[symbol] RGC Resources
Natural Gas
Propane
Applications
GIS
HVAC
2000 Annual Report
Raising the Bar
<PAGE>
MISSION STATEMENT
RGC Resources provides superior customer and shareholder value as a
preferred provider of energy and diversified products and services in its
selected market areas.
PRODUCTS AND MARKETS
[OUTLINE OF VIRGINIA AND WEST VIRGINIA]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Product Division Market Territory
Natural Gas Roanoke Gas Natural gas sales & service Virginia
Bluefield Gas Natural gas sales & service West Virginia
Propane Highland Propane Propane sales & service VA. & W. VA.
Applications Application Resources Information System Services National
GIS GIS Resources Global Positioning Systems, National
Geographic Information
Systems - mapping
Information services
HVAC Highland/Cox Heating, ventilation and West Virginia
air conditioning
</TABLE>
Mission Statement IFC
Financial Highlights 1
Shareholders Letter 2
Natural Gas 4
Diversified Energy Company 6
RGC Ventures 8
Selected Financial Data 9
Managements Discussion and Analysis 10
Directors and Officers 20
Corporate Info IBC
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Years Ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue - Natural Gas $ 55,685,168 $ 48,619,143 $ 51,857,052
Operating Revenue - Propane $ 11,246,152 $ 8,469,728 $ 7,530,040
Energy Marketing Revenue $ 8,828,492 $ 5,639,783 $ 6,519,467
Other Revenue $ 1,990,183 $ 1,474,055 $ 601,288
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Net Earnings $ 2,873,702 $ 2,883,407 $ 2,726,879
Net Earnings Per Share $ 1.54 $ 1.59 $ 1.60
Dividend Per Share - Cash $ 1.10 $ 1.08 $ 1.06
-------------------------------------------------------------------------------------------------------------------
Number of Customers - Natural Gas 56,067 55,283 53,582
Number of Customers - Propane 15,973 13,832 11,004
Total Natural Gas Deliveries - DTH 11,253,948 10,928,471 11,418,883
Total Propane Sales - Gallons 9,666,772 8,977,524 7,702,384
-------------------------------------------------------------------------------------------------------------------
Total Additions to Plant $ 8,398,388 $ 9,110,603 $ 9,583,661
===================================================================================================================
</TABLE>
[Bar Graph appears here]
1998 1999 2000
Number of Customers Natural Gas 53,582 55,283 56,067
[Bar Graph appears here]
1998 1999 2000
Number of Customers Propane 11,004 13,832 15,973
[Bar Graph appears here]
1998 1999 2000
Dividend Per Share 1.06 1.08 1.10
1
<PAGE>
["We have been busy implementing our key strategy: growing core markets, while
using the holding company structure to develop new products and services focused
around our natural gas and propane delivery assets, expertise and systems."]
Dear Fellow Shareholders
[Picture of John Williamson appears here.]
John B. Williamson, III
President and CEO
I am pleased to report significant progress in our first full year of
operations under a holding company structure. We have been busy implementing our
key strategy: growing core markets, while using the holding company structure to
develop new products and services focused around our natural gas and propane
delivery assets, expertise and systems.
The number of active natural gas customers increased by 1.4%, or
approximately the national average, while our number of propane customers
increased by 15.5%, continuing our fourth year with a double digit propane
customer growth rate. The very slight decline in earnings in 2000 does not mask
the benefits of our progress to shareholders, employees, and customers. In spite
of the last two years having been the warmest back-to-back heating seasons for
our service territory since the 1930s, we have maintained solid earnings,
restructured the Company, increased dividends, financed customer growth, and
implemented several diversification projects.
Net income for the year declined by 3 tenths of one percent from the
prior year's record level, partly as a result of the very mild winter affecting
natural gas and propane usage. However, the major factors impacting net earnings
growth were one-time expenses associated with Year 2000 planning and
implementation, start-up costs and early operating losses associated with
diversification projects, and higher bad debt accruals driven by higher energy
costs to customers. I anticipate that our diversification projects will
contribute to company earnings in 2001.
We are developing our heating, ventilation and air conditioning
diversification efforts as a complement to our propane service, trading as
Highland/Cox Heating and Cooling. We are now offering geographic information and
mapping service to municipal, industrial and utility customers in Virginia and
West Virginia under the trade name GIS Resources. We are also excited about our
new professional service offerings in software development, customization and
business analysis related to utility customer information systems.
We enhanced our core business assets, replacing over ten miles of bare
steel and cast iron mains, further implementing our
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renewal program for older parts of the natural gas distribution system. We
replaced our propane customer information and delivery forecasting software,
allowing for full integration of the accounting and information systems
supporting both natural gas and propane operations. The new software allows our
customer call center to answer both propane and natural gas customer inquiries
while operating from a single user platform. Future innovations in our customer
information systems will address issues related to the increasing complexities
of customer and energy supplier transactions with further deregulation and
implementation of internet-based billing and information services.
I am concerned about the recent rise in energy prices, with natural
gas, propane, heating oil, and crude oil at or near all-time price highs.
Customers have grown accustomed to very low energy costs, even as the overall
economy has been in a phenomenal decade-long growth cycle. We expect to see some
elasticity of demand as our customers adjust their energy use in recognition of
higher prices. In the interest of long term customer relations we are
encouraging conservation and efficient use of energy. On the positive side, the
higher prices are providing significant incentive for increased exploration and
production, and I do not believe there will be material supply problems this
winter.
I am proud of our employees' performance this year, and with their
adjustment to industry changes and our movement to a performance based culture.
We recently formalized a five year labor agreement with our bargaining group
employees representing approximately 25% of our workforce. The agreement
includes provisions for incentive based compensation tied to individual
performance and to the earning performance of the Company. Our other employees,
who were already participating in performance based compensation systems, have
begun to recognize, appreciate and act upon the direct linkage between their
performance, their compensation, and the overall health, growth and value of the
Company. I believe we are building the needed momentum to thrive in the new
century and an increasingly new and more complex economy.
I am excited about our industry, our Company, the dramatic changes
taking place, and the opportunities that will develop with these changes. On
behalf of our Board of Directors, I thank you for your continuing interest and
investment in RGC Resources and its family of companies. I look forward to
updating you on the activities of your Company as our management team continues
to raise the bar in service offerings, growth and shareholder value.
Sincerely,
s/John B. Williamson, III
John B. Williamson, III
President and Chief Executive Officer
["In spite of the last two years having been the warmest back-to-back heating
seasons for our service territory since the 1930s, we have maintained solid
earnings, restructured the Company, increased dividends, financed customer
growth, and implemented several diversification projects."]
3
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NATURAL GAS
Art Pendleton
["During the past year the natural gas operation experienced another period of
excellent customer growth as we continued our marketing strategy centered on
maintaining strong trade ally relationships, and exceptional customer service."]
[Picture of Art Pendleton.]
Art Pendleton
Roanoke Gas Company - President & COO
The natural gas companies continue to be the primary core business unit
of RGC Resources, contributing 83% of total net income. Our service territory
serves a thriving economy in Roanoke, Virginia and surrounding areas and also
includes a growing Bluefield, West Virginia market. During the past year the
natural gas operation experienced another period of excellent customer growth as
we continued our marketing strategy centered on maintaining strong trade ally
relationships, and exceptional customer service. Our sales staff has expanded
marketing efforts to include, not only the traditional new construction and
conversion space heating market, but also load building initiatives that focus
on additional uses for natural gas such as water heating, clothes drying,
cooking and manufacturing operations.
Providing timely and accurate information to customers is a key
corporate objective. Our customer service call center has expanded hours of
operation to include evening service. Our new, enhanced customer information and
billing systems offer advanced technologies that provide our customer service
4
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representatives with real time access and additional flexibility in responding
to customer inquiries. We are exceptionally proud of our customer satisfaction
ratings and are very pleased that natural gas continues to be the choice for
comfort and economy.
