Filed pursuant to Rule 424(b)(1)
File No. 333-43649
165,000 SHARES
[LOGO]
ROANOKE GAS COMPANY
COMMON STOCK
------------------------------------
All of the 165,000 shares of Common Stock offered hereby (the
"Offering") are being issued and sold by Roanoke Gas Company.
The Common Stock of Roanoke Gas Company is included for quotation in
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "RGCO." The last reported sale price of the Common Stock on January
20, 1998 on the Nasdaq National Market was $20.00 per share.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C>
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Per Share.................... $20.00 $0.85 $19.15
Total(3)..................... $3,300,000 $140,250 $3,159,750
</TABLE>
(1) Excluding a $7,500 financial advisory fee being paid to the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933 (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $80,000, all of which are payable by
the Company.
(3) The Company has granted the Underwriter an option, exercisable within 30
days of the date hereof, to purchase up to an additional 16,500 shares of
Common Stock solely to cover over-allotments. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $3,630,000, $154,275 and $3,475,725,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter, and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify the Offering without notice and reject orders in
whole or in part. It is expected that delivery of the Common Stock offered
hereby will be made against payment therefor on or about January 27, 1998, at
the offices of Scott & Stringfellow, Inc., Richmond, Virginia.
------------------------------------
Scott & Stringfellow, Inc.
------------------------------------
The date of this Prospectus is January 21, 1998
<PAGE>
THE COMPANY'S NATURAL GAS SERVICE TERRITORIES AND PROPANE MARKETS
[Graphic and key of a map of West Virginia and Virginia showing the
Company's natural gas service territories and propane markets appears
here.]
Communities Served by the Company:
Beckley Galax Roanoke
Bedford Hillsville Rocky Mount
Blacksburg Hinton Rupert
Bluefield Lewisburg Salem
Bramwell Lexington Smith Mountain Lake
Buchanan Marion Tazewell
Christiansburg Natural Bridge Troutville
Clifton Forge New Castle Vinton
Covington Princeton White Sulphur Springs
Fincastle Pulaski Wytheville
Floyd Radford
Fort Chiswell Rainelle
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING THE UNDERWRITER MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and
is qualified in its entirety by the more detailed information and consolidated
financial statements and notes thereto contained elsewhere in this Prospectus or
incorporated herein by reference. Unless otherwise indicated, the information in
this Prospectus assumes that the underwriter's over-allotment option will not be
exercised. All references below to the Company shall mean Roanoke Gas Company
and its subsidiary corporations. This Prospectus contains forward looking
statements within the meaning of Section 27A of the Securities Exchange Act of
1934 (the "Exchange Act"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward Looking Statements."
The Company
Roanoke Gas Company and its subsidiaries (the "Company") are engaged
primarily in the retail distribution and sale of natural gas and propane to
residential, commercial and industrial customers in southwestern Virginia and
southern West Virginia. The Company's gas utility markets include the cities of
Roanoke and Salem, Virginia and Bluefield, West Virginia, and surrounding
regions, including Roanoke County and portions of Bedford, Botetourt, Franklin,
Montgomery and Tazewell Counties, Virginia and Mercer County, West Virginia. As
of September 30, 1997, the Company's gas utility operations served approximately
52,800 natural gas customers. Of the Company's revenues in fiscal 1997 from
regulated gas operations, approximately 57% was derived from residential
customers and approximately 43% was derived from commercial and industrial
customers. The Company's gas utility operations are regulated by the State
Corporation Commission of Virginia (the "Virginia Commission") and the Public
Service Commission of West Virginia (the "West Virginia Commission").
As of September 30, 1997, the Company's unregulated propane operations
served approximately 8,800 customers and represented the fastest growing segment
of the Company. From September 30, 1993 to September 30, 1997, the Company's
propane customer base grew at a compound annual rate of approximately 17%.
Including the lease and subsequent purchase of the propane assets of U.S. Gas,
Inc. ("U.S. Gas"), a small propane company serving the Bedford, Franklin and
Smith Mountain Lake areas of Virginia, the Company's propane customer base
increased by approximately 38% in fiscal 1997. For fiscal 1997, propane and
other nonutility operations accounted for approximately 21% of the Company's
total net earnings.
<TABLE>
The Offering
<S> <C>
Common Stock offered hereby............................... 165,000 shares
Common Stock outstanding after the Offering (1)........... 1,726,803 shares
Nasdaq National Market trading symbol..................... RGCO
Range of high and low bid prices of Common Stock
(January 1, 1997 through January 21, 1998)................ $15.75 - $21.38
Closing sale price on January 20, 1998.................... $20.00
Indicated annualized dividend rate per share.............. $1.06
Book value per share at September 30, 1997................ $13.48
Use of proceeds........................................... To repay borrowings under lines of credit incurred
to fund additions to the utility plant of Roanoke
Gas Company
</TABLE>
(1) Based on the number of shares outstanding as of September 30, 1997,
adjusted to reflect the issuance of 34,317 shares of Common Stock on
December 9, 1997, in connection with the purchase of the propane assets of
U.S. Gas, and the issuance of 165,000 shares of Common Stock offered
hereby.
