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, 1999
Commission File Number 070-09391
RGC Resources, Inc.
(Successor to Roanoke Gas Company)
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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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
Common Stock, $5 Par Value 1,822,851
RGC RESOURCES, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
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June 30, September 30,
ASSETS 1999 1998
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UTILITY PLANT:
Utility Plant in Service $73,362,663 $69,986,124
Accumulated Depreciation (26,074,949) (24,644,581)
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Utility Plant in Service, Net 47,287,714 45,341,543
Construction Work-In-Progress 1,475,780 1,674,543
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Utility Plant, Net 48,763,494 47,016,086
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NONUTILITY PROPERTY:
Propane 12,708,898 10,188,124
Accumulated Depreciation (3,741,076) (3,059,870)
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Nonutility Property, Net 8,967,822 7,128,254
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CURRENT ASSETS:
Cash and Cash Equivalents 1,236,572 84,037
Accounts Receivable - (Less Allowance for
Uncollectibles of $736,361 and $202,652,
Respectively) 4,113,478 3,051,474
Inventories 5,280,599 7,969,730
Prepaid Income Taxes - 712,687
Deferred Income Taxes 2,410,483 1,868,888
Other 456,784 451,027
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Total Current Assets 13,497,916 14,137,843
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OTHER ASSETS 1,054,734 852,737
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TOTAL $72,283,966 $69,134,920
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See condensed notes to condensed consolidated financial statements.
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RGC RESOURCES, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
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June 30, September 30,
LIABILITIES 1999 1998
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CAPITALIZATION:
Stockholders' Equity:
Common Stock - Par Value $5; Authorized,
3,000,000 Shares; Issued and Outstanding
1,822,851, and 1,794,416 Shares, Respectively $9,114,255 $8,972,080
Capital in Excess of Par Value 9,332,147 8,909,145
Retained Earnings 10,687,547 8,583,356
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Total Stockholders' Equity 29,133,949 26,464,581
Long-Term Debt (Less Current Maturities) 20,844,903 20,700,000
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Total Capitalization 49,978,852 47,164,581
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CURRENT LIABILITIES:
Current Maturities of Long-Term Debt 23,707 -
Notes Payable 4,032,000 4,584,000
Dividends Payable 492,687 476,140
Accounts Payable 5,414,310 6,968,594
Income Taxes Payable 1,162,741 -
Customers' Deposits 540,148 399,750
Accrued Expenses 4,740,077 4,224,693
Refunds From Suppliers - Due Customers 34,259 85,572
Purchased Gas Adjustments 1,787,872 1,269,829
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Total Current Liabilities 18,227,801 18,008,578
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DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred Income Taxes 3,653,235 3,508,838
Deferred Investment Tax Credits 424,078 452,923
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Total Deferred Credits and Other Liabilities 4,077,313 3,961,761
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TOTAL $72,283,966 $69,134,920
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See condensed notes to condensed consolidated financial statements.