Many U. S. energy experts consider natural gas the ideal energy
solution. Our product is abundant in North America, it is clean to use and safe
to transport. Natural gas is perfectly suited to meet our nation's energy needs
today, tomorrow and beyond. Year after year America's natural gas industry
builds on its record of operating one of the safest, most reliable pipeline
delivery systems in the world.
Our trade allies have been very instrumental in assisting us with our
customer growth and new load building initiatives. For the year, our total firm
sales increased 1.9% over last year, from 7.74 MDTH to 7.89 MDTH. Total
interruptible volume increased 5.7% from 3.18 MDTH to 3.36 MDTH. Adding to the
significance of this increased sales volume is the fact that winter weather was
12% warmer than normal. During the year capital expenditures totaled $5,237,911,
which included the addition of 1,267 new services, 10.4 miles of new main, 512
replacement services and 10.7 miles of replacement main piping. Previous year
capital expenses totaled $5,310,000 and included 1,361 new services, 15.4 miles
of new main, 651 replacement services and 12.2 miles of replacement mains.
During the first part of 2000, the price of natural gas in the spot and
futures market increased significantly. Decreased drilling and exploration
resulting from previous low gas prices and increases in the demand of natural
gas contributed to the price increase. Current drilling activity indicators
point to an expectation that domestic production capability will remain strong.
Price signals in the marketplace will encourage additional drilling which will
in turn produce downward price pressure over time. By combining long and short
term gas acquisition contracts, coupled with over 2.9 billion cubic feet of
contracted natural gas storage, the company has created a reliable and
economical gas supply portfolio that allows us to effectively adapt to changing
market conditions.
Our primary operational objectives have focused on raising the bar to
improve the efficiency, reliability and safety of our natural gas distribution
system. We are pleased with our continuing efforts to replace aging pipeline
facilities. This program has resulted in reduced maintenance costs and improved
system integrity. We congratulate our employees for their commitment to industry
best practices for operating facilities in an efficient manner, and most
importantly, in a manner that promotes and emphasizes public safety as well as
safety in the work place.
["We always make sure gas is available when developing town homes because that
is what our clients prefer. They like the warmth from gas heat, the economy of
gas water heaters, and the convenience of gas logs."]
-Rodney Spickard,
Spickard Contracting, Inc.
5
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DIVERSIFIED ENERGY COMPANY
John D'Orazio
[Picture of John D'Orazio.]
John D'Orazio
Diversified Energy Company - President & COO
["Highland Propane continually looks for ways to raise the bar in customer
service and shareholder value."]
Diversified Energy Company is the largest non-regulated affiliate of
the RGC Resources family. Diversified Energy does business in southwestern
Virginia and southern West Virginia as Highland Propane and Highland Energy.
Highland Propane sells and distributes propane to homes and businesses. Highland
Energy is a wholesale marketer of natural gas with customers in both states.
Despite 12% warmer than normal weather and an increase of over 25% in
propane prices, Highland Propane had one of its best years both financially and
in new customer additions. It is clear to see that propane is the energy choice
for many customers who do not have natural gas available to them. For the year
ended September 30, 2000, Highland Propane's total sales were $11,246,152
resulting in net income of $534,973. These sales and net income values compare
to last year of $8,469,728 and $275,726, representing a 94% increase in net
income. Gallons delivered increased also from 8.98 million to 9.67 million for
the year ended September 2000.
This past year marked the fourth year in a row that Highland Propane's
customer growth exceeded 15% with the average growth rate over the last four
years exceeding 25% per year. Highland's customer base grew from 13,832 to
15,973 representing a net gain of 2,141 customers, a 15.5% increase.
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During this past fiscal year, the new tank installations were in excess
of 3,000 making this year the third consecutive year for new installations to
exceed the 3,000 mark. Geographically, Highland continues to see steady growth
in all of its propane divisions and will continue to focus growth along the
interstate corridors in both Virginia and West Virginia.
Propane prices have followed natural gas and crude oil increases.
Propane production comes from crude oil refining and natural gas liquids
extraction. Given the high levels of demand for natural gas and other oil
products, propane production has also benefitted. Even though the replenishment
season began at below normal levels, it quickly grew to normal levels. To
mitigate price volatility, Highland uses a variety of mechanisms such as summer
storage purchases to keep price stable. Highland also uses fixed price
contracts, pre-buys, and cap contracts to maintain an acceptable level of cost
control.
Highland Propane continually looks for ways to raise the bar by
improving service to customers. The commission sales program continues to be
successful and provides employees with incentive to provide excellent customer
service. Highland offers a commission-based pay program for the employees
responsible for delivery of propane as well as for the service technicians.
These commission-based incentives have resulted in significant productivity
gains over a traditional hourly pay plan. This past fiscal year also supported
the installation of a new customer information and billing system. This new
system allows for flexibility of billing multiple services at multiple
locations, provides for more accurate forecasting of customer consumption, and
provides management with summary reports. In addition to these improvements,
Highland is continuing to evaluate the benefits of GIS/GPS mapping systems for
routing and delivery with on-board computers in the delivery fleet for real-time
data accessibility.
Highland Propane's employees work as a team to effectively represent
the Company and provide customers with the services they want. Highland's
management team is also actively involved in the leadership of industry
associations providing the entire propane industry with creative ideas and best
practices. The positive atmosphere that these dedicated employees create will
continue to contribute to Highland's rapid growth into one of the top propane
companies in the industry.
Highland Energy, the natural gas marketing function within Diversified
Energy, also had an excellent growth year. For the year ended September 30,
2000, Highland Energy sold over 2.5 million decatherms (DTH) of natural gas,
representing a 25% increase over the previous year. Many of Highland Energy's
customers saw growth in their own industry resulting in increased production.
The natural gas marketing business is a highly competitive business; however,
Highland is currently evaluating the economic feasibility of marketing
electricity and other energy forms in an expanded geographic market.
[This past year marked the fourth year in a row that Highland Propane's customer
growth exceeded 15% with the average growth rate over the last four years
exceeding 25% per year. ]
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RGC VENTURES
["GIS has rapidly emerged as one of the premier technologies for the
integration and communication of information."]
[Picture of Barry Jones.]
Barry Jones GIS Resources - President and COO
RGC Ventures is the newest member of the RGC Resources, Inc. family.
Ventures is a non-regulated affiliate that is currently involved in several
activities including sales, installation and service of heating, ventilating,
and air conditioning equipment, computer-based mapping, and information systems
applications. RGC Ventures does business under several names in Virginia and
West Virginia. Ventures does business as Highland/Cox Heating and Cooling in
West Virginia with offices in Beckley and Lewisburg, West Virginia; as GIS
Resources with offices in Bluefield, West Virginia and Roanoke, Virginia, and as
Application Resources with an office in Roanoke, Virginia. GIS Resources
provides GIS (geographic information systems) services to clients to integrate
maps and data into a digital form so that geographic information that would
normally require space to store and time to retrieve can be stored digitally.
The result is a comprehensive and versatile digital representation of
information that can be used in a variety of ways. For example, city and county
governments use GIS to manage 911 systems; public safety and healthcare
professionals can analyze crime incidents and patterns, develop safety and
security plans for fire escapes; utilities use it to monitor facilities and
infrastructure; delivery companies use GIS for routing and scheduling; and
marketing professionals can use GIS information to determine appropriate target
markets. GIS has rapidly emerged as one of the premier technologies for the
integration and communication of information.
Application Resources is currently providing information system
services to software providers in the utility industry. These services primarily
consist of design, development, and implementation of customer information
systems.
