Exhibit 13
THE NEXT GENERATION
[Pictures of caterpillar, cocoon and butterfly.]
Roanoke Gas Company
becomes
RGC Resources, Inc.
RGC Resources [symbol]
1999 ANNUAL REPORT
TABLE OF CONTENTS
1. Letter To Shareholders 17. Independent Auditors' Report
2. Board of Directors 18. Consolidated Balance Sheets
3. The Next Generation 20. Consolidated Statement of Earnings
5. Heritage 21. Consolidated Statement of Stockholders'
Weather, Price & Policy Equity
22. Consolidated Statements of Cash Flows
7. Community
Natural Gas Growth 38. Summary of Gas Sales and Statistics
9. Diversity 39. Capitalization Statistics
Diversified Operations
40. Board of Directors and Officers
10. Management's Discussion and Analysis
of Financial Condition Corporate Information - Inside Back Cover
& Results of Operations
16. 1999 Financial Highlights
SERVICE AND MARKET AREA
[MAP OF SERVICE AND MARKET AREA]
LETTER TO SHAREHOLDERS
Dear Shareholder:
I am pleased to report that we completed our corporate restructuring this
year and established RGC Resources, Inc. as our holding company effective July
1, 1999. I am also pleased that 1999 was another record earnings year with net
income of $2.9 million, a 6 % increase over 1998. The improvement in total
earnings occurred in spite of 8% warmer weather, primarily as a result of
customer growth, improved rate design, and cost management.
Solid customer growth was realized with 4,529 net customer additions, a 7%
growth rate overall, driven by a 3.2% increase in natural gas customers and a
26% increase in propane customers. A new record was set for propane deliveries
at 9 million gallons, up 17%. Natural gas volumes were down 5% as a result of
the warmer weather.
I believe we have positioned RGC Resources, Inc. to grow and prosper in the
new century. Our natural gas subsidiaries in Roanoke and Bluefield are
consistently demonstrating customer growth above the national average with
earnings growth even in years when the weather is not favorable to gas sales.
Our propane subsidiary is now operating in 33 counties in western Virginia and
southern West Virginia with substantial opportunities for customer growth within
existing market areas, as well as further geographic expansion.
With the holding company structure now in place, we can begin to develop
and provide additional services to existing and new customers that were not
possible while we were operating under the Roanoke Gas Company utility corporate
structure. We are analyzing the potential for additional services based on input
from our customers and the opportunity for synergies with our operating systems,
management talents, and work flows. One focus will be to balance seasonal
workloads and to lessen our revenue and earnings sensitivity to fluctuations in
winter weather patterns.
I believe we made major strides in our core business operation in 1999. In
addition to the customer growth, we replaced over 12 miles of bare steel and
cast iron mains as part of our distribution system renewal program. We obtained
regulatory approval for an annual rate adjustment to recover the cost associated
with the distribution system renewal program for the next three years. This
arrangement eliminates the necessity to file formal rate cases during this
period to recover the incremental depreciation and interest expense associated
with the renewal program. We also further expanded our geographic propane
footprint with new bulk storage facilities constructed in Beckley, West Virginia
and Weyers Cave, Virginia. These two locations further our strategy of expanding
in the interstate corridors.
We spent a significant amount of employee time and effort this year in
addressing systems replacement and upgrades to address Y2K concerns and to
modernize our customer information system. In addition to customer, accounting,
and financial system upgrades, we replaced gas control and remote electronic
metering systems, pressure regulation and monitoring control systems and our
telephone system to ensure Y2K readiness. These efforts, combined with our
contingency planning and the readiness planning of our major supplier and
vendors, positions us well for the year 2000 date change.
The year just ended has been an exciting one for the energy industry. Early
in the year energy prices fell dramatically with the significantly warmer than
normal weather, followed by price spikes during the summer and fall associated
with air conditioning energy demand and an OPEC reduction in crude oil
production. In addition, it was a very active year for mergers and acquisitions
as the electric and larger natural gas utilities made or attempted to make
acquisitions either as defensive or offensive moves in anticipation of perceived
opportunities or threats with further deregulation of natural gas and
electricity commodity prices. The merger mania has generally not impacted our
service areas, but has been confined to much larger metropolitan markets where
some industry executives and analysts believe that economies of scale are needed
to compete in more deregulated commodity markets.
While we understand the economies of scale issue, we also recognize that we
are one of the lowest cost providers of natural gas in Virginia and West
Virginia. We do not believe the theoretical savings promised by consolidation
would result in our becoming a more competitive service provider, in our less
densely populated markets. We have already realized many of these economies of
scale through selective outsourcing. Our strategy will be to profitably grow our
core energy markets and to use or new holding company structure to add
shareholder value by providing new products and services developed around our
natural gas and propane delivery systems and customers.
I am pleased with our growth and earnings this year as well as our progress
on a variety of fronts ranging from systems enhancements to creating a
performance culture among Company employees. I thank you for your interest in
the growth and evolution of our Company and for your continuing decision to
invest in RGC Resources stock.
Sincerely,
s/John B. Williamson, III
John B. Williamson, III
President and CEO
1
[Picture of Board of Directors]
Seated: Frank Ellett, Frank Farmer, John Williamson, Wilbur Hazlegrove
Standing: Frank Smith, Ab Boxley, Lynn Avis, Allen Layman, Tom Robertson
BOARD OF DIRECTORS
Lynn D. Avis Wilbur L. Hazlegrove
President, Avis Construction Co., Inc. Woods, Rogers & Hazlegrove, PLC
Abney S. Boxley, III J. Allen Layman
President & CEO, Boxley Co., Inc. President & CEO, R & B Communications,
Inc.
Frank T. Ellett Thomas L. Robertson
President, Virginia Truck Center, Inc. President & CEO, Carilion Health
System and Carilion Medical Center
F. A. Farmer
Chairman of the Board of Directors S. Frank Smith
RCG Resources Vice President,
Coastal Coal Company, LLC
John B. Williamson, III
President & CEO, RGC Resources
2
THE NEXT GENERATION
In 1999 Roanoke Gas Company underwent a metamorphosis (like the caterpillar
on our cover) from a regulated utility company of the past to a modern holding
company of the future, poised to take advantage of significant opportunities in
today's marketplace.
The next generation of our company, RGC Resources, Inc. is a new order of
corporate structure that provides for rapid start-ups, increased flexibility and
broadened potential for growth and profits. RGC currently consists of three
subsidiaries:
Roanoke Gas Company: the regulated company in Virginia, which now includes
the former Commonwealth Public Service Company, providing natural gas sales and
services.
Bluefield Gas Company: the regulated company in West Virginia providing
natural gas sales and services.
Diversified Energy Company: the non-regulated company providing propane
sales and services in Virginia and West Virginia, doing business as Highland
Propane Company and Highland Gas Marketing.
Financial
The Company has once again surpassed the previous year's earnings even
though this year's weather was 8% warmer than the previous year. Net earnings
for fiscal 1999 were approximately $2,883,000 as compared with approximately
$2,727,000 for fiscal 1998. Basic earnings per share were $1.59 in fiscal 1999
compared with $1.60 in fiscal 1998 on average shares of 1,814,864 and 1,701,048,
respectively. At September 30, 1999, the market value of the Company's stock was
$20.125 per share, or 131% of book value.
In November 1998, the directors voted to increase the regular quarterly
dividend from $0.265 to $0.27 per share effective February 1, 1999. The annual
dividend of $1.08 per share is a 5.37% yield on the September 30, 1999 market
value of the Company's stock and represents a payout of 68% based on earnings
for fiscal 1999.
In August 1999, Highland Propane Company issued intermediate debt at a
variable rate in the amount of $2,500,000 for seven years.
The Company has unsecured lines of credit totaling $22,500,000, at indexed
interest rates. These lines are subject to annual renewal and do not require
compensating balances. The average month-end balance of short-term debt in
fiscal 1999 was approximately $6,216,000. The average interest rate on unsecured
lines of credit during fiscal 1999 was 5.80%. The month-end balance at September
30, 1999 was $6,363,000 at an average interest rate of 5.86%.
Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information on the Company's
capital resources and for an analysis of changes in revenue and expenses.
3
HERITAGE
[Pictures]
Roanoke Gas Company, the cornerstone of the RGC Resources family, has been
providing natural gas service to Roanoke, Virginia and surrounding areas since
1883.
(Photos circa 1930)
4
Weather, Price & Supply
The RGC Resources service area experienced some of the warmest weather on
record during winter 1998-99. Nationally, since record keeping began in 1895-96,
this past winter (December - February) was the second warmest ever recorded.
During RGC's 1999 fiscal year, Roanoke, Virginia unofficially recorded 3717
Heating Degree Days (HDD), or 12 percent less than the long-term normal. In
Bluefield, West Virginia the unofficial total was 4490 HDD, again almost 12
percent fewer HDD than normal.
The warm weather along with higher than normal storage levels combined to
quickly lower winter heating fuel prices. Commodity gas and propane prices were
both lower than the previous year.
While the average commodity prices have once again fallen over the past
fiscal year, natural gas and propane remain highly volatile commodities and
prices may increase significantly in the next fiscal year. To mitigate such
volatility and create a more stable environment for Roanoke Gas Company and its
customers, Roanoke Gas uses a variety of mechanisms to manage price risk
including summer storage injections. Roanoke Gas will continue its Virginia
financial hedging pilot program for a third year and Bluefield Gas Company will
continue the second year of a similar West Virginia pilot program. Highland
Propane Company also uses a mixture of fixed price contracts, pre-buys and
financial hedges to control volatility in propane prices.
RGC regards storage supplies as an integral component of its natural gas
supply portfolio. The Roanoke and Bluefield operations combined hold the rights
to about 2.9 billion cubic feet (BCF) of natural gas storage space. This storage
includes pipeline and third party underground facilities in both the Gulf coast
and Appalachian areas as well as our own liquefied natural gas (LNG) storage in
Botetourt County, Virginia.
Historically, Roanoke Gas Company and Bluefield Gas Company have handled
their gas supply and transportation functions internally. As a means to more
fully utilize pipeline capacity and further lower costs to its customers,
Roanoke Gas Company and Bluefield Gas Company have entered into asset management
agreements. Effective November 1, 1999, PG&E Energy Trading, the asset manager,
will manage nomination, confirmation and scheduling of all existing supply and
storage contracts as well as supply any additional natural gas requirements.