3
<PAGE>
<TABLE>
Summary Consolidated Financial and Operating Information
(In thousands, except share, per share and customer data)
<CAPTION>
<S> <C>
As of or for Fiscal Years Ended
September 30,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- -------------- -------------- ------------- ------------
Statement of Earnings Data:
Operating revenues:
Gas utilities $ 57,842 $ 60,068 $ 44,062 $ 53,525 $ 53,506
Propane operations 7,206 5,703 4,549 4,671 4,210
----------- ------------ ----------- ----------- -----------
Total operating revenues 65,048 65,771 48,611 58,196 57,716
Operating margin:
Gas utilities 19,167 19,305 17,034 17,415 16,251
Propane operations 3,298 2,726 2,402 2,487 2,046
----------- ------------ ---------- ---------- ----------
Total operating margin 22,465 22,031 19,436 19,902 18,297
Operating expenses 18,062 17,996 15,914 16,365 15,062
---------- ---------- --------- --------- ---------
Operating earnings 4,403 4,035 3,522 3,537 3,235
Earnings before interest charges 4,550 4,113 3,702 3,592 3,265
Net earnings $ 2,310 $ 2,197 $ 1,777 $ 1,677 $ 1,441
Net earnings per share $ 1.54 $ 1.51 $ 1.26 $ 1.25 $ 1.13
Cash dividends declared per sha re $ 1.04 $ 1.02 $ 1.00 $ 1.00 $ 1.00
Average shares outstanding 1,503,388 1,455,999 1,408,659 1,339,402 1,280,176
Balance Sheet Data:
Utility and non-utility property and plant, net $ 48,159 $ 43,244 $ 40,146 $ 37,031 $ 34,111
Total assets 62,593 58,921 51,615 49,579 48,759
Long-term debt, excluding current
installments 17,079 20,222 17,504 16,415 16,530
Common stockholders' equity 20,597 18,975 17,555 16,425 14,653
Book value per share $ 13.48 $ 12.86 $ 12.25 $ 11.88 $ 11.36
Shares outstanding at September 30 1,527,486 1,475,843 1,432,512 1,382,343 1,289,302
Customer Data:
Number of gas customers 52,763 51,094 49,813 48,544 46,788
Number of propane customers 8,829 6,410 6,006 5,684 4,648
<CAPTION>
As of September 30, 1997
--------------------------------------------------------------------
Actual As Adjusted(1)
-------------------------------- --------------------------------
Amount Percentage Amount Percentage
-------------- ------------- -------------- -------------
Capitalization:
Common stockholders' equity $ 20,597 54.7% $24,294 58.7%
Long-term debt, excluding current installments 17,079 45.3 17,079 41.3
------- -------- ------- -------
Total capitalization $ 37,676 100.0% $41,373 100.0%
======= ======== ======= =======
</TABLE>
(1) Adjusted to reflect the issuance of 34,317 shares of Common Stock on
December 9, 1997, in connection with the purchase of the propane assets of
U.S. Gas, and the issuance of 165,000 shares of Common Stock offered hereby
at the offering price of $20.00 per share and the application of estimated
proceeds therefrom as described in "Use of Proceeds."
4
<PAGE>
THE COMPANY
The Company is engaged primarily in the retail distribution and sale of
natural gas and propane to residential, commercial and industrial customers in
southwestern Virginia and southern West Virginia. Unless the context requires
otherwise, references to the Company include Roanoke Gas Company ("Roanoke Gas")
and its wholly owned regulated subsidiaries, Bluefield Gas Company ("Bluefield")
and Commonwealth Public Service Corporation ("Commonwealth"), as well as its
wholly owned unregulated subsidiary, Diversified Energy Company ("Diversified").
Roanoke Gas, a Virginia public service company, provides natural gas
service to approximately 48,000 customers in Roanoke, Virginia and surrounding
areas. Roanoke Gas' service area includes the cities of Roanoke and Salem,
Virginia and surrounding regions, including Roanoke County and portions of
Bedford, Botetourt, Franklin and Montgomery counties, Virginia. Bluefield, a
West Virginia public service corporation, provides natural gas service to
approximately 4,000 customers located in and around Bluefield, West Virginia.
Bluefield's service area extends from Princeton, West Virginia to the western
most city limits of Bluefield, West Virginia. Bluefield owns all of the issued
and outstanding stock of Commonwealth, a Virginia public service corporation,
which serves approximately 900 customers in Bluefield, Virginia and surrounding
areas. Commonwealth's service area includes principally the Town of Bluefield,
Virginia and a portion of Tazewell County, Virginia. Diversified, which is not a
regulated public utility, has two operating divisions, Highland Propane Company
("Highland Propane"), which sells propane and propane related products, and
Highland Gas Marketing ("Highland Marketing"), through which the Company assists
large industrial customers in the purchase of natural gas.