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<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Years Ended September 30, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 77,749,995 $ 64,202,709 $ 66,507,847 $ 68,484,468 $ 68,767,763
Operating Margin 26,040,519 23,892,521 23,624,462 22,768,976 22,254,719
Operating Earnings 6,915,177 6,649,827 6,428,919 5,840,077 5,372,858
Earnings Before Interest & Taxes 6,816,370 6,576,223 6,291,745 5,754,986 5,276,484
Net Earnings 2,873,702 2,883,407 2,726,879 2,309,880 2,196,672
Net Earnings Per Share 1.54 1.59 1.60 1.54 1.51
Cash Dividends Declared
Per Share 1.10 1.08 1.06 1.04 1.02
Book Value Per Share 15.94 15.36 14.75 13.48 12.86
Average Shares Outstanding 1,863,275 1,814,864 1,701,048 1,503,388 1,455,999
Total Assets 87,407,494 77,789,982 69,134,920 62,593,258 58,921,099
Long-Term Debt
(Less Current Portion) 23,310,522 23,336,614 20,700,000 17,079,000 20,222,124
Stockholders' Equity 29,985,871 28,154,923 26,464,581 20,596,951 18,975,001
Shares Outstanding at Sept. 30 1,881,733 1,832,771 1,794,416 1,527,486 1,475,843
</TABLE>
GENERAL:
The core business of RGC Resources, Inc. is the sale and distribution
of natural gas to approximately 56,100 customers in Roanoke, Virginia, and
Bluefield, Virginia and West Virginia and the surrounding areas. RGC Resources
also sells and distributes propane to approximately 16,000 customers in western
Virginia and southern West Virginia. Natural gas service is provided at rates
and for the terms and conditions of service set forth by the State Corporation
Commission in Virginia and the Public Service Commission in West Virginia. The
Company is experiencing customer growth and plans to meet these growth needs by
attracting adequate investment capital and by maintaining adequate rates.
Propane sales are a significant portion of the consolidated operation
with an annual growth rate that far exceeds the growth in natural gas customers.
Energy conservation and competition from alternative fuels could result in a
decline in the Company's operating earnings.
Roanoke Gas and Bluefield Gas 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 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statements
From time to time, RGC Resources 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;
however, these rate freezes are offset by the application of a Distribution
System Renewal Surcharge in Virginia and stepped-in increments in West Virginia
which allow Roanoke Gas Company and Bluefield Gas Company to recover the cost
associated with non-revenue producing capital investments, (ii) earning on a
consistent basis an adequate return on invested capital; (iii) increasing
expenses and labor costs and availability; (iv) price competition from alternate
fuels; (v) volatility in the price of natural gas and propane; (vi) uncertainty
in the projected rate of growth of natural gas and propane in the Company's
service area; (vii) general economic conditions both locally and nationally;
(viii) developments in deregulation and industry restructuring, and (ix)
fluctuations in heating degree days.
[Bar Graph appears here.]
Comparison of Net Income to Heating Degree Days (HDD)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Net Income $ 2,196,672 $ 2,309,880 $ 2,726,879 $ 2,883,407 $ 2,873,702
Heating Degree Days (HDD) 4,696 4,298 4,054 3,717 3,721
</TABLE>
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CAPITAL RESOURCES AND LIQUIDITY
Roanoke Gas Company's 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 2000 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 2000 were
approximately $8.4 million allocated as follows: $4.6 million for Roanoke Gas
Company, $.7 million for Bluefield Gas Company, $2.5 million for Highland
Propane Company and $.6 million for RGC Ventures. Cash flow from operations
provided approximately $4.5 million in support of capital expenditures, or
approximately 54% of total investment. Historically, consolidated capital
expenditures were $9.1 million in 1999 and $9.6 million in 1998. It is
anticipated that future capital expenditures will be funded with the combination
of internally generated funds, operating earnings, sale of Company equity
securities and issuance of debt.
At September 30, 2000, the Company had available lines of credit for
its short-term borrowing needs totaling $23.5 million, of which $13,295,000 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, 2000, the Company has
$11,180,513 in inventoried natural gas supplies.
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. The
terms of short-term borrowings are negotiable, with average rates of 6.67% in
2000, 5.80% in 1999 and 6.19% in 1998. 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.
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Stockholders' equity increased for the period by $1,830,948, reflecting
an increase of $813,437 in retained earnings, proceeds of $539,286 from new
common stock purchases through the Plan and the Restricted Stock Plan For
Outside Directors and the issuance of $478,225 in stock in the purchase of Cox
Heating and Cooling, Inc.
At September 30, 2000, the Company's consolidated capitalization was
56% equity and 44% debt, compared to 55% equity and 45% debt at September 30,
1999.
Regulatory Affairs
The Company does not currently have any proceeding pending before
either regulatory body. The distribution system renewal surcharge in Virginia
and the stepped-in rates in West Virginia have minimized the need for non-gas
rate changes. The Company will have rate proceedings in both states in 2002. The
Company has been involved in the various generic proceedings that have taken
place before the Virginia State Corporation Commission as well as the West
Virginia Public Service Commission during the past fiscal year. These
proceedings include the establishment of a code of conduct for pilot programs,
development of new affiliate transaction rules, metering and billing issues, and
the development of new rules for practice and procedure.
[Bar graph appears here.]
Capitalization Ratio
1996 1997 1998 1999 2000
Long-Term Debt 52 50 44 45 44
Common Stock Equity 48 50 56 55 56
[Bar graph appears here.]
Total Capitalization (in millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Total Capitalization $ 39,866,548 $ 40,819,075 $ 47,164,581 $ 51,515,819 $ 53,322,485
</TABLE>
12
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RESULTS OF OPERATIONS
Fiscal Year 2000 Compared With Fiscal Year 1999
Operating Revenues - Fiscal 2000 operating revenues for natural gas
increased 14.5% compared with fiscal 1999 primarily due to the increase in the
cost of natural gas. Although the weather was on par with last year, throughput
increased 3.0% due to growth in customers and industrial output.
Operating revenues for propane in fiscal 2000 increased 32.8% over
fiscal 1999 due to a 4.81(cents) increase in unit margins plus a 7.7% increase
in gallons sold associated with customer growth.
Energy marketing revenues were up 56.5% in fiscal 2000 compared to
fiscal 1999 primarily due to the increased usage of three industrial customers
along with a 25.8% increase in natural gas costs.
Other operating revenues were up 35.0% in fiscal 2000 compared to
fiscal 1999 due to the addition of GIS Resources and Highland/Cox Heating and
Cooling.
Cost of Sales - The total cost of natural gas purchased and resold to
customers in fiscal 2000 increased 20.9% based on an increase of 2.0% in volume
and an 18.5% increase in unit cost.
Propane total cost of sales increased 50.5% in fiscal 2000 compared
with fiscal 1999 due to a 7.7% increase in gallons sold and a 39.8% increase in
the unit cost of propane.
Energy marketing cost of sales increased 57.8% in fiscal 2000 as
compared to fiscal 1999 due to a 25.4% increase in decatherms delivered and a
25.8% increase in per decatherm cost.
Other costs of sales increased 4.7% in fiscal 2000 over fiscal 1999.
The costs of sales associated with GIS Resources and Highland/Cox more than
offset the costs associated with the one time coal sale in 1999.
[Graph appears here.]
Natural Gas DTH Delivered (In millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Natural Gas DTH Delivered (DTH) 12,074,747 11,630,016 11,418,883 10,928,471 11,253,948
</TABLE>
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Other Operating Expenses - Operations and maintenance expenses
increased 9.9% and 5.9% respectively in fiscal 2000 over fiscal 1999. Operations
expenses were up $954,936 due mainly to line locations, bad debt expense and
additional expenses associated with GIS Resources and Highland/Cox Heating and
Cooling. Maintenance expenses were more normal as repairs were down in fiscal
1999.
General taxes increased 17.7% in fiscal 2000 as compared to fiscal
1999. Gross receipts and business and occupations taxes were up corresponding to
an increase in revenues. An increase in state valuation tax and additional
payroll and property taxes associated with the new business under RGC Ventures,
Inc. contributed to the additional taxes. Depreciation and amortization
increased $430,963 or 10.8% in fiscal 2000 as compared to fiscal 1999 due to
increases in utility plant, propane tanks and the addition of Highland/Cox plant
and equipment.