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RGC RESOURCES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE-MONTH AND NINE-MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998
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UNAUDITED
- --------- Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
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OPERATING REVENUES:
Gas utilities $8,450,212 $8,222,260 $41,572,017 $44,924,911
Propane operations 979,760 760,056 7,329,956 6,603,759
-------------- --------------- -------------- ---------------
Total operating revenues 9,429,972 8,982,316 48,901,973 51,528,670
-------------- --------------- -------------- ---------------
COST OF GAS:
Gas utilities 4,833,718 4,704,193 25,597,380 28,448,209
Propane operations 470,238 369,132 3,267,107 3,201,665
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Total cost of gas 5,303,956 5,073,325 28,864,487 31,649,874
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OPERATING MARGIN 4,126,016 3,908,991 20,037,486 19,878,796
-------------- --------------- -------------- ---------------
OTHER OPERATING EXPENSES:
Gas utilities:
Other operations 1,546,115 1,762,490 5,274,198 5,759,769
Maintenance 249,404 382,959 741,192 1,025,672
Taxes - general 440,271 449,294 1,837,865 1,991,737
Taxes - income 69,404 (67,118) 1,546,124 1,417,967
Depreciation and amortization 769,661 713,986 2,290,769 2,139,668
Propane operations (including taxes
- income of $(137,212), $(105,742),
$388,774 and $427,414, respectively 677,724 514,188 3,326,227 2,656,265
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Total other operating expenses 3,752,579 3,755,799 15,016,375 14,991,078
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OPERATING EARNINGS 373,437 153,192 5,021,111 4,887,718
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OTHER INCOME AND DEDUCTIONS:
Gas utilities:
Interest Income 21,044 20,530 21,140 21,449
Merchandising and jobbing, net 9,474 22,818 85,308 94,921
Other deductions (16,609) (18,903) (59,467) (70,616)
Taxes - income (4,743) (8,301) (18,485) (15,566)
Propane operations, net 29,148 19,334 89,900 87,750
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Total other income and deductions 38,314 35,478 118,396 117,938
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EARNINGS BEFORE INTEREST CHARGES 411,751 188,670 5,139,507 5,005,656
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INTEREST CHARGES:
Gas utilities:
Long-term debt 392,923 380,588 1,176,718 1,158,535
Other interest 17,649 48,221 185,055 352,836
Propane operations 74,494 41,077 203,353 107,803
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Total interest charges 485,066 469,886 1,565,126 1,619,174
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NET EARNINGS (LOSS) $(73,315) $(281,216) $3,574,381 $3,386,482
============== =============== ============== ===============
BASIC EARNINGS PER COMMON SHARE $(0.04) $(0.16) $1.97 $2.02
============== =============== ============== ===============
DILUTED EARNINGS PER COMMON SHARE $(0.04) $(0.16) $1.97 $2.02
============== =============== ============== ===============
CASH DIVIDENDS PER COMMON SHARE $0.265 $0.265 $0.795 $0.795
============== =============== ============== ===============
See condensed notes to condensed consolidated financial statements.
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RGC RESOURCES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH AND NINE-MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998
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UNAUDITED
- --------- Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ($73,315) ($281,216) $3,574,381 $3,386,482
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,039,473 903,397 3,085,686 2,679,980
(Gain) loss on disposal of property (1,738) 6,923 (4,247) 15,032
Loss on sale of other assets - - - 566
Deferred taxes and investment tax credits 304,122 317,576 (426,043) (1,417,737)
Changes in assets and liabilities which provided
cash, exclusive of changes and noncash
transactions shown separately 1,634,150 1,417,288 2,861,129 5,278,346
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Net cash provided by operating activities 2,902,692 2,363,968 9,090,906 9,942,669
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (1,723,385) (2,000,834) (6,474,600) (6,109,106)
Cost of removal of utility plant, net (20,913) (18,008) (51,123) (50,426)
Proceeds from disposal of equipment 6,009 11,750 27,818 33,367
Proceeds from sale of other assets - - - 173,334
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Net cash used in investing activities (1,738,289) (2,007,092) (6,497,905) (5,952,831)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 1,656,000 - 3,356,000
Retirement of long-term debt and capital leases - (8,834) - (2,872,811)
Net repayments under lines of credit (181,000) (785,000) (552,000) (5,834,000)
Cash dividends paid (490,150) (467,977) (1,453,643) (1,282,730)
Proceeds from issuance of stock 196,699 185,865 565,177 4,210,494
Capital stock expense - - - (245,714)
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Net cash provided by (used in) financing
activities (474,451) 580,054 (1,440,466) (2,668,761)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 689,952 936,930 1,152,535 1,321,077
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 546,620 500,192 84,037 116,045
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,236,572 $1,437,122 $1,236,572 $1,437,122
============= ============ ============ =============
SUPPLEMENTAL INFORMATION:
Interest paid $654,922 $518,824 $1,715,086 $1,972,876
Income taxes paid, net $612,955 $1,012,823 $503,996 $2,273,446
NONCASH TRANSACTIONS:
The assets of a propane company were acquired in December 1997 in exchange for 34,317 shares of stock for a
total value of $617,706.
The Company refinanced the remaining balances of Series K and Series L First Mortgage Bonds in the amount of
$3,344,000 into a First Mortgage Note due July 1, 2008 in June 1998.