[Graph showing the comparison of net income to heating degree days]
Comparison of Net Income to Heating Degree Days (HDD)
Year Net Income HDD
1994 1,677,098 4,416
1995 1,777,240 3,791
1996 2,196,672 4,696
1997 2,309,880 4,298
1998 2,726,879 4,054
1999 2,883,407 3,717
RGC Resources shows profits despite year's warmth
5
COMMUNITY
[Pictures]
From its origin in 1883, RGC Resources and its predecessors have bene committed
to improving the communities which it serves. Management and employees not only
focus their time and attention to providing safe and reliable services, they
also give generously of themselves. This generosity is reflected in the areas of
education, child development, and health issues to just name a few. John
D'Orazio, President and COO of Diversified Energy, is on the board of directors
of the Boys and Girls Club of the Roanoke Valley.
RGC Resources CEO John Williamson, a Hollins University trustee, reviews with
Hollins President Janet Rasmussen plans for the university's Richard Wetherill
Visual Arts Center. Hollins University is transforming the former Fishburn
Library into a center for the visual arts. Plans for the 58,650-square-foot
renovation and addition feature large flexible galleries to offer more
exhibitions, which will be open to the public. To honor the Fishburn legacy, the
university is naming the arts center's entrance, Fishburn Hall.
6
Natural Gas Growth
Roanoke Gas Company and Bluefield Gas Company experienced another year of
excellent customer growth with approximately 1,700 customer additions. This
represents an overall growth rate of 3.2%. On an individual company basis,
customer additions were approximately 3.4% for Roanoke Gas Company and 1.2% for
Bluefield Gas Company.
Our commission sales force focuses on the addition of new gas customers
along existing gas mains. Natural gas conversions totaled 721, representing
higher than average growth for the fourth year in a row. These conversions
represented approximately 48% of the new customer growth for Roanoke Gas Company
and 88% for Bluefield Gas Company.
New commercial accounts represented 11.6% of the customer growth for
Roanoke Gas Company and 14.9% of Bluefield Gas Company. For the fiscal year,
Roanoke Gas installed 73,866 feet, or 14.0 miles, of new mains over 64 different
projects. Bluefield Gas installed 7,359 feet, or 1.4 miles, of new mains over 16
different projects.
The marketing strategy for natural gas continues to center around
maintaining strong trade ally relationships, establishing one-on-one contacts
with members of the RGC sales team and providing real-time customer service.
This strategy has been the nucleus of our success, and the number of trade
allies continues to grow. As we expand our trade ally base, we seek feedback
from the trade ally group to improve our sales and service to our customers. The
trade ally program will be expanded in fiscal 2000 to include a structured
incentive program that rewards individuals for the total volume of connected gas
load. A major marketing objective for fiscal 2000 will be the feasibility
analysis for natural gas geographic expansion. A primary area to be targeted is
Rocky Mount, Virginia. Rocky Mount has historically experienced a steady blend
of residential, commercial and industrial growth.
The future looks very bright for Roanoke Gas Company and Bluefield Gas
Company. The Year 2000 is certain to bring many new and exciting challenges and
opportunities. Our commitment to both our customers and their communities will
carry us far into the new millennium.
Natural Gas Customer Growth
Year Number of Customers
1994 48,544
1995 49,813
1996 51,094
1997 52,763
1998 54,114
1999 55,654
7
DIVERSITY
[Pictures]
Propane installations are increasing steadily, especially in areas where natural
gas is not available because customers continue to choose gas as their
energy source.
Creative marketing has produced some customers who use both natural gas and
propane. Art Pendleton, President and COO of Roanoke Gas Company assesses gas
needs at R. R. Donnelley in Salem, Virginia.
8
Diversified Operations
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Highland Propane
Fiscal year 1999 marked the third year in a row that Highland Propane's
customer growth exceeded 25%. In fiscal 1999, Highland's customer base grew from
11,004 to 13,832, for a net gain of 2,828 new customers or a 25.7% increase.
Highland surpassed the 4,000 tank installations in a single year for the first
time in the Company's history. These installations represent a 40% increase over
last year's installations. Tank installations were up in most geographic areas
with our Bluefield, West Virginia division leading the way with an increase of
92% from fiscal 1998, followed by Rainelle, West Virginia division with a 57%
increase and Lexington, Virginia division with a 49% increase.
Highland Propane expanded its service area through the acquisition of Four
C's Enterprises in Dunmore, West Virginia. The acquisition added 388 new propane
customers to our base and expanded our service area into Pocahontas County, West
Virginia. Since the acquisition, that customer base has increased from 388 to
558 in a 10-month period, a 44% increase. Other system expansions include a new
bulk facility in Weyers Cave, Virginia and a new facility in Beckley, West
Virginia. We now have a total of 15 bulk storage facilities located throughout
our service area.
Total sales by Highland Propane were 8.98 million gallons with 3,717
Roanoke Heating Degree Days in fiscal 1999, compared to 7.7 million gallons with
4,054 heating degree days in fiscal 1998. Increase in customer growth offset the
warmer weather, resulting in a 16.6 % increase in total gallons delivered.
Highland Gas Marketing
Highland Gas Marketing sold just over 2 million decatherms (Dth) of natural
gas in 1999. This represents a slight decrease over last year's totals. The
decrease was due to an 8% warmer winter this year compared to last year.
Highland Gas Marketing buys interruptible supplies of spot gas and temporary
interstate pipeline transportation services, and resells them to large
industrial customers that contract with the local utility for delivery from the
interstate pipeline to the customer's meter. The natural gas marketing business
is highly competitive with relatively low margins; however, it also has a low
cost of operation with minimal facility and personnel requirements.
Other Opportunities
We are constantly evaluating other non-regulated operations that will
enhance our core services, provide a needed service to our area and are
profitable. Some of the areas currently being evaluated as part of our
diversification efforts are home security services, HVAC (Heating, Ventilation
and Air Conditioning) sales and service, Internet service provider, home
appliance lease program and GPS/GIS (Global Positioning Systems/Geographic
Information Systems) mapping information system services.
Propane Customer Growth
Year Number of Customers
1994 5,684
1995 6,006
1996 6,410
1997 8,829
1998 10,432
1999 13,342
9
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
RGC Resources, Inc.
SELECTED FINANCIAL DATA
Years Ended September 30
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating Revenues $57,088,871 $59,387,092 $65,047,826 $65,770,873 $48,611,147
Operating Margin 23,579,244 23,279,585 22,464,921 22,030,795 19,435,864
Operating Earnings 4,820,917 4,717,026 4,403,423 4,035,304 3,522,258
Earnings Before Interest Charges 4,967,249 4,822,590 4,550,333 4,113,044 3,701,907
Net Earnings 2,883,407 2,726,879 2,309,880 2,196,672 1,777,240
Net Earnings Per Share 1.59 1.60 1.54 1.51 1.26
Cash Dividends Declared
Per Share 1.08 1.06 1.04 1.02 1.00
Book Value Per Share 15.36 14.75 13.48 12.86 12.25
Average Shares Outstanding 1,814,864 1,701,048 1,503,388 1,455,999 1,408,659
Total Assets 77,789,982 69,134,920 62,593,258 58,921,099 51,614,667
Long-Term Debt
(Less Current Portion) 23,336,614 20,700,000 17,079,000 20,222,124 17,504,047
Stockholders' Equity 28,154,923 26,464,581 20,596,951 18,975,001 17,555,172
Shares Outstanding at Sept. 30 1,832,771 1,794,416 1,527,486 1,475,843 1,432,512
General
The core business of RGC Resources is the distribution of natural gas to
approximately 55,300 customers in the cities of Roanoke, Salem, and Bluefield,
Virginia and Bluefield, West Virginia, and the surrounding areas and the sale
and distribution of propane to approximately 13,800 customers in southern West
Virginia and Western Virginia. Natural gas service is provided at rates and for
the terms and conditions set forth, approved and regulated by the State
Corporation Commission in Virginia (the Virginia Commission) and the Public
Service Commission in West Virginia (the West Virginia Commission). The Company
continues to experience customer growth and plans to meet the needs of its
current and future customers by attracting adequate investment capital and by
maintaining adequate rates.
Propane sales have become an important aspect of the consolidated
operations, with the annual growth in propane customers now exceeding the annual
growth in natural gas customers. While the demand for natural gas and propane
continues to increase in the Roanoke Gas and Bluefield Gas service territory,
the weather normalized per capita residential usage is declining due to energy
conservation, high efficiency furnaces and appliances, and better-insulated
homes. The effect of such per capita declines, unless offset by new customer
growth, a strong revenue stream during the winter, or other forms of revenue
stabilization, could result in a decline in the Company's net operating
earnings. Competition from alternative fuels and/or suppliers could also impact
the Company's profitability levels.
Roanoke Gas Company and Bluefield Gas Company currently hold the only
franchises and/or certificates of public convenience and necessity to distribute
natural gas in its Virginia and West Virginia service areas. These franchises
are for multi-year periods and are effective through January 1, 2016 in Virginia
and August 23, 2009 in West Virginia. While there are no assurances, the Company
believes that it will be able to negotiate acceptable franchises when the
current agreements expire. Certificates of public convenience and necessity are
exclusive and are of perpetual duration.
10
Forward-Looking Statements
From time to time, RGC may publish forward-looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: (i) frozen rates in both regulated jurisdictions; (ii)
earning on a consistent basis an adequate return on invested capital; (iii)
increasing expenses and labor costs and availability; (iv) price competition
from alternative fuels; (v) volatility in the price of natural gas and propane;
(vi) uncertainty in the projected rate of growth of natural gas and propane
requirements in the Company's service area; (vii) general economic conditions
both locally and nationally; and (viii) developments in electricity and
natural gas deregulation and associated industry restructuring. In addition, the
Company's business is seasonal in character and strongly influenced by weather
conditions. Extreme changes in winter heating degree days from the normal or
mean can have significant short-term impacts on revenues and gross margins.
Capital Resources & Liquidity
RGC Resources' primary capital needs are the funding of its continuing
construction program and the seasonal funding of its stored gas inventories. The
Company's capital expenditures for fiscal 1999 were a combination of
replacements and expansions, reflecting the need to replace older cast iron and
bare steel pipe with plastic pipe, while continuing to meet the demands of
customer growth. Total capital expenditures for fiscal 1999 were approximately
$9.1 million allocated as follows: $5.3 million for Roanoke Gas Company, $.5
million for Bluefield Gas Company and $3.3 million for Highland Propane Company.