Interest Charges - Total interest charges increased 16.5% in fiscal
2000 over fiscal 1999. The gas utility interest was up $162,942 due to
additional borrowings to finance capital additions and higher gas inventory
balances associated with the increased cost of gas. Interest charges on the
propane business were up $160,803 to finance customer growth and plant assets.
An additional $20,809 of interest was associated with the new business under RGC
Ventures.
Income Taxes - Income taxes for fiscal 2000 were down 5.9% compared
with fiscal 1999 due to a reduction in pre-tax income and a higher effective tax
rate in 1999 as a result of nondeductible organizational expenses incurred in
1999 related to the establishment of the holding company.
Net Earnings and Dividends - Net earnings for fiscal 2000 were
$2,873,702 as compared to fiscal 1999 earnings of $2,883,407. The reduction in
earnings in the utility business and the losses in the new ventures were
practically offset by increases in the propane business. Basic earnings per
share of common stock were $1.54 in fiscal 2000 compared with $1.59 in fiscal
1999. Dividends per share of common stock were $1.10 in fiscal 2000 compared
with $1.08 in fiscal 1999.
[RGC Resources is building the needed momentum to thrive in the new century
and in an increasingly more complex economy.]
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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 2.5%.
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.
Energy marketing revenues associated with industrial sales in fiscal
1999 decreased 13.5% as compared to fiscal 1998 due to a 1.5% reduction in sales
volume and a 12.2% reduction in revenue per decatherm as competition in the
energy marketing business extended pressure on pricing.
Other revenues increased 145.1% due to a one-time coal sale to an
electric facility in North Carolina.
Cost of Sales - 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 DTH was $3.75 in
fiscal 1999 and $3.84 in fiscal 1998.
Propane cost of sales increased 6.6% in fiscal 1999 compared to fiscal
1998 primarily as a result of customer growth more than offsetting an 8.5%
reduction in the unit cost of propane.
Energy marketing cost of sales for fiscal 1999 decreased 13.5% as
compared to fiscal 1998 as a direct reduction in the cost of natural gas.
Other costs of sales increased 209.8% due to the one time purchase of
coal for resale.
[Graph appears here.]
Gallons of Propane Delivered (In millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C> <C>
Gallons of Propane Delivered 5,997,912 6,568,066 7,702,384 8,977,524 9,666,772
</TABLE>
15
<PAGE>
Other Operating Expenses - Operation and maintenance expenses decreased
3.6% in fiscal 1999 compared to fiscal 1998. Natural gas operations and
maintenance expenses decreased 10% in response to the warm weather as the
Company redirected its maintenance program from repair to replacement where
applicable. The propane operations and maintenance expenses increased 18.4% as a
result of increased delivery and administrative costs associated with customer
growth.
General taxes decreased 3.6% in fiscal 1999 over fiscal 1998. Although
payroll and property taxes were up $66,984, revenue sensitive taxes were down
$163,998. Depreciation and amortization expenses increased 16.0% in fiscal 1999
compared with fiscal 1998 primarily due to more depreciable plant in service.
Interest Charges - Total interest charges for the 1999 fiscal period
were down $11,869 or .6% from fiscal 1998. On the gas utilities, interest
expense was down $148,294 due to an approximately $1,000,000 reduction in
average daily balance of short-term debt and a reduction in short-term borrowing
rates. Interest charges on the propane business were up $136,425 due to
additional tanks and transportation equipment associated with customer growth.
Income Taxes - Income taxes for fiscal 1999 were up 9.5% compared with
fiscal 1998 based on a 7.1% increase in pre-tax income and a higher effective
tax rate due to nondeductible organizational expenses incurred in 1999 related
to the establishment of the holding company.
Net Earnings and Dividends - Net earnings for fiscal 1999 were
$2,883,407 as compared with $2,726,879 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.
[Bar graph appears here.]
Number of Shares Issued (In millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Number of Shares Issued 1,475,843 1,527,486 1,794,416 1,832,771 1,881,733
</TABLE>
16
<PAGE>
Impact of Inflation
The cost of natural gas represented approximately 70% for fiscal 2000,
67% for fiscal 1999 and 68% for fiscal 1998 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.
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.
New Accounting Standard
See footnote #1 of the financial statements for the impact of adoption
of SFAS 133.
[The RGC Resources team will continue to raise the bar in service
offerings, growth, and shareholder value.]
17
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF GAS SALES AND STATISTICS
Years Ended September 30, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Residential Sales $ 32,605,568 $ 28,152,236 $ 30,396,540 $ 32,595,261 $ 33,981,835
Commercial Sales 20,270,890 17,812,922 18,764,195 19,879,180 20,219,289
Interruptible Sales 859,504 646,256 695,279 3,892,301 4,569,766
Transportation Gas Sales 1,784,508 1,776,049 1,715,032 1,107,922 943,215
Backup Services 10,979 89,061 97,552 173,655 190,310
Late Payment Charges 112,210 108,340 156,634 157,369 135,838
Miscellaneous Gas Utility Revenue 41,509 34,279 31,820 36,493 27,154
Propane 11,246,152 8,469,728 7,530,040 7,205,645 5,703,466
Energy Marketing 8,828,492 5,639,783 6,519,467 2,869,514 2,433,503
Other 1,990,183 1,474,055 601,288 567,128 563,387
-------------------------------------------------------------------------------
Total $ 77,749,995 $ 64,202,709 $ 66,507,847 $ 68,484,468 $ 68,767,763
NET INCOME $ 2,873,702 $ 2,883,407 $ 2,726,879 $ 2,309,880 $ 2,196,672
-------------------------------------------------------------------------------
DTH DELIVERED:
Residential 4,572,256 4,528,752 4,861,127 5,024,492 5,543,688
Commercial 3,315,915 3,198,766 3,389,010 3,484,513 3,666,479
Interruptible 177,387 164,348 182,110 1,030,329 1,183,290
Transportation Gas 3,186,497 3,021,229 2,967,227 2,059,518 1,641,252
Backup Service 1,893 15,376 19,409 31,164 40,038
-------------------------------------------------------------------------------
Total 11,253,948 10,928,471 11,418,883 11,630,016 12,074,747
GALLONS DELIVERED (PROPANE) 9,666,772 8,977,524 7,702,384 6,568,066 5,997,912
HEATING DEGREE DAYS 3,721 3,717 4,054 4,298 4,696
NUMBER OF CUSTOMERS:
Natural Gas
Residential 50,520 49,860 48,265 47,539 46,007
Commercial 5,502 5,379 5,272 5,181 5,043
Interruptible and Interruptible
Transportation Service 45 44 45 43 44
-------------------------------------------------------------------------------
Total 56,067 55,283 53,582 52,763 51,094
Propane 15,973 13,832 11,004 8,829 6,410
-------------------------------------------------------------------------------
Total Customers 72,040 69,115 64,586 61,592 57,504
GAS ACCOUNT (DTH):
Natural Gas Available 11,933,719 11,525,469 11,883,769 12,273,858 12,704,230
Natural Gas Deliveries 11,253,948 10,928,471 11,418,883 11,630,016 12,074,747
Storage - LNG 123,002 136,338 73,381 112,868 150,485
Company Use And Miscellaneous 47,325 62,189 40,127 52,317 57,524
System Loss 509,444 398,471 351,378 478,657 421,474
-------------------------------------------------------------------------------
Total Gas Available 11,933,719 11,525,469 11,883,769 12,273,858 12,704,230
TOTAL ASSETS $ 87,407,494 $ 77,789,982 $ 69,134,920 $ 62,593,258 $ 58,921,099
LONG-TERM OBLIGATIONS $ 23,310,522 $ 23,336,614 $ 20,700,000 $ 17,079,000 $ 20,222,124
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION STATISTICS
Years Ended September 30, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK:
Shares Issued 1,881,733 1,832,771 1,794,416 1,527,486 1,475,843
Net Earnings Per Share $ 1.54 $ 1.59 $ 1.60 $ 1.54 $ 1.51
Dividends Paid Per Share (Cash) $ 1.10 $ 1.08 $ 1.06 $ 1.04 $ 1.02
Dividends Paid Out Ratio 71.4% 67.9% 66.3% 67.5% 67.5%
Number of Shareholders 1,747 1,796 1,836 1,853 1,713
------------------------------------------------------------------------------
CAPITALIZATION RATIOS:
Long-Term Debt, Including
Current Maturities 43.8 45.3 43.9 49.5 52.4
Common Stock And Surplus 56.2 54.7 56.1 50.5 47.6
------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
------------------------------------------------------------------------------
Long-Term Debt, Including
Current Maturities $ 23,336,614 $ 23,360,896 $ 20,700,000 $ 20,222,124 $ 20,891,547
Common Stock And Surplus 29,985,871 28,154,923 26,464,581 20,596,951 18,975,001
------------------------------------------------------------------------------
Total Capitalization Plus
Current Maturities $ 53,322,485 $ 51,515,819 $ 47,164,581 $ 40,819,075 $ 39,866,548
==============================================================================
</TABLE>
MARKET PRICE AND DIVIDEND INFORMATION
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.