A capital lease obligation of $170,510 was incurred when the Company entered into an equipment lease in February 1999.
See condensed notes to condensed consolidated financial statements.
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RGC RESOURCES, INC.
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CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
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UNAUDITED
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1. At the close of business on July 1, 1999, Roanoke Gas Company, Bluefield
Gas Company and Diversified Energy Company became subsidiaries of RGC
Resources, Inc. ("Resources"), an exempt public utility holding company,
and shareholders of Roanoke Gas Company automatically became shareholders
of RGC Resources, Inc., with each share of Roanoke Gas Company common stock
converted into one share of Resources common stock. Also on this date,
Commonwealth Public Service Corporation was merged into Roanoke Gas Company
and new Affiliate Agreements were signed between and among Resources and
each subsidiary. On July 2, 1999, NASDAQ began trading Resources shares
under the ticker symbol RGCO. All of the resulting amendments to the stock
purchase plans have been filed and approved by the Securities and Exchange
Commission. The information filed with these plan amendments clearly state
that shareholders are not required to take any action with regard to their
stock to continue to receive their dividends.
2. 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 Resources
financial position as of June 30, 1999 and September 30, 1998, and the
results of its operations and its cash flows for the three and nine months
ended June 30, 1999 and 1998. The results of operations for the nine months
ended June 30, 1999 are not indicative of the results to be expected for
the fiscal year ending September 30, 1999.
3. The condensed consolidated financial statements and condensed notes are
presented as permitted by Form 10-Q and do not contain certain information
included in Resources' annual consolidated financial statements and notes
thereto.
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. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires the recognition
of all derivative instruments as assets or liabilities in Resources'
balance sheet and measurement of those instruments at fair value. The
accounting treatment of changes in fair value is dependent upon whether or
not a derivative instrument is designated as a hedge and if so, the type of
hedge. The subsidiaries have entered into
RGC RESOURCES, INC.
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CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
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UNAUDITED
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certain arrangements for hedging the price of natural gas and propane gas
for the purpose of providing price stability during the winter months.
Resources has not fully analyzed the impact of the provisions of FAS No.
133 on its financial statements.
In June 1999, the FASB issued SFAS No. 137 which deferred the effective
date of SFAS No. 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000.
6. 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, 1999 were 1,819,693 and 1,809,997 compared to 1,769,654 and 1,672,756
for the same periods in 1998. The weighted average number of shares
outstanding assuming dilution were 1,823,668 and 1,813,573 for the
three-month and nine-month periods ended June 30, 1999 compared to
1,776,837 and 1,679,372 for the same periods in 1998. 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.
7. Both Roanoke Gas Company and Bluefield Gas Company (collectively "the
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 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 Bluefield Gas 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,
RGC RESOURCES, INC.
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CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
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UNAUDITED
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management believes that any costs incurred related to this matter will not
have a material effect on the Company's financial condition.
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Reorganization
On March 31, 1999, shareholders of Roanoke Gas Company ("Roanoke Gas") approved
a reorganization of Roanoke Gas and its subsidiaries into a holding company
structure. As part of the reorganization, at the close of business on July 1,
1999, shareholders of Roanoke Gas automatically became shareholders of RGC
Resources, Inc. ("Resources") with each share of Roanoke Gas common stock
converted into one share of Resources' common stock. All financial and common
stock data presented in this report have been restated to reflect the
reorganization.
The following discussion and analysis refers to RGC Resources, Inc. and its
subsidiaries (collectively referred to as the "Company"). The Company, primarily
through Resources' wholly owned subsidiary, Roanoke Gas, is engaged principally
in the distribution of natural gas to residential, commercial and industrial
customers in Roanoke and Bluefield, Virginia. Other subsidiaries distribute
natural gas in Bluefield, West Virginia, sell liquified petroleum gas in bulk to
residential, commercial and industrial customers in Southwest Virginia and
Southern West Virginia, and participate in other fuel-related marketing
services.
Results of Operations and Financial Condition
Consolidated net earnings (loss) for the three-month period and nine-month
periods ended June 30, 1999 were ($73,315) and $3,574,381 compared to ($281,216)
and $3,386,482 for the same period last year.
