SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996 Commission file number 0-367
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ROANOKE GAS COMPANY
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(Exact name of registrant as specified in its charter)
Virginia 54-0359895
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
519 Kimball Ave., N.E., Roanoke, VA 24016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 983-3800
-------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- --------------------------- --------------------------
OTC (Nasdaq
Common Stock, $5 Par Value National Market)
- --------------------------- --------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of December 13, 1996. $25,800,589
-----------
<PAGE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at December 13, 1996
- -------------------------- --------------------------------
COMMON STOCK, $5 PAR VALUE 1,484,926 SHARES
- -------------------------- --------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1996 Annual Report to Stockholders are incorporated by
reference into Parts II and IV hereof.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on January 27, 1997 are incorporated by reference into Part III hereof.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment
to its Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROANOKE GAS COMPANY
By: /s/ Roger L. Baumgardner 4/28/97
------------------------ --------
Roger L. Baumgardner Date
Vice President, Secretary and
Treasurer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to its Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/F. A. Farmer, Jr. 4/28/97 President, Chief Executive Officer
- -----------------------------------
Frank A. Farmer, Jr. Date and Director
/s/John B. Williamson, III 4/28/97 Vice President - Rates and Finance
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John B. Williamson, III Date (Principal Financial Officer)
/s/Roger L. Baumgardner 4/28/97 Vice President, Secretary and
- ------------------------------------
Roger L. Baumgardner Date Treasurer (Principal Accounting
Officer)
/s/Lynn D. Avis 4/28/97 Director
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Lynn D. Avis Date
/s/Abney S. Boxley, III 4/28/97 Director
- ------------------------------------
Abney S. Boxley, III Date
/s/Frank T. Ellett 4/28/97 Director
- ------------------------------------
Frank T. Ellett Date
/s/Wilbur L. Hazlegrove 4/28/97 Director
- ------------------------------------
Wilbur L. Hazlegrove Date
Director
- ------------------------------------
W. Bolling Izard Date
/s/J. Allen Layman 4/28/97 Director
- ------------------------------------
J. Allen Layman Date
/s/John H. Parrott 4/28/97 Director
- ------------------------------------
John H. Parrott Date
/s/Thomas L. Robertson 4/28/97 Director
- ------------------------------------
Thomas L. Robertson Date
/s/S. Frank Smith 4/28/97 Director
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S. Frank Smith Date
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit No. Description Page
- ---------- ----------- ----
3 (a) Articles of Incorporation, as amended, of
Roanoke Gas Company (incorporated herein by
reference to Exhibit 19 of the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1992)
3 (b) Bylaws, as amended, of Roanoke Gas Company 29
4 (a) Specimen copy of certificate for Roanoke Gas
Company common stock, $5.00 par value
(incorporated herein by reference to Exhibit
4(a) of the Annual Report on Form 10-K for the
fiscal year ended September 30, 1992)
4 (b) Article I of the Bylaws of Roanoke Gas Company
(incorporated herein by reference to Exhibit 19
of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992)
4 (c) Instruments defining the rights of holders of
long-term debt (incorporated herein by reference
Exhibit 4(c) of the Annual Report on Form 10-K
for the fiscal year ended September 30, 1991)
10 (a) Firm Transportation Agreement between East
Tennessee Natural Gas Company and Roanoke Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(a) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (b) Interruptible Transportation Agreement between
East Tennessee Natural Gas Company and Roanoke
Gas Company dated July 1, 1991 (incorporated
herein by reference to Exhibit 10(b) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (c) NTS Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas
Company dated October 25, 1994 (incorporated
herein by reference to Exhibit 10(c) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (d) SIT Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas
Company dated November 30, 1993 (incorporated
herein by reference to Exhibit 10(d) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (e) FSS Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas Company
dated November 1, 1993 (incorporated herein by
reference to Exhibit 10(e) of the Annual Report on
Form 10-K for the fiscal year ended September 30, 1994)
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
10 (f) FTS Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(f) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (g) SST Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(g) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (h) ITS Service Agreement between Columbia Gas
Transmission Corporation and Roanoke Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(h) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (i) FTS-1 Service Agreement between Columbia Gulf
Transmission Company and Roanoke Gas Company
dated November 1, 1993 (incorporated herein by
reference to Exhibit 10(i) of the Annual Report
on Form 10-K for the fiscal year ended
September 30, 1994)
10 (j) ITS-1 Service Agreement between Columbia Gulf
Transmission Company and Roanoke Gas Company
dated November 1, 1993 (incorporated herein by
reference to Exhibit 10(j) of the Annual Report
on Form 10-K for the fiscal year ended
September 30, 1994)
10 (k) Gas Transportation Agreement, for use under
FT-A rate schedule, between Tennessee Gas
Pipeline Company and Roanoke Gas Company dated
November 1, 1993 (incorporated herein by
reference to Exhibit 10(k) of the Annual Report
on Form 10-K for the fiscal year ended
September 30, 1994)
10 (l) Gas Transportation Agreement, for use under IT
rate schedule, between Tennessee Gas Pipeline
Company and Roanoke Gas Company dated September
1, 1993 (incorporated herein by reference to
Exhibit 10(l) of the Annual Report on Form 10-K
for the fiscal year ended September 30, 1994)
10 (m) Gas Storage Contract under rate schedule FS
(Production Area) Bear Creek II between
Tennessee Gas Pipeline Company and Roanoke Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(m) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
10 (n) Gas Storage Contract under rate schedule FS
(Production Area) Bear Creek I between
Tennessee Gas Pipeline Company and Roanoke Gas
Company dated September 1, 1993 (incorporated
herein by reference to Exhibit 10(n) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (o) Certificate of Public Convenience and Necessity
for Bedford County dated February 21, 1966
(incorporated herein by reference to Exhibit
10(o) of Registration Statement No. 33-36605,
on Form S-2, filed with the Commission on
August 29, 1990, and amended by Amendment No.
1, filed with the Commission on September 19,
1990)
10 (p) Certificate of Public Convenience and Necessity
for Roanoke County dated October 19, 1965
(incorporated herein by reference to
Exhibit 10(p) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (q) Certificate of Public Convenience and Necessity
for Botetourt County dated August 30, 1966
(incorporated herein by reference to
Exhibit 10(q) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (r) Certificate of Public Convenience and Necessity
for Montgomery County dated July 8, 1985
(incorporated herein by reference to
Exhibit 10(r) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (s) Certificate of Public Convenience and Necessity
for Tazewell County dated March 25, 1968
(incorporated herein by reference to
Exhibit 10(s) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
10 (t) Certificate of Public Convenience and Necessity
for Franklin County dated September 8, 1964
(incorporated herein by reference to
Exhibit 10(t) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (u) Ordinance of the Town of Bluefield, Virginia
dated August 25, 1986 (incorporated herein by
reference to Exhibit 10(u) of Registration
Statement No. 33-36605, on Form S-2, filed with
the Commission on August 29, 1990, and amended
by Amendment No. 1, filed with the Commission
on September 19, 1990)
10 (v) Ordinance of the City of Bluefield, West
Virginia dated as of August 23, 1979
(incorporated herein by reference to
Exhibit 10(v) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (w) Resolution of the Council for the Town of
Fincastle, Virginia dated June 8, 1970
(incorporated herein by reference to
Exhibit 10(f) of Registration Statement
No. 33-11383, on Form S-4, filed with the
Commission on January 16, 1987)
10 (x) Resolution of the Council for the Town of
Troutville, Virginia dated November 4, 1968
(incorporated herein by reference to
Exhibit 10(g) of Registration Statement
No. 33-11383, on Form S-4, filed with the
Commission on January 16, 1987)
10 (y)* Consulting Agreement between Albert W. Buckley
and Roanoke Gas Company dated February 20, 1992
(incorporated herein by reference to
Exhibit 10(b)(b) of the Annual Report on
Form 10-K for the fiscal year ended
September 30, 1992)
10 (z)* Consulting Contract between A. Anson Jamison
and Roanoke Gas Company dated March 27, 1990
(incorporated herein by reference to
Exhibit 10(c)(c) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
10 (a) (a) Contract between Roanoke Gas Company and
Diversified Energy Services, Inc. dated
December 18, 1978 (incorporated herein by
reference to Exhibit 10(e)(e) of Registration
Statement No. 33-36605, on Form S-2, filed with
the Commission on August 29, 1990, and amended
by Amendment No. 1, filed with the Commission
on September 19, 1990)
10 (b) (b) Service Agreement between Bluefield Gas Company
and Commonwealth Public Service Corporation
dated January 1, 1981 (incorporated herein by
reference to Exhibit 10(f)(f) of Registration
Statement No. 33-36605, on Form S-2, filed with
the Commission on August 29, 1990, and amended
by Amendment No. 1, filed with the Commission
on September 19, 1990)
10 (c) (c)* Retirement Payment Agreement between Arthur T.
Ellett and Roanoke Gas Company dated April 6,
1972 (incorporated herein by reference to
Exhibit 10(g)(g) of Registration Statement
No. 33-36605, on Form S-2, filed with the
Commission on August 29, 1990, and amended by
Amendment No. 1, filed with the Commission on
September 19, 1990)
10 (d) (d)* Consulting Services Agreement between Edward C.
Dunbar and Roanoke Gas Company dated
February 25, 1991 (incorporated herein by
reference to Exhibit 10(h)(h) of the Annual
Report on Form 10-K for the fiscal year ended
September 30, 1991)
10 (e) (e)* Consultation Contract between Gordon C. Willis
and Roanoke Gas Company dated April 29, 1991
(incorporated herein by reference to
Exhibit 10(i)(i) of the Annual Report on
Form 10-K for the fiscal year ended
September 30, 1991)
10 (f) (f) Gas Storage Contract under rate schedule FS
(Market Area) Portland between Tennessee Gas
Pipeline Company and Roanoke Gas Company dated
November 1, 1993 (incorporated herein by
reference to Exhibit 10(k)(k) of the Annual
Report on Form 10-K for the fiscal year ended
September 30, 1994)
10 (g) (g) FTS Service Agreement between Columbia Gas
Transmission Corporation and Bluefield Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(l)(l) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
10 (h) (h) ITS Service Agreement between Columbia Gas
Transmission Corporation and Bluefield Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(m)(m) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (i) (i) FSS Service Agreement between Columbia Gas
Transmission Corporation and Bluefield Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(n)(n) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (j) (j) SST Service Agreement between Columbia Gas
Transmission Corporation and Bluefield Gas
Company dated November 1, 1993 (incorporated
herein by reference to Exhibit 10(o)(o) of the
Annual Report on Form 10-K for the fiscal year
ended September 30, 1994)
10 (k) (k) FTS-1 Service Agreement between Columbia Gulf
Transmission Company and Bluefield Gas Company
dated November 1, 1993 (incorporated herein by
reference to Exhibit 10(p)(p) of the Annual
Report on Form 10-K for the fiscal year ended
September 30, 1994)
10 (l) (l)* Roanoke Gas Company Key Employee Stock Option
Plan (incorporated herein by reference to
Exhibit 10(q)(q) of the Annual Report on
Form 10-K for the fiscal year ended
September 30, 1995)
10 (m) (m)* Roanoke Gas Company Stock Bonus Plan
(incorporated herein by reference to
Exhibit 10(r)(r) of the Annual Report on
Form 10-K for the fiscal year ended
September 30, 1995)
10 (n) (n) Gas Franchise Agreement between the Town of
Vinton, Virginia, and Roanoke Gas Company dated
July 2, 1996 41
10 (o) (o) Gas Franchise Agreement between the City of
Salem, Virginia, and Roanoke Gas Company dated
July 9, 1996 46
10 (p) (p) Gas Franchise Agreement between the City of
Roanoke, Virginia, and Roanoke Gas Company
dated July 12, 1996 50
13 1996 Annual Report to Stockholders (such
report, except to the extent incorporated
herein by reference, is being furnished for the
information of the Commission only and is not
to be deemed filed as part of this Report on
Form 10-K) 55
<PAGE>
Exhibit No. Description (continued) Page
- ---------- ----------- ----
21 Subsidiaries of the Company (incorporated
herein by reference to Exhibit (22) of
Registration Statement No. 33-36605, on
Form S-2, filed with the Commission on
August 29, 1990, and amended by Amendment
No. 1, filed with the Commission on
September 19, 1990)
23 Accountants' Consent 92
27 Financial Data Schedule 94
________________
*Management contract or compensatory plan or agreement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
RGCO
Roanoke Gas
Bluefield Gas
Highland Propane
1996 ANNUAL REPORT
<PAGE>
SOUTHWEST VIRGINIA AND SOUTHERN WEST VIRGINIA'S
CHOICE FOR COMFORT AND ECONOMY
PROUDLY SERVING:
Beckley New Castle
Bedford Princeton
Blacksburg Pulaski
Bluefield Radford
Bramwell Rainelle
Buchanan Roanoke
Christiansburg Rocky Mount
Fincastle Rupert
Floyd Salem
Fort Chiswell Smith Mountain
Galax Tazewell
Hillsville Troutville
Hinton Vinton
Lewisburg White Sulphur Springs
Lexington Wytheville
Marion AND OTHER AREA
Natural Bridge COMMUNITIES
CORPORATE MISSION STATEMENT
Roanoke Gas Company provides superior customer and stockholder value by being
the preferred choice for safe, dependable, efficient, economical energy and
services in the market it serves.
<PAGE>
CONTENTS
2 Letter To Stockholders
3 Questions Investors Frequently Ask
AN INTERVIEW WITH FRANK A. FARMER, JR., CEO
4 Review Of Operations
7 Management's Discussion & Analysis
12 1996 Financial Highlights
13 Independent Auditors' Report
14 Consolidated Balance Sheets
16 Consolidated Statements Of Earnings
17 Consolidated Statements Of Stockholders' Equity
18 Consolidated Statements Of Cash Flows
20 Notes To Consolidated Financial Statements
31 Summary Of Gas Sales & Statistics
32 Summary of Capitalization Statistics
Notice Of Annual Meeting - BACK COVER
<PAGE>
LETTER TO STOCKHOLDERS
(Photo of Frank A. Farmer, Jr.)