<TABLE>
<CAPTION>
Fiscal Year Ended High Low Cash Dividend
September 30 Declared
---------------------------------------------------------------------------------
2000
---------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 23.125 $ 19.500 $ 0.275
Second Quarter 22.500 19.750 0.275
Third Quarter 21.125 15.813 0.275
Fourth Quarter 19.750 17.000 0.275
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
</TABLE>
At September 30, 2000 and 1999, respectively, the company had 1,747 and
1,796 common shareholders of record.
19
<PAGE>
RGC RESOURCES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
RGC Resources, Inc. and Roanoke Gas Company
<S> <C> <C> <C> <C> <C> <C>
Lynn D. Avis Abney S. Boxley III Frank T. Ellett Frank A. Farmer, Jr.
Avis Construction Co., Inc. Boxley Co., Inc. Virginia Truck Center, Inc. Chairman Of The Board
Chairman Of The Board President & CEO President
J. Allen Layman Thomas L. Robertson S. Frank Smith John B. Williamson III
R & B Communications, Inc. Carilion Health System & Coastal Coal Co., LLC President & CEO
President & CEO Carilion Medical Center Vice President
President & CEO
</TABLE>
Bluefield Gas Company Diversified Energy Company &
RGC Ventures, Inc.
Roger L. Baumgardner
Vice President, Secretary Roger L. Baumgardner
& Treasurer Vice President, Secretary
& Treasurer
Frank A. Farmer, Jr.
RGC Resources, Inc. Frank T. Ellett
Chairman Of The Board Virginia Truck Center, Inc.
President
Arthur L. Pendleton
President & COO Frank A. Farmer, Jr.
RGC Resources, Inc.
Scott H. Schott Chairman Of The Board
Paper Supply Company
Secretary & Treasurer Arthur L. Pendleton
Roanoke Gas Company
John B. Williamson President & COO
Chairman & CEO
S. Frank Smith
Coastal Coal Co., LLC
Vice President
John B. Williamson III
Chairman & CEO
<TABLE>
<CAPTION>
OFFICERS
RGC Resources, Inc.
<S> <C> <C> <C> <C> <C> <C>
Frank A. Farmer, Jr. Roger L. Baumgardner Howard T. Lyon John B. Williamson, III
Chairman Of The Board Vice President, Secretary Controller & Assistant President & CEO
Treasurer Treasurer
Dale P. Moore
Assistant Vice President &
Assistant Secretary
</TABLE>
Roanoke Gas Company Bluefield Gas Company Diversified Energy
Company & RGC
John B. Williamson, III John B. Williamson, III Ventures, Inc.
Chairman & CEO Chairman & CEO
John B. Williamson, III
Arthur L. Pendleton Arthur L. Pendleton Chairman & CEO
President & COO President & COO
John S. D'Orazio
Roger L. Baumgardner Roger L. Baumgardner President & COO
Vice President, Secretary Vice President, Secretary
& Treasurer & Treasurer Roger L. Baumgardner
Vice President, Secretary
Jane N. O'Keeffe & Treasurer
Vice President Human Resources
Richard F. Pevarski
Vice President Operations
& Marketing
J. David Anderson
Assistant Secretary &
Assistant Treasurer
20
<PAGE>
CORPORATE INFORMATION
Corporate Office
RGC Resources, Inc.
519 Kimball Avenue, N.E.
P.O. 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 & 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.
P.O. 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.
P.O. Box 13007
Roanoke, VA 24030
(540) 777-3855
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.
P.O. Box 13007
Roanoke, VA 24030
Access up-to-date information on RGC Resources and its subsidiaries at
www.rgcresources.com
<PAGE>
RGC Resources, Inc.
Trading on NASDAQ as RGCO
519 Kimball Avenue, N.E.
P. O. Box 13007
Roanoke, VA 24030
(540) 777-4427
www.rgcresources.com
<PAGE>
RGC Resources, Inc.
and Subsidiaries
Independent Auditors' Report
Consolidated Financial Statements
Years Ended September 30, 2000, 1999 and 1998
<PAGE>
TABLE OF CONTENTS
-------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 2-3
Consolidated Statements of Earnings 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-21
<PAGE>
Deloitte & Touche
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, 2000 and 1999, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period then ended in conformity with accounting
principles generally accepted in the United States of America.