Cash flow from operations provided approximately $4.1 million in support of
capital expenditures, or approximately 45% of total investment. Historically,
consolidated capital expenditures were $9.6 million in 1998 and $8.1 million in
1997. It is anticipated that future capital expenditures will be funded with the
combination of internal cash flow, sale of Company equity securities, and
issuance of debt.
At September 30, 1999, the Company had available lines of credit for its
short-term borrowing needs totaling $22.5 million, of which $6,363,000 was
outstanding. Short-term borrowing, in addition to providing limited capital
project bridge financing, is used to finance summer and fall gas purchases,
which are stored in the underground facilities of Columbia Gas Transmission
Corporation, Tennessee Gas Pipeline Company and Virginia Gas Storage Company, as
well as in the Company's above-ground LNG storage facility, to ensure adequate
winter supplies to meet customer demand. At September 30, 1999, the Company has
$7,371,646 in inventoried natural gas supplies.
The terms of short-term borrowings result in average rates of 5.80% in
1999, 6.19% in 1998 and 5.97% in 1997. The lines do not require compensating
balances. The Company utilizes a cash management program, which provides for
daily balancing of the Company's temporary investment and short-term borrowing
needs with interest rates indexed to the 30-day LIBOR interest rate plus a
premium. The program allows the Company to maximize returns on temporary
investments and minimize the cost of short-term borrowings. Short-term
borrowings, together with internally generated funds, long-term debt and the
sale of common stock through the Company's Dividend Reinvestment and Stock
Purchase Plan (Plan), have been adequate to cover construction costs, debt
service and dividend payments to shareholders.
Stockholders' equity increased for the period by $1,690,342, reflecting an
increase of $918,161 in retained
11
MANAGEMENT'S DISCUSSION & ANALYSIS
earnings and proceeds of $772,181 of new common stock purchases through the Plan
and the Restricted Stock Plan For Outside Directors.
At September 30, 1999, the Company's consolidated capitalization was 55%
equity and 45% debt, compared to 56% equity and 44% debt at September 30, 1998.
Plant Additions
RGC Resources invested $9,111,000 in fiscal year 1999 in capital additions.
Roanoke Gas Company added $5,310,000, Bluefield added $502,000, and Highland
Propane added $3,299,000 including the acquisition of Star Gas. New business
expenditures, including mains, meters, new service lines, and new propane
installations totaled $5,003,000. The natural gas companies installed 1,361 new
service lines and 15.4 miles of new mains. Highland Propane experienced its
fourth consecutive year of record growth by adding 4,000 new tank sets.
During the year the natural gas companies continued to maintain the 25-year
program to replace all of its bare steel and cast iron facilities by replacing
651 service lines and 12.2 miles of main. Other major increases in plant
additions included $254,000 for propane transportation equipment, $161,000 for
propane storage facilities, $726,000 for new customer support services
equipment, including a new telephone system and the implementation of Enterprise
Customer Information System (E-CIS).
For fiscal year 2000 the Company has budgeted $8,500,000 for capital
expenditures including $2,500,000 to support Highland Propane customer growth,
$2,400,000 for natural gas customer additions, $1,750,000 for the renewal
program, $500,000 for technology advancements and implementation of the new
propane E-CIS software.
Regulatory Affairs
During the past fiscal year, the Company received a Final Order in two rate
increase requests and has entered into a joint stipulation and agreement for
settlement in a third case. On August 27, 1999, the West Virginia Public Service
Commission (PSC) issued a Final Order accepting the filed stipulation and
authorizing a rate increase of $80,000 effective November 30, 1999 for Bluefield
Gas Company. This Order also approved a stepped-in rate increase of 3 cents per
MCF effective November 1, 2000 and another 3 cents per MCF effective on November
1, 2001.
On September 15, 1999, the Virginia State Corporation Commission (SCC)
issued a Final Order accepting the filed stipulation and authorizing a rate
increase of $433,650 effective February 28, 1999 in the Roanoke Gas Company rate
case. This Order also approved the implementation of a Distribution System
Renewal (DSR) Surcharge and the movement to therm billing. In the Order the
Commission commended Roanoke Gas for proposing the DSR surcharge stating that it
will provide an innovative approach to cost recovery, allowing for continued
improvement of the safety and reliability of Roanoke's gas distribution system
and including adequate safeguards that will protect the interest of customers.
The approval of the DSR surcharge will permit Roanoke Gas to recover on a timely
basis, the carrying costs and depreciation on an investment of up to $1,500,000,
annually, in the distribution renewal program through a surcharge. Roanoke Gas
implemented the first surcharge on December 1, 1999. Additional surcharge
amounts will be implemented on December 1, 2000 and December 1, 2001.
The Company currently has one rate increase application pending before the
SCC for Commonwealth Public Service Corporation (CPSC). While Commonwealth is
now structurally part of Roanoke Gas Company, the company's will keep their
rates separate until a consolidating rate case. On June 29, 1999, the CPSC filed
for a rate increase of $36,547 in annual revenue. This case included the
movement to therm billing and a request for the implementation of a Distribution
System Renewal Surcharge like that approved for Roanoke Gas to cover investment
in the distribution system renewal program of up to $200,000 annually. The CPSC,
Staff, and the Attorney General entered into a joint stipulation settling
12
all of the issues in the case including an agreement on the revenue requirement
of the entire requested amount of $36,547. A Final Order is expected by the end
of the calendar year.
Results of Operations
Fiscal Year 1999 Compared With Fiscal Year 1998
Operating Revenues - Fiscal 1999 operating revenues for natural gas
decreased 6.2% compared with fiscal 1998 primarily because weather was
approximately 8.3% warmer in fiscal 1999 compared with fiscal 1998 and the unit
cost of natural gas decreased by 2%.
Operating revenues for propane in fiscal 1999 increased 12.5% compared with
fiscal 1998 because the propane business had a 16.6% increase in the number of
gallons sold due to a 25.7% increase in customer growth even though the weather
was warmer.
Cost of Gas - The cost of sales for natural gas purchased and resold to
customers decreased 8.7% in fiscal 1999 compared with fiscal 1998 due to the
same reasons operating revenue decreased. The cost of gas per MCF was $3.97 in
fiscal 1999 and $4.03 in fiscal 1998.
Propane cost of sales increased 6.6% in fiscal 1999 compared to fiscal 1998
primarily as a result of customer growth.
Operating Margin - Because the utility's cost of gas is recovered from its
customers it has no effect on operating margin. Operating margin decreased 2.1%
in fiscal 1999 compared to fiscal 1998 because volumetric margins decreased 6.5%
due to weather partially offset by an approximately 7% increase in the service
charge rate effective February 28, 1999.
The unit margins on propane are market based and are greatly influenced by
competition. Highland Propane had a 17.9% increase in margin associated with a
16.6% increase in gallons delivered due to a 25.7% increase in customer growth.
MARKET PRICE AND DIVIDEND INFORMATION
Range of Prices
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended High Low Cash Dividend
September 30 $ $ Declared ($)
- -------------------------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------------------------
First Quarter 22.250 18.500 0.270
Second Quarter 22.000 19.500 0.270
Third Quarter 21.250 19.375 0.270
Fourth Quarter 23.250 20.000 0.270
1998
- -------------------------------------------------------------------------------------------------------------------
First Quarter 21.375 17.500 0.265
Second Quarter 22.750 19.250 0.265
Third Quarter 22.250 19.750 0.265
Fourth Quarter 20.703 18.125 0.265
RGC Resources' common stock is listed on the Nasdaq National Market under the
trading symbol RGCO. Payment of dividends is within the discretion of the Board
of Directors and will depend on, among other factors, earnings, capital
requirements, and the operating and financial condition of the Company. The
Company's long-term indebtedness contains restrictions on cumulative net
earnings and dividends previously paid. At September 30, 1999 and 1998,
respectively, the company had 1,796 and 1,837 common shareholders of record with
1,832,771 and 1,794,416 common shares outstanding.
Other Operating Expenses - Operation and maintenance expenses decreased by
10% in fiscal 1999 compared with fiscal 1998 primarily because the Company
continued its expense reduction program in response to the warm winter. The
Company redirected its maintenance program from repair to replacement where
applicable.
General taxes decreased 5.3 % in fiscal 1999 over fiscal 1998. Although
payroll and property taxes were up $63,000, revenue sensitive taxes were down
$156,000.
Income taxes on the utility increased 19.6% in fiscal 1999 compared with
fiscal 1998 due to an increase in pre-tax income in fiscal 1999.
Depreciation and amortization expenses increased 7.4% in fiscal 1999
compared with fiscal 1998 primarily because of more depreciable plant in
service.
Other operating expenses-propane operations includes the operating and
maintenance expenses, taxes and depreciation of Highland Propane Company. These
expenses increased 24.4% in fiscal 1999 compared with fiscal 1998. General taxes
were up $34,000 associated with additional property and payroll taxes.
13
MANAGEMENT'S DISCUSSION & ANALYSIS
Depreciation was up $340,000 due to increased tanks and transportation
equipment associated with customer growth. Transportation expense, sales
expense, insurance, customer accounting expense, delivering expenses, management
expense and fringe benefits increased $429,000 also associated with customer
growth.
Other Income - Other income, net of other deductions, increased 38.6% in
fiscal 1999 compared with fiscal 1998 primarily due to other income in the
propane business.
Interest Charges - Total interest charges on the utility decreased 7.6% in
fiscal 1999 compared with fiscal 1998. Interest on long-term debt increased
$22,000 due to a slightly higher daily average balance in fiscal 1999 compared
with fiscal 1998. Interest on short-term debt decreased $170,000 due to an
approximately $1,000,000 reduction in average daily balance and a reduction in
short-term borrowing rates. Interest charges for Highland Propane were up
$136,000 in fiscal 1999 compared to fiscal 1998 due to additional tanks and
transportation equipment associated with customer growth.
Net Earnings and Dividends - Net earnings for fiscal 1999 were $2,883,000
as compared with $2,727,000 in fiscal 1998. The increase was primarily due to
increased margins in the propane business due to higher sales volumes and the
reduction in operation and maintenance expense in the utility business due to
increased capitalization of labor and overheads associated with additional
capital projects. Basic earnings per share of common stock were $1.59 in fiscal
1999 compared with $1.60 in fiscal 1998. Dividends per share of common stock
were $1.08 in fiscal 1999 compared with $1.06 in fiscal 1998.