FRANK A. FARMER, JR.
Chairman, President & CEO, Roanoke Gas Company
DEAR STOCKHOLDER:
I am pleased to say that the year ended September 30, 1996, was one of new
records at Roanoke Gas Company with revenues and earnings at all time highs.
Revenues at $69 million were 35 percent greater than last year on 24 percent
colder weather. Earnings were $2.2 million and 24 percent higher than last
year. Earnings per share were $1.51, a 20 percent increase over last year with
the number of shares of stock outstanding increasing by three percent.
The volume of natural gas sold or transported and the amount of propane
delivered also set new records. Total deliveries of MCFs (thousand cubic feet
units) of natural gas was 11.2 million, an increase of 12 percent over 1995.
Deliveries of propane reached to just under 6 million gallons, a 24 percent
increase.
Our dividend record remains strong with 52 years of consecutive quarterly
dividends. I am pleased to say we also raised the dividend rate by two percent
with the February 1996 dividend payment. Our dividend reinvestment and stock
purchase plan remains an attractive feature for our stockholders as reflected
by the fact that 19.4 percent of dividends paid this year were directly
reinvested through the plan by stockholders.
We have successfully negotiated and executed new 20-year franchise
agreements with the Cities of Roanoke and Salem and the Town of Vinton. While
we have continued operations as usual during the two-year lapse in the
franchise agreements, I am pleased we reached full consensus with our major
municipalities for operations within their respective jurisdictional
boundaries.
A survey we commissioned by an independent market research firm in the
spring of 1996 confirmed what our sales and new customer additions imply;
natural gas continues to be the energy of choice in the areas we serve.
Customer growth remains strong, with the number of natural gas customers
increasing by three percent and the number of propane installations growing
by approximately 14 percent.
Our customer and sales growth strategy is three fold. We concentrate
heavily on our saturation program, which means we try to attract homes and
businesses located near existing natural gas mains to connect to the system,
thus allowing us to add customers with a minimum of additional investment.
Slightly over half of our natural gas customer growth this year was
accomplished through this effort. We concentrate our new main extension
efforts either in new subdivisions where we work with developers and builders
who are strongly committed to natural gas appliances, or in areas with
existing homes where the age of the homes and neighborhood surveys indicate
owners are ready to seriously consider replacing existing heating equipment
with natural gas units. In areas where construction density is insufficient
to justify construction of natural gas facilities, we concentrate on propane
sales. We believe we understand how to efficiently provide suburban, semirural,
rural and even mountainous areas with propane service almost as reliable as
pipeline natural gas.
<PAGE>
We continued our efforts at aggressively employing new technology and
management practices for cost control including outsourcing where savings
combined with improved service or efficiencies justify the paradigm shift.
Examples of computerization during the year include implementing new computer
software systems to automate processing work orders and to better track and
control Company assets, installing improved billing estimate programs for when
weather disrupts meter reading and upgrades to our central computer processor
and memory. Examples of outsourcing in-clude printing and mailing customer
bills, distribution system map development and maintenance, reading customer
meters, and installation of customer premises propane tanks. In some instances,
out sourcing allows us to tap into economies of scale such as in the case of
printing customer bills and reading meters. In other situations, outsourcing
allows us to handle peak or seasonal work load demands with less disruption to
the size and utilization rate of the Company's workforce, such as is the case
with pipeline and propane tank installations.
We remain committed to our long-term program to replace all bare steel and
cast iron in the natural gas distribution system to continue to control
maintenance costs and to increase safety and system reliability. We replaced
8.7 miles of bare steel and cast iron piping this year, 3.3 miles greater than
last year.
The 1995-96 winter was the fifth coldest in the 68 years we have been
keeping records and certainly tested our ability to manage gas supplies. I am
pleased to say we not only set a record for volume of deliveries, but we did it
without a single day of supply disruption to a single firm natural gas customer
during a very long and cold winter. The increased investment in our liquefied
natural gas storage facility in Botetourt County, Virginia, in 1994 coupled
with enhancements made to the distribution system in the summer and fall of
1995 and additional interstate pipeline and storage capacities added in 1995
served us well. We annually review our system peak day and peak season gas
load projections to ensure that we are managing our supply and pipeline
capacities to meet customer demand without over investing in facilities or
paying for excess capacity. We are very proud of the successful efforts of
our management team and all of our employees this year, especially during a
very severe winter season.
We remain committed to growing Roanoke Gas Company, to providing quality
service to our customers, to continuing to enhance the value of our stock and
to providing a safe and growth opportunity working environment for our
employees. We certainly appreciate your being a stockholder of the Company and
hope you continue to grow your investment through our dividend reinvestment
and stock purchase program either with reinvested dividends or by using the
cash purchase option available in the plan.
On behalf of our Board of Directors and our Management Team, I once again
extend an invitation for you to join us for a stockholders breakfast and
renewal of acquaintances prior to our Annual Meeting on January 27, 1997. We
look forward to further updating you on recent Company operations during the
meeting.
Sincerely,
(Signature of Frank A. Farmer, Jr.)
FRANK A. FARMER, JR.
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
ROANOKE GAS COMPANY
2
<PAGE>
QUESTIONS INVESTORS FREQUENTLY ASK
An Interview With Frank A. Farmer, Jr., CEO
Q. WHAT IS "UNBUNDLING" IN THE GAS INDUSTRY AND WHAT EFFECT HAS
IT HAD ON ROANOKE GAS COMPANY?
A. Unbundling means that the sale of the commodity (natural gas) is separated
or unbundled from the sale of the transportation of the commodity.
Roanoke Gas Company has unbundled the sale of natural gas to its
interruptible customers and today an interruptible service customer may
buy its transportation or delivery service from Roanoke Gas and purchase
the commodity from a variety of marketing companies. Roanoke Gas Company
has not been adversely affected by unbundling because the Company designed
its transportation rates to realize the same margin per MCF of transported
gas (adjusted for utility and gross receipts tax) as per MCF of gas sold
retail.
Q. WHY WOULD A MARKETER BE ABLE TO SELL THE COMMODITY TO AN
INTERRUPTIBLE CUSTOMER CHEAPER THAN ROANOKE GAS COMPANY?
A. Under State regulations Roanoke Gas Company has to charge an interruptible
customer its system average commodity cost of gas plus a mark up for State
and local government gross receipt taxes and local government utility
taxes. The marketer can purchase spot gas without the gas cost impact of
longer term contracts or supply reservation fees, plus because the
marketer is not legally a utility the price does not include a mark up for
gross receipts tax and local utility taxes.
Q. DO YOU EXPECT FURTHER UNBUNDLING OF NATURAL GAS SERVICE ON THE
COMPANY'S SYSTEM?
A. Yes. Eventually unbundling will occur for firm gas sales as well. The
unbundling process will be more complicated because firm service has to be
backed up by firm delivery capacity on the interstate pipeline system and
peak day supply such as is available from our liquefied natural gas
storage (LNG) facility. Our strategy will be to design our firm
transportation rates so that the utility does not lose margin if a
customer switches from system gas to a marketer's gas. Actually, we see
potential opportunities by providing services such as meter reading,
billing and collecting, delivery imbalance management, andother services
to marketers for a fee. However, we suspect that most homeowners will not
want the hassle of dealing with multiple commodity suppliers and will stay
with the locally known and trusted name.
Q. WHAT IS ROANOKE GAS COMPANY DOING TO PLAN FOR FUTURE CHANGES
IN THE INDUSTRY AND AREA MARKETS?
A. In August, the Company held a strategic opportunity planning retreat with
our entire management team using facilitators from Virginia Tech, where we
explored options and developed a series of short and long range strategic
objectives designed to keep us on top of market and industry opportunities
and conditions. In addition, we are active in American Gas Association
(AGA), National Association of Regulatory Commissions (NARUC),
Southeastern Gas Association (SEGA), and several propane gas association
activities and informational forums and seminars. I am on the Small
Company Coordinating Council of the AGA and on the Board of Directors of
the AGA, with the intent of keeping the Company abreast of what is
happening regionally and nationally.
<PAGE>
Q. HOW DO YOU SEE THE CHANGES IN THE ELECTRIC INDUSTRY IMPACTING
ROANOKE GAS COMPANY?
A. Restructuring of the electric industry is in the very early stages. At
this time, the Federal Energy Regulatory Commission has mandated wholesale
transportation on the electric grid system, but decisions on whether and
when to allow retail unbundling is being left up to the States. We do not
anticipate Virginia being one of the early States to unbundle. However,
we think it will begin with the industrial customers similar to the way it
is progressing in the natural gas industry. We think this may provide
opportunities as well and we are exploring the potential for Roanoke Gas
Company to be a full energy source and services provider.
Q. IN AN INDUSTRY WHERE MERGERS ARE RAPIDLY OCCURRING AND THE
TERMS "CRITICAL MASS AND ECONOMIES OF SCALE" ARE FREQUENTLY USED,
WHAT FUTURE DO YOU SEE FOR ROANOKE GAS COMPANY?
A. I think that the outlook is good for Roanoke Gas Company to remain a
strong independent Company as long as we stay competitive in our prices
and offer quality service. We are a low cost natural gas company compared
to most other gas companies in Virginia. We are outsourcing in areas
where we think we can benefit from economies of scale to control costs.
As the energy markets change, we plan to change with them and to position
ourselves to ensure economical, reliable service to our residential and
small business customers and adequate supply and capacity for the region's
industrial and large scale commercial growth. We may partner with other
energy suppliers or vendors to ensure our customers have access to the
variety of new services that may become available in the industry while
maintaining a locally owned and operated Company responsive to local needs
and concerns.
Q. WHAT ARE YOUR PLANS FOR YOUR RETIREMENT AND HOW WILL THAT
AFFECT ROANOKE GAS COMPANY?
A. I anticipate retiring in calendar 1998. However, I expect to remain on
the Board of Directors and with the Board's approval, serve as Chairman of
the Board for several years. I also expect to remain active in the AGA
and will be Chairman of the Small Company Coordinating Council of the AGA
in 1998. The Board of Directors has established a nominating committee
and one of their functions is succession planning and recommending to the
Board of Directors a nominee to become President and Chief Executive
Officer when I retire. We have three Vice Presidents in the Company and
we feel that we have adequate talent from which to select the next person
to lead the Company. We have a very knowledgeable and experienced Board of
Directors and I expect the transition to a new CEO in 1998 to go smoothly.
1996 ANNUAL REPORT
3
<PAGE>
REVIEW OF OPERATIONS
ROANOKE GAS COMPANY CONTINUES TO
REGARD STORAGE AS AN INTEGRAL COMPONENT
OF ITS GAS SUPPLY PORTFOLIO. HAVING STORAGE
SPACE ALLOWS ROANOKE GAS TO MINIMIZE
GAS COSTS BY PURCHASING AND INJECTING
NATURAL GAS IN THE SUMMER WHEN THE
COMMODITY PRICES ARE TRADITIONALLY LOWER.
FINANCIAL
The Company achieved record earnings in fiscal 1996 with net income of
$2,196,672 or $1.51 per share. This compares to earnings of $1,777,240 or
$1.26 per share for fiscal 1995. The stockholders' investment in the Company
grew by $1,419,829 to $18,975,001 which amounts to $12.86 per share. At
September 30, 1996, the market price of the Company's stock was $17.25 per
share or 134% of book value.
In December, 1995 the directors voted to increase the regular quarterly
dividend to $.255 per share from $.25 per share effective February, 1996. The
current annual dividend of $1.02 per share represents a 5.9% yield on the
current market value of the Company's stock and is a payout ratio of 67.9%
based on earnings in fiscal 1996.
The Company's issuance of $8,000,000 unsecured senior notes payable for
Roanoke Gas Company and $1,300,000 unsecured notes payable for Bluefield Gas
Company have been classified as long-term debt in accordance with the Company's
refinance of current installments of long-term debt and borrowings under lines
of credit on a long-term basis subsequent to fiscal year-end. The Company
increased its equity capitalization by issuing $714,232 in stock through its
Dividend Reinvestment and Stock Purchase Plan.
The Company has unsecured lines of credit through its cash management
system totaling $18,000,000 at interest rates of prime or less. These lines
are subject to annual renewal and do not require compensating balances. The
average month-end balance of short-term debt in 1996 was approximately
$4,453,000, at an average interest rate of approximately 5.84%. The month-end
balance at September 30, 1996 was $6,652,500, at an average interest rate of
5.71%.
Please refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations for additional information on the Company's capital
resources and for an analysis of changes in revenues and expenses.
GAS SUPPLY
The winter of 1995-96 brought much colder than normal weather to the
central and eastern United States. One consequence of the cold weather was to
increase demand for flowing natural gas supplies, resulting in significant
increases in natural gas supply acquisition costs. For fiscal 1996, commodity
indexes relevant to Roanoke Gas Company purchases averaged almost 52% higher
than the previous year.
Roanoke Gas was very pleased with the performance of its natural gas
suppliers during the winter of 95-96. Even under extreme winter weather
conditions all suppliers continued to perform flawlessly. Roanoke Gas continues
to use a mixture of long-term (multi-year), mid-term (seasonal) and short-term
(spot) gas purchase contracts. The Company's objective is to create a reliable
and economical mixture of gas supply contracts with terms that will not limit
the Company's ability to adapt to changing market conditions or additional
regulatory changes. Long-term suppliers currently include Amoco Energy Trading,
Ashland Exploration, Coastal Gas Marketing, Columbia Energy Services, LG&E
Natural Gas and Panenergy Trading Company.
<PAGE>
Roanoke Gas Company continues to regard storage supplies as an integral
component of its gas supply portfolio. The Roanoke and Bluefield operations
combined hold the rights to about 2.8 billion cubic feet (BCF) of natural gas
storage space, up about 0.2 BCF from the previous year. This storage includes
pipeline and third party underground facilities in both the Gulf coast and
Appalachian areas as well as the Company's own liquefied natural gas (LNG)
storage in Botetourt County, Virginia.