As of September 30, 1997, the Company's utility operations, which are
regulated by the Virginia and West Virginia Commissions, served approximately
52,800 natural gas customers. From September 30, 1993 to September 30, 1997, the
Company's natural gas customer base grew at a compound annual rate of
approximately 3%, and its natural gas customer base increased by approximately
3% in fiscal 1997. Based on American Gas Association ("AGA") statistics, the
compound annual growth rate of natural gas customers in the United States from
1992 to 1996 was approximately 1.6%. Of the Company's revenues from regulated
gas operations during fiscal 1997, approximately 57% was derived from
residential customers and approximately 43% was derived from commercial and
industrial customers. The Company obtains its gas supply using a mix of
long-term, mid-term and spot gas purchase contracts. The Company also regards
storage supplies as an integral part of its gas portfolio. The Company's gas
operations hold the rights to approximately 2.9 billion cubic feet ("BCF") of
natural gas storage space, including 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.
The Company's unregulated propane operations served approximately 8,800
customers as of September 30, 1997 and represent the fastest growing segment of
the Company. From September 30, 1993 to September 30, 1997, the Company's
propane customer base grew at a compound annual rate of approximately 17%.
Including the lease and subsequent acquisition of the propane assets of U.S.
Gas, the Company's propane customer base increased by approximately 38% in
fiscal 1997. For fiscal 1997, propane and other nonutility operations accounted
for approximately 21% of the Company's total net earnings.
The Company's principal executive offices are located at 519 Kimball
Avenue, N.E., Roanoke, Virginia 24016, and its telephone number is (540)
983-3800.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, estimated to be approximately $3.1 million (approximately $3.4 million
if the Underwriter's over-allotment option is exercised in full), are intended
to be used to repay borrowings under lines of credit incurred to fund additions
to the utility plant of Roanoke Gas. At September 30, 1997, the Company had
approximately $7.1 million in borrowings under lines of credit outstanding, with
a weighted average interest rate of 6.14%.
5
<PAGE>
Roanoke Gas conducts an ongoing program of expansion and replacement of its
utility plant to maintain and improve the reliability and capacity of its gas
distribution system. The Company's capital expenditures totaled approximately
$8.1 million for the year ended September 30, 1997, approximately $5.1 million
of which represented additions to the utility plant of Roanoke Gas. Total
capital expenditures for the year ending September 30, 1998 are estimated to be
approximately $7.7 million, approximately $4.8 million of which is budgeted for
use by Roanoke Gas. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources and Liquidity."
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the Nasdaq National Market under
the trading symbol RGCO. 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,
and quarterly dividends declared per share.
<TABLE>
<CAPTION>
<S> <C>
Range of Bid Prices
--------------------------- Cash Dividends
Fiscal Year Ended September 30, High Low Per Share Declared
- ------------------------------- ---- --- ------------------
1995
First Quarter $18.50 $16.00 $0.250
Second Quarter 17.00 14.00 0.250
Third Quarter 15.13 13.50 0.250
Fourth Quarter 15.00 14.25 0.250
1996
First Quarter $16.25 $14.25 $0.255
Second Quarter 18.50 15.00 0.255
Third Quarter 18.25 16.50 0.255
Fourth Quarter 17.25 14.75 0.255
1997
First Quarter $18.00 $16.75 $0.260
Second Quarter 18.25 17.00 0.260
Third Quarter 17.75 15.75 0.260
Fourth Quarter 18.13 16.00 0.260
1998
First Quarter $21.38 $17.50 $0.265
Second Quarter (through January 21, 1998) 20.75 19.25 *
</TABLE>
- -----------------
* The dividend for the second fiscal quarter will be considered by the
Board of Directors in late March, and, if declared, will be payable in May.
At September 30, 1997, the Company had 1,853 holders of record of its
Common Stock. The last reported sales price for the Common Stock on the Nasdaq
National Market was $20.00, on January 20, 1998.
Although the Company has paid continuous quarterly dividends to its
stockholders since August 1, 1944 and has increased per share dividends for
three consecutive fiscal years, 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 the
payment of dividends, primarily based on cumulative net earnings of the Company
and dividends previously paid.
6
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
consolidated basis as of September 30, 1997 and as adjusted as of such date to
reflect the issuance of 34,317 shares of Common Stock on December 9, 1997, in
connection with the purchase of the propane assets of U.S. Gas, and to give
effect to the sale of the Common Stock offered hereby at the offering price of
$20.00 per share and the application of the estimated proceeds therefrom (after
giving effect to the underwriting discounts and commissions and estimated
offering expenses payable by the Company) as described under "Use of Proceeds."