Operating margin for the three months ended June 30, 1999 increased $217,025, or
5.6 percent, over the same period last year due to increases in base customer
charges and delivered propane volumes. Base customer charges on natural gas
increased $196,403 over the same quarter last year as the result of the rate
increase placed into effect in March 1999. Total natural gas deliveries declined
by 54,551 MCF, or 3 percent, as the current quarter's weather was 9 percent
warmer than the same period last year. An increase of 297,786, or 34 percent, in
propane gallons delivered offset the impact of the decline in MCF sales for the
quarter. Customer growth associated with an ongoing aggressive marketing
campaign and the addition of customers from the propane acquisition completed in
December 1998 accounted for the increase in volume. Total propane customer base
has increased by 27 percent since last June.
Other operations and maintenance expenses for the current quarter declined from
the same period last year as the Company continued its expense reduction program
in response to the warm winter. Reductions occurred in non-essential areas of
operations and maintenance including office expenses, travel, professional
services and support services. Furthermore, improvement in
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
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customer delinquencies attributable to the warm winter, lower gas costs and a
good local economy has lowered bad debt expense by more than $88,000 from the
same period last year. The Company continued the redirection of its maintenance
program from repair to replacement where applicable. This change allowed for
expense reductions and served to complement the Company's renewal program. As a
result of the changes, total payroll and benefits charged to operations and
maintenance declined $84,260 from the same period last year as more labor was
utilized for capital projects and to assist the propane operation. General taxes
declined $9,023 for the current quarter compared to the same period last year
with most of the decrease associated with the capitalization of more payroll
taxes associated with more capital labor. Capital expenditures for adding new
customers to the distribution system and replacement of older facilities have
increased depreciation expense $55,675 above last year's levels. Propane
operations expense experienced a $163,536 increase over the same period last
year with increases in propane delivery costs, marketing expenses, benefit costs
and depreciation resulting from the exceptional growth in customers and sales
volumes in the Company's propane subsidiary. Interest charges increased by
$15,180 from the same period last year as increases in average debt balances
offset a reduction in the average effective interest rate during the period.
For the nine-month period ended June 30, 1999, operating margins increased
$158,690, or 0.8 percent, from the same period last year. Natural gas deliveries
fell by 577,821 MCF, or 6 percent, from the same period last year, as weather
was 9.4 percent warmer. However, the rate increase placed into effect in March
1999, in addition to growth in the number of natural gas customers, resulted in
the revenues generated by the customer base charge increasing by $289,832 over
the same period last year. During the same period, propane volumes increased
1,091,696 gallons, or 16.5 percent. Customer growth has served to mitigate the
impact of the weather on propane sales. As discussed above, growth in the
propane division continues to be a significant factor in the Company's
performance.
For the nine-month period ended June 30, 1999, operations and maintenance
expenses declined by $770,051 from the same period last year. These declines
correspond to reductions in all nonessential expenses during the period, greater
emphasis on the Company's renewal program resulting in more capitalized labor
and benefits and lower bad debt expense associated with improved delinquencies.
General taxes declined $153,872 from the same period last year as revenue
sensitive taxes decreased on reduced natural gas revenues and capitalization of
more payroll taxes. The increase of $151,101 in depreciation corresponds with
the increases in capital additions. Propane operations expense increased by
$669,962 compared to the same period last year. The growth in the customer base
of propane has demanded more of the Company's resources to properly serve the
customers. Interest charges declined $54,048 for the nine-month
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
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period ended June 30, 1999 as compared to the same period last year, as the
average interest rate decline attributable to the refinancing of Series K and L
First Mortgage Bonds more than offset increases in the Company's average debt
position.
The nine-month earnings presented herein should not be considered as reflective
of the Company's consolidated financial results for the fiscal year ending
September 30, 1999. The total revenues during the first nine months reflect
higher billings due to the weather sensitive nature of the gas business.
Improvement or decline in earnings depends primarily on temperature and weather
conditions during the remaining months. Furthermore, management will continue
with the austerity program by continuing to reduce expenditures on all
nonessential operations. Critical operations and safety will remain a top
priority, including the Company's efforts to address the Year 2000 issue.