Having storage space allows Roanoke Gas to minimize gas costs by purchasing
and injecting natural gas in the summer when the commodity prices are
traditionally lower. The storage gas then acts as winter supply that is both
economical and highly reliable. Roanoke Gas Company participates in pipeline
capacity release programs to further minimize the cost of firm service to its
customers by reselling pipeline capacity not needed during the warmer months.
NONUTILITY OPERATIONS
Total sales by Highland Propane Company for fiscal year 1996 were 5,997,912
gallons, an increase of 24% from 1995 levels on 24% colder weather. Primary
wholesale suppliers to Highland Propane included Exxon, Pratt Propane, EIL
Petroleum and Enron Gas Liquids.
Propane operations are organized into geographic divisions based on areas
of market concentration and location of fuel storage facilities. Current
divisions include Roanoke, Virginia; Southwest Virginia; Bluefield, West
Virginia; and Rainelle, West Virginia. The Company maintains a program of
evaluating additional areas for expansion or potential acquisition of existing
operations.
The Company's capital expenditures for propane operations have been focused
on acquisition of additional customer premises storage tanks to meet growth,
modernization and replacement of the propane delivery fleet, and development of
additional or enhancement of existing bulk storage facilities.
Total sales by Highland Gas Marketing for fiscal year 1996 were 1,011,261
DTH, an increase of 1% over 1995, even though total interruptible usage in the
Roanoke Valley was down due to the amount of curtailments as a result of the
weather. Highland Gas Marketing buys interruptible supplies of spot gas, along
with interruptible interstate pipeline transportation services, and resells
them to large industrial customers that contract for local distribution line
transportation service from the local utility. The gas marketing business is
highly competitive with relatively low margins, but it is also a relatively low
cost operation with minimal facility and personnel requirements.
ROANOKE GAS COMPANY
4
<PAGE>
PLANT ADDITIONS
Capital additions for the year totaled $5,522,977 for the consolidated
companies, slightly below the $5,609,292 total for last year. Bluefield Gas
accounted for 10.2% of the total or $563,500, Highland Propane additions were
12.3% of the total or $677,877 and Roanoke Gas added $4,281,600 in capital or
77.5% of total capital additions. New business expenditures, including mains,
meters, new service lines and propane tanks, totaled $2,773,354, which was in
line with last year's $2,843,290.
The natural gas companies installed 1,563 new service lines and 18.1 miles
of new mains compared to 1,237 new service lines and 21.2 miles of new mains
last year. Main replacement and service renewal expenditures totaled
$1,507,951, which is double the prior year's investment. During the year the
Company replaced 800 service lines and 8.7 miles of main compared to previous
year totals of 484 services and 5.38 miles of main. The increase in facility
replacement work was to ensure that cumulative replacement expenditures are on
track to maintain the 25-year program schedule to replace, by the year 2017,
approximately 12,000 bare steel services and 210 miles of cast iron or bare
steel distribution mains. This program is designed to reduce maintenance costs
and improve system integrity by reducing unaccounted for gas volumes caused by
leakage.
Other major increases in plant additions included: $57,800 for facility
relocations due to road construction projects including the Peters Creek Road
Project; $370,045 for new equipment including replacement vehicles; and
$303,000 to add new support services equipment including additions to mainframe
computer software and hardware.
For fiscal year 1997, the Company has budgeted $5,802,931 for capital
expenditures. Projections include $3.1 million in new customer additions,
$1,170,000 to replace existing mains and services, $150,000 for relocations due
to road construction projects, $550,000 for new equipment including automotive
replacements and $400,000 for computer software, hardware and facilities for
networking of personal computers.
MARKETING & SALES
Natural gas continues to be the energy of choice in the communities served
by the Company, which enjoyed strong customer growth during the fiscal year.
Customer growth was approximately 3% at Roanoke Gas and 2% at Bluefield Gas.
Conversions represented approximately 55% of the new customer growth for
Roanoke Gas and 63% for Bluefield Gas.
Roanoke Gas reached the 50,000 customer milestone in January. A customer
in the Roanoke Valley became the 50,000th customer and joined the 49,999 others
in the Roanoke Valley and Bluefield area who use natural gas.
Highland Propane enjoyed a 14% customer growth during the fiscal year and
surpassed 1,000 tank installations in a single year for the first time in
Highland's history. Highland Propane expanded its market territory and now
covers the Beckley, West Virginia and Rockbridge County, Virginia areas.
In May, Martin Research, Inc. completed a marketing research survey to
determine the image of Roanoke Gas Company and the image of natural gas as an
energy source within the Roanoke Valley. The Martin survey was first conducted
in 1985, again in 1988, 1990 and 1993. Seven hundred interviews were conducted
and the survey data has a confidence level of 95%. Top of mind awareness for
natural gas is very high; half of all respondents mentioned natural gas first
when they thought of home heat energy sources. Natural gas was even mentioned
first by 16.1% of the oil users and 18.6% of the electricity users, indicating
a high profile even among users of competitive sources.
<PAGE>
Respondents were again in 1996 much more likely to think of natural gas
when considering which energy source was "most efficient" and "provides the
best value." In 1985, 54% of the respondents mentioned natural gas and by 1996
the percentage had increased to 67.8%. This has been a strong competitive
advantage for Roanoke Gas Company, especially when the perception of value
is coupled with the good feeling people have regarding the high quality of
service provided by the Company. Natural gas was also selected by a majority
of respondents as "least expensive and most reliable."
The marketing strategy for both propane and natural gas is centered on
strong trade ally relationships and one-on-one contacts with members of the
sales team. The program has been very successful, and the number of trade
allies has grown to over 80 contractors. The Company has been proactive in its
efforts to seek feedback from the trade allies and has made improvements to
operations based on their suggestions.
Commission sales representatives, whose primary goal is to focus on the
conversion of electric water heaters to gas and the addition of new gas
customers along existing gas mains or the addition of new propane customers,
have proven to be highly successful. They achieved a water heater conversion
in approximately 45% of the homes that were converted to natural gas. New
propane tank sets increased approximately 48% compared to the number of new
tank sets last year.
The Company has installed three natural gas heat pumps (York Triathlon) in
its service territory this year for a total of eight system wide. The
Triathlon, with a 126% efficiency rating, is the most technologically advanced
gas fired heating and cooling system on the market today. The Company
anticipates installation of several more units in the coming year.
The Company remained actively involved in various leadership positions
within the community, including, but not limited to, the Economic Development
Partnership of the Roanoke Valley, Junior Achievement, the Arts Council of the
Blue Ridge, The Council of Community Services, The Salvation Army, and the
Roanoke Regional Homebuilders Association. The Company takes its community
responsibilities seriously and encourages employees and other companies to
become involved in community affairs.
CUSTOMER SERVICE
With the completion of the consolidation of billing, credit and customer
service into one department, the emphasis has been to further refine the
operations and procedures of the Customer Service Department to provide optimal
service which is sensitive to customer needs.
Responding to customer and employee feedback concerning delays in phone
calls routed through the automated attendant, changes were made which
substantially reduced or eliminated customer hold time into the Customer
Service Department. This was accomplished by modifying the phone system to
allow phone calls to bypass the automated attendant during times when there
are customer service representatives available to immediately receive the
calls. When there is no available customer service representative the call
will then be answered by the automated attendant and forwarded to the first
available representative.
Due to the seasonal weather changes it becomes increasingly difficult to
1996 ANNUAL REPORT
5
<PAGE>
collect on past due accounts in the spring and early summer. With customer
bills reflecting the colder than normal winter and past due amounts on the
rise, two new plans were offered to assist the customers with past due amounts.
In early summer, Roanoke Gas Company and subsidiaries began accepting payment
by credit card and the Company now accepts Visa and MasterCard payments from
walk-in customers at each office location. In addition to credit card
acceptance, the Company developed a plan to work with past due customers to
extend payments over several summer months as a way to help the customer handle
the past due payment and avoid having to disconnect the service. Over 50% of
those customers contacted made payments under this program and retained active
service.
In the final quarter of fiscal 1996, Stone & Webster Management
Consultants, Inc. was commissioned to perform a study of Roanoke Gas Company's
credit and collection policies. Stone & Webster is internationally known for
its work in the gas industry. The study focused on a review of credit and
collection policies of Roanoke Gas Company and bench-marking Roanoke Gas with
other companies in the industry. A final report is expected in the first
quarter of 1997; however, preliminary findings indicate the Company is
performing better than the industry average, but improvements can still be
made. The final report will provide information to help the Company develop
and implement enhanced credit and collection policies and procedures in 1997.
In September 1996, Roanoke Gas Company was launched into cyberspace with
publication of the Roanoke Gas Company website on the Internet. Featured in
the homepage is a Message From the President, Company Information,
Stockholder/Financial Information and Products and Services. The homepage also
links the Company's site with local weather forecasts, industry sites and area
sites. In its first six weeks of existence, there were over 2,000 hits
(inquiries) on the homepage, including inquiries from abroad. The Internet
address is http://www.roanokegas.com.
The Company again conducted its annual HeatShare Program, designed to
provide monetary assistance to low income customers having difficulty paying
their winter heating bills. Now in its fourteenth season, the program has
helped more than 5,300 families with nearly $800,000 donated by the Company,
employees, customers and concerned individuals. The program is administered
each year by the local Salvation Army. In addition, customer service employees
provide information to needy families on additional sources of financial
assistance.
INFORMATION SYSTEMS
As technological changes continue at unprecedented levels, Roanoke Gas
Company continued its efforts to provide its employees with more information
and better tools to complete their ever changing jobs. The constant growth in
the number of customers and an increasing demand for improved information in
all aspects of the business require greater and greater employee efficiency.
Efforts are focused on system integration, system usability and employee
training in an effort to enhance employee performance. In situations where
outsourcing was considered cost effective, interfaces were developed to provide
communications with the vendor.
Efforts continued toward the goal of complete system integration, including
the implementation of a new Special Equipment System. The system retains all
current and historic information on natural gas mains, services, regulators,
valves, and other key pieces of equipment. The Special Equipment System
integrates with the Work Order System and the Customer Information System (CIS)
and it enables the Engineering Department to test and analyze Company
facilities more easily. Integration allows direct access to equipment
information as well as customer record information. The employee can check the
service equipment located at a customer's address and simultaneously analyze
the customer's usage from billing history for a given type of equipment.
<PAGE>
The CIS was upgraded adding enhancements like improved bill estimating and
further integration between the service order system and inventory control
system. Additional upgrades were made to Financial Systems, with further
integration and progress towards preparing for the year 2000. The IBM AS/400
system was upgraded with additional memory and disk storage to ensure adequate
system performance.
The printing of all customer billing statements and other key forms was
outsourced, reducing costs associated with the overhead of forms management,
printing equipment, changing postal requirements, and labor cost. The Company
electronically transmits all forms to be printed on a daily basis to the
outsourced contractor. In addition to enhanced efficiency, there is improved
quality of the printing.
MARKET PRICE & DIVIDEND INFORMATION
The Company's common stock is listed on the Nasdaq National Market under
the trading symbol RGCO. This provides stockholders, brokers and others with
immediate access to the latest bid and ask prices and creates greater liquidity
in the Company's stock. The table below sets forth the range of bid prices for
shares of the Company's common stock, as reported in the Nasdaq National
Market.
Although the Company has paid continuous quarterly dividends to its
stockholders since August 1, 1944, the Company has not established a formal
policy with respect to dividends. Payment of dividends is within the
discretion of the Company's Board of Directors and will depend upon, among
other factors, earnings, capital requirements and the operating and financial
condition of the Company. There can be no assurance that these or other
conditions will not in the future negatively affect the Company's ability
to pay dividends. In addition, the Company's long-term indebtedness contains
restrictions on cumulative net earnings of the Company and dividends previously
paid. At September 30, 1996, there were 1,713 holders of record of the
Company's common stock.
<TABLE>
<CAPTION>
RANGE OF CASH DIVIDENDS
BID PRICES DECLARED
FISCAL YEAR ENDED HIGH LOW
SEPTEMBER 30,
<S> <C> <C> <C>
1996
First Quarter $16.25 $14.25 $.255
Second Quarter 18.50 15.00 .255
Third Quarter 18.25 16.50 .255
Fourth Quarter 17.25 14.75 .255
1995
First Quarter $18.50 $16.00 $ .25
Second Quarter 17.00 14.00 .25
Third Quarter 15.125 13.50 .25
Fourth Quarter 15.00 14.25 .25
</TABLE>
ROANOKE GAS COMPANY
6
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Roanoke Gas Company & Subsidiaries
SELECTED FINANCIAL DATA
Years Ended September 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 65,770,873 $ 48,611,147 $ 58,195,857 $ 57,715,679 $ 49,147,998
Operating Margin 22,030,795 19,435,864 19,902,497 18,297,030 16,645,764
Operating Earnings 4,035,304 3,522,258 3,537,267 3,235,269 2,848,130
Earnings Before Interest Charges 4,113,044 3,701,907 3,592,351 3,264,713 3,051,031
NET EARNINGS 2,196,672 1,777,240 1,677,098 1,441,336 1,305,125
Net Earnings Per Share 1.51 1.26 1.25 1.13 1.03
Cash Dividends Declared
Per Share 1.02 1.00 1.00 1.00 1.00
Book Value Per Share 12.86 12.25 11.88 11.36 11.16
A verage Shar es Outstanding 1,455,999 1,408,659 1,339,402 1,280,176 1,264,994
TOTAL ASSETS 58,921,099 51,614,667 49,579,447 48,758,728 45,325,270
Long-Term Debt
(Less Current Portion) 20,222,124 17,504,047 16,414,900 16,530,499 16,936,500
Stockholders' Equity 18,975,001 17,555,172 16,424,919 14,652,663 14,176,330
SHARES OUTSTANDING AT SEPTEMBER 30 1,475,843 1,432,512 1,382,343 1,289,302 1,269,924
</TABLE>
GENERAL
The primary business of Roanoke Gas Company and its public utility
affiliates is the distribution of natural gas to approximately 51,000 active
customers in the cities of Roanoke, Salem and Bluefield, Virginia and
Bluefield, West Virginia, and the surrounding areas, at rates and charges
regulated by the State Corporation Commission in Virginia (the Virginia
Commission) and the Public Service Commission in West Virginia (the West
Virginia Commission). The Company is required, as a public utility, to ensure
that it has the capacity to adequately serve the ongoing needs of its
customers. The Company also continues to expand its facilities to keep pace
with the industrial and commercial development and residential growth in its
service areas. The Company continues to experience steady customer growth, and
anticipates continuing this trend by attracting adequate investment capital,
along with adequate and timely increases in rates when needed from the state
commissions. The Company also serves approximately 6,400 active propane
accounts with approximately 7,500 tank installations in southwestern Virginia
and southern West Virginia and serves natural gas industrial transportation
customers by brokerage of natural gas supplies through its subsidiary,
Diversified Energy Company, which trades as Highland Propane Company and
Highland Gas Marketing.