The information included in the table below is qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
<S> <C>
As of September 30, 1997
--------------------------------------------------------------------
Actual As Adjusted(1)
-------------------------------- --------------------------------
Amount Percentage Amount Percentage
-------------- ------------- -------------- -------------
(Dollars in thousands)
------------- -------------- -------------
Common Stockholders' Equity:
Common Stock.......................................... $ 7,637 $ 8,634
Capital in excess of par value........................ 5,272 7,972
Retained earnings(2).................................. 7,688 7,688
-------- --------- --------- ---------
Total common stockholders' equity.............. 20,597 54.7% 24,294 58.7%
Long-Term Debt:
Roanoke Gas Company:
First Mortgage Bonds
Series K, 10%, due July 1, 2002.................. 1,350 1,350
Series L, 10.375%, due April 1, 2004............. 2,328 2,328
Term debentures..................................... 7,200 7,200
Unsecured senior notes payable...................... 8,000 8,000
Obligations under capital leases.................... 32 32
Bluefield Gas Company:
Unsecured installment loan.......................... 12 12
Unsecured note payable.............................. 1,300 1,300
-------- --------- --------- ---------
Total long-term debt........................... 20,222 20,222
Less current installments...................... (3,143) (3,143)
-------- --------- --------- ---------
Long-term debt, less current installments...... 17,079 45.3% 17,079 41.3%
-------- --------- --------- ---------
Total capitalization........................... $ 37,676 100.0% $ 41,373 100.0 %
======== ========= ========= =========
Total borrowings under lines of credit.................. $ 7,129 $ 4,049
======= =========
- ------------------------------------
</TABLE>
(1) Adjusted to reflect the issuance of 34,317 shares of Common Stock on
December 9, 1997, in connection with the purchase of the propane assets of
U.S. Gas, and the issuance of 165,000 shares of Common Stock offered hereby
at the offering price of $20.00 per share and the application of estimated
proceeds therefrom as described in "Use of Proceeds."
(2) The Company's obligations contain various provisions including a minimum
interest charge coverage ratio and limitations on debt as a percentage of
total capitalization. The obligations also contain a provision restricting
the payment of dividends, primarily based on the earnings of the Company and
dividends previously paid. At September 30, 1997, approximately $4.4 million
of retained earnings was available for dividends.
7
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected consolidated financial and
operating data of the Company. The selected consolidated financial data as of
and for the five fiscal years ended September 30, 1997 was derived from the
audited consolidated financial statements of the Company. The financial data set
forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Results of Operations and Financial Condition," included elsewhere in this
Prospectus.
<CAPTION>
<S> <C>
As of or for Fiscal Years Ended September 30,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ -------------- ------------- ------------ -------------
(In thousands, except share, per share, customer and degree day data)
Statement of Earnings Data:
Operating revenues:
Gas utilities.............................. $ 57,842 $ 60,068 $ 44,062 $ 53,525 $ 53,506
Propane operations......................... 7,206 5,703 4,549 4,671 4,210
----------- ----------- ----------- ----------- -----------
Total operating revenues................... 65,048 65,771 48,611 58,196 57,716
Cost of gas:
Gas utilities.............................. 38,675 40,763 27,028 36,110 37,255
Propane operations......................... 3,908 2,977 2,147 2,184 2,164
----------- ----------- ----------- ----------- -----------
Total cost of gas.......................... 42,583 43,740 29,175 38,294 39,419
Operating margin:
Gas utilities.............................. 19,167 19,305 17,034 17,415 16,251
Propane operations......................... 3,298 2,726 2,402 2,487 2,046
----------- ----------- ----------- ----------- -----------
Total operating margin..................... 22,465 22,031 19,436 19,902 18,297
Operating expenses........................... 18,062 17,996 15,914 16,365 15,062
---------- ---------- ---------- ---------- ----------
Operating earnings........................... 4,403 4,035 3,522 3,537 3,235
Earnings before interest charges............. 4,550 4,113 3,702 3,592 3,265
Net earnings................................. $ 2,310 $ 2,197 $ 1,777 $ 1,677 $ 1,441
Net earnings per share....................... $ 1.54 $ 1.51 $ 1.26 $ 1.25 $ 1.13
Cash dividends declared per share............ $ 1.04 $ 1.02 $ 1.00 $ 1.00 $ 1.00
Average shares outstanding................... 1,503,388 1,455,999 1,408,659 1,339,402 1,280,176
Balance Sheet Data:
Utility property and plant, net.............. $ 44,065 $ 40,911 $ 38,107 $ 35,264 $ 32,039
Non-utility property and plant, net.......... 4,094 2,333 2,039 1,767 2,072
Total assets................................. 62,593 58,921 51,615 49,579 48,759
Current installments of long-term debt and
borrowings under lines of credit........... 10,272 7,322 2,621 5,907 6,019
Long-term debt, excluding current installments 17,079 20,222 17,504 16,415 16,530
Common stockholders' equity.................. 20,597 18,975 17,555 16,425 14,653
Book value per share......................... $ 13.48 $ 12.86 $ 12.25 $ 11.88 $ 11.36
Selected Other Data:
Additions to utility and non-utility property
and plant................................. $ 8,053 $ 5,523 $ 5,609 $ 5,518 $ 3,796
Depreciation and amortization expense........ $ 3,247 $ 2,810 $ 2,563 $ 2,334 $ 2,147
Number of gas customers...................... 52,763 51,094 49,813 48,544 46,788
Number of propane customers.................. 8,829 6,410 6,006 5,684 4,648
Heating degree days (normal year - 4,232).... 4,298 4,696 3,791 4,416 4,356
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The core business of the Company is the distribution of natural gas.
The Company's natural gas operation provides services to customers in the cities
of Roanoke and Salem, Virginia and Bluefield, West Virginia, and surrounding
regions, including Roanoke County and portions of Bedford, Botetourt, Franklin,
Montgomery and Tazewell Counties, Virginia and Mercer County, West Virginia.