Fiscal Year 1998 Compared With Fiscal Year 1997
Operating Revenues - Fiscal 1998 operating revenues for natural gas
decreased 10.4% compared with fiscal 1997 primarily because the change in sales
mix due to weather that was approximately 6.0% warmer in fiscal 1998 compared to
fiscal 1997 and a decrease of 7.5% in the unit cost of natural gas.
Operating revenues for propane increased 4.5% in fiscal 1998 compared to
fiscal 1997 due to a 25% increase in customer growth even though revenues per
gallon decreased 10.9% due to the lower price of propane.
Cost of Gas - Cost of sales for natural gas decreased 16.0% in fiscal 1998
compared with fiscal 1997 because there was a 7.5% decrease in the unit cost of
natural gas and a 786,876 MCF decrease in interruptible sales purchases.
The cost of propane sales decreased 6.9% in fiscal 1998 compared with
fiscal 1997 primarily due to a decrease in the unit cost of propane associated
with an abundant supply of propane due to warm weather.
Operating Margin - Because the utility's cost of gas is recovered from its
customers it has no effect on operating margin. Operating margin increased 1.1%
in fiscal 1998 compared with fiscal 1997. In addition to increased margins from
customer growth, Roanoke Gas & Bluefield Gas realized the full annual effect of
rate increases which produced an $815,000 increase in operating margin.
The unit margins on propane are market based and are greatly influenced by
competition. Highland Propane had an 18.1% increase in margins associated with a
17.3% increase in gallons delivered due to a 25% increase in customer growth.
Other Operating Expenses - Operations and maintenance expenses decreased by
5.2% in fiscal 1998 compared with fiscal 1997 primarily due to a reduction in
bad debt accruals of $210,000 and the absence of regulatory asset write-offs
which occurred in 1997 in the amount of $307,000.
General taxes decreased 3.3% in fiscal 1998 compared with fiscal 1997.
Increases in business license and merchant taxes, franchise taxes and property
taxes in the amount of $7,400 were more than offset by decreases in the
revenue-sensitive taxes in the amount of $75,600.
Income taxes on the utility increased 28.3% in fiscal 1998 compared with
fiscal 1997 due to higher pre-tax income in 1998.
Depreciation and amortization expenses increased 10.8% in fiscal 1998
compared with fiscal 1997 due to increased depreciation related to normal
additions to plant in service.
14
Other operating expenses - propane operations includes the operating and
maintenance expenses, taxes and depreciation of Highland Propane Company. These
expenses increased 20.9% in fiscal 1998 compared with fiscal 1997. The increase
was primarily attributable to growth in customers and propane assets and the
associated increase in volumes delivered. Depreciation on tanks and equipment
increased by $78,000, property and related taxes increased by $33,000,
transportation and delivery costs increased by $157,000 and sales expense
increased by $65,000 and a variety of other growth-driven operating costs
increased associated with billing and collecting, accounting and management
overhead.
Other Income - Other income, net of other deductions, decreased 28.1% in
fiscal 1998 compared with fiscal 1997 primarily associated with rate refund
expenses of $9,000 and the write-off of obsolete and damaged propane tanks in
the amount of $31,000.
Interest Charges - Total interest charges on the utility decreased 10.7% in
fiscal 1998 compared with fiscal 1997 due to the payoff of $2,500,000 in
long-term debt in October 1997 and the use of the proceeds from the issuance of
181,500 shares of common stock in January 1998.
Interest charges for Highland Propane were up $89,000 in fiscal 1998
compared with fiscal 1997 due to additional tanks and transportation equipment
associated with customer growth.
Net Earnings & Dividends - Net earnings for fiscal 1998 were $2,727,000 as
compared with $2,310,000 in fiscal 1997. The increase can be attributed to cost
management which resulted in operation and maintenance expenditures for natural
gas being $497,000 less than the prior year off-setting increased propane
operations expense related to customer growth and increased revenue from natural
gas customer growth combined with the full effect of rate increases which
produced an $815,000 increase in operating margin. Basic earnings per share of
common stock were $1.60 in fiscal 1998 compared with $1.54 in 1997. Dividends
per share of common stock were $1.06 in fiscal 1998 compared with $1.04 in
fiscal 1997.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 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.
In 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that start-up activities, including organization
costs, be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998. However, Resources elected
to early adopt SOP 98-5. The adoption did not have a material impact on
Resources' financial position or results of operation.
Impact of Inflation
The cost of natural gas represented approximately 67% for fiscal 1999, 68%
for fiscal 1998 and 72% for fiscal 1997 of the total operating expenses of the
Company's gas utilities operations. However, under the present regulatory
Purchased Gas Adjustment mechanisms, the increases and decreases in the cost of
gas are passed through to the Company's customers.
15
MANAGEMENT'S DISCUSSION & ANALYSIS
Inflation impacts the Company through increases in non-gas costs such as
insurance, labor costs, supplies and services used in operations and maintenance
and the replacement cost of plant and equipment. The rates charged to natural
gas customers to cover these costs can only be increased through the regulatory
process via a rate increase application. In addition to stressing performance
improvements and higher gas sales volumes to offset inflation, management must
continually review operations and economic conditions to assess the need for
filing and receiving adequate and timely rate relief from the state commissions.
Other Issues
RGC Resources, Inc. is in the final stages of its Year 2000 readiness
planning. The Company has identified all internal systems and processes that are
date sensitive and has either taken corrective action to make the systems or
processes Year 2000 compliant or has developed a detailed contingency plan. The
Company believes that it has taken 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, or
telephone will be converted in a timely manner. If interruptions were to occur
in any such outside service, such interruptions would create a significant
barrier to providing service to the Company's customers and could result in
material increases in operating expenses and lost revenue.
The Notes to Consolidated Financial Statements contained on pages 24
through 37 may contain a discussion of an Environmental Matter.
RGC Resources, Inc.
1999 FINANCIAL HIGHLIGHTS
Operating Revenue - Natural Gas $ 48,619,143
Operating Revenue - Propane $ 8,469,728
Other Revenue - Gas Marketing $ 5,639,783
Merchandising and Jobbing $ 522,149
Interest Income $ 24,966
Net Earnings $ 2,883,407
Net earnings per Share $ 1.59
Dividends per Share - Cash $ 1.08
Total Customers - Natural Gas 55,283
Total Customers - Propane 13,832
Customers per Employee 424
Total Natural Gas Deliveries - MCF 10,318,043
Total Propane Sales - Gallons 8,977,524
Capitalization Ratio (Debt/Equity) 45%/55%
Total Additions to Plant $ 9,111,000
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
RGC Resources, Inc.:
We have audited the accompanying consolidated balance sheets of RGC Resources,
Inc. and Subsidiaries (the "Company") as of September 30, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the two years in the period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of the Company for the year ended September
30, 1997 were audited by other auditors whose report, dated October 17, 1997,
expressed an unqualified opinion on those consolidated statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of September 30, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
S/Deloitte & Touche LLP
Charlotte, North Carolina
October 22, 1999
17
Independent Auditors' Report
The Board of Directors and Stockholders
RGC Resources, Inc.:
We have audited the accompanying consolidated statements of earnings,
stockholders' equity and cash flows of RGC Resources, Inc. and subsidiaries
(successor to Roanoke Gas Company and subsidiaries) for the year ended September
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of RGC Resources, Inc. and subsidiaries for the year ended September 30, 1997,
in conformity with generally accepted accounting principles.
s/KPMG LLP
KPMG LLP
Roanoke, Virginia
October 17, 1997
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS 1999 1998
UTILITY PLANT:
In service $ 74,710,899 $ 69,986,124
Accumulated depreciation and amortization (26,499,546) (24,644,581)
---------------- ----------------
In service, net 48,211,353 45,341,543
Construction work-in-progress 1,425,918 1,674,543
---------------- ----------------
Total utility plant, net 49,637,271 47,016,086
---------------- ----------------
NON-UTILITY PROPERTY:
Propane 13,463,990 10,188,124
Accumulated depreciation and amortization (3,984,241) (3,059,870)
---------------- ----------------
Total non-utility property, net 9,479,749 7,128,254
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 139,501 84,037
Accounts receivable, less allowance for doubtful accounts
of $229,238 in 1999 and $202,652 in 1998 6,306,117 3,051,474
Inventories 8,363,199 7,969,730
Prepaid income taxes 430,992 712,687
Deferred income taxes 1,962,448 1,868,888
Other 572,154 451,027
---------------- ----------------
Total current assets 17,774,411 14,137,843
---------------- ----------------
OTHER ASSETS 898,551 852,737
---------------- ----------------
TOTAL ASSETS $ 77,789,982 $ 69,134,920
================ ================
See notes to consolidated financial statements.