Continued public acceptance and a growing preference for natural gas as a
competitively priced, clean and efficient fuel for space heating and other
residential, commercial and industrial applications have prompted the steady
increase in the number of customers served and in the cost of constructing
facilities required to serve them. Energy conservation and the availability of
modern, highly efficient furnaces and other appliances for replacement and new
services in better-insulated homes continue to result in a slight decline in
annual weather normalized per capita residential usage. The effect of such per
capita declines, unless offset by new customer growth, abnormally cold weather,
or rate relief, could result in a decline or attrition in the Company's net
operating earnings as a percentage of the equity component of the rate base.
Competition from alternate fuels and/or supplies could also impact the
Company's profitability levels.
<PAGE>
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include the following: (i) obtaining adequate rate relief from
regulatory authorities on a timely basis; (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) some uncertainty in the projected
rate of growth of natural gas and propane requirements in the Company's service
area; and (vii) general economic conditions both locally and nationally.
In addition, the Company's business is seasonal in character and strongly
influenced by weather conditions. Extreme changes in winter heating degree
days from the normal or mean can have significant short-term impacts on
revenues and gross margin.
1996 ANNUAL REPORT
7
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NATURAL GAS
CUSTOMERS
(Bar graph appears here with the following plot points.)
<S> <C> <C> <C> <C> <C>
YEAR 1992 1993 1994 1995 1996
CUSTOMERS 46,172 46,788 48,544 49,813 51,094
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The Company is in the process of making major changes to the debt
capitalization at the end of fiscal year 1996. The Company's consolidated
balance sheet reflects the issuance of $8,000,000 in long-term senior notes at
an interest rate of 7.66% and $1,300,000 in intermediate notes at 7.28% shortly
after the fiscal year end close. The issues will be used to retire $5,912,500
in existing intermediate and long-term debt and $3,387,500 of short-term debt,
shortly after the fiscal year end.
Stockholders' equity increased by $1,419,829, reflecting an increase of
$705,595 in retained earnings and proceeds of $714,234 of new stock purchases
through the Company's Dividend Reinvestment and Stock Purchase Plan (the Plan)
for the period. The purchase price of Company common stock under the Plan is
based upon the fair market value of such common stock, determined by the Board
of Directors based on the closing sales price of the Company's common stock on
the Nasdaq National Market on the investment date, if the investment date is a
trading day, or if not, the first trading day prior to such day.
The Company's capital expenditures for the year were a combination of
replacements and expansions, reflecting the need to replace older cast iron and
bare steel pipe in the system, while continuing to meet the demands of customer
growth. Total capital expenditures for the period were approximately $5.5
million, broken down to $4.3 million for Roanoke Gas Company, $.6 million for
Bluefield Gas Company and $.6 million for Highland Propane Company.
Depreciation cash flow provided approximately $2.8 million in support of
capital expenditures, or approximately 51% of total investment. Historically,
consolidated capital expenditures were $5.6 million in 1995 and $5.5 million in
1994. It is anticipated that future capital expenditures will be funded with
the combination of depreciation cash flow, retained earnings, sale of common
stock through the Plan and issuance of debt.
At September 30, 1996, the Company had available lines of credit totaling
$18.0 million for its short-term borrowing needs, of which $6,652,500 was
outstanding after recognition of the debt refinancing subsequent to year end as
discussed above. Short-term borrowing, in addition to providing limited
capital project bridge financing, is used to finance summer and fall gas
purchases which are injected into storage 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 own LNG facility,
to ensure adequate winter supplies to meet customer demand. At September 30,
1996, the Company has $6,484,700 in inventoried natural gas supplies.
Short-term borrowings, together with internally-generated funds, long-term
debt and the sale of stock, have been adequate to cover construction costs,
debt service and dividend payments to stockholders. The terms of short-term
borrowings are negotiable, with average rates of 5.84% in 1996, 6.07% in 1995
and 3.90% in 1994. 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 cost on short-term borrowings.
<PAGE>
At September 30, 1996, the Company's consolidated long-term capitalization
was 48% equity and 52% debt, compared to 50% equity and 50% debt at September
30, 1995.
REGULATORY & RATE CASE PROCEEDINGS
Roanoke Gas Company's last rate case filing was on June 15, 1994. However,
the Company anticipates filing a rate case early in fiscal year 1997 to recover
additional capital and depreciation costs associated with its bare steel and
cast iron renewal program and additional interest costs associated with its
refinancing in early 1997.
The Company filed a $41,388 rate increase application for Commonwealth
Public Service Corporation on February 15, 1996, and received an order from the
State Corporation Commission shortly after the fiscal year end approving an
increase of $24,863. Commonwealth Public Service Corporation is a subsidiary
of Bluefield Gas Company providing natural gas service in Bluefield, Virginia.
The Company also filed a $111,738 rate increase application on behalf of
Bluefield Gas Company on February 24, 1996. After being informed by the Staff
of the West Virginia Public Service Commission that the Staff intended to apply
weather normalization adjustments to the financial results underlying the rate
application, the Company withdrew the application. The Company determined that
normalizing fiscal year 1995 Bluefield Gas Company revenues for normal weather
would negate the rate increase justification.
In 1996, the General Assembly of Virginia passed legislation providing for
the possibility for natural gas utilities to apply to the State Corporation
Commission for an alternative rate regulation model based on a performance
plan.
The Company has advised the Commission of its general intent to file for
consideration of a performance-based rate regulatory plan and anticipates
making a filing sometime in 1997. The Company is currently applying the
provisions of Statement of Financial Accounting
ROANOKE GAS COMPANY
8
<PAGE>
Standards No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
(Statement 71), and has recorded regulatory assets of $416,844 at September 30,
1996, exclusive of purchased gas adjustments of $1,782,590, consistent with the
provisions of Statement 71. Management is evaluating the continued application
of Statement 71 and the corresponding effect on the Company's regulatory
assets, excluding purchased gas adjustments which would not be affected by an
alternative rate regulation model, should the Company convert to a performance-
based rate regulatory plan.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
OPERATING REVENUES- Operating revenues for the natural gas utilities
increased $16,005,670 to $60,067,407 in 1996 from $44,061,737 in 1995. The
increase in revenues is attributed to weather that was approximately 24% colder
in 1996 than in 1995 and a 34% increase in the unit cost of gas. Operating
revenues for propane increased $1,154,056 to $5,703,466 in 1996 from $4,549,410
in 1995. The increase in revenues is also attributed to the colder weather and
customer growth.
ENERGY VOLUMES- The volume of natural gas delivered to customers was up
1,208,071 MCF or approximately 12% for the year. The interruptible and
transportation volumes were down due to curtailments but the firm volumes were
up 21% due to the colder weather. Propane sales volumes were up 1,175,635
gallons or 24% due to the colder weather and an increase in customer growth.
COST OF ENERGY- The cost of natural gas was $40,763,104 in 1996 compared to
$27,027,507 in 1995. The $13,735,597 increase was due to a 12% increase in the
volume of gas delivered to customers and a 34% increase in the unit cost of
gas.
Both the volume and price increases were impacted by the weather that was 11%
colder than normal. Likewise, the cost of propane was up $829,198 due to a 24%
increase in sales volume associated with the colder weather and customer
growth, and an 11% increase in the unit cost of propane.
OTHER OPERATING EXPENSES- Other operations and maintenance expenses
increased 11% to $9,924,491 in 1996 from $8,959,677 in 1995. The largest
increases were in bad debt accrual (associated with higher billings),
collection and billing expenses, legal expenses, general office renovations
and maintenance of distribution system.
General taxes increased 15% to $2,401,768 in 1996 from $2,082,896 in 1995,
due primarily to revenue sensitive taxes (gross receipts and business and
occupation taxes).
Income taxes on the natural gas utilities increased $252,458 to $963,895 in
1996 from $711,437 in 1995, primarily due to increased taxable income. See
note 5 of the notes to consolidated financial statements for additional
information on income taxes.
Depreciation and amortization expenses increased $160,959 to $2,294,447 in
1996 from $2,133,488 in 1995 due to depreciation on normal additions to plant
in service.
Other operating expenses - propane operations consist of the operating and
maintenance expenses, taxes and depreciation of Highland Propane. These costs
increased to $2,410,890 in 1996 from $2,026,108 in 1995. The $384,782 increase
was mainly attributable to (1) tank sets in regard to customer growth, (2)
additional delivery costs associated with increased volumes and foul weather,
(3) additional sales expense associated with
<PAGE>
<TABLE>
<CAPTION>
COMPARISON
MCF to HDD (Heating Degree Days)
(Bar graph appears here with the following plot points.)
YEAR 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
MCFS DELIVERED 9,338,521 9,820,345 10,267,038 9,961,877 11,169,948
HDD 3,986 4,356 4,416 3,791 4,696
</TABLE>
<TABLE>
<CAPTION>
COMPARISON
Gallons Delivered to HDD (Heating Degree Days)
(Bar graph appears here with the following plot points.)
YEAR 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
GALLONS PROPANE 4,178,671 4,586,334 5,012,830 4,822,277 5,997,912
HDD 3,986 4,356 4,416 3,791 4,696
</TABLE>
<TABLE>
<CAPTION>
COMPARISON
Net Income to HDD (Heating Degree Days)
(Bar graph appears here with the following plot points.)
YEAR 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
NET INCOME $1,305,125 $1,441,336 $1,677,098 $1,777,240 $2,196,672
HDD 3,986 4,356 4,416 3,791 4,696
</TABLE>
1996 ANNUAL REPORT
9
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
market area expansion and the resulting customer growth and sales
commissions, (4) tank maintenance, and (5) greater depreciation on additional
customer tanks and delivery vehicles.
OTHER INCOME- Other income, net of other deductions, decreased
significantly in 1996 to $77,740 from $179,649 in 1995. The decrease was
primarily due to Roanoke Gas Company being in a borrowing mode instead of an
investment mode on the cash management system, a reduction in net jobbing
revenues, and the elimination of interest income and a capital gain on the sale
of investment property of Highland Propane.
INTEREST CHARGES- Total interest charges were down $8,295 for 1996 versus
1995 due to the liquidity of Highland Propane Company.
NET EARNINGS AND DIVIDENDS- Net earnings for fiscal 1996 were $2,196,672 as
compared to $1,777,240 for fiscal 1995. The $419,432 increase in earnings can
be attributed to weather that was 11% colder than normal and 24% colder than
last year and increased sales from customer growth. Earnings per share of
common stock were $1.51 in 1996 compared to $1.26 in 1995. Dividends per share
of common stock were $1.02 in 1996 and $1.00 in 1995.
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
OPERATING REVENUES- Operating revenues for natural gas decreased $9,463,570
to $44,061,737 in 1995 from $53,525,307 in 1994, due to a decrease of 305,161
MCF in total sales volume associated with 14% warmer weather and a 16.76%
decrease in the cost per unit of natural gas. Operating revenues for propane
were $4,549,410 in 1995 compared to $4,670,550 in 1994, primarily from a
decrease in volume associated with the warmer weather.
ENERGY VOLUMES - The volume of natural gas delivered to customers was down
305,161 MCF to 9,961,877 MCF in 1995 from 10,267,038 MCF in 1994 primarily
attributable to weather that was approximately 14% warmer than the weather for
1994. While customer growth was on par for the period and sales to
interruptible customers were up, the weather had a significant impact on sales
to our residential and commercial customers. Propane sales volumes for 1995
were 4,822,277 gallons compared to 5,012,830 gallons in 1994, a decrease of
190,553 gallons, and this decrease can also be attributed to the warmer
weather.
COST OF ENERGY- The cost of natural gas was $27,027,507 in 1995 compared to
$36,109,555 in 1994. Gas prices began decreasing with fiscal 1994 and
continued to decline in fiscal 1995 as the nation experienced a very warm
winter and the per unit price of natural gas decreased approximately 17%. The
total cost of propane decreased in 1995 to $2,147,776 from $2,183,805 in 1994
due to a volume decrease associated with approximately 14% warmer weather even
though the per unit price increased approximately $.01.
OTHER OPERATING EXPENSES- Other operations and maintenance expenses
decreased $420,108 to $8,959,677 in 1995 from $9,379,785 in 1994. The decrease
was the result of management's reorganization via an early retirement incentive
plan and an austerity program placed into effect as a result of the warm
weather. Also, maintenance expenses for the last half of the year were limited
to essential or required areas and an emphasis was placed on renewal versus
repair.
<PAGE>
General taxes decreased to $2,082,896 in 1995 from $2,395,379 in 1994
primarily as a result of lower gross receipts taxes on total revenues due to
lower cost of gas.
Income taxes on the natural gas utilities increased $64,995 to $711,437 in
1995 from $646,442 in 1994 in proportion to taxable earnings. See note 5 of
the notes to consolidated financial statements for additional information on
income taxes.