Natural gas revenue is comprised of the sale and distribution, as well as the
transportation of natural gas to firm and interruptible customers, and is based
on rates and charges regulated by the Virginia Commission and the West Virginia
Commission. The Company also distributes and sells propane to customers in
southwestern Virginia and southern West Virginia through its Highland Propane
division. Propane has become an increasingly important aspect of the Company's
operations, with the annual growth in propane customers significantly exceeding
the annual growth in natural gas customers. See "Business."
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 requested 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 alternative fuels and/or suppliers could also impact the Company's
profitability levels. Continued public acceptance and a growing preference for
natural gas and propane as competitively priced, clean and efficient fuels for
space heating and other residential, commercial and industrial applications have
contributed to increases in the number of customers served by the Company and in
the cost of constructing plant and facilities required to serve them.
Seasonality and Sensitivity to Temperature Change
The Company's results of operations are highly seasonal and sensitive
to average temperature changes because a significant amount of the natural gas
and propane sold by the Company is used for heating purposes. Therefore, the
Company's results of operations in any given period reflect the impact of
weather, with colder average temperatures during a period resulting in increased
sales. The Company typically records a significant percentage of its total
fiscal year revenues and net earnings in its first and second fiscal quarters
(which cover the period from October 1 to March 31) and typically records
significantly lower revenues and net losses in its third and fourth fiscal
quarters (which cover the period from April 1 to September 30). In both fiscal
1997 and fiscal 1996, the Company recorded 72% of its annual revenues during the
first and second fiscal quarters.
Forward-looking Statements
This Prospectus and the documents incorporated by reference herein
contain forward-looking statements relating to anticipated financial
performance, business prospects, regulatory developments, supply arrangements
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) fluctuations in demand for natural gas and propane
attributable to weather; (ii) difficulty in obtaining rate increases from
regulatory authorities in adequate amounts and on a timely basis; (iii)
difficulty in earning on a consistent basis an adequate return on invested
capital; (iv) competition from alternative fuels for industrial and other
significant customers and fluctuations in the prices of oil, which can make oil
less costly than natural gas, and potential increased future competition
resulting from continuing industry deregulation; (v) volatility in the supply
and price of natural gas and propane; (vi) some uncertainty in projected rate of
growth of natural gas and propane requirements of the Company's customers; (vii)
increasing expenses and labor costs and availability; and (viii) general
economic conditions both locally and nationally.
9
<PAGE>
Results Of Operations
Fiscal Year 1997 Compared With Fiscal Year 1996
Operating revenues of the Company's natural gas utility operations
decreased $2,225,226 to $57,842,181 in 1997 from $60,067,407 in 1996. The volume
of natural gas delivered to customers decreased 0.4 BCF to 10.8 BCF in 1997 from
11.2 BCF in 1996. The decreases in revenues and volume delivered are primarily
attributable to weather that was approximately 8% warmer in 1997 than in 1996.
The warmer weather more than offset the impact of natural gas customer growth of
3% in 1997. The cost of natural gas was $38,675,337 in 1997 compared to
$40,763,104 in 1996. The $2,087,767 decrease was due to the 3% decline in gas
volume delivered and a 2% decrease in the average unit cost of gas purchased,
both factors of which were influenced by the warmer 1997 weather. As a result of
all of these factors, the operating margin of the Company's natural gas utility
operations decreased $137,459 to $19,166,844 in 1997 from $19,304,303 in 1996.
Operating revenues of the Company's propane operations increased
$1,502,179 to $7,205,645 in 1997 from $5,703,466 in 1996, due to the significant
growth in 1997 of the Company's propane customer base and to higher billing
rates influenced by higher average cost of propane. The Company delivered 6.6
million gallons of propane in 1997 compared to 6.0 million gallons in 1996, an
increase of 570,000 gallons or 10%, despite warmer average weather. The cost of
propane was $3,907,568 in 1997 compared to $2,976,974 in 1996. The $930,594
increase was due to the increase in sales volume and a 20% increase in the
average unit cost of propane purchased. As a result of all of these factors, the
operating margin of the Company's propane operations increased $571,585 to
$3,298,077 in 1997 from $2,726,492 in 1996.
Total operating expenses from the Company's natural gas utilities
decreased by $223,729 to $15,360,872 in 1997 from $15,584,601 in 1996. Although
the Company had modest increases in expenses associated with health insurance
and bad debt accruals, legal expenses and the write-off of regulatory assets,
these were more than offset by reductions in FAS 106 accruals and maintenance
expenses. General taxes increased $54,631 to $2,456,399 in 1997 from $2,401,768
in 1996. While there were decreases in the revenue-sensitive taxes (gross
receipts and occupation taxes), the business license and merchants taxes,
franchise taxes and property taxes increased. Income taxes were down $105,931 to
$857,964 in 1997 from $963,895 in 1996. See Note 5 of the Notes to Consolidated
Financial Statements for information on income taxes. Depreciation and
amortization expenses increased $239,465 to $2,533,912 in 1997 from $2,294,447
in 1996 due to depreciation on normal additions to plant in service. Other
operating expenses - propane operations includes the operating and maintenance
expenses, taxes and depreciation of Highland Propane. These costs increased
$289,736 to $2,700,626 in 1997 from $2,410,890 in 1996. The increase was mainly
due to depreciation on increased plant associated with customer growth and
increased income taxes associated with higher taxable income.