18
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CAPITALIZATION:
Stockholders' equity:
Common stock, $5 par value; authorized 10,000,000 shares;
issued and outstanding 1,832,771 and 1,794,416 shares in
1999 and 1998, respectively $ 9,163,855 $ 8,972,080
Preferred stock, no par; authorized 5,000,000 shares;
0 shares issued and outstanding in both 1999 and 1998 - -
Capital in excess of par value 9,489,551 8,909,145
Retained earnings 9,501,517 8,583,356
---------------- ----------------
Total stockholders' equity 28,154,923 26,464,581
Long-term debt, excluding current maturities 23,336,614 20,700,000
---------------- ----------------
Total capitalization 51,491,537 47,164,581
---------------- ----------------
CURRENT LIABILITIES:
Current maturities of long-term debt 24,282 -
Borrowings under lines of credit 6,363,000 4,584,000
Dividends payable 495,055 476,140
Accounts payable 9,206,173 6,968,594
Customer deposits 546,364 399,750
Accrued expenses 4,605,376 4,224,693
Refunds from suppliers - due customers 26,062 85,572
Overrecovery of gas costs 684,155 1,269,829
---------------- ----------------
Total current liabilities 21,950,467 18,008,578
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 3,934,489 3,508,838
Deferred investment tax credits 413,489 452,923
---------------- ----------------
Total deferred credits and other liabilities 4,347,978 3,961,761
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,789,982 $ 69,134,920
================ ================
19
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
OPERATING REVENUES:
Gas utilities $48,619,143 $51,857,052 $57,842,181
Propane operations 8,469,728 7,530,040 7,205,645
------------- ------------- -------------
Total operating revenues 57,088,871 59,387,092 65,047,826
------------- ------------- -------------
COST OF GAS:
Gas utilities 29,631,592 32,471,072 38,675,337
Propane operations 3,878,035 3,636,435 3,907,568
------------- ------------- -------------
Total cost of gas 33,509,627 36,107,507 42,582,905
------------- ------------- -------------
OPERATING MARGIN 23,579,244 23,279,585 22,464,921
------------- ------------- -------------
OPERATING EXPENSES:
Gas utilities:
Operations 7,033,018 7,583,583 8,049,833
Maintenance 1,083,190 1,432,203 1,462,764
Taxes - general 2,250,794 2,376,227 2,456,399
Taxes - income 1,316,190 1,100,506 857,964
Depreciation and amortization 3,015,001 2,806,278 2,533,912
Propane operations (including income taxes of $260,037,
$326,206 and $309,137 in 1999, 1998 and 1997,
respectively) 4,060,134 3,263,762 2,700,626
------------- ------------- -------------
Total operating expenses 18,758,327 18,562,559 18,061,498
------------- ------------- -------------
OPERATING EARNINGS 4,820,917 4,717,026 4,403,423
------------- ------------- -------------
OTHER INCOME (DEDUCTIONS):
Gas utilities, net 58,805 67,759 68,240
Propane operations, net 120,274 80,248 116,222
Taxes - income (32,747) (42,443) (37,552)
------------- ------------- -------------
Total other income 146,332 105,564 146,910
------------- ------------- -------------
EARNINGS BEFORE INTEREST CHARGES 4,967,249 4,822,590 4,550,333
------------- ------------- -------------
INTEREST CHARGES:
Gas utilities:
Long-term debt 1,572,862 1,550,734 1,740,998
Other 227,987 398,409 441,444
Propane operations 282,993 146,568 58,011
------------- ------------- -------------
Total interest charges 2,083,842 2,095,711 2,240,453
------------- ------------- -------------
NET EARNINGS $ 2,883,407 $2,726,879 $2,309,880
============= ============= =============
BASIC EARNINGS PER SHARE $ 1.59 $ 1.60 $ 1.54
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 1,814,864 1,701,048 1,503,388
============= ============= =============
DILUTED EARNINGS PER SHARE $ 1.59 $ 1.60 $ 1.53
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 1,818,541 1,706,902 1,504,915
============= ============= =============
See notes to consolidated financial statements.
20
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Capital in Total
Common Excess of Retained Stockholders'
Stock Par Value Earnings Equity
BALANCE, SEPTEMBER 30, 1996 $ 7,379,215 $ 4,647,163 $ 6,948,623 $ 18,975,001
Net earnings - - 2,309,880 2,309,880
Cash dividends declared ($1.04 per share) - - (1,570,649) (1,570,649)
Issuance of common stock (51,643 shares) 258,215 624,504 - 882,719
------------- ------------- --------------- --------------
BALANCE, SEPTEMBER 30, 1997 7,637,430 5,271,667 7,687,854 20,596,951
Net earnings - - 2,726,879 2,726,879
Cash dividends declared ($1.06 per share) - - (1,831,377) (1,831,377)
Issuance of common stock (266,930
shares) 1,334,650 3,637,478 - 4,972,128
------------- ------------- --------------- --------------
BALANCE, SEPTEMBER 30, 1998 8,972,080 8,909,145 8,583,356 26,464,581
Net earnings - - 2,883,407 2,883,407
Cash dividends declared ($1.08 per share) - - (1,965,246) (1,965,246)
Issuance of common stock (38,355 shares) 191,775 580,406 - 772,181
------------- ------------- --------------- --------------
BALANCE, SEPTEMBER 30, 1999 $ 9,163,855 $ 9,489,551 $ 9,501,517 $ 28,154,923
============= ============= =============== ==============
See notes to consolidated financial statements.
21
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $2,883,407 $2,726,879 $2,309,880
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,131,688 3,577,872 3,247,015
Loss (gain) on asset disposition (3,277) 40,380 6,562
Writeoff of regulatory assets - - 132,523
Change in over/under recovery of gas costs (585,674) 1,857,286 1,195,133
Deferred taxes and investment tax credits 292,657 (338,421) (681,937)
Other noncash items, net (45,814) (284,466) 93,131
Changes in assets and liabilities which provided (used) cash:
Accounts receivable and customer deposits, net (3,108,030) 1,109,365 (266,066)
Inventories (393,469) (542,149) (24,995)
Prepaid income taxes and other current assets 160,568 (735,672) 349,405
Accounts payable and accrued expenses 2,618,262 1,447,079 1,599,788
Refunds from suppliers - due customers (59,510) (340,288) 401,995
----------- ----------- -----------
Net cash provided by operating activities 5,890,808 8,517,865 8,362,434
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and non-utility property (8,940,093) (9,238,614) (8,052,801)
Cost of removal of utility plant, net (64,209) (70,949) (158,855)
Proceeds from sales of assets 73,720 225,159 192,063
----------- ----------- -----------
Net cash used in investing activities (8,930,582) (9,084,404) (8,019,593)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,500,000 3,356,000 -
Retirement of long-term debt (9,614) (2,878,124) (669,423)
Net borrowings (repayments) under lines of credit 1,779,000 (2,545,000) 476,500
Proceeds from issuance of common stock 772,181 4,601,069 882,719
Common stock issuance costs - (246,647) -
Cash dividends paid (1,946,329) (1,752,767) (1,549,914)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,095,238 534,531 (860,118)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 55,464 (32,008) (517,277)
CASH AND CASH EQUIVALENTS:
Beginning of year 84,037 116,045 633,322
----------- ----------- -----------
End of year $ 139,501 $ 84,037 $ 116,045
=========== =========== ===========
22
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid during the year for:
Interest $2,036,967 $2,148,861 $2,065,893
=========== =========== ===========
Income taxes, net of refunds $1,034,623 $2,512,897 $1,575,952
=========== =========== ===========
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.
In June 1998, the Company refinanced the remaining balances of Series K and
Series L First Mortgage Bonds in the amount of $3,344,000 through the
issuance of a First Mortgage Note due July 1, 2008.
In February 1999, a capital lease obligation of $170,510 was incurred when
the Company entered into an equipment lease.
See notes to consolidated financial statements.
23
RGC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization - On July 1, 1999, Roanoke Gas Company, Bluefield Gas
Company and Diversified Energy Corporation became subsidiaries of RGC
Resources, Inc., an exempt holding company. Also on this date,
Commonwealth Public Service Corporation was merged into Roanoke Gas
Company and new Affiliate Agreements were signed between and among
RGC Resources, Inc. and each affiliate. On July 2, 1999 NASDAQ began
trading RGC Resources, Inc. as RGCO.
General - The consolidated financial statements include the accounts
of RGC Resources, Inc. and its wholly owned subsidiaries (the
"Company"), Roanoke Gas Company, Bluefield Gas Company and
Diversified Energy Company, operating as Highland Propane Company and
Highland Gas Marketing. Roanoke Gas Company and Bluefield Gas Company
are gas utilities, which distribute and sell natural gas to
residential, commercial and industrial customers within their service
areas. Highland Propane Company distributes and sells propane in
southwestern Virginia and southern West Virginia. Highland Gas
Marketing brokers natural gas to several industrial transportation
customers of Roanoke Gas Company and Bluefield Gas Company.
The primary business of the Company is the distribution of natural
gas to residential, commercial and industrial customers in Roanoke,
Virginia; Bluefield, Virginia; Bluefield, West Virginia; and the
surrounding areas. The Company distributes natural gas to its
customers at rates and charges regulated by the State Corporation
Commission in Virginia and the Public Service Commission in West
Virginia.
All significant intercompany transactions have been eliminated in
consolidation.
Regulation - The Company's regulated operations meet the criteria,
and accordingly, follow the accounting and reporting requirements of
Statement of Financial Accounting Standards ("SFAS") No. 71,
Accounting for the Effects of Certain Types of Regulation. The
economic effects of regulation can result in a regulated company
recording costs that have been or are expected to be allowed in the
rate-setting process in a period different from the period in which
the costs would be charged to expense by an unregulated enterprise.
When this results, costs are deferred as assets in the consolidated
balance sheet (regulatory assets) and recorded as expenses as those
same amounts are reflected in rates. Additionally, regulators can
impose liabilities upon a regulated company for amounts previously
collected from customers and for recovery of costs that are expected
to be incurred in the future (regulatory liabilities).
24
The amounts recorded by the Company as regulatory assets and
regulatory liabilities are as follows:
September 30,
------------------------------------------
1999 1998
Regulatory assets:
Early retirement incentive costs $ 7,560 $ 20,520
Rate case costs 52,988 1,163
Other 74,171 101,043
---------------- ----------------
Total regulatory assets $ 134,719 $ 122,726
================ ================
Regulatory liabilities:
Refunds from suppliers - due customers $ 26,062 $ 85,572
Overrecovery of gas costs 684,155 1,269,829
---------------- ----------------
Total regulatory liabilities $ 710,217 $ 1,355,401
================ ================
Utility Plant - Utility plant is stated at original cost. The cost of
additions to utility plant includes direct charges and overhead. The
cost of depreciable property retired, plus cost of removal, less
salvage is charged to accumulated depreciation. Maintenance, repairs,
and minor renewals and betterments of property are charged to
operations.
Depreciation and Amortization - Provisions for depreciation are
computed principally on composite straight-line rates for financial
statement purposes and on accelerated rates for income tax purposes.
Depreciation and amortization for financial statement purposes are
provided on annual composite rates ranging from 2 percent to 33
percent. The annual composite rates are determined by periodic
depreciation studies.
Cash and Cash Equivalents - For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
Inventories - Inventories consist primarily of propane and natural
gas. Natural gas is valued at the weighted average cost charged to
inventory and propane is valued at the lower of average cost or
market.
Unbilled Revenues - The Company bills its natural gas customers on a
monthly cycle basis, although certain large industrial customers are
billed at or near the end of each month. The Company records revenue
based on service rendered to the end of the accounting period. The
amounts of unbilled revenue receivable included in accounts
receivable on the consolidated balance sheets at September 30, 1999
and 1998 were $919,903 and $795,438, respectively.
Income Taxes - Income taxes are accounted for using the liability
method. Under the liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the years in which those temporary
differences are expected to be recovered or settled.
The Company and its subsidiaries file a consolidated federal income
tax return. Federal income taxes have been provided by the Company on
the basis of the separate company income and deductions.
Bond Expenses - Bond expenses are being amortized over the lives of
the bonds using the bonds outstanding method.
Over/Under Recovery of Gas Costs - Pursuant to the provisions of the
Company's Purchased Gas Adjustment ("PGA") clause, increases or
decreases in gas costs are passed on to its customers.