Regulatory Affairs
The Company currently has three rate case applications pending before regulatory
bodies. In Virginia, Roanoke Gas Company entered into a Stipulation with both
the Virginia State Corporation Commission Staff (Commission) and the Office of
the Attorney General providing for an annual increase of approximately $433,500
in gross revenues. All issues in the rate application were settled except for
the implementation of a surcharge to recover the carrying cost and depreciation
on non-revenue producing investment in distribution plant made over a three year
future period. A Hearing Examiner's decision was issued on June 29, 1999,
recommending that the stipulation be accepted and further recommending the
adoption of the Distribution System Renewal (DSR) surcharge on a three-year
experimental basis. During the three year experiment, Roanoke Gas Company would
not file traditional rate increase requests. The Hearing Examiner's decision is
subject to final Commission approval. After the filing of the Stipulation,
Roanoke Gas Company filed and received approval of a motion to implement the
settlement rates in May of 1999 and to provide refunds dating back to February
28, 1999 when interim rates went into effect. Roanoke Gas Company has completed
the refund in this case. The final Commission decision is expected by the end of
the summer.
Also before the Virginia State Corporation Commission is a recent filing made by
Commonwealth Public Service Corporation seeking a $36,000 rate increase. This
case is almost a mirror image of the Roanoke Gas case with one goal being to
align the tariff rates of the two companies as much as possible. When the
Commission approved the Roanoke Gas Company reorganization, they stated that the
two companies needed to remain separate with regard to rates and regulatory
filings until a consolidating rate case is filed. The current Commonwealth case
serves as an intermediate step toward a consolidating rate case. This case
includes movement to
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
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therm billing, monthly transportation balancing, a request for the DSR
surcharge, and a rate design structure change to match Roanoke Gas rates. The
Commonwealth Public Service Corporation will be pursuing a stipulation in the
case similar to the one filed in the Roanoke Gas case.
In West Virginia, hearings were held in the Bluefield Gas Company case in June.
At the start of the hearing, Bluefield Gas Company and the West Virginia Public
Service Commission Staff filed a joint stipulation supporting an $80,000 annual
rate increase effective on December 1, 1999 with a three cents per MCF increase
effective December 1, 2000, as well as an additional three cents per MCF
becoming effective on December 1, 2001. As a result of this settlement,
Bluefield Gas Company agreed to a three-year moratorium on any additional
non-gas cost rate increases. The stipulation did not support the movement to
therm billing. The Administrative Law Judge is due to file his report on August
19, 1999.
Year 2000
RGC Resources, Inc. has reached the final stages of its Year 2000 readiness
plan. The Year 2000 concern is caused by the movement from 1999 to the year
2000. Many computer-based systems rely on the last two numbers of the date to
distinguish the year, and many of these systems will not recognize "00" as an
acceptable date. Even if systems will accept "00" as an appropriate date, many
systems will not distinguish the year 2000 from the year 1900. Like all other
companies that use application software and rely on a computer-based
infrastructure that includes microprocessor systems, the Year 2000 issue affects
many areas of the Company's operations. The Company has a Year 2000 Task Force
comprised of a comprehensive group of employees who have developed a written
plan that addresses communications, system remediation and conversions, system
testing and contingency planning.
During the year, the Company completed an extensive inventory to identify and
categorize all of its internal systems that may be date-sensitive. These
internal systems control, monitor, or assist in the operation of the Company,
its equipment and machinery. Generally, these systems contain microprocessor
chips, integrated circuits, or computer boards. The Company identified
date-sensitive applications in customer service, operations, financial systems,
end-user applications, storage and distribution systems, meters,
telecommunications, vehicles, building controls and other areas. With these
systems identified, each system was reviewed to determine how it can be tested.
When applicable, manufacturers were contacted concerning available compliance
information. An industry consultant has assisted the Company with this phase.