Other income, net of other deductions, increased $69,170 to $146,910 in
1997 from $77,740 in 1996. The increase was primarily due to jobbing revenues
and interest income and the elimination of a write-down of nonutility property
which occurred in 1996.
Total interest charges increased $324,081 to $2,240,453 in 1997 from
$1,916,372 in 1996. The increase was associated with higher borrowings under
lines of credit due to under-collections of gas costs in the early winter
months, higher receivable balances, higher inventories, increases in capital
additions and interest on rate refund reserve.
Net earnings for 1997 were $2,309,880 as compared to $2,196,672 for
1996. Net earnings per share of Common Stock were $1.54 in 1997 compared to
$1.51 in 1996. The $113,208 increase in net earnings can be attributed to cost
containment and customer growth.
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Fiscal Year 1996 Compared With Fiscal Year 1995
Operating revenues of the Company's natural gas utilities increased
$16,005,670 to $60,067,407 in 1996 from $44,061,737 in 1995. The volume of
natural gas delivered to customers increased 1.2 BCF to 11.2 BCF in 1996 from
10.0 BCF in 1995. The increase in revenues and volume delivered is attributable
to weather that was approximately 24% colder in 1996 than in 1995, as well as to
natural gas customer growth of approximately 3% in 1996. 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 the 12% increase in gas volume delivered and a 34% increase
in the average unit cost of gas purchased, both factors of which were influenced
by colder weather. As a result of all of these factors, the operating margin of
the Company's natural gas utility operations increased $2,270,073 to $19,304,303
in 1996 from $17,034,230 in 1995.
Operating revenues of the Company's propane operations increased
$1,154,056 to $5,703,466 in 1996 from $4,549,410 in 1995, due to the significant
growth in 1996 of the Company's propane customer base, to higher billing rates
influenced by the higher average cost of propane and to significantly colder
average weather in 1996 compared to 1995. The Company delivered 6.0 million
gallons of propane in 1996 compared to 4.8 million gallons in 1995, an increase
of 1.2 million gallons or 24%. The cost of propane was $2,976,974 in 1996
compared to $2,147,776 in 1995. The $829,198 increase was due to the increase in
sales volume and an 11% increase in the average unit cost of propane purchased.
As a result of all of these factors the operating margin of the Company's
propane operations increased $324,858 to $2,726,492 in 1996 from $2,401,634 in
1995.
Total operating expenses from the Company's natural gas utilities
increased by $1,697,103 to $15,584,601 in 1996 from $13,887,498 in 1995. 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 accruals (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 higher expenses
associated with market expansion, customer growth and foul weather, including
higher tank setting, delivery and marketing expenses, as well as higher
depreciation expense on increased plant.
Other income, net of other deductions, decreased significantly in 1996
to $77,740 from $179,649 in 1995. The decrease was primarily due to the 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.
Total interest charges were down $8,295 for 1996 versus 1995 due to the
liquidity of Highland Propane.
Net earnings for fiscal 1996 were $2,196,672 as compared to $1,777,240
for fiscal 1995. The $419,432 increase in net earnings can be attributed to
weather that was 11% colder than normal and 24% colder than fiscal 1995 and
increased sales from customer growth. Net earnings per share of common stock
were $1.51 in 1996 compared to $1.26 in 1995.
Capital Resources and Liquidity
The Company's primary capital needs are the funding of its continuing
pipeline construction program and the seasonal funding of its stored gas
inventories. The Company's capital expenditures for fiscal 1997 were invested in
a combination of replacement and expansion projects, reflecting the Company's
long-term program to replace older cast iron and bare steel pipe with new
plastic pipe, while continuing to meet the requirements of customer growth.
Total
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capital expenditures for fiscal 1997 were $8,052,801, allocated as follows:
$5,118,473 for Roanoke Gas, $608,106 for Bluefield Gas and $2,326,222 for
Highland Propane. In fiscal 1997, the Company recorded $3,247,015 of
depreciation and amortization expense, which was equal to 40% of its capital
expenditures for the year. The Company invested $5,522,977 in 1996 and
$5,609,292 in 1995 capital expenditures. The Company estimates that its fiscal
1998 capital expenditures will total $7,666,931, of which $4,833,360 is budgeted
for use by Roanoke Gas. The Company believes that the net proceeds from the
Offering, internally generated funds and available lines of credit will be
adequate to meet its capital requirements for fiscal 1998. The Company
anticipates that future capital expenditures will be funded with a combination
of internally generated funds, lines of credit, and issuances of debt and
equity.
At September 30, 1997, the Company had available lines of credit
totaling $20 million for its short-term borrowing needs, of which $7,129,000 was
outstanding. Short-term borrowing, in addition to providing limited capital
project bridge financing, is used to finance summer and fall gas purchases,
which are stored in the underground facilities of Columbia Gas Transmission
Corporation, Tennessee Gas Pipeline Company and Virginia Gas Storage Company, as
well as in the Company's LNG storage facility, to help ensure adequate winter
supplies to meet customer demand.