Depreciation and amortization expenses increased to $2,133,488 in 1995 from
$1,945,672 in 1994. The increase of $187,816 represents depreciation on normal
additions to plant in service and amortization of additional regulatory assets.
Other operating expenses - propane operations consist of the operating and
maintenance expenses, taxes and depreciation of Highland Propane. These costs
increased $28,156 to $2,026,108 in 1995 from $1,997,952 in 1994 and was largely
attributable to increased legal and pension benefit costs.
OTHER INCOME- Other income, net of other deductions, was $179,649 in 1995
as compared to $55,084 in 1994. The increase of $124,565 was mainly the result
of improved jobbing revenues due to enhanced service billing rates and the
elimination of the merchandise function in the natural gas utilities. In the
propane operations, a deferred gain was recognized on the sale of investment
property and revenues from the brokerage of natural gas increased.
INTEREST CHARGES- Total interest charges increased to $1,924,667 in 1995
from $1,915,253 in 1994. The increase was due to a higher average balance of
long-term debt. Short-term interest declined in 1995 due to the decrease in
interest on supplier refunds. The interest expense in the propane operations
was down significantly due to a lower average borrowing balance.
GROSS UTILITY PLANT
(Including Construction Work-In-Progress)
Millions Of Dollars: 1996 - $61,732,904
(Bar graph appears here with the following plot points)
87 88 89 90 91 92 93 94 95 96
31.5 33 36 41.5 43 46.5 49.5 52.5 58.5 61.5
ROANOKE GAS COMPANY
10
<PAGE>
NET EARNINGS AND DIVIDENDS- Net earnings for fiscal 1995 were $1,777,240 as
compared to $1,677,098 for fiscal 1994. Earnings per share of common stock
were $1.26 in 1995 compared with $1.25 in 1994. Dividends per share of common
stock were $1.00 per share in 1995 and 1994. The $100,142 increase in earnings
can be attributed to increased rates put into effect in the first quarter and
management's restructuring and cost containment plans.
ACCOUNTING CHANGES
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, which established a new accounting
principle for the cost of retiree health care and other postretirement
benefits.
Prior to October 1, 1993, the Company recognized these benefits on the pay-
as-you-go method. The cumulative effect of the change in method of accounting
for postretirement benefits other than pensions of $4,746,000 was determined as
of October 1, 1993 and is being amortized on a straight-line basis over a 20-
year period for financial reporting purposes and over a 40-year period for
regulatory accounting treatment. The adoption of Statement 106 resulted in an
increase in net periodic post retirement benefits cost for the year ended
September 30, 1994 from approximately $296,000 under the pay-as-you-go method
to $649,936 under Statement 106, with approximately 67% of the consolidated
annual cost being recovered from the Company's customers through rates. The
effect of adopting Statement 106 on net income was a decrease of $77,087, or
$.06 per share.
Effective October 1, 1993, the Company also adopted the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Statement 109 required a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date. The adoption of Statement 109 did not
have a material impact on the Company's consolidated financial statements, and
accordingly, no cumulative effect of accounting change was reported in the 1994
consolidated statement of earnings.
RECENT ACCOUNTING DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (Statement
121).
Statement 121 requires companies to review long-lived assets and certain
identifiable intangibles to be held, used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company is required to adopt the
provisions of Statement 121 in fiscal year 1997. The Company believes the
adoption of Statement 121 will not have a material impact on its consolidated
financial statements.
<PAGE>
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION(Statement 123).
The Company is required to adopt the provisions of Statement 123 in fiscal
year 1997. The Company plans to retain the intrinsic value method of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for recognizingstock-
based compensation in the consolidated financial statements. The Company is
still evaluating the new disclosure requirements of Statement 123; however,
management believes the adoption of this Statement will not have a material
impact on the Company's consolidated financial position or results of
operations.
IMPACT OF INFLATION
The cost of natural gas represented approximately 72% , 66% and 72% of the
total operating expenses of the Company's gas utilities' operations for fiscals
1996, 1995 and 1994, respectively. However, under the present regulatory PGA
mechanism, the increases and decreases in the wholesale 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 on the replacement cost of plant and equipment. Since the
Company can only recover these costs through the regulatory process via rate
application, increased costs can significantly impact the results of
operations. Therefore, it is extremely important that management continually
review operations and economic conditions to assess the need for filing and
receiving adequate and timely rate relief from the State commissions.
FRANCHISES
Roanoke Gas Company and Commonwealth Public Service Corporation, a
subsidiary of Bluefield Gas Company, currently hold the only franchise and/or
certificates of public convenience and necessity to distribute natural gas in
their respective Virginia service areas. The franchises generally extend for
multi-year periods and are renewable by the municipalities. Certificates of
public convenience and necessity, which are
GAS SALES
Volume (Millions)
1996 - 11,169,948 MCF
(Bar graph appears here with the following plot points)
87 88 89 90 91 92 93 94 95 96
YEAR
7.8 9.2 9.3 9.1 8.1 9.4 9.8 10.6 9.6 11.4
1996 ANNUAL REPORT
11
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
issued by the State Corporation Commission of Virginia, are of perpetual
duration, subject to compliance with regulatory standards.
In July 1996, Roanoke Gas and the City of Roanoke signed a new multi-year
franchise agreement, providing for approximately $42,000 in annual franchise
fees, with a three percent annual fee increment. This new agreement has a 20-
year term beginning January 1, 1996. In addition, Roanoke Gas signed new
multi-year franchise agreements with the City of Salem and the Town of Vinton
in July 1996. The new agreements provide for combined annual franchise fees of
approximately $14,000, with three percent annual fee increments. Each of the
new agreements has a 20-year term beginning January 1, 1996.
Bluefield Gas Company holds the only franchise to distribute natural gas in
its West Virginia service area. Its franchise extends for a period of 30 years
from August 23, 1979.
Management anticipates that the Company will be able to renew all of its
franchises when they expire. There can be no assurance, however, that a given
jurisdiction will not refuse to renew a franchise or will not in connection
with the renewal of a franchise, impose certain restrictions or conditions that
could adversely affect the Company's business operations or financial
condition.
ENVIRONMENTAL ISSUES
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. The process involved heating coal in a low-oxygen environment to
produce a manufactured gas that could be distributed through the Company's
pipeline system to customers. A by-product of the process was coal tar, and
the potential exists for on-site tar waste contaminants at both former plant
sites.
The extent of contaminants at these sites is unknown at this time, and the
Company has not performed formal analysis at the Roanoke Gas Company MGP site.
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 these prior sites. Therefore, the
Company has no plans for subsurface remediation at either of the MGP sites.
Should the Company eventually be required to remediate either of the MGP sites,
the Company will pursue all prudent and reasonable means to recover any related
costs, including insurance claims and regulatory approval for rate case
recognition of expenses associated with any work required. Based upon prior
orders of the Commission related to environmental matters at other companies,
the Company believes it would be able to recover prudently incurred costs.
Additionally, a stipulated rate case agreement between the Company and the
West Virginia Commission recognizes 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 which are anticipated to be recoverable in future rates. Based on
anticipated regulatory actions and current practices, management believes that
any costs incurred related to the previously-mentioned environmental matters
will not have a material effect on the Company's consolidated financial
position.
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company & Subsidiaries
HOW 1996 REVENUE
DOLLARS WERE SPENT
Year Ended September 30, 1996
Gross Revenues - $68,789,437
(Bar graph appears here with the following plot points)
<S> <C>
Cost Of Gas & Propane $43,740,078
Salaries & Wages $ 5,263,280
All Other Expenses $ 9,191,539
Taxes $ 3,671,182
Interest Charges $ 1,916,372
Depreciation & Amortization $ 2,810,314
Dividends Declared To Owners $ 1,491,077
Earnings Retained In Business $ 705,595
</TABLE>
<TABLE>
<CAPTION>
Roanoke Gas Company & Subsidiaries
1996 FINANCIAL
HIGHLIGHTS
<S> <C>
Operating Revenues - Gas .......................................$60,067,407
Propane Revenues - Propane......................................$ 5,703,466
Other Revenues - Gas Marketing..................................$ 2,433,503
Merchandising And Jobbing.......................................$ 563,387
Interest Income ................................................$ 21,674
Gross Revenues..................................................$68,789,437
Net Earnings....................................................$ 2,196,672
Earnings Per Share .............................................$ 1.51
Dividends Per Share - Cash .....................................$ 1.02
Total Customers - Natural Gas................................... 51,094
Total Customers - Propane....................................... 6,410
Total Natural Gas Deliveries - MCF.............................. 11,169,948
Total Propane Sales - Gallons................................... 5,997,912
Number Of Full-Time Employees.................................... 153
Total Payroll Chargeable To Operations & Construction ..........$ 5,745,920
Total Additions To Plant........................................$ 5,522,977
</TABLE>
ROANOKE GAS COMPANY
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Roanoke Gas Company:
We have audited the accompanying consolidated balance sheets of Roanoke Gas
Company and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Roanoke Gas
Company and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in 1994 to adopt
the provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. As discussed in notes 1 and 6 to the consolidated
financial statements, the Company also adopted the provisions of Statement of
Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, in 1994.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
October 18, 1996, except as to note 4,
which is as of November 11, 1996
1996 ANNUAL REPORT
13
<PAGE>
Roanoke Gas Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1996 1995
UTILITY PLANT:
In service $ 60,454,905 56,834,174
Accumulated depreciation and amortization (20,822,398) (19,262,416)
In service, net 39,632,507 37,571,758
Construction work-in-progress 1,277,999 535,107
Utility plant, net 40,910,506 38,106,865
NONUTILITY PROPERTY:
Propane 4,403,630 3,781,633
Accumulated depreciation and amortization (2,070,405) (1,742,342)
Nonutility property, net 2,333,225 2,039,291
CURRENT ASSETS:
Cash and cash equivalents 633,322 502,895
Accounts receivable, less allowance for doubtful
accounts of
$279,316 in 1996 and $171,947 in 1995 3,857,407 3,463,104
Inventories 7,402,586 5,347,994
Prepaid income taxes 297,521 -
Deferred income taxes 379,356 967,732
Purchased gas adjustments 1,782,590 -
Other 479,926 181,190
Total current assets 14,832,708 10,462,915
OTHER ASSETS 844,660 1,005,596
$ 58,921,099 51,614,667
</TABLE>
See accompanying notes to consolidated financial statements.
ROANOKE GAS COMPANY
14
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
CAPITALIZATION:
Stockholders' equity:
Common stock, $5 par value. Authorized 3,000,000
shar es; issued and outstanding
1,475,843 and 1,432,512 shar es in 1996 and
1995, respectively $ 7,379,215 7,162,560
Capital in excess of par value 4,647,163 4,149,584
Retained earnings 6,948,623 6,243,028
Total stockholders' equity 18,975,001 17,555,172
Long-term debt, excluding current maturities 20,222,124 17,504,047
Total capitalization 39,197,125 35,059,219
CURRENT LIABILITIES:
Current maturities of long-term debt 669,423 1,179,415
Borrowings under lines of credit 6,652,500 1,442,000
Dividends payable 376,795 358,743
Accounts payable 4,931,467 5,544,647
Income taxes payable - 476,410
Customers deposits 362,384 314,647
Accrued expenses 3,214,953 3,027,825
Refunds from suppliers - due customers 23,865 682,851
Purchased gas adjustments - 236,999
Total current liabilities 16,231,387 13,263,537
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 2,960,795 2,721,470
Deferred investment tax credits 531,792 570,441
Total deferred credits and other liabilities 3,492,587 3,291,911
$58,921,099 51,614,667
</TABLE>
1996 ANNUAL REPORT
15
<PAGE>
Roanoke Gas Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended September 30, 1996,1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING REVENUES:
Gas utilities $ 60,067,407 44,061,737 53,525,307
Propane operations 5,703,466 4,549,410 4,670,550
Total operating revenues 65,770,873 48,611,147 58,195,857
COST OF GAS:
Gas utilities 40,763,104 27,027,507 36,109,555
Propane operations 2,976,974 2,147,776 2,183,805
Total cost of gas 43,740,078 29,175,283 38,293,360
OPERATING MARGIN 22,030,795 19,435,864 19,902,497
OTHER OPERATING EXPENSES:
Gas utilities:
Other operations 8,056,211 7,726,611 7,891,993
Maintenance 1,868,280 1,233,066 1,487,792
Taxes - general 2,401,768 2,082,896 2,395,379
Taxes - income 963,895 711,437 646,442
Depreciation and amortization 2,294,447 2,133,488 1,945,672
Propane operations (including taxes - income of $177,059,
$224,017 and $239,069 in 1996, 1995 and 1994,
respectively) 2,410,890 2,026,108 1,997,952
Total other operating expenses 17,995,491 15,913,606 16,365,230
OPERATING EARNINGS 4,035,304 3,522,258 3,537,267
OTHER INCOME (DEDUCTIONS):
Gas utilities:
Interest income 274 26,652 22,907
Merchandising and jobbing, net 99,334 120,475 50,734
Other deductions (120,539) (142,389) (124,655)
Taxes - income (22,486) (14,547) 5,608
Propane operations, net 121,157 189,458 100,490
Total other income (deductions) 77,740 179,649 55,084
EARNINGS BEFORE INTEREST CHARGES 4,113,044 3,701,907 3,592,351
INTEREST CHARGES:
Gas utilities:
Long-term debt 1,621,661 1,680,078 1,615,679
Other 292,301 231,142 242,776
Propane operations 2,410 13,447 56,798
Total interest charges 1,916,372 1,924,667 1,915,253
NET EARNINGS $ 2,196,672 1,777,240 1,677,098
NET EARNINGS PER SHARE $ 1.51 1.26 1.25
</TABLE>
See accompanying notes to consolidated financial statements.