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
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The Company started upgrading internal systems in the winter of 1996 and
completed the majority of the upgrades by the fall of 1997. These systems cover
the entire scope of the business, ranging from the Payroll System to the
Customer Information System. With baseline validation complete, testing for the
Year 2000 and other key dates began in mid 1998. In October 1998, the Company
established a training and testing lab, and operating system testing was
completed in November 1998. The Company began performing tests on all software
applications in December 1998 and such testing was completed during 1999. Over
70% of the Company's systems have successfully completed testing and were found
to be Year 2000 compliant. The remaining 30%, which includes the propane system,
remains to be tested.
RGC Resources, Inc. has made considerable progress in upgrading its information
systems to be Year 2000 ready. Essentially, all of the core IBM AS/400 systems
have been upgraded, with the exception of propane, which should be completed by
late 1999. All Local Area Network (LAN) and Wide Area Network (WAN) systems have
been upgraded. The remaining systems are believed to be ready or a plan is in
place to reach a state of readiness. The Company believes that most of its
vendors, suppliers and major customers are dedicated to the problem with
intentions of completing their efforts in a timely manner. Employee awareness
and planning are a top priority of the Company's Year 2000 Task Force.
The Company added a segregated test environment that included a second AS/400 in
1998 and an additional network file server. This will not only help facilitate
the implementation of new software systems, but will also allow for more
thorough Year 2000 testing. The segregated test environment also upgrades the
Company's Disaster Recovery Planning by enabling an internal recovery hot-site.
The Company has developed a contingency plan that identifies the areas with the
highest potential risk of Year 2000 exposure. Detailed Year 2000 contingency
operating plans have been created for those critical functions. The Company
believes that sufficient contingency plans are in place to address the
foreseeable concerns of the millennium date change.
The Company maintains emergency operating plans for problems that could arise
from both internal and external sources. With regard to internal systems, the
Company believes that it has identified and is addressing the Year 2000
compliance of the systems that pose the most significant risk to its ability to
provide safe and reliable service to customers. Externally, the Company has
conducted discussions with suppliers of interstate transportation capacity and
relies on their testing and remediation methods to continue the supply of
natural gas to its distribution system. Furthermore, the Company has received
and responded to letters from many of its
RGC RESOURCES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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customers concerning its Year 2000 compliance status. Likewise, the Company has
held discussions with large-volume customers concerning their Year 2000 issues.
The Company believes that it is taking reasonable measures to ensure the safe
and uninterrupted delivery of natural gas. There can be no guarantee that the
systems of other companies and external services, such as water, electricity,
and telephone, on which the Company's operations rely, will be timely converted,
or will be converted in a manner compatible with the Company's systems. If this
were to occur, it would create a significant barrier to providing service to the
Company's customers and could result in material increases in operating expenses
and lost revenues.
To date, the Company has spent approximately $50,000 on Year 2000 remediation
activities. The Company projects that it will spend an additional $100,000, over
and above otherwise planned upgrades to systems and hardware, over the course of
the next six months to complete its Year 2000 readiness plan.
Environmental Issues
Both Roanoke Gas Company and Bluefield Gas Company (collectively "the 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 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 site. Should the Company eventually be required to remediate either of
the MGP sites, 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 Bluefield Gas 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.
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 June 30, 1999, the Company issued a total of 433
shares of restricted stock pursuant to the Restricted Stock Plan
as follows:
Investment Date Price Number of Shares
--------------- ----- ----------------
4-1-99 $20.000 145.000
5-1-99 $20.000 145.000
6-1-99 $20.250 143.210
During the quarter ended June 30, 1999, the Company also issued
1,437.749 shares of its common stock as bonuses to certain
employees and management personnel as rewards for performance.
The 1,437.749 shares were not issued in a transaction
constituting a "sale" within the meaning of section 2(3) of the
Act.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
Exhibits 27 - Financial Data Schedule
(b) Reports on Form 8-K
Roanoke Gas Company filed one report on Form 8-K for the
three months ended June 30, 1999. The report was dated
April 6, 1999 and reported the shareholder approval of the
corporate reorganization into a holding company structure.
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 thereunto duly authorized.
RGC Resources, Inc.
Date: August 13, 1999 By: s/Roger L. Baumgardner
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Roger L. Baumgardner
Vice President/Secretary and
Treasurer