Short-term borrowings, together with internally-generated funds,
long-term debt and the sale of Common Stock through the Company's Dividend
Reinvestment and Stock Purchase Plan (the "DRP"), have been adequate to cover
construction costs, debt service and dividend payments to stockholders. The
terms of the Company's short-term borrowings under lines of credit are
negotiable, with average rates of 5.97% in 1997, 5.84% in 1996 and 6.07% in
1995. 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.
From September 30, 1996 to September 30, 1997, stockholders' equity
increased by $1,621,950, reflecting an increase of $739,231 in retained earnings
and proceeds of $882,719 from issuances of common stock through the DRP and the
Restricted Stock Plan for Outside Directors.
Accounting Changes
The Company adopted the provisions of 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"), on October 1, 1996.
Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of Statement 121 in 1997 did not have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.
Prior to October 1, 1996, the Company accounted for its stock options
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the option price. On
October 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement 123
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net earnings and pro forma net earnings per share disclosures
for stock option grants made in 1996 and future years as if the fair-value-based
method defined in Statement 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of Statement 123.
Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings
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Per Share, and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly-held
common stock or potential common stock. The Company is required to adopt the
provisions of Statement 128 for fiscal 1998. The Company believes the adoption
of Statement 128 will not have a material impact on its EPS calculations.
The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards ("SFAS") No. 129, Disclosure of Information about
Capital Structure, SFAS No. 130, Reporting Comprehensive Income, and SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. These
Statements are effective for fiscal years beginning after December 15, 1997. The
Company does not anticipate the adoption of these Statements will have a
material impact on its consolidated financial position, results of operations or
liquidity.
Impact Of Inflation
The cost of natural gas represented approximately 72% for fiscals 1997
and 1996 and 66% for fiscal 1995 of the total operating expenses of the
Company's gas utilities' operations. However, under the present regulatory
purchased gas adjustment mechanism, the increases and decreases in the cost of
gas are passed through to the Company's customers.
Inflation impacts the Company through increases in non-gas costs such
as insurance, labor costs, supplies and services used in operations and
maintenance and in the replacement cost of plant and equipment. The margin
charged to natural gas customers to cover these costs can only be increased
through the regulatory process via a rate increase application. In addition to
stressing performance improvements and higher gas sales volumes to offset
inflation, management must continually review operations and economic conditions
to assess the need for filing and receiving adequate and timely rate relief from
the Virginia Commission and the West Virginia Commission.
Franchises and Certificates of Public Convenience and Necessity
Roanoke Gas and Commonwealth 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 Virginia Commission,
are exclusive and of perpetual duration, subject to compliance with regulatory
standards.
Bluefield 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, attempt to impose certain
restrictions or conditions that could adversely affect the Company's business
operations or financial condition.
Environmental Issues
Both Roanoke Gas and Bluefield operated manufactured gas plants
("MGPs") as a source of fuel for lighting and heating until the early 1950s. 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 analyses of any environmental media at the Roanoke Gas MGP
site. An analysis at the Bluefield site indicates some 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 statutes
or regulations related to the MGP sites and is not aware of any off-site
contamination or pollution as a result
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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, although there can be no assurance this will be
the case.
BUSINESS
General
Roanoke Gas was organized as a Virginia public service corporation in
1912. The principal service of Roanoke Gas was, and continues to be, the
distribution and sale of natural gas. On May 15, 1987, Roanoke Gas, through a
series of merger transactions, acquired 100% of the outstanding stock of
Bluefield, a public service corporation, organized in 1944 under the laws of
West Virginia and principally engaged in the distribution of natural gas in
Bluefield, West Virginia and surrounding areas. Bluefield owns all of the issued
and outstanding stock of Commonwealth, a small Virginia public service
corporation organized in 1930 as the subsidiary of a predecessor corporation to
Bluefield. The distribution and sale of propane was added to the Company's line
of business in 1972 and is operated through the Company's Highland Propane
division. In addition, the Company, through its Highland Marketing division,
maintains a gas marketing operation which brokers natural gas to several
industrial customers on the Roanoke Gas and Bluefield distribution systems.
The Company's utility markets include the cities of Roanoke and Salem,
Virginia and Bluefield, West Virginia, and surrounding regions, including
Roanoke County and portions of Bedford, Botetourt, Franklin, Montgomery and
Tazewell Counties, Virginia and Mercer County, West Virginia. The Company's
propane markets are located in southwestern Virginia and southern West Virginia
and currently extend east to Lynchburg, Virginia, west to Marion, Virginia,
north to Beckley, West Virginia and south to the North Carolina border and, in
addition to the markets in the Company's gas utility territories, include
Bedford, Blacksburg, Christiansburg, Lexington, Lynchburg and Radford Virginia,
and Beckley, Princeton and Lewisburg, West Virginia. The total population of the
Company's gas utility and propane market areas is approximately 700,000.
Management believes there are strong pockets of growth in the Company's market
areas. For example, Bedford County had the fourth fastest population growth of
all the counties of Virginia from 1990 to 1996. In addition, the Company's
markets along the Interstate 81 corridor are experiencing growth in the
manufacturing and industrial sector.