ROANOKE GAS COMPANY
16
<PAGE>
Roanoke Gas Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDERS'
STOCK PAR VALUE EARNINGS EQUITY
<S> <C> <C> <C> <C>
Balances, September 30, 1993 $ 6,446,510 2,647,056 5,559,097 14,652,663
Net earnings - - 1,677,098 1,677,098
Cash dividends ($1.00 per share) - - (1,354,326) (1,354,326)
Issuance of common stock (93,041 shares) 465,205 1,098,129 - 1,563,334
Common stock issuance costs - (113,850) - (113,850)
Balances, September 30, 1994 6,911,715 3,631,335 5,881,869 16,424,919
Net earnings - - 1,777,240 1,777,240
Cash dividends ($1.00 per share) - - (1,416,081) (1,416,081)
Issuance of common stock (50,169 shares) 250,845 522,699 - 773,544
Common stock issuance costs - (4,450) - (4,450)
Balances, September 30, 1995 7,162,560 4,149,584 6,243,028 17,555,172
Net earnings - - 2,196,672 2,196,672
Cash dividends ($1.02 per share) - - (1,491,077) (1,491,077)
Issuance of common stock (43,331 shares) 216,655 497,579 - 714,234
Balances, September 30, 1996 $ 7,379,215 4,647,163 6,948,623 18,975,001
</TABLE>
See accompanying notes to consolidated financial statements.
1996 ANNUAL REPORT
17
<PAGE>
Roanoke Gas Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,196,672 1,777,240 1,677,098
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,810,314 2,563,128 2,334,457
Loss (gain) on disposal of utility plant and
nonutility pr operty (4,202) 4,823 (364)
Gain on sale of other asset - (67,556) -
Decrease (increase) in purchased gas
adjustments (2,019,589) 931,422 1,387,025
Decrease in gas cost recoverable from
customers - - 219,443
Decrease in gas cost payable to suppliers - - (219,443)
Changes in assets and liabilities which
provided (used)
cash, exclusive of changes and noncash
transactions shown separately (3,608,875) 3,139,960 (320,415)
Net cash provided by (used in) operating
activities (625,680) 8,349,017 5,077,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant in service and under
construction and nonutility property (5,522,977) (5,609,292) (5,518,275)
Proceeds from disposal of property 42,511 70,403 33,796
Cost of removal of utility plant, net (423,221) (122,523) (184,908)
Proceeds from collection of note receivable - 490,000 -
Net cash used in investing activities (5,903,687) (5,171,412) (5,669,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 2,700,000 2,000,000
Retirement of long-term debt and payments on
obligations under capital leases (1,179,415) (1,124,703) (2,470,696)
Net borrowings (repayments) under lines of credit 8,598,000 (3,793,000) 235,000
Proceeds from issuance of common stock 714,234 773,544 1,563,334
Common stock issuance costs - (4,450) (113,850)
Cash dividends paid (1,473,025) (1,403,370) (1,330,619)
Net cash provided by (used in) financing
activities 6,659,794 (2,851,979) (116,831)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 130,427 325,626 (708,417)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 502,895 177,269 885,686
CASH AND CASH EQUIVALENTS, END OF YEAR $ 633,322 502,895 177,269
</TABLE>
CONTINUED
ROANOKE GAS COMPANY
18
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED (USED)
CASH, EXCLUSIVE OF CHANGES AND NONCASH TRANSACTIONS
SHOWN SEPARATELY:
Accounts receivable and customer deposits, net $ (346,566) (304,927) 399,531
Inventories (2,054,592) 1,028,359 (175,108)
Prepaid income taxes (297,521) 260,609 157,183
Accounts payable (613,180) 224,166 437,812
Income taxes payable (476,410) 476,410 -
Accrued expenses and other current assets (111,608) 2,011,166 (227,585)
Refunds from suppliers - due customers (658,986) 183,953 (496,605)
Other noncurrent assets 160,936 (277,339) (116,050)
Deferred taxes, including amortization of deferred
investment tax credits 789,052 (350,121) (299,593)
Other deferr ed credits - (112,316) -
$ (3,608,875) 3,139,960 (320,415)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 1,493,801 1,867,816 2,306,579
Income taxes, net of refunds $ 1,148,319 675,418 1,022,314
Noncash Transactions:
The Company refinanced $9,300,000 of current
installments of
long-term debt and borrowings under lines of
credit as long-term
debt in 1996 (see note 4).
Capital lease obligations of $21,119 and $7,925
were incurred in
1995 and 1994, respectively , when the
Company entered into
equipment leases.
A note receivable of $490,000 was received in
1994 upon the sale
of a building, resulting in a deferred gain
of $67,556. The note was
paid in full and the deferred gain
recognized in 1995.
A regulatory asset of $20,484 and a regulatory
liability of $112,316
were recorded in 1994 via adjustment of the
deferred income tax
liability upon adoption of Statement 109 (see
notes 1 and 5).
</TABLE>
See accompanying notes to consolidated financial statements.
1996 ANNUAL REPORT
19
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The consolidated financial statements include the accounts of Roanoke Gas
Company and its wholly-owned subsidiaries (the Company), Bluefield Gas Company
and Highland Propane Company (with propane and gas marketing divisions in
Roanoke and a propane division in Bluefield). 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.
The gas utilities are subject to regulation by the Federal Energy Regulatory
Commission and their applicable state regulatory commissions. Highland Propane
Company, which is not a public utility, distributes and sells propane in
southwestern Virginia and southern West Virginia. The gas marketing division of
Highland Propane brokers natural gas to several industrial transportation
customers of Roanoke Gas Company.
The Company maintains its financial records in accordance with the
accounting policies as prescribed by its regulatory commissions and generally
accepted accounting principles. The Company's regulated operations meet the
criteria, and accordingly, follow the reporting and accounting requirements of
Statement of Financial Accounting Standards No. 71, ACCOUNTING FOR THE EFFECTS
OF CERTAIN TYPES OF REGULATION(Statement 71). Statement 71 sets forth the
application of generally accepted accounting principles to those companies
whose rates are determined by an independent third-party regulator. The
economic effects of regulation can result in regulated companies 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 follow:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
REGULATORY ASSETS:
Early retirement incentive plan costs $ 246,768 318,463
Statement 106 implementation costs 18,884 35,670
Rate case costs 20,879 53,797
Franchise negotiation costs 41,846 55,237
LNG tank painting costs 25,720 33,951
Union or ganization costs 29,325 58,651
Purchased gas adjustments 1,782,590 -
Statement 109 implementation 20,484 20,484
Other 12,938 25,414
$2,199,434 601,667
REGULATORY LIABILITIES:
Refunds from suppliers - due customers 23,865 682,851
Purchased gas adjustments - 236,999
$ 23,865 919,850
</TABLE>
All significant intercompany transactions have been eliminated in
consolidation.
<PAGE>
UTILITY PLANT
Utility plant is stated at original cost. The cost of additions to utility
plant includes direct labor and overhead. The cost of depreciable property
retired, plus cost of dismantling, 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 and amortization 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 20 percent, except for propane plant and certain other utility
plant which are depreciated on a straight-line basis over the assets' estimated
useful lives. The annual composite rates are determined by depreciation
studies performed for rate-making purposes; however, these studies provide
estimated useful lives which are materially consistent with generally accepted
accounting principles, and accordingly, no significant differences in annual
depreciation and amortization expense amounts occur as a result of regulation.
ROANOKE GAS COMPANY
20
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, which consist primarily of propane gas and natural gas firm
and winter storage, are valued at the lower of cost (average cost) or market.
UNBILLED REVENUES
The Company bills most of its customers on a monthly cycle basis, although
certain large industrial customers are billed at or near the end of each month.
The Company records revenue based on service rendered to the end of the
accounting period. The amounts of unbilled revenues receivable included in
accounts receivable on the consolidated balance sheets in 1996 and 1995 were
$863,480 and $770,735, respectively.
INCOME TAXES
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
Statement 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date. The adoption of Statement 109 did not
have a material impact on the Company's consolidated financial statements, and
accordingly, no cumulative effect of accounting change was reported in the 1994
consolidated statement of earnings.
BOND EXPENSES
Bond expenses are being amortized over the lives of the bonds using the
bonds outstanding method.
PURCHASED GAS ADJUSTMENTS
Pursuant to the provisions of the Company's purchased gas adjustment (PGA)
clause, increases or decreases in gas costs are passed on to its customers.
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 and amounts are
reflected in customer billings.
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all
of its employees. Generally, the Company's funding policy is to contribute
annually an amount equal to that which can be deducted for federal income tax
purposes. Pension costs are computed based upon the provisions of Statement
of Financial Accounting Standards No. 87.
<PAGE>
The Company also provides certain health care, supplemental retirement and
life insurance benefits to active and retired employees. Effective October 1,
1993, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS, which establishes a new accounting principle for the cost of retiree
health care and other postretirement benefits (see also note 6). The
cumulative effect of the change in method of accounting for postretirement
benefits other than pensions is being amortized on a straight-line basis over a
20-year period.
NET EARNINGS PER SHARE
Net earnings per share are based on the weighted average number of shares
outstanding during the year (1,455,999 shares in 1996, 1,408,659 shares in 1995
and 1,339,402 shares in 1994). The calculation of weighted average shares
outstanding for 1996 does not include the effect of common stock equivalents
(CSEs), since the impact of including CSEs in the weighted average shares
outstanding is less than three percent.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
1996 ANNUAL REPORT
21
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the changes in the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
Balances, beginning of year $ 171,947 318,834 287,189
Provision for doubtful accounts 550,777 345,585 468,183
Recoveries of accounts written off 131,499 91,941 107,117
Accounts written off (574,907) (584,413) (543,655)
Balances, end of year $ 279,316 171,947 318,834
</TABLE>
(3) BORROWINGS UNDER LINES OF CREDIT
The Company had total short-term lines of credit of $18,000,000 in 1996 and
$13,000,000 in 1995 and 1994. The balances outstanding under these lines of
credit at September 30, 1996, 1995 and 1994 were $6,652,500, $1,442,000 and
$5,235,000, respectively. The balance outstanding at September 30, 1996
reflects the effect of the Company's partial refinance of borrowings under
lines of credit on a long-term basis subsequent to year end (see note 4).
The highest month-end balances outstanding under these lines of credit were
$7,587,000, $7,186,000 and $5,250,000 in 1996, 1995 and 1994, respectively.
The average month-end balances outstanding were approximately $4,453,000,
$2,809,000 and $2,658,000 in 1996, 1995 and 1994, respectively. The average
interest rates on the lines of credit were approximately 5.84 percent, 6.07
percent and 3.90 percent for 1996, 1995 and 1994, respectively. The lines are
subject to annual renewal and do not require compensating balances. The
average interest rates were 5.71 percent, 6.27 percent and 5.22 percent on
balances outstanding at September 30, 1996, 1995 and 1994, respectively.
<PAGE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
ROANOKE GAS COMPANY:
First mortgage bonds, collateralized by utility plant:
Series K, 10%, due July 1, 2002, with provision
for retirement of
$265,000 each year through 2001 with a
final payment of $290,000 $1,615,000 1,880,000
Series L, 10.375%, due April 1, 2004, with
provision for retirement of $334,000
each year through 2003 with a final payment
of $324,000 2,662,000 2,996,000
Term debentures, collateralized by indenture
dated October 1, 1991,
with provision for retirement in varying
annual payments through
October 1, 2016 and interest rates ranging
from 6.75% to 9.625%,
partially refinanced subsequent to year end 7,200,000 8,400,000
Unsecured senior notes payable, with interest
rate fixed at 7.66%,
with provision for retirement of
$1,600,000 for each year beginning in
November 2014 thr ough November 2018 8,000,000 -
Unsecured notes payable, with interest rates
ranging from 5% to 7.64%,
with provision for retirement of
$3,000,000 on October 19, 1996
and $1,000,000 on November 22, 1996,
refinanced subsequent to
year end - 4,000,000
Obligations under capital leases, due in
aggregate monthly payments
of $3,076, including imputed interest,
through August 1998 64,547 94,962
</TABLE>
CONTINUED
ROANOKE GAS COMPANY
22
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(4) LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
BLUEFIELD GAS COMPANY:
Unsecured installment loan, with interest rate
based on prime
(8.25% and 8.75% at September 30, 1996 and 1995,
respectively),
with provision for retirement of $50,000 for
each year through
1997 and a final payment of $12,500 on January
31, 1998,
partially refinanced subsequent to year end $ 50,000 112,500
Unsecured notes payable, with interest rate fixed
at 7.28%,
with provision for retirement of $25,000
quarterly in fiscal years
2003 and 2004 and a final payment of $1,100,000
in November 2004 1,300,000 -
Unsecured note payable, with inter est rate fixed
at 5.8%, with
provision for retirement in full in August
1996 - 500,000
Unsecured note payable, with interest based on 30-
day LIBOR plus
120 basis points (7.075% at September 30, 1995),
with provision
for retirement in full on October 18, 1996,
refinanced subsequent to year end - 700,000
Total long-term debt 20,891,547 18,683,462
Less current maturities of long-term debt (669,423) (1,179,415)
Total long-term debt, excluding current installments $ 20,222,124 17,504,047
</TABLE>
The $8,000,000 unsecured senior notes payable and $1,300,000 unsecured
notes payable have been classified as long-term debt in accordance with the
Company's refinance of current installments of long-term debt and borrowings
under lines of credit on a long-term basis, consistent with financing
agreements dated November 11, 1996 and October 23, 1996, respectively.
The above debt obligations contain various provisions including a minimum
interest charge coverage ratio, limitations on debt as a percentage of total
capitalization, and limitations on total liabilities as a percentage of
tangible net worth. 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, 1996, a total of $4,000,000 of
retained earnings was available for dividends.
<PAGE>
The aggregate annual maturities of long-term debt, including obligations
under capital leases, subsequent to September 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30,
<S> <C>
1997 $ 669,423
1998 643,124
1999 599,000
2000 599,000
2001 599,000
Thereafter 17,782,000
Total $ 20,891,547
</TABLE>
(5) INCOME TAXES
As discussed in note 1, the Company adopted the provisions of Statement 109
as of October 1, 1993. The adoption of Statement 109 did not have a material
impact on the Company's consolidated financial statements, and accordingly, no
cumulative effect of accounting change was reported in the 1994 consolidated
statement of earnings. Prior years' consolidated financial statements were not
restated to apply the provisions of Statement 109.