s/Deloitte & Touche LLP
October 27, 2000
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
ASSETS 2000 1999
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 721,249 $ 139,501
Accounts receivable, less allowance for doubtful
accounts of $314,081 in 2000 and $229,238 in 1999 6,251,248 6,306,117
Inventories 12,421,327 8,363,199
Prepaid income taxes 464,299 430,992
Deferred income taxes 1,836,581 1,962,448
Underrecovery of gas costs 888,687 -
Other 430,307 572,154
-------------- -------------
Total current assets 23,013,698 17,774,411
-------------- -------------
UTILITY PLANT:
In service 78,780,014 74,710,899
Accumulated depreciation and amortization (28,765,599) (26,499,546)
-------------- -------------
In service, net 50,014,415 48,211,353
-------------- -------------
Construction work-in-progress 1,562,138 1,425,918
-------------- -------------
Total utility plant, net 51,576,553 49,637,271
-------------- -------------
NON-UTILITY PROPERTY:
Non-utility property 16,393,264 13,463,990
Accumulated depreciation and amortization (5,044,294) (3,984,241)
-------------- -------------
Total non-utility property, net 11,348,970 9,479,749
-------------- -------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization 1,014,509 385,659
Other assets 453,764 512,892
-------------- -------------
Total other assets 1,468,273 898,551
-------------- -------------
TOTAL ASSETS $ 87,407,494 $ 77,789,982
============== =============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 26,092 $ 24,282
Borrowings under lines of credit 13,295,000 6,363,000
Dividends payable 517,827 495,055
Accounts payable 11,003,592 9,206,173
Customer deposits 506,562 546,364
Accrued expenses 3,733,320 4,605,376
Refunds from suppliers - due customers 223,009 26,062
Overrecovery of gas costs - 684,155
------------- ------------
Total current liabilities 29,305,402 21,950,467
------------- ------------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 23,310,522 23,336,614
------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 4,431,643 3,934,489
Deferred investment tax credits 374,056 413,489
------------- ------------
Total deferred credits and other liabilities 4,805,699 4,347,978
------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
CAPITALIZATION:
Stockholders' equity:
Common stock, $5 par value; authorized 10,000,000 shares;
issued and outstanding 1,881,733 and 1,832,771 shares in
2000 and 1999, respectively 9,408,665 9,163,855
Preferred stock, no par; authorized 5,000,000 shares;
no shares issued and outstanding in 2000 and 1999 - -
Capital in excess of par value 10,262,252 9,489,551
Retained earnings 10,314,954 9,501,517
------------- ------------
Total stockholders' equity 29,985,871 28,154,923
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 87,407,494 $ 77,789,982
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas utilities $ 55,685,168 $ 48,619,143 $ 51,857,052
Propane operations 11,246,152 8,469,728 7,530,040
Energy marketing 8,828,492 5,639,783 6,519,467
Other 1,990,183 1,474,055 601,288
--------------- -------------- --------------
Total operating revenues 77,749,995 64,202,709 66,507,847
--------------- -------------- --------------
COST OF SALES:
Gas utilities 35,833,723 29,631,592 32,471,072
Propane operations 5,837,087 3,878,035 3,636,435
Energy marketing 8,673,354 5,496,306 6,354,911
Other 1,365,312 1,304,255 420,967
--------------- -------------- --------------
Total cost of sales 51,709,476 40,310,188 42,883,385
--------------- -------------- --------------
OPERATING MARGIN 26,040,519 23,892,521 23,624,462
--------------- -------------- --------------
OTHER OPERATING EXPENSES:
Operations 10,639,549 9,684,613 9,707,104
Maintenance 1,230,907 1,162,204 1,549,996
General taxes 2,851,526 2,423,480 2,515,079
Depreciation and amortization 4,403,360 3,972,397 3,423,364
--------------- -------------- --------------
Total other operating expenses 19,125,342 17,242,694 17,195,543
--------------- -------------- --------------
OPERATING EARNINGS 6,915,177 6,649,827 6,428,919
--------------- -------------- --------------
OTHER DEDUCTIONS, NET (98,807) (73,604) (137,174)
--------------- -------------- --------------
EARNINGS BEFORE INTEREST AND INCOME TAXES 6,816,370 6,576,223 6,291,745
--------------- -------------- --------------
INTEREST CHARGES 2,428,396 2,083,842 2,095,711
--------------- -------------- --------------
EARNINGS BEFORE INCOME TAXES 4,387,974 4,492,381 4,196,034
INCOME TAXES 1,514,272 1,608,974 1,469,155
--------------- -------------- --------------
NET EARNINGS $ 2,873,702 $ 2,883,407 $ 2,726,879
=============== ============== ==============
BASIC AND DILUTED EARNINGS PER SHARE $ 1.54 $ 1.59 $ 1.60
=============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 1,863,275 1,814,864 1,701,048
=============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 1,867,138 1,818,541 1,706,902
=============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Capital in Total
Common Excess of Retained Stockholders'
Stock Par Value Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
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
Net earnings - - 2,873,702 2,873,702
Cash dividends declared ($1.10 per share) - - (2,060,265) (2,060,265)
Issuance of common stock (48,962 shares) 244,810 772,701 - 1,017,511
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2000 $ 9,408,665 $ 10,262,252 $ 10,314,954 $ 29,985,871
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,873,702 $ 2,883,407 $ 2,726,879
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 4,538,635 4,131,688 3,577,872
Loss (gain) on asset disposition 17,908 (3,277) 40,380
Change in over/under recovery of gas costs (1,572,842) (585,674) 1,857,286
Deferred taxes and investment tax credits 583,589 292,657 (338,421)
Other noncash items, net (63,140) (45,814) (284,466)
Changes in assets and liabilities which provided (used) cash:
Accounts receivable and customer deposits, net 15,067 (3,108,030) 1,109,365
Inventories (4,058,128) (393,469) (542,149)
Other current assets 108,540 160,568 (735,672)
Accounts payable and accrued expenses 925,363 2,618,262 1,447,079
Refunds from suppliers - due customers 196,947 (59,510) (340,288)
--------------- -------------- --------------
Net cash provided by operating activities 3,565,641 5,890,808 8,517,865
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and non-utility property (7,920,163) (8,940,093) (9,238,614)
Cost of removal of utility plant, net (51,544) (64,209) (70,949)
Proceeds from sales of assets 84,886 73,720 225,159
--------------- -------------- --------------
Net cash used in investing activities (7,886,821) (8,930,582) (9,084,404)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 2,500,000 3,356,000
Retirement of long-term debt (530,865) (9,614) (2,878,124)
Net borrowings (repayments) under lines of credit 6,932,000 1,779,000 (2,545,000)
Proceeds from issuance of common stock 539,286 772,181 4,601,069
Common stock issuance costs - - (246,647)
Cash dividends paid (2,037,493) (1,946,329) (1,752,767)
--------------- -------------- --------------
Net cash provided by financing activities 4,902,928 3,095,238 534,531
--------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 581,748 55,464 (32,008)
CASH AND CASH EQUIVALENTS:
Beginning of year 139,501 84,037 116,045
--------------- -------------- --------------
End of year $ 721,249 $ 139,501 $ 84,037
=============== ============== ==============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid during the year for:
Interest $ 2,566,700 $ 2,036,967 $ 2,148,861
=============== ============== ==============
Income taxes, net of refunds $ 963,990 $ 1,034,623 $ 2,512,897
=============== ============== ==============
Noncash transactions:
In December 1997, the assets of a propane company were acquired 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.
In January 2000, the assets of a heating and air conditioning company were
acquired in exchange for 22,243 shares of stock valued at
$478,225.Subsequent to the acquisition, the Company retired $506,583 in debt
associated with the heating and air conditioning company.
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
RGC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, Diversified Energy Company,
operating as Highland Propane Company and Highland Energy, and RGC
Ventures, Inc., operating as GIS Resources, Highland/Cox Heating and
Cooling and Application Resources. 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 Energy
brokers natural gas to several industrial transportation customers of
Roanoke Gas Company and Bluefield Gas Company. GIS Resources provides
mapping services. Highland/Cox Heating and Cooling provides heating and
cooling service and installation in West Virginia. Application Resources
provides information system services to software providers in the
utility industry.
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 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).
The amounts recorded by the Company as regulatory assets and regulatory
liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Regulatory assets:
Rate case costs 20,772 $ 52,988
Underrecovery of gas costs 888,687 -
Other 66,815 81,731
----------- -----------
Total regulatory assets $ 976,274 $ 134,719
=========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Regulatory liabilities:
Refunds from suppliers - due customers 223,009 $ 26,062
Overrecovery of gas costs - 684,155
----------- -----------
Total regulatory liabilities $ 223,009 $ 710,217
=========== ===========
</TABLE>
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.
Intangible assets are amortized on a straight-line basis over periods
ranging from 10 to 15 years.
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 natural gas and propane.
Natural gas inventories are recorded at average cost charged thereto.
Propane inventories are valued at the lower of average cost or market.
UNBILLED REVENUES - The Company bills its natural gas customers on a
monthly cycle basis. 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, 2000 and 1999 were $1,265,706 and
$919,903, respectively.
INCOME TAXES - Income taxes are accounted for using the asset and
liability method. Under the asset and 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.
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 customers. 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.
9
<PAGE>
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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, 2000. 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.
In June 2000, the FASB issued SFAS No. 138, which amended certain
provisions of SFAS 133. The amendment included, among other things,
expansion of the "normal purchase and sale" exemption for supply
contracts and a redefined definition of interest rate risk to reduce
sources of ineffectiveness.
The Company has entered into futures and swaps for the purpose of
hedging the price of propane in order to provide price stability during
the winter months. Energy commodity forward contracts involve physical
delivery of an energy commodity. Over-the-counter swap agreements
require the Company to receive or make payments based on the difference
between a specified price and the actual price of the underlying
commodity.
The Company will adopt SFAS 133, as amended, as of October 1, 2000. SFAS
133, will not have a material impact on RGC Resources, Inc.'s
consolidated results of operations, financial position, or cash flows
upon adoption.