Marketing and Sales
The Company experienced strong customer growth in fiscal 1997, with
customer growth of approximately 3% for its utility operations and approximately
38% for its propane operations. The Company's total combined customer base
increased from approximately 57,500 customers at September 30, 1996 to
approximately 61,600 customers at September 30, 1997, an approximately 7%
increase.
In fiscal 1997, Highland Propane surpassed 2,000 tank installations in
a single year for the first time in the Company's history. This represented a
112% increase over tank installations in fiscal 1996. Including the lease and
subsequent purchase of the propane assets of U.S. Gas, Highland Propane expanded
its marketing efforts in fiscal 1997 in Beckley, West Virginia and Rockbridge
County, Alleghany County and Bedford County, Virginia.
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The Company has intensified its marketing efforts over the last several
years. The marketing strategy for both the Company's natural gas and propane
distribution businesses is centered around developing strong relationships with
key decision makers in the local construction, retail, wholesale and service
markets, in addition to providing superior, timely customer service. Over the
last three years, the Company has increased its number of commissioned sales
representatives from one to six. These sales representatives focus on
maintaining one-on-one contact with such local decision makers, and their
primary goal is the addition of new gas customers along existing gas mains or
the addition of new propane customers. The Company also monitors and works
closely with prospective industrial and commercial customers, as well as
regional economic development groups.
Natural Gas Distribution Operations
As of September 30, 1997, the Company's utility operations served
approximately 52,800 natural gas customers through an integrated natural gas
distribution system. Natural gas is purchased from suppliers and distributed to
residential, commercial and large industrial users through the Company's
underground pipeline system. Of the Company's revenues from regulated gas
operations during fiscal 1997, approximately 57% was derived from residential
customers and 43% was derived from commercial and industrial customers. The
Company's utility operations served approximately 47,600 residential customers
and approximately 5,200 industrial and commercial customers in fiscal 1997.
The Company's natural gas distribution business accounted for 89%, 92%,
and 91% of the total Company revenues in fiscal years 1997, 1996 and 1995,
respectively. The Company's revenues are affected by the cost of natural gas,
economic conditions in the areas that the Company serves and weather conditions.
Higher gas costs, which the Company is generally able to pass through to
customers, may cause customers to conserve, or in the case of industrial
customers, to use alternative energy sources. In recent years, however,
regulatory changes at the federal level and excess supply in the natural gas
industry have led to a national spot market for natural gas and an increase in
the number of suppliers of natural gas.
Natural Gas Supplies and Storage. Since November 1, 1993, the natural
gas transportation pipelines supplying the Company, including Columbia Gas
Transmission Corporation and Columbia Gulf Transmission Corporation (together
"Columbia") and East Tennessee Natural Gas Company and Tennessee Gas Pipeline
Company (together "East Tennessee"), have operated under Federal Energy
Regulatory Commission ("FERC") Order 636. Order 636 represented a major shift in
the responsibility of gas supply procurement and management from pipeline
companies to local distribution companies, such as the Company.
Order 636 required interstate pipeline companies to unbundle or
separate gas sales, transportation and storage services. Upon the implementation
of Order 636, most pipeline companies discontinued their traditional merchant
function. This resulted in local distribution companies, like the Company,
becoming responsible for obtaining all of their gas supply in the open market.
Although the unbundling of these services provides local distribution companies
with greater flexibility in selecting and managing the type of services required
to provide their customers with the lowest possible priced gas while maintaining
reliable gas supplies, it also places responsibility on a local distribution
company to obtain gas supplies in the open market on a timely basis to fulfill
customer demand requirements during peak use periods.
In fiscal 1997 and fiscal 1996, the Company delivered 10.8 BCF and 11.2
BCF, respectively, of natural gas to its customers. The Company currently uses
long-term (one year or longer), mid-term (one month to one year) and spot (less
than one month) gas purchase contracts to meet its system requirements. The
Company's objective is to create a reliable and cost effective mixture of supply
contracts with terms that will not prohibit the Company's ability to respond to
changing market conditions or additional unbundling. The Company currently has
long-term supply contracts with Amoco Energy Trading, Cabot Oil and Gas,
Columbia Energy Services, Engage Energy, Phoenix Energy Sales Company, Texaco
Natural Gas and Southern Company Energy (Vastar), which together provide for the
supply of up to approximately 8.0 BCF of gas on an annual basis. The Company
currently has mid-term supply contracts with Duke Energy and LG& E Energy
Marketing, which together provide for the supply of up to approximately 1.5 BCF
of gas
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on an annual basis. Spot gas supply is generally always available to the Company
at current market prices, with daily deliverability determined by the amount of
capacity available under the Company's pipeline contracts. The Company's volumes
of spot gas purchases fluctuate based on demand, pricing and season.
The Company regards storage supplies as an integral component of its
gas supply portfolio. With the growth of the spot gas market, gas prices have
developed a pronounced seasonal pattern, with summer to winter price swings of
as much as 40%. The Company tries to take advantage of these price swings by
injecting lower-priced summer gas into its LNG storage facility, which is
capable of storing