1996 ANNUAL REPORT
23
<PAGE>
Roanoke Gas Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(5) INCOME TAXES (CONTINUED)
The details of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
Charged to other operating expenses - gas utilities:
Current
Federal $ 206,399 1,104,505 917,069
State (40,248) 48,649 30,807
Total current 166,151 1,153,154 947,876
Deferred:
Federal 777,772 (370,870) (256,945)
State 58,621 (32,198) (8,457)
Total deferred 836,393 (403,068) (265,402)
Investment tax credits, net (38,649) (38,649) (36,032)
Total charged to other operating expenses - gas
utilities 963,895 711,437 646,442
Charged to other income and deductions - gas utilities:
Current:
Federal 22,195 14,587 (6,372)
State 665 (40) 764
Total current 22,860 14,547 (5,608)
Deferred:
Federal (374) - -
State - - -
Total deferred (374) - -
Total charged to other income and deductions - gas
utilities 22,486 14,547 (5,608)
Charged to other operating expenses - propane
operations:
Current:
Federal 153,044 200,022 193,795
State 32,333 44,715 43,433
Total current 185,377 244,737 237,228
Deferred:
Federal (6,052) (15,528) (2,443)
State (2,266) (5,192) 4,284
Total deferred (8,318) (20,720) 1,841
Total charged to other operating expenses - propane
operations 177,059 224,017 239,069
Total income tax expense $ 1,163,440 950,001 879,903
</TABLE>
ROANOKE GAS COMPANY
24
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(5) INCOME TAXES (CONTINUED)
Income tax expense for the years ended September 30, 1996, 1995 and 1994
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,
1996 1995 1994
<S> <C> <C> <C>
Net earnings $ 2,196,672 1,777,240 1,677,098
Income tax expense 1,163,440 950,001 879,903
Earnings before income taxes $ 3,360,112 2,727,241 2,557,001
Computed "expected" income tax expense 1,142,438 927,262 869,380
Increase (reduction) in income tax expense resulting
from:
Amortization of deferred investment tax credits (38,649) (38,649) (36,032)
Other, net 59,651 61,388 46,555
Total income tax expense $ 1,163,440 950,001 879,903
</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,
1996 1995
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful
accounts $ 105,602 60,898
Accrued pension and medical benefits, due to
accrual for
financial reporting purposes in excess of
actual contributions 682,471 687,828
Accrued vacation and bonuses, due to accrual for
financial reporting purposes 164,542 151,392
Purchased gas adjustments, due to accrual for
financial reporting
purposes in excess of actual payments to
customers - 100,873
Other 92,456 23,697
Total gross deferred tax assets 1,045,071 1,024,688
Less valuation allowance - -
Net deferred tax assets 1,045,071 1,024,688
Deferred tax liabilities:
Utility plant, due to differences in depreciation 2,912,432 2,653,872
Purchased gas adjustments, due to actual payments
to
customers in excess of accrual for financial
reporting purposes 620,788 -
Prepaid expenses and other assets, due to
capitalization for
financial reporting purposes 93,290 124,554
Total gross deferred tax liabilities 3,626,510 2,778,426
Net deferred tax liability $ 2,581,439 1,753,738
</TABLE>
<PAGE>
The Company has determined that a valuation allowance for the gross
deferred tax assets was not necessary at September 30, 1996 and 1995, since
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws, as well as the reversal of the temporary differences which gave rise to
the deferred tax liabilities.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
1996 ANNUAL REPORT
25
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(6) EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension 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.
Pension expense includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
Service cost for the current year $ 148,465 127,908 146,849
Interest cost on the projected benefit obligation 397,458 376,147 370,811
Actual return on assets held in the plan (717,703) (988,813) (96,300)
Net amortization and deferral of unrecognized gains and
losses 372,234 727,706 (182,032)
Special termination benefits cost related to the early
retirement incentive plan - 168,730 -
Net pension expense $ 200,454 411,678 239,328
</TABLE>
The Plan's funded status is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation:
Vested $ 4,241,528 3,955,511
Nonvested 30,872 28,742
Accumulated benefit obligation 4,272,400 3,984,253
Effect of anticipated future compensation levels and
other events 1,343,289 1,292,654
Projected benefit obligation 5,615,689 5,276,907
Fair value of assets held in the plan (5,498,868) (4,971,725)
Unfunded excess of projected benefit obligation over plan
assets $ 116,821 305,182
</TABLE>
<PAGE>
The unfunded excess of projected benefit obligation over plan assets
consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
Net unrecognized gain from past experience different
than assumed $ (1,283,944) (1,166,807)
Unamortized transition liability 435,421 540,865
Unrecognized prior service cost 94,377 113,251
Accrued pension cost included in the consolidated balance
sheets 870,967 817,873
Total $ 116,821 305,182
</TABLE>
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation were 7.75 percent for 1996
and 1995 and 8 percent for 1994. The rates of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation in 1996, 1995 and 1994 were 4 percent for compensation increases
through December 31, 1996 and 5 percent for compensation increases thereafter.
The assumed long-term rate of return on assets was 8.5 percent for 1996, 1995
and 1994.
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 for 1996 and 1995; the plan was
noncontributory for 1994. The Company has elected to fund the plan over future
years.
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as of October 1, 1993. The
transition obligation resulting from this change in accounting principle of
$4,746,000 was determined as of October 1, 1993 and is being amortized on a
straight-line basis over a 20-year period. The adoption of Statement 106
resulted in an increase in net periodic postretirement benefits cost for the
year ended September 30, 1994 from approximately $296,000 under the pay-as-you-
go method to $649,936 under Statement 106, with approximately 67 percent of the
consolidated annual cost being recovered from the Company's customers through
rates. The effect of adopting Statement 106 on net earnings was a decrease of
$77,087, or $.06 per share.
ROANOKE GAS COMPANY
26
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(6) EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table presents the plan's funded status reconciled with the
amounts recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees $ 2,448,483 2,464,992
Fully eligible active plan participants 646,587 1,026,018
Other active plan participants 1,202,667 1,319,200
Total accumulated postretirement benefits obligation 4,297,737 4,810,210
Plan assets at fair value, principally cash equivalents
and mutual funds (971,630) (651,155)
Accumulated postretirement benefits obligation in excess
of plan assets 3,326,107 4,159,055
Unrecognized net gain 1,322,715 743,605
Unrecognized transition obligation (4,034,100) (4,271,400)
Postretirement benefits cost included in accrued
expenses $ 614,722 631,260
</TABLE>
The unrecognized net gain of $743,605 as of September 30, 1995 has been
reduced by the curtailment loss of $195,258 resulting from the early retirement
incentive plan offered by the Company in 1995.
Net periodic postretirement benefits cost includes the following
components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
Service cost for the current year $ 89,000 86,613 79,506
Interest cost on the accumulated postretirement
benefits obligation 363,000 320,992 333,464
Return on assets held in the plan (40,000) (35,000) (6,020)
Amortization of transition obligation 237,300 237,300 237,300
Net total of other components (16,000) (7,583) 5,686
Special termination benefits cost related to the early
retirement incentive plan - 242,319 -
Net periodic postretirement benefits cost $ 633,300 844,641 649,936
</TABLE>
For measurement purposes, 10.5 percent, 11 percent and 12 percent annual
rates of increase in the per capita cost of covered benefits (i.e., medical
trend rate) were assumed for 1996, 1995 and 1994, respectively; the rates were
assumed to decrease gradually to 6.25 percent by the year 2005 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, 1996 by
approximately $254,218 and the aggregate of the service and interest cost
components of net postretirement benefits cost by approximately $51,636.
<PAGE>
The weighted average discount rates used in determining the accumulated
postretirement benefits obligation were 7.75 percent at September 30, 1996 and
1995 and 8 percent at September 30, 1994.
During 1995, the Company offered a voluntary early retirement incentive
plan to all employees over age 55 who were vested in the Company's pension
plan. Of the 25 eligible employees, 12 accepted the early retirement offer by
the April 26, 1995 deadline. The total cost of the early retirement incentive
plan was $444,367, of which $125,904 was expensed directly in the Company's
third quarter and $318,463 was established as a regulatory asset, with
amortization beginning in fiscal year 1996 when rates were placed into effect
to allow recovery of the capitalized costs. The costs expensed during the
third quarter of 1995 related to the portion of the plan costs that would be
amortized during the period between the recognition of the plan costs and the
implementation of new rates, which provide for plan cost recovery, in fiscal
year 1996. The Company recorded $71,695 of amortization expense related to
this regulatory asset during the year ended September 30, 1996.
The Company also has a defined contribution thrift plan covering all of its
employees who elect to participate. The Company makes annual contributions to
the plan based on 50 percent of the net participants' basic contributions (from
1 percent to 6 percent of their total compensation). The annual cost of the
plan was $134,188, $132,261 and $132,683 for 1996, 1995 and 1994, respectively.
During 1996, the Company's Board of Directors approved management's proposal to
convert the thrift plan into a 401(k) plan effective October 1, 1996. The plan
conversion will not have a significant impact on the annual cost of the plan.
1996 ANNUAL REPORT
27
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(7) COMMON STOCK OPTIONS
During 1996, the Company's stockholders approved the Roanoke Gas Company Key
Employee Stock Option Plan. The plan provides for the issuance of common
stock options to officers and certain other full-time salaried employees to
acquire a maximum of 50,000 shares of the Company's common stock. The plan
requires each option's exercise price per share to equal the fair value of the
Company's common stock as of the date of grant.
The aggregate number of shares under option pursuant to the Roanoke Gas
Company Key Employee Stock Option Plan are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options granted 13,000 $15.50
Options outstanding, September 30, 1996 13,000 $15.50
</TABLE>
Under the terms of the plan, the options become exercisable six months from
the grant date and expire ten years subsequent to the grant date. All options
outstanding were fully vested and exercisable at September 30, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION(Statement 123). The Company is required to adopt the provisions
of Statement 123 in fiscal year 1997. The Company plans to retain the
intrinsic value method of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, for recognizing stock-based compensation in the consolidated
financial statements. The Company is still evaluating the new disclosure
requirements of Statement 123; however, management believes the adoption of
this Statement will not have a material impact on the Company's consolidated
financial position or results of operations.
(8) RELATED PARTY TRANSACTIONS
Certain of the Company's directors render various business services or
products to the Company. The services included legal fees of approximately
$69,000, $173,000 and $197,000 in 1996, 1995 and 1994, respectively, and
construction costs of approximately $1,963,000 in 1994. The products included
natural gas purchases of approximately $1,950,000 in 1996 and $1,250,000 in
1995. It is anticipated that similar services and products will be provided to
the Company in 1997.
<PAGE>
(9) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data as previously reported for the years ended
September 30, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Operating revenues $ 17,993,759 29,625,390 10,435,031 7,716,693
Operating earnings (loss) $ 1,865,501 2,412,749 38,336 (281,282)
Net earnings (loss) $ 1,434,772 1,954,256 (407,940) (784,416)
Net earnings (loss) per share $ 1.00 1.35 (.28) (.56)
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
Operating revenues $ 14,115,726 18,949,627 8,995,204 6,550,590
Operating earnings $ 1,046,530 2,267,518 193,645 14,565
Net earnings (loss) $ 558,602 1,795,737 (237,891) (339,208)
Net earnings (loss) per share $ .40 1.28 (.17) (.25)
</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.
ROANOKE GAS COMPANY
28
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(10) BUSINESS AND CREDIT CONCENTRATIONS
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. The Company also serves propane customers in
southwestern Virginia and southern West Virginia through its nonregulated
subsidiary.
During 1996, 1995 and 1994, no single customer accounted for more than 5
percent of the Company's sales, and no account receivable from any customer
exceeded 5 percent of the Company's total stockholders' equity at September 30,
1996 and 1995.
(11) FRANCHISES
Roanoke Gas Company (Roanoke Gas) and Commonwealth Public Service
Corporation, a subsidiary of Bluefield Gas Company, currently hold the only
franchises and/or certificates of public convenience and necessity to
distribute natural gas in their respective Virginia service areas. The
franchises generally extend for multi-year periods and are renewable by the
municipalities. Certificates of public convenience and necessity, which are
issued by the State Corporation Commission of Virginia, are of perpetual
duration, subject to compliance with regulatory standards.
In July 1996, Roanoke Gas and the City of Roanoke signed a new multi-year
franchise agreement, providing for approximately $42,000 in annual franchise
fees, with a 3 percent annual fee increment. This new agreement, which was
effective January 1, 1996, has a 20-year term. In addition, Roanoke Gas signed
new multi-year franchise agreements with the City of Salem and the Town of
Vinton in July 1996. The new agreements provide for annual franchise fees of
approximately $14,000, with 3 percent annual fee increments. The new
agreements, which were effective January 1, 1996, have 20-year terms.
Bluefield Gas Company holds the only franchise to distribute natural gas in
its West Virginia service area. Its franchise extends for a period of 30 years
from August 23, 1979.
Management anticipates that the Company will be able to renew all of its
franchises when they expire. There can be no assurance, however, that a given
jurisdiction will not refuse to renew a franchise or will not in connection
with the renewal of a franchise, impose certain restrictions or conditions
that could adversely affect the Company's business operations or financial
condition.
(12) ENVIRONMENTAL MATTERS
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. The process involved heating coal in a low-oxygen environment to
produce a manufactured gas that could be distributed through the Company's
pipeline system to customers. A by-product of the process was coal tar, and
the potential exists for on-site tar waste contaminants at both former plant
sites. The extent of contaminants at these sites is unknown at this time, and
the Company has not performed a formal analysis at the Roanoke Gas Company MGP
site. 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 these prior operations.