RECLASSIFICATIONS - Certain reclassifications were made to prior year
balances to conform with current year presentations.
2. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Operating segments are defined as components of an enterprise for which
separate financial information is available and is evaluated regularly
by the chief decision maker in deciding how to allocate resources in
assessing performance.
The reportable segments of the Company disclosed herein are as follows:
GAS UTILITIES - 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 OPERATIONS - 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.
ENERGY MARKETING - The energy marketing segment generates revenue
through the sale of natural gas to industrial transportation customers
of Roanoke Gas Company and Bluefield Gas Company.
10
<PAGE>
PARENT AND OTHER - The other segment includes the heating and cooling
operations, mapping services, information system services and certain
corporate adjustments.
Information related to the segments of the Company is detailed below:
<TABLE>
<CAPTION>
Gas Propane Energy Parent Consolidated
Utilities Operations Marketing and Other Total
<S> <C> <C>
For the year ended
September 30, 2000:
Operating revenues $ 55,685,168 $ 11,246,152 $ 8,828,492 $ 1,990,183 $ 77,749,995
Operating margin 19,851,445 5,409,065 155,138 624,871 26,040,519
Operations,
maintenance and
general taxes 11,288,679 2,905,186 11,449 516,668 14,721,982
Depreciation and
amortization 3,156,936 1,178,567 - 67,857 4,403,360
Interest charges 1,963,791 443,796 - 20,809 2,428,396
Earnings before
income taxes 3,397,456 862,812 143,689 (15,983) 4,387,974
As of September 30, 2000:
Total assets $ 70,970,880 $ 12,660,667 $ 1,161,515 $ 2,614,432 $ 87,407,494
Gross additions to
long-lived assets 5,237,912 2,539,413 - 621,063 8,398,388
Gas Propane Energy Parent Consolidated
Utilities Operations Marketing and Other Total
For the year ended
September 30, 1999:
Total revenues $ 48,619,143 $ 8,469,728 $ 5,639,783 $ 1,474,055 $ 64,202,709
Operating margin 18,987,551 4,591,693 143,477 169,800 23,892,521
Operations,
maintenance and
general taxes 10,367,002 2,894,587 8,708 - 13,270,297
Depreciation and
amortization 3,015,001 957,396 - - 3,972,397
Interest charges 1,800,849 282,993 - - 2,083,842
Earnings before
income taxes 3,739,902 447,910 134,769 169,800 4,492,381
As of September 30, 1999:
Total assets $ 65,789,548 $ 10,871,676 $ 926,984 $ 201,774 $ 77,789,982
Gross additions to
long-lived assets 5,811,671 3,298,932 - - 9,110,603
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Gas Propane Energy Parent Consolidated
Utilities Operations Marketing and Other Total
<S> <C> <C> <C> <C> <C> <C>
For the year ended
September 30, 1998:
Operating revenues $ 51,857,052 $ 7,530,040 $ 6,519,467 $ 601,288 $ 66,507,847
Operating margin 19,385,980 3,893,605 164,556 180,321 23,624,462
Operations,
maintenance and
general taxes 11,392,013 2,379,965 201 - 13,772,179
Depreciation and
amortization 2,806,278 617,086 - - 3,423,364
Interest charges 1,949,143 146,568 - - 2,095,711
Earnings before
income taxes 3,139,175 712,183 164,355 180,321 4,196,034
As of September 30, 1998:
Total assets $ 60,586,015 $ 8,038,593 $ 510,312 $ - $ 69,134,920
Gross additions to
long-lived assets 5,892,438 3,691,223 - - 9,583,661
</TABLE>
During 2000, 1999 and 1998, no single customer accounted for more than
five percent of the Company's sales. No accounts receivable from any
customer exceeded five percent of the Company's total accounts
receivable at September 30, 2000 and 1999.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the changes in the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Balances, beginning of year $ 229,238 $ 202,652 $ 368,345
Provision for doubtful accounts 528,382 234,705 481,297
Recoveries of accounts written off 160,310 208,584 188,309
Accounts written off (603,849) (416,703) (835,299)
------------- ----------- --------------
Balances, end of year $ 314,081 $ 229,238 $ 202,652
============= =========== ==============
</TABLE>
12
<PAGE>
4. BORROWINGS UNDER LINES OF CREDIT
A summary of short-term lines of credit follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Lines of credit at year end $ 23,500,000 $ 22,500,000 $ 21,000,000
Outstanding balance at year end 13,295,000 6,363,000 4,584,000
Highest month end balances outstanding 13,295,000 10,364,000 12,929,000
Average month end balances 8,831,000 6,216,000 5,280,000
Average rates of interest during year 6.67% 5.80% 6.19%
Average rates of interest on balances
outstanding at year end 7.05% 5.86% 6.18%
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Roanoke Gas Company:
First Mortgage notes payable, at 7.804%, due July 1, 2008 $ 5,000,000 $ 5,000,000
Collateralized term debentures 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, 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, through April 2005 136,614 160,896
Bluefield Gas Company:
Unsecured note payable, 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 2,500,000
Unsecured note payable, at 7%, with provision for
retirement on December 31, 2007 1,700,000 1,700,000
-------------- --------------
Total long-term debt 23,336,614 23,360,896
Less current maturities (26,092) (24,282)
-------------- --------------
Total long-term debt, excluding current maturities $ 23,310,522 $ 23,336,614
============== ==============
</TABLE>
13
<PAGE>
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,
2000, approximately $6,230,000 of retained earnings were available for
dividends.
The aggregate annual maturities of long-term debt, subsequent to
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Years ending September 30:
<S> <C> <C>
2001 $ 26,092
2002 803,037
2003 130,126
2004 2,157,372
2005 19,987
Thereafter 20,200,000
--------------
Total $ 23,336,614
==============
</TABLE>
6. INCOME TAXES
The details of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Current income taxes:
Federal $ 868,975 $ 1,258,775 $ 1,726,628
State 61,888 57,542 80,949
------------- ------------ ------------
Total current income taxes 930,863 1,316,317 1,807,577
------------- ------------ ------------
Deferred income taxes:
Federal 586,733 313,895 (298,971)
State 36,289 18,196 (17)
------------- ------------ ------------
Total deferred income taxes 623,022 332,091 (298,988)
------------- ------------ ------------
Investment tax credits, net (39,433) (39,434) (39,434)
------------- ------------ ------------
Total income tax expense $ 1,514,452 $ 1,608,974 $ 1,469,155
============= ============ ============
</TABLE>
14
<PAGE>
Income tax expense for the years ended September 30, 2000, 1999 and 1998
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:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Earnings before income taxes $ 4,387,974 $ 4,492,381 $ 4,196,034
============ ============ ============
Computed "expected" income tax expense $ 1,491,911 $ 1,527,410 $ 1,426,652
Increase (reduction) in income tax expense
resulting from:
Amortization of deferred investment tax credits (39,433) (39,434) (39,434)
Other, net 61,794 120,998 81,937
------------ ------------ ------------
Total income tax expense $ 1,514,272 $ 1,608,974 $ 1,469,155
============ ============ ============
</TABLE>
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for uncollectibles $ 118,015 $ 82,898
Accrued pension and medical benefits 1,254,970 1,088,777
Accrued vacation 184,212 174,504
Over/under recovery of gas costs - 233,373
Costs on gas held in storage 423,700 360,062
Other 201,091 55,327
------------- -------------
Total deferred tax assets 2,181,988 1,994,941
------------- -------------
Deferred tax liabilities:
Utility plant basis differences 4,470,376 3,966,982
Over/under recovery of gas costs 306,674 -
------------- -------------
Total deferred tax liabilities 4,777,050 3,966,982
------------- -------------
Net deferred tax liability $ 2,595,062 $ 1,972,041
============= =============
</TABLE>
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.