25
Accordingly, the difference between actual costs incurred and costs
recovered through the application of the PGA is reflected as a net
deferred charge or credit. At the end of the deferral period, the
balance of the net deferred charge or credit is amortized over the
next 12-month period as amounts are reflected in customer billings.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Derivative and Hedging Activities - 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
the Company's 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 Company has entered into certain arrangements for hedging the
price of natural gas and propane for the purpose of providing price
stability during the winter months. The Company has not fully
analyzed the provisions of SFAS No. 133 on the Company's 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 all fiscal
years beginning after June 15, 2000.
Reorganization Costs - The Company has elected to early adopt
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that start-up costs and organizational
costs be expensed as incurred. The adoption did not have a material
impact on the Company's financial position or results of operations.
Reclassifications - Certain reclassifications were made to prior year
balances to conform with current year presentations.
2. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
The reportable segments disclosed herein were determined based on a
variety of factors, including the regulatory environment and the
types of products and services offered.
Natural Gas - The natural gas segment of the Company generates
revenue from its tariff rates under which it provides distribution
energy services for its residential, commercial and industrial
customers.
Propane Gas - The propane gas segment of the Company generates
revenue from the sale and delivery of propane gas and related
services to its residential, commercial and industrial customers
located in southwestern Virginia and southern West Virginia.
Parent and Other - The parent and other segment of the Company
contains certain transactions incurred at the parent company level
and miscellaneous other operating activities.
26
Information related to the segments of the Company is detailed below:
Parent
and Consolidated
Gas Propane Other Total
For the year ended September 30, 1999:
Total revenues $ 48,619,143 $ 8,469,728 $ 522,149 $ 57,611,020
Operating margin 19,002,388 4,576,856 202,192 23,781,436
Operations, maintenance and
general taxes 10,367,002 2,894,587 32,392 13,293,981
Depreciation and amortization 3,015,001 957,396 - 3,972,397
Interest charges 1,800,849 282,993 - 2,083,842
Income taxes 1,306,986 242,001 59,987 1,608,974
Segment net earnings (loss) 2,454,903 318,691 109,813 2,883,407
As of September 30, 1999:
Total assets $ 65,832,140 $ 11,956,853 $ 989 $ 77,789,982
Gross additions to long-lived
assets 5,811,671 3,298,932 - 9,110,603
For the year ended September 30, 1998:
Total revenues $ 51,857,052 $ 7,530,040 $ 587,030 $ 59,974,122
Operating margin 19,385,980 3,893,605 189,634 23,469,219
Operations, maintenance and
general taxes 11,392,013 2,372,339 9,313 13,773,665
Depreciation and amortization 2,806,278 617,086 - 3,423,364
Interest charges 1,949,143 146,568 - 2,095,711
Income taxes 1,085,895 321,335 61,925 1,469,155
Segment net earnings (loss) 2,132,317 476,166 118,396 2,726,879
As of September 30, 1998:
Total assets $ 60,586,015 $ 8,548,905 $ - $ 69,134,920
Gross additions to long-lived assets 5,892,438 3,691,223 - 9,583,661
For the year ended September 30, 1997:
Total revenues $ 57,842,181 $ 7,205,645 $ 567,128 $ 65,614,954
Operating margin 19,166,844 3,298,077 215,604 22,680,525
Operations, maintenance and
general taxes 11,968,996 1,881,412 7,958 13,858,366
Depreciation and amortization 2,533,912 539,063 - 3,072,975
Interest charges 2,182,442 58,011 - 2,240,453
Income taxes 845,123 285,786 73,744 1,204,653
Segment net earnings 1,739,548 436,430 133,902 2,309,880
As of September 30, 1997:
Total assets $ 57,770,655 $ 4,822,603 $ - $ 62,593,258
Gross additions to long-lived assets 5,726,579 2,326,222 - 8,052,801
During 1999, 1998 and 1997, no single customer accounted for more
than five percent of the Company's sales, and no accounts receivable
from any customer exceeded five percent of the Company's total
accounts receivable at September 30, 1999 and 1998.
27
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the changes in the allowance for doubtful accounts
follows:
Years Ended September 30,
-------------------------------------------------------------
1999 1998 1997
Balances, beginning of year $ 202,652 $ 368,345 $ 279,316
Provision for doubtful accounts 234,705 481,297 660,400
Recoveries of accounts written off 208,584 188,309 125,035
Accounts written off (416,703) (835,299) (696,406)
---------------- ---------------- ----------------
Balances, end of year $ 229,238 $ 202,652 $ 368,345
================ ================ ================
4. BORROWINGS UNDER LINES OF CREDIT
A summary of short-term lines of credit follows:
September 30,
-------------------------------------------------------------
1999 1998 1997
Lines of credit $ 22,500,000 $ 21,000,000 $ 20,000,000
Outstanding balance 6,363,000 4,584,000 7,129,000
Highest month end balances outstanding 10,364,000 12,929,000 15,896,000
Average month end balances 6,216,000 5,280,000 8,098,000
Average rates of interest during year 5.80% 6.19% 5.97%
Average rates of interest on balances
outstanding at year end 5.86% 6.18% 6.14%
5. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
------------------------------------------------
1999 1998
Roanoke Gas Company:
First Mortgage notes payable, interest fixed at 7.804%
due July 1, 2008 $ 5,000,000 $ 5,000,000
Term debentures, collateralized by indenture dated October 1,
1991, with provision for retirement in varying annual payments through
October 1, 2016, at interest rates ranging
from 6.75% to 9.625% 4,700,000 4,700,000
Unsecured senior notes payable, interest at 7.66%, with provision for
retirement of $1,600,000 each year
beginning December 1, 2014 through December 1, 2018 8,000,000 8,000,000
Obligations under capital leases, aggregate monthly payments
of $2,924 including interest, through April 2005 160,896 -
28
September 30,
------------------------------------------------
1999 1998
Bluefield Gas Company:
Unsecured note payable, interest at 7.28%, with provision for retirement of
$25,000 quarterly beginning January 1, 2002 and a final payment of
$1,125,000 on October 1, 2003 $ 1,300,000 $ 1,300,000
Highland Propane Company:
Unsecured note payable, with variable interest rate based on 90-day LIBOR plus
95 basis-point spread, with provision
for retirement on August 26, 2006 2,500,000 -
Unsecured note payable, interest at 7%, with
provision for retirement on December 31, 2007 1,700,000 1,700,000
------------------- -------------------
Total long-term debt 23,360,896 20,700,000
Less current maturities (24,282) -
------------------- -------------------
Total long-term debt, excluding current maturities $ 23,336,614 $ 20,700,000
=================== ===================
The above debt obligations contain various provisions including a
minimum interest charge coverage ratio and limitations on debt as a
percentage of total capitalization. The obligations also contain a
provision restricting the payment of dividends, primarily based on
the earnings of the Company and dividends previously paid. At
September 30, 1999, approximately $5,416,000 of retained earnings
were available for dividends.
The aggregate annual maturities of long-term debt, subsequent to
September 30, 1999 are as follows:
Years ending September 30:
2000 $ 24,282
2001 26,092
2002 803,037
2003 130,126
2004 2,157,372
Thereafter 20,219,987
----------------
Total $ 23,360,896
================
29
6. INCOME TAXES
The details of income tax expense (benefit) are as follows:
Years Ended September 30,
-----------------------------------------------------------------
1999 1998 1997
Charged to operating expenses - gas utilities:
Current:
Federal $ 1,147,215 $ 1,566,868 $ 1,561,779
State 37,246 54,764 (15,946)
------------- ------------- -------------
Total current 1,184,461 1,621,632 1,545,833
------------- ------------- -------------
Deferred:
Federal 180,709 (447,054) (668,660)
State (9,546) (34,638) 20,226
------------- ------------- -------------
Total deferred 171,163 (481,692) (648,434)
------------- ------------- -------------
Investment tax credits, net (39,434) (39,434) (39,435)
------------- ------------- -------------
Total charged to operating expenses -
gas utilities 1,316,190 1,100,506 857,964
------------- ------------- -------------
Charged to other operating expenses - propane operations:
Current 101,455 139,592 282,380
Deferred 158,582 186,614 26,757
------------- ------------- -------------
Total charged to other operating expenses -
propane operations 260,037 326,206 309,137
------------- ------------- -------------
Charged to other income and deductions gas utilities:
Current 30,401 46,353 37,892
Deferred 2,346 (3,910) (340)
------------- ------------- -------------
Total charged to other income and deductions -
gas utilities 32,747 42,443 37,552
------------- ------------- -------------
Total income tax expense $ 1,608,974 $ 1,469,155 $ 1,204,653
============= ============= =============
30
Income tax expense for the years ended September 30, 1999, 1998 and
1997 differed from amounts computed by applying the U.S. Federal
income tax rate of 34 percent to earnings before income taxes as a
result of the following:
Years Ended September 30,
-----------------------------------------------------------------
1999 1998 1997
Net earnings $ 2,883,407 $ 2,726,879 $ 2,309,880
Income tax expense 1,608,974 1,469,155 1,204,653
------------- ------------- -------------
Earnings before income taxes $ 4,492,381 $ 4,196,034 $ 3,514,533
============= ============= =============
Computed "expected" income tax expense $ 1,527,410 $ 1,426,652 $ 1,194,941
Increase (reduction) in income tax expense
resulting from:
Amortization of deferred investment tax credits (39,434) (39,434) (39,435)
Other, net 120,998 81,937 49,147
------------- ------------- -------------
Total income tax expense $ 1,608,974 $ 1,469,155 $ 1,204,653
============= ============= =============
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are as follows:
September 30,
--------------------------------------------
1999 1998
Deferred tax assets:
Allowance for uncollectibles $ 82,898 $ 74,740
Accrued pension and medical benefits 1,088,777 909,898
Accrued vacation 174,504 172,707
Over/under recovery of gas costs 233,373 430,529
Costs on gas held in storage 360,062 245,902
Other 22,834 35,112
---------------- ----------------
Total gross deferred tax assets 1,962,448 1,868,888
---------------- ----------------
Deferred tax liabilities:
Utility plant basis differences 3,966,982 3,508,489
Other (32,493) 349
---------------- ----------------
Total gross deferred tax liabilities 3,934,489 3,508,838
---------------- ----------------
Net deferred tax liability $ 1,972,041 $ 1,639,950
================ ================
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The benefits are based on years
of service and employee compensation. Plan assets are invested
principally in cash equivalents and corporate stocks and bonds.