Therefore, the Company has no plans for subsurface remediation at either of the
MGP sites. Should the Company eventually be required to remediate either of the
<PAGE>
MGP sites, the Company will pursue all prudent and reasonable means to recover
any related costs, including insurance claims and regulatory approval for rate
case recognition of expenses associated with any work required. Based upon
prior orders of the State Corporation Commission of Virginia related to
environmental matters at other companies, the Company believes it will be able
to recover prudently incurred costs. Additionally, a stipulated rate case
agreement between the Company and the West Virginia Public Service Commission
recognizes 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 which
are anticipated to be recoverable in future rates. Based on anticipated
regulatory actions and current practices, management believes that any costs
incurred related to the previously-mentioned environmental matters will not
have a material effect on the Company's consolidated financial position.
(13) COMMITMENTS
The Company has six short-term contracts with five natural gas suppliers
requiring the purchase of approximately 4,222,000 DTH of natural gas at varying
prices during the period October 1, 1996 through September 30, 1997. The
Company has also provided notice of bid awards to three fuel suppliers, and
anticipates these notices to result in three contracts to purchase an
additional 1,787,000 DTH of natural gas at varying prices during fiscal year
1997. In addition, the Company has short-term contracts with two propane
suppliers requiring the purchase of 1,040,000 gallons of propane during the
period October 1, 1996 through September 30, 1997. Management does not
anticipate that these contracts will have a material impact on the Company's
fiscal year 1997 consolidated results of operations.
1996 ANNUAL REPORT
29
<PAGE>
Roanoke Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995 and Years Ended September 30, 1996, 1995 and 1994
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Statement 107), requires the Company to
disclose estimated fair values of its financial instruments. Statement 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
fair value.
CASH AND CASH EQUIVALENTS
The carrying amount is a reasonable estimate of fair value.
LONG-TERM DEBT
The fair value of long-term debt is estimated by discounting the future
cash flows of each instrument at rates currently offered to the Company for
similar debt instruments of comparable maturities.
BORROWINGS UNDER LINES OF CREDIT
The carrying amount is a reasonable estimate of fair value since the rates
of interest paid on borrowings under lines of credit approximate market rates.
The carrying amounts and approximate fair values of the Company's financial
instruments at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING APPROXIMATE
AMOUNTS FAIR VALUES
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 633,322 633,322
Total financial assets $ 633,322 633,322
FINANCIAL LIABILITIES:
Long-term debt $ 20,891,547 22,057,130
Borrowings under lines of credit 6,652,500 6,652,500
Total financial liabilities $ 27,544,047 28,709,630
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
<PAGE>
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
Significant assets that are not considered financial assets include utility
plant, nonutility property, current deferred income taxes, purchased gas
adjustments and other assets; significant liabilities that are not considered
financial liabilities are refunds from suppliers - due customers, noncurrent
deferred income taxes and deferred investment tax credits. In addition, the
tax ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in the estimates.
(15) STATEMENT 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF(Statement 121).
Statement 121 requires companies to review long-lived assets and certain
identifiable intangibles to be held, used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company is required to adopt the
provisions of Statement 121 in fiscal year 1997. The Company believes the
adoption of Statement 121 will not have a material impact on its consolidated
financial statements.
ROANOKE GAS COMPANY
30
<PAGE>
Roanoke Gas Company and Subsidiaries
SUMMARY OF GAS SALES AND STATISTICS
Years Ended September 30,
<TABLE>
<CAPTION>
REVENUES: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Residential Sales $ 33,981,835 $ 25,078,211 $ 29,844,636 $ 27,841,933 $ 23,439,809
Commercial Sales 20,219,289 14,313,723 16,979,230 16,005,765 13,683,948
Interruptible Sales 4,569,766 3,513,181 5,607,002 9,262,947 7,954,908
Transportation Gas Sales 943,215 909,515 610,682 53,611 -
Backup Services 190,310 107,652 222,025 - -
Late Payment Charges 135,838 115,130 194,156 147,814 22,893
Miscellaneous 27,154 24,325 67,576 193,449 210,818
Propane 5,703,466 4,549,410 4,670,550 4,210,160 3,835,622
Total $ 65,770,873 $ 48,611,147 $ 58,195,857 $ 57,715,679 $ 49,147,998
NET INCOME $ 2,196,672 $ 1,777,240 $ 1,677,098 $ 1,441,336 $ 1,305,125
MCF'S DELIVERED:
Residential 5,108,553 4,204,222 4,701,703 4,508,694 4,146,456
Commercial 3,385,962 2,834,884 2,981,888 2,853,079 2,762,004
Interruptible 1,088,921 1,240,658 1,521,663 2,377,236 2,430,061
Transportation Gas 1,549,854 1,660,504 1,022,892 81,336 -
Backup Service 36,658 21,609 38,892 - -
Total 11,169,948 9,961,877 10,267,038 9,820,345 9,338,521
GALLONS DELIVERED (PROPANE) 5,997,912 4,822,277 5,012,830 4,586,334 4,178,671
HEATING DEGREE DAYS 4,696 3,791 4,416 4,356 3,986
NUMBER OF CUSTOMERS:
Residential 46,007 44,873 43,734 42,232 41,695
Commercial 5,043 4,896 4,767 4,512 4,429
Interruptible And Interruptible
Transportation Service 44 44 43 44 48
Total 51,094 49,813 48,544 46,788 46,172
<PAGE>
GAS ACCOUNT (MCF):
Natural Gas Purchases And Storage 11,756,089 10,453,696 10,795,928 10,430,635 9,960,017
Gas Made - Propane - - 14,008 - -
Total Available 11,756,089 10,453,696 10,809,936 10,430,635 9,960,017
Natural Gas Deliveries 11,169,948 9,961,877 10,267,038 9,820,345 9,338,521
Storage - LNG 142,297 118,393 134,893 153,478 168,761
Company Use And Miscellaneous 54,140 46,532 50,356 66,211 82,470
System Loss 389,704 326,894 357,649 390,601 370,265
Total Gas Available 11,756,089 10,453,696 10,809,936 10,430,635 9,960,017
TOTAL ASSETS $ 58,921,099 $ 51,614,667 $ 49,579,447 $ 48,758,728 $ 45,325,270
LONG-TERM OBLIGATIONS $ 20,222,124 $ 17,504,047 $ 16,414,900 $ 16,530,499 $ 16,936,500
</TABLE>
1996 ANNUAL REPORT
31
<PAGE>
Roanoke Gas Company and Subsidiaries
SUMMARY OF CAPITALIZATION STATISTICS
Years Ended September 30,
<TABLE>
<CAPTION>
COMMON STOCK: 1 996 1 995 1 994 1 993 1 992
<S> <C> <C> <C> <C> <C>
Shares Issued 1,475,843 1,432,512 1,382,343 1,289,302 1,269,924
Net Earnings Per Share $ 1.51 $ 1.26 $ 1.25 $ 1.13 $ 1.03
Dividends Paid Per Share (Cash) $ 1.02 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Dividends Paid Out Ratio 67.5% 79.4% 80.0% 88.9% 97.1%
Number Of Shareholders 1,713 1,699 1,625 901 911
CAPITALIZATION RATIOS:
Long-Term Debt,
Including Current Maturities 52.4 51.6 51.0 54.5 55.9
Common Stock And Surplus 47.6 48.4 49.0 45.5 44.1
Total 100.0 100.0 100.0 100.0 100.0
Long-Term Debt,
Including Current Maturities $ 20,891,547 $ 18,683,462 $ 17,087,046 $ 17,549,817 $ 17,935,500
Common Stock And Surplus 18,975,001 17,555,172 16,424,919 14,652,663 14,176,330
TOTAL CAPITALIZATION
PLUS CURRENT MATURITIES $ 39,866,548 $ 36,238,634 $ 33,511,965 $ 32,202,480 $ 32,111,830
</TABLE>
ROANOKE GAS COMPANY
32
<PAGE>
ROANOKE GAS COMPANY
BOARD OF DIRECTORS
LYNN D. AVIS
AVIS CONSTRUCTION COMPANY
PRESIDENT
ABNEY S. BOXLEY, III
W. W. BOXLEY COMPANY
PRESIDENT
FRANK T. ELLETT
VIRGINIA TRUCK CENTER, INC.
PRESIDENT
FRANK A. FARMER, JR.
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
WILBUR L. HAZLEGROVE
LAW FIRM OF WOODS, ROGERS & HAZLEGROVE, P.L.C.
MEMBER
W. BOLLING IZARD
W. BOLLING IZARD SURETY & CONSULTING AGENCY, INC.
PRESIDENT
J. ALLEN LAYMAN
R & B COMMUNICATIONS, INC.
PRESIDENT & CEO
JOHN H. PARROTT
JOHN H. PARROTT ASSOCIATES
PRESIDENT
THOMAS L. ROBERTSON
CARILION HEALTH SYSTEM &
CARILION MEDICAL CENTER
PRESIDENT
S. FRANK SMITH
COASTAL COAL SALES INC.
EXECUTIVE VICE PRESIDENT
(Photo appears here with the following caption:)
ROANOKE GAS COMPANY
Officers (left to right): Arthur L. Pendleton, Roger L. Baumgardner, Frank A.
Farmer, Jr., Jane N. O'Keeffe, John B. Williamson III, and J. David Anderson.
OFFICERS
FRANK A. FARMER, JR.
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
JANE N. O'KEEFFE
ASSISTANT VICE PRESIDENT - HUMAN RESOURCES
ROGER L. BAUMGARDNER
VICE PRESIDENT, SECRETARY & TREASURER
J. DAVID ANDERSON
ASSISTANT SECRETARY & ASSISTANT TREASURER
ARTHUR L. PENDLETON
VICE PRESIDENT - OPERATIONS
JOHN B. WILLIAMSON, III
VICE PRESIDENT - RATES & FINANCE
<PAGE>
BLUEFIELD GAS COMPANY
BOARD OF DIRECTORS
ROGER L. BAUMGARDNER
ROANOKE GAS COMPANY
VICE PRESIDENT, SECRETARY & TREASURER
JOHN C. SHOTT
PAPER SUPPLY COMPANY
PRESIDENT
FRANK A. FARMER
PRESIDENT
FRANK A. FARMER, JR.
ROANOKE GAS COMPANY
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
SCOTT H. SHOTT
PAPER SUPPLY COMPANY
SECRETARY & TREASURER
JOHN H. PARROTT
JOHN H. PARROTT ASSOCIATES
PRESIDENT
ARTHUR L. PENDLETON
VICE PRESIDENT - OPERATIONS
OFFICERS
FRANK A. FARMER
PRESIDENT
ARTHUR L. PENDLETON
ROANOKE GAS COMPANY
VICE PRESIDENT - OPERATIONS
JOHN B. WILLIAMSON, III
VICE PRESIDENT - RATES & FINANCE
ROGER L. BAUMGARDNER
SECRETARY & TREASURER
DIVERSIFIED ENERGY COMPANY
T/A Highland Propane Company & Highland Gas Marketing
BOARD OF DIRECTORS
ROGER L. BAUMGARDNER
ROANOKE GAS COMPANY
VICE PRESIDENT, SECRETARY & TREASURER
S. FRANK SMITH
COASTAL COAL SALES, INC.
EXECUTIVE VICE PRESIDENT
FRANK T. ELLETT
VIRGINIA TRUCK CENTER, INC.
PRESIDENT
<PAGE>
FRANK A. FARMER, JR.
ROANOKE GAS COMPANY
CHAIRMAN OF THE BOARD, PRESIDENT & CEO
ARTHUR L. PENDLETON
ROANOKE GAS COMPANY
VICE PRESIDENT - OPERATIONS
OFFICERS
ARTHUR L. PENDLETON
VICE PRESIDENT - OPERATIONS
FRANK A. FARMER
PRESIDENT
JOHN B. WILLIAMSON, III
VICE PRESIDENT - RATES & FINANCE
ROGER L. BAUMGARDNER
SECRETARY & TREASURER
<PAGE>
Notice of Annual Meeting
The annual meeting of stockholders
of Roanoke Gas Company will be held
at the Executive Office of the Company,
519 Kimball Avenue, N.E.,
Roanoke, Virginia at 9:00 a.m.,
Monday, January 27, 1997.
(Roanoke Gas logo appears here)
Roanoke Gas
Your Choice for Comfort and Economy.
P.O. Box 13007
Roanoke, Virginia 24030-3007
540-983-3800
Roanoke Gas Company trades on Nasdaq as RGCO.
Transfer Agent and Dividend Disbursing Agent
First Union National Bank of North Carolina
Dividend Reinvestment Services
P.O. Box 1154
Charlotte, North Carolina 28288-1154
1-800-829-8432
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM ROANOKE GAS
COMPANY'S ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1996, AS
SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 40,910,506
<OTHER-PROPERTY-AND-INVEST> 2,333,225
<TOTAL-CURRENT-ASSETS> 14,832,708
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 844,660
<TOTAL-ASSETS> 58,921,099
<COMMON> 7,379,215
<CAPITAL-SURPLUS-PAID-IN> 4,647,163
<RETAINED-EARNINGS> 6,948,623
<TOTAL-COMMON-STOCKHOLDERS-EQ> 18,975,001
0
0
<LONG-TERM-DEBT-NET> 20,222,124
<SHORT-TERM-NOTES> 6,652,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 669,423
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 12,402,051
<TOT-CAPITALIZATION-AND-LIAB> 58,921,099
<GROSS-OPERATING-REVENUE> 65,770,873
<INCOME-TAX-EXPENSE> 963,895
<OTHER-OPERATING-EXPENSES> 60,771,674
<TOTAL-OPERATING-EXPENSES> 61,735,569
<OPERATING-INCOME-LOSS> 4,035,304
<OTHER-INCOME-NET> 77,740
<INCOME-BEFORE-INTEREST-EXPEN> 4,113,044
<TOTAL-INTEREST-EXPENSE> 1,916,372
<NET-INCOME> 2,196,672
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,196,672
<COMMON-STOCK-DIVIDENDS> 1,491,077
<TOTAL-INTEREST-ON-BONDS> 1,252,134
<CASH-FLOW-OPERATIONS> (625,680)
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
</TABLE>