15
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of funded status:
Funded status $ 383,107 $ 131,349
Unrecognized actuarial gain (1,557,901) (1,397,341)
Unrecognized transition obligation 13,650 119,089
Unrecognized prior service cost 18,881 37,755
Contribution made between measurement date and fiscal
year end 50,000 50,000
------------ -------------
Net pension liability recognized $(1,092,263) $ (1,059,148)
============ =============
Change in projected benefit obligation:
Benefit obligation at beginning of year 7,392,617 7,989,241
Service cost 211,029 239,185
Interest cost 538,265 523,844
Actuarial gain (2,993) (961,328)
Benefit payments (406,432) (398,325)
------------ -------------
Benefit obligation at end of year $ 7,732,486 $ 7,392,617
============ =============
2000 1999
Change in plan assets:
Fair value of plan assets at beginning of year 7,523,966 7,029,755
Actual return on plan assets 839,813 722,536
Employer contribution 158,246 170,000
Benefit payments (406,432) (398,325)
------------ -------------
Fair value of plan assets at end of year $ 8,115,593 $ 7,523,966
============ =============
2000 1999 1998
Components of net periodic pension cost:
Service cost $ 211,029 $ 239,185 $ 157,705
Interest cost 538,265 523,844 444,696
Expected return on plan assets (630,627) (584,472) (523,334)
Amortization of unrecognized transition
obligation 105,439 105,444 105,444
Prior service cost recognized 18,874 18,874 18,874
Recognized gains (51,619) - (81,537)
-------------- ------------ -------------
Net periodic pension cost $ 191,361 $ 302,875 $ 121,848
============== ============ =============
Assumptions used for pension accounting:
Discount rate 7.50% 6.75% 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
</TABLE>
16
<PAGE>
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 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 of September 30, as determined by an independent actuary:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of funded status:
Funded status $(5,577,818) $(5,071,792)
Contribution made between measurement date and year end 353,000 -
Unrecognized actuarial loss 1,475,283 294,361
Unrecognized transition obligation 3,084,900 3,322,200
----------- -----------
Net postretirement benefit liability $ (664,635) $(1,455,231)
=========== ===========
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 6,490,544 $ 5,769,802
Service cost 122,320 118,847
Interest cost 471,927 377,830
Participant contributions 20,289 22,885
Actuarial loss 1,122,417 515,825
Benefit payments (429,902) (314,645)
----------- -----------
Benefit obligation at end of year $ 7,797,595 $ 6,490,544
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,418,752 $ 1,164,820
Actual return on plan assets 18,428 72,902
Employer contributions 1,192,210 472,790
Participant contributions 20,289 22,885
Benefit payments (429,902) (314,645)
----------- -----------
Fair value of plan assets at end of year $ 2,219,777 $ 1,418,752
=========== ===========
2000 1999 1998
Components of net periodic postretirement benefit
cost:
Service cost $ 122,320 $ 118,847 $ 86,436
Interest cost 471,927 377,830 362,179
Amortization of unrecognized transition obligation 237,300 237,300 237,300
Expected return on plan assets (77,143) (68,000) (59,000)
Recognized gains - - (27,532)
----------- ----------- -----------
Net periodic benefit cost $ 754,404 $ 665,977 $ 599,383
=========== =========== ===========
</TABLE>
17
<PAGE>
The weighted average discount rate used for postretirement benefits
accounting was 7.5 percent, 6.75 percent and 7.75 percent for 2000, 1999
and 1998, respectively.
For measurement purposes, 9.0 percent, 8.5 percent and 9 percent annual
rates of increase in the per capita cost of covered benefits (i.e.,
medical trend rate) were assumed for 2000, 1999 and 1998, respectively;
the rates were assumed to decrease gradually to 5.5 percent by the year
2007 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, 2000 by approximately $953,000
or 12 percent, and would increase the aggregate of the service and
interest cost components of net postretirement benefits cost by
approximately $118,000, or 20 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 in 2000, 1999 and 1998, based on 70 percent of
the net participants' basic contributions (from 1 to 6 percent of their
total compensation). The annual cost of the plan was $211,443, $212,344
and $206,766 for 2000, 1999 and 1998, respectively.
8. COMMON STOCK OPTIONS
During 1996, 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. In October 1999, the Plan was amended by the Board of
Directors and ratified by the Company's stockholders to authorize an
additional 50,000 shares to be made available under the Plan.
The aggregate number of shares under option pursuant to the RGC
Resources, Inc. Key Employee Stock Option Plan are as follows:
<TABLE>
<CAPTION>
Weighted
Average Option
Number Exercise Price
of Shares Price Per Share
<S> <C> <C> <C> <C> <C> <C>
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
Options granted 20,000 20.875 -
Options exercised - - -
------------
Options outstanding, September 30, 2000 57,000 $ 19.105 $ 15.500-20.875
============
</TABLE>
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, 2000 and 1999.
18
<PAGE>
The per share weighted-average fair values of stock options granted
during 2000 and 1998 were $3.08 and $2.85, 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.
<TABLE>
<CAPTION>
2000 1998
<S> <C> <C>
Expected dividend yield 5.27% 5.14%
Risk-free interest rate 5.95% 4.33%
Expected volatility 18% 21%
Expected life 10 years 10 years
</TABLE>
The Company uses the intrinsic value method 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:
<TABLE>
<CAPTION>
2000 1998
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 2,831,902 $ 2,697,709
Basic earnings per share $ 1.52 $ 1.58
</TABLE>
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 $92,425, $168,000
and $185,000 in 2000, 1999 and 1998, respectively. The products sold to
the Company include natural gas purchases of approximately $6,093,922,
$5,628,000 and $6,052,000 in 2000, 1999 and 1998, respectively. It is
anticipated that similar services and products will be provided to the
Company in 2001.
10. ENVIRONMENTAL MATTER
Both Roanoke Gas Company 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 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.
19
<PAGE>
11. COMMITMENTS
The Company has short-term contracts with natural gas suppliers
requiring the purchase of approximately 1,414,000 dekatherms of natural
gas at varying prices during the period October 1, 2000 through
September 30, 2001. In addition, the Company has short-term contracts
with propane suppliers requiring the purchase of approximately 3,203,000
gallons of propane during the period October 1, 2000 through September
30, 2001. Management does not anticipate that these contracts will have
a material impact on the Company's fiscal year 2001 consolidated results
of operations.
The Company has entered into futures and swaps to purchase approximately
3.9 million gallons of propane during fiscal 2001. The costs associated
with the these futures and swaps will be expensed during the year ended
September 30, 2001.
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:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
2000 1999
---------------------------- ------------------------------
Carrying Approximate Carrying Approximate
Amounts Fair Value Amounts Fair Value
<S> <C> <C> <C> <C>
Long-term debt $23,336,614 $24,617,929 $23,360,896 $23,662,491
</TABLE>
Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of
September 30, 2000 and 1999 are not necessarily indicative of the
amounts the Company could have realized in current market exchanges.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for the years ended September 30, 2000 and
1999 is summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Operating revenues $ 20,572,193 $ 28,798,491 $ 14,807,323 $ 13,571,988
============= ============= ============= =============
Operating earnings $ 2,465,211 $ 4,782,960 $ 95,440 $ (428,434)
============= ============= ============= =============
Net earnings (loss) $ 1,159,165 $ 2,663,707 $ (300,105) $ (649,065)
============= ============= ============= =============
Basic earnings (loss) per
share $ 0.63 $ 1.43 $ (0.16) $ (0.36)
============= ============= ============= =============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 17,930,800 $ 24,509,182 $ 10,828,295 $ 10,934,432
============= ============= ============= =============
Operating earnings (loss) $ 2,051,002 $ 4,738,449 $ 347,860 $ (487,484)
============= ============= ============= =============
Net earnings (loss) $ 956,759 $ 2,690,937 $ (73,315) $ (690,974)
============= ============= ============= =============
Basic earnings (loss) per
share $ .53 $ 1.49 $ (.04) $ (.39)
============= ============= ============= =============
</TABLE>
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.
********
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