gas Asset Management Agreement between
Bluefield Gas Company and Duke Energy Trading and
Marketing, L.L.C. dated November 1, 2001.