Company contributions are intended to provide not only for benefits
attributed to date but also for those expected to be earned in the
future.
31
The following sets forth the Pension Plan's funded status and amounts
recognized in the consolidated balance sheet as of September 30 as
determined by an independent actuary:
1999 1998
Reconciliation of funded status:
Funded status $ 131,349 $ (959,486)
Unrecognized actuarial gain (1,397,341) (297,949)
Unrecognized transition obligation 119,089 224,533
Unrecognized prior service cost 37,755 56,629
Contribution made between measurement date and fiscal
year end 50,000 40,000
--------------- ---------------
Net pension liability recognized $ (1,059,148) $ (936,273)
=============== ===============
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 7,989,241 $ 5,940,051
Service cost 239,185 157,705
Interest cost 523,844 444,696
Actuarial (gain) loss (961,328) 1,812,080
Benefit payments (398,325) (365,291)
--------------- ---------------
Benefit obligation at end of year $ 7,392,617 $ 7,989,241
=============== ===============
Change in plan assets:
Fair value of plan assets at beginning of year $ 7,029,755 $ 6,299,249
Actual return on plan assets 722,536 1,005,797
Employer contribution 170,000 90,000
Benefit payments (398,325) (365,291)
--------------- ---------------
Fair value of plan assets at end of year $ 7,523,966 $ 7,029,755
=============== ===============
1999 1998 1997
Components of net periodic pension cost:
Service cost $ 239,185 $ 157,705 $ 142,467
Interest cost 523,844 444,696 419,474
Expected return on plan assets (584,472) (523,334) (454,175)
Amortization of unrecognized transition
obligation or asset 105,444 105,444 105,444
Prior service cost recognized 18,874 18,874 18,874
Recognized gains - (81,537) (53,626)
---------------- -------------- --------------
Net periodic pension cost $ 302,875 $ 121,848 $ 178,458
================ ============== ==============
Assumptions used for net periodic pension cost:
Discount rate 6.75% 7.75% 7.75%
Expected rate of compensation increase 5.00 5.00 5.00
Expected long-term rate of return on plan assets 8.50 8.50 8.50
In addition to pension benefits, the Company has a postretirement
benefits plan which provides certain health care, supplemental
retirement and life insurance benefits to active and
32
retired employees who meet specific age and service requirements. The
plan is contributory. The Company has elected to fund the plan over
future years.
The following sets forth the postretirement medical and life insurance
plans' funded status and amounts recognized in the consolidated balance
sheet, as determined by an independent actuary, as of September 30:
1999 1998
Reconciliation of funded status:
Funded status $ (5,071,792) $ (4,604,982)
Unrecognized actuarial (gain) loss 294,361 (216,562)
Unrecognized transition obligation 3,322,200 3,559,500
--------------- ---------------
Net postretirement benefit liability $ (1,455,231) $ (1,262,044)
=============== ===============
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 5,769,802 $ 4,820,564
Service cost 118,847 86,436
Interest cost 377,830 362,179
Participant contributions 22,885 28,503
Actuarial (gain) loss 515,825 790,444
Benefit payments (314,645) (318,324)
--------------- ---------------
Benefit obligation at end of year $ 6,490,544 $ 5,769,802
=============== ===============
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,164,820 $ 988,734
Actual return on plan assets 72,902 154,998
Employer contributions - 310,909
Participant contributions 495,675 28,503
Benefit payments (314,645) (318,324)
--------------- ---------------
Fair value of plan assets at end of year $ 1,418,752 $ 1,164,820
=============== ===============
1999 1998 1997
Components of net periodic postretirement benefit cost:
Service cost $ 118,847 $ 86,436 $ 96,255
Interest cost 377,830 362,179 325,036
Amortization of unrecognized transition obligation
or asset 237,300 237,300 237,300
Expected return on plan assets (68,000) (59,000) (89,542)
Recognized gains - (27,532) (25,201)
-------------- -------------- --------------
Net periodic benefit cost $ 665,977 $ 599,383 $ 543,848
============== ============== ==============
The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 7.5 percent, 6.75 percent and
7.75 percent for 1999, 1998 and 1997, respectively.
33
For measurement purposes, 8.5 percent, 9 percent and 10 percent annual
rates of increase in the per capita cost of covered benefits (i.e.,
medical trend rate) were assumed for 1999, 1998 and 1997, respectively;
the rates were assumed to decrease gradually to 5.25 percent by the
year 2006 and remain at that level thereafter. The medical trend rate
assumption has a significant effect on the amounts reported. For
example, increasing the assumed medical cost trend rate by one
percentage point each year would increase the accumulated
postretirement benefits obligation as of September 30, 1999 by
approximately $779,000 or 12 percent, and would increase the aggregate
of the service and interest cost components of net postretirement
benefits cost by approximately $80,000, or 16 percent.
The Company also has a defined contribution plan covering all of its
employees who elect to participate. The Company made annual matching
contributions to the plan based on 70 percent in 1999, 1998 and 1997 of
the net participants' basic contributions (from 1 to 6 percent of their
total compensation). The annual cost of the plan was $212,344, $206,766
and $217,466 for 1999, 1998 and 1997, respectively.
8. COMMON STOCK OPTIONS
During 1997, the Company's stockholders approved the RGC Resources,
Inc. Key Employee Stock Option Plan (the "Plan"). The Plan provides for
the issuance of common stock options to officers and certain other
full-time salaried employees to acquire a maximum of 50,000 shares of
the Company's common stock. The Plan requires each option's exercise
price per share to equal the fair value of the Company's common stock
as of the date of grant.
The aggregate number of shares under option pursuant to the RGC
Resources, Inc. Key Employee Stock Option Plan are as follows:
Weighted
Average Option
Number Exercise Price
of Shares Price Per Share
Options outstanding, September 30, 1997 34,500 $ 16.357 $15.500-16.875
Options granted 15,500 20.625 -
Options exercised (13,000) 16.346 -
--------------
Options outstanding, September 30, 1998 37,000 $ 18.149 $15.500-20.625
Options granted - - -
Options exercised - - -
--------------
Options outstanding, September 30, 1999 37,000 $ 18.149 $15.500-20.625
==============
Under the terms of the Plan, the options become exercisable 6 months
from the grant date and expire 10 years subsequent to the grant date.
All options outstanding were fully vested and exercisable at September
30, 1999 and 1998.
34
The per share weighted-average fair values of stock options granted
during 1998 and 1997 were $2.85 and $1.08, respectively, on the dates
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions. There were no options granted
during 1999.
1998 1997
Expected dividend yield 5.14% 5.78%
Risk-free interest rate 4.33% 6.29%
Expected volatility 21% 10%
Expected life 10 years 10 years
The Company uses the intrinsic value method of APB Opinion No. 25 for
recognizing stock-based compensation in the consolidated financial
statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options, the Company's net
earnings and basic earnings per share would have been as follows:
1998 1997
Net earnings $ 2,697,709 $ 2,278,093
Basic earnings per share $ 1.58 $ 1.52
9. RELATED PARTY TRANSACTIONS
Certain of the Company's directors are affiliated with companies that
render services or sell products to the Company. Such transactions are
conducted under normal business terms. The significant services relate
to legal fees charged to the Company of approximately $168,000,
$185,000 and $182,000 in 1999, 1998 and 1997, respectively. The
products sold to the Company include natural gas purchases of
approximately $5,628,000, $6,052,000 and $3,052,000 in 1999, 1998 and
1997, respectively. It is anticipated that similar services and
products will be provided to the Company in 2000.
10. ENVIRONMENTAL MATTER
Both RGC Resources, Inc. and Bluefield Gas Company 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
35
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.
11. COMMITMENTS
The Company has short-term contracts with natural gas suppliers
requiring the purchase of approximately 2,873,000 dekatherms of natural
gas at varying prices during the period October 1, 1999 through
September 30, 2000. In addition, the Company has short-term contracts
with propane suppliers requiring the purchase of approximately
3,854,000 gallons of propane during the period October 1, 1999 through
September 30, 2000. Management does not anticipate that these contracts
will have a material impact on the Company's fiscal year 2000
consolidated results of operations.
Both Roanoke Gas Company and Bluefield Gas Company participate in pilot
gas cost hedging programs approved by their respective public utility
commissions which are intended to help protect against supply related
price volatility adversely impacting customer billing rates. Under the
pilot programs, gas cost hedges may be employed for up to 50% of normal
winter demand not supplied from storage. Under the pilot programs, the
Company has entered into options to purchase approximately 690,000
dekatherms of natural gas during fiscal 2000. All costs and benefits of
the Company's natural gas hedging programs are reflected in cost of gas
and recovered through customer billing rates.
In addition to natural gas hedging transactions, the Company has also
entered into options to purchase approximately 1.2 million gallons of
propane during fiscal 2000. The costs associated with the purchase of
these options will be expensed during the year ended September 30,
2000.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents and borrowings under
lines of credit are a reasonable estimate of fair value due to their
short-term nature and because the rates of interest paid on borrowings
under lines of credit approximate market rates.
The fair value of long-term debt is estimated by discounting the future
cash flows of each issuance at rates currently offered to the Company
for similar debt instruments of comparable maturities. The carrying
amounts and approximate fair values are as follows:
September 30,
-----------------------------------------------------------------------------------
1999 1998
---------------------------------------- -----------------------------------------
Carrying Approximate Carrying Approximate
Amounts Fair Value Amounts Fair Value
Long-term debt $ 23,360,896 $ 23,662,491 $ 20,700,000 $ 24,287,744
Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of
September 30, 1999 and 1998 are not necessarily indicative of the
amounts the Company could have realized in current market exchanges.
36
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for the years ended September 30, 1999 and
1998 is summarized as follows:
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
Operating revenues $ 16,444,192 $ 23,027,809 $ 9,429,972 $ 8,186,898
================= ================= ================ ===============
Operating earnings (loss) $ 1,444,714 $ 3,202,960 $ 373,437 $ (200,194)
================= ================= ================ ===============
Net earnings (loss) $ 956,759 $ 2,690,937 $ (73,315) $ (690,974)
================= ================= ================ ===============
Basic earnings (loss) per share $ .53 $ 1.49 $ (.04) $ (.39)
================= ================= ================ ===============
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
Operating revenues $ 20,796,021 $ 21,750,333 $ 8,982,316 $ 7,858,422
================= ================= ================ ===============
Operating earnings (loss) $ 2,071,945 $ 2,662,581 $ 153,192 $ (170,692)
================= ================= ================ ===============
Net earnings (loss) $ 1,544,234 $ 2,123,464 $ (281,216) $ (659,603)
================= ================= ================ ===============
Basic earnings (loss) per share $ 1.00 $ 1.24 $ (.16) $ (.48)
================= ================= ================ ===============
The pattern of quarterly earnings is the result of the highly seasonal
nature of the business, as variations in weather conditions generally
result in greater earnings during the winter months.
* * * * * * * *
37
RGC Resources, Inc.
SUMMARY OF GAS SALES AND STATISTICS
Years Ended September 30
REVENUES: 1999 1998 1997 1996 1995
- --------- ------------------------------------------------------------------------------------
Residential Sales $ 28,152,236 $ 30,396,540 $ 32,595,261 $ 33,981,835 $ 25,078,211
Commercial Sales 17,812,922 18,764,195 19,879,180 20,219,289 14,313,723
Interruptible Sales 646,256 695,279 3,892,301 4,569,766 3,513,181
Transportation Gas Sales 1,776,049 1,715,032 1,107,922 943,215 909,515
Backup Services 89,061 97,552 173,655 190,310 107,652
Late Payment Charges 108,340 156,634 157,369 135,838 115,130
Miscellaneous 34,279 31,820 36,493 27,154 24,325
Propane 8,469,728 7,530,040 7,205,645 5,703,466 4,549,410
------------------------------------------------------------------------------------
Total $ 57,088,871 $ 59,387,092 $ 65,047,826 $ 65,770,873 $ 48,611,147
NET INCOME $ 2,883,407 $ 2,726,879 $ 2,309,880 $ 2,196,672 $ 1,777,249
------------------------------------------------------------------------------------
MCF's DELIVERED
Residential 4,271,243 4,633,403 4,651,819 5,108,553 4,204,222
Commercial 3,020,147 3,228,452 3,230,714 3,385,962 2,834,884
Interruptible 156,148 172,270 959,146 1,088,921 1,240,658
Transportation Gas 2,855,938 2,822,856 1,933,236 1,549,854 1,660,504
Backup Service 14,567 18,500 29,130 36,658 21,609
------------------------------------------------------------------------------------
Total 10,318,043 10,875,481 10,804,045 11,169,948 9,961,877
GALLONS DELIVERED
(PROPANE) 8,977,524 7,702,384 6,568,066 5,997,912 4,822,277
HEATING DEGREE DAYS 3,717 4,054 4,298 4,696 3,791
NUMBER OF CUSTOMERS:
Natural Gas
Residential 49,860 48,265 47,539 46,007 44,873
Commercial 5,379 5,272 5,181 5,043 4,896
Interruptible and Interruptible
Transportation Service 44 45 43 44 44
------------------------------------------------------------------------------------
Total 55,283 53,582 52,763 51,094 49,813
Propane 13,832 11,004 8,829 6,410 6,006
------------------------------------------------------------------------------------
Total Customers 69,115 64,586 61,592 57,504 55,819
GAS ACCOUNT (MCF):
Natural Gas Available 10,883,269 11,316,714 11,406,613 11,756,089 10,453,696
Natural Gas Deliveries 10,318,043 10,875,481 10,804,045 11,169,948 9,961,877
Storage - LNG 129,369 69,343 106,892 142,297 118,393
Company Use And Miscellaneous 58,982 37,998 49,444 54,140 46,532
System Loss 376,875 333,892 446,232 389,704 326,894
------------------------------------------------------------------------------------
Total Gas Usage 10,883,269 11,316,714 11,406,613 11,756,089 10,453,696
TOTAL ASSETS $ 77,789,982 $ 69,134,920 $ 62,593,258 $ 58,921,099 $ 51,614,667
LONG-TERM OBLIGATIONS $ 23,336,614 $ 20,700,000 $ 17,079,000 $ 20,222,124 $ 17,504,047
38
RGC Resources, Inc.
CAPITALIZATION STATISTICS
Years Ended September 30
COMMON STOCK: 1999 1998 1997 1996 1995
- ------------- --------------------------------------------------------------------------
Shares Issued 1,832,771 1,794,416 1,527,486 1,475,843 1,432,512
Earnings Per Share:
Net earnings $ 1.59 $ 1.60 $ 1.54 $ 1.51 $ 1.26
Dividends Paid Per Share (Cash) $ 1.08 $ 1.06 $ 1.04 $ 1.02 $ 1.00
Dividends Paid Out Ratio 67.9% 66.3% 67.5% 67.5% 79.4%
Number of Shareholders 1,796 1,836 1,853 1,713 1,699
--------------------------------------------------------------------------
CAPITALIZATION RATIOS:
Long-Term Debt,
Including Current Maturities 45.3 43.9 49.5 52.4 51.6
Common Stock And Surplus 54.7 56.1 50.5 47.6 48.4
Total 100.0 100.0 100.00 100.0 100.0
--------------------------------------------------------------------------
Long-Term Debt,
Including Current Maturities $ 23,360,896 $ 20,700,000 $ 20,222,124 $ 20,891,547 $ 18,683,462
Common Stock And Surplus 28,154,923 26,464,581 20,596,951 18,975,001 17,555,172
--------------------------------------------------------------------------
Total Capitalization
Plus Current Maturities $ 51,515,819 $ 47,164,581 $ 40,819,075 $ 39,866,548 $ 36,238,634
--------------------------------------------------------------------------
39
RGC RESOURCES, INC.
& SUBSIDARIES
BOARD OF DIRECTORS
Lynn D. Avis
Avis Construction Co., Inc.
President
Abney S. Boxley III
Boxley Co., Inc.
President & CEO
Frank T. Ellett
Virginia Truck Center, Inc.
President
Frank A. Farmer, Jr.
Chairman Of The Board
Wilbur L. Hazlegrove
Woods, Rogers and Hazlegrove,
P.L.C.
J. Allen Layman
R & B Communications, Inc.
President and CEO
Thomas L. Robertson
Carilion Health System &
Carilion Medical Center
President & CEO
S. Frank Smith
Coastal Coal Co., LLC
Vice President
John B. Williamson III
President and CEO
RGC RESOURCES, INC.
OFFICERS
Frank A. Farmer, Jr.
Chairman of the Board
John B. Williamson, III
President and CEO
Roger L. Baumgardner
Vice President
Secretary and Treasurer
Howard T. Lyon
Controller & Assistant Treasurer
Dale P. Moore
Assistant Vice President
& Assistant Secretary
ROANOKE GAS COMPANY
OFFICERS
John B. Williamson, III
Chairman & CEO
Arthur L. Pendleton
President and COO
Roger L. Baumgardner
Vice President
Secretary and Treasurer
J. David Anderson
Assistant Sec. & Assistant Treas.
Richard F. Pevarski
Vice President
Operations and Marketing
Jane N. O'Keeffe
Vice President
Human Resources
BLUEFIELD GAS COMPANY
BOARD OF DIRECTORS
Roger L. Baumgardner
Vice President, Secretary & Treasurer
Arthur L. Pendleton
President & COO
John C. Shott (thru 3/31/99)
Paper Supply Company
President
Scott H. Shott
Paper Supply Company
Secretary & Treasurer
John B. Williamson III
Chairman & CEO
OFFICERS
John B. Williamson, III
Chairman and CEO
Arthur L. Pendleton
President and COO
Roger L. Baumgardner
Vice President
Secretary and Treasurer
DIVERSIFIED ENERGY COMPANY
BOARD OF DIRECTORS
Roger L. Baumgardner
Vice President, Secretary & Treasurer
Frank T. Ellett
Virginia Truck Center, Inc.
President
Arthur L. Pendleton
Roanoke Gas Company
President & COO
S. Frank Smith
Coastal Coal Co., LLC
Vice President
John B. Williamson III
Chairman & CEO
OFFICERS
John B. Williamson III
Chairman & CEO
John S. D'Orazio
President & COO
Roger L. Baumgardner
Vice President
Secretary & Treasurer
40
CORPORATE INFORMATION
Corporate Office
RGC Resources, Inc.
519 Kimball Avenue, N.E.
PO Box 13007
Roanoke, VA 24030
(540) 777-4GAS (4427)
Fax (540) 777-2636
Auditors
Deloitte & Touche LLP
1100 Carillon
227 West Trade Street
Charlotte, NC 28202-1675
Common Stock Transfer Agent, Registrar, Dividend Disbursing Agent & Dividend
Reinvestment Agent First Union National Bank of North Carolina First Union
Customer Information Center Corporate Trust Client Services NC-1153 1525 West
W.T. Harris Boulevard - 3C3 Charlotte, NC 28288-1153
Common Stock
RGC Resources' common stock is listed on the Nasdaq National Market under the
trading symbol RGCO.
Direct Deposit Of Dividends &
Safekeeping of Stock Certificates
Shareholders can have their cash dividends deposited automatically into
checking, saving or money market accounts. The shareholder's financial
institution must be a member of the Automated Clearing House. Also, RGC
Resources offers safekeeping of stock certificates for shares enrolled in the
dividend reinvestment plan. For more information about these shareholder
services, please contact the Transfer Agent, First Union National Bank of North
Carolina.
10-K Report
A copy of RGC Resources, Inc. latest annual report to the Securities and
Exchange Commission on Form 10-K will be provided without charge upon written
request to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
RGC Resources, Inc.
PO Box 13007
Roanoke, VA 24030
Shareholder Inquiries
Questions concerning shareholder accounts, stock transfer requirements,
consolidation of accounts, lost stock certificates, safekeeping of stock
certificates, replacement of lost dividend checks, payment of dividends, direct
deposit of dividends, initial cash payments, optimal cash payments and name or
address changes should be directed to the Transfer Agent, First Union National
Bank. All other shareholder questions should be directed to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
RGC Resources, Inc.
PO Box 13007
Roanoke, VA 24030
Financial Inquiries
All financial analysts and professional investment managers should direct their
questions and requests for financial information to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
RGC Resources, Inc.
PO Box 13007
Roanoke, VA 24030
Access up-to-date information on
RGC Resources and its subsidiaries at www.rgcresources.com
RGC Resources (Symbol)
Trading on NASDAQ as RGCO
Transfer Agent and Dividend Disbursing Agent:
First Union National Bank of North Carolina
First Union Customer Information Center
Corporate Trust Client Services NO-1153
1525 West W. T. Harris Boulevard - 3C3
Charlotte, North Carolina 28288-1153
1-800-829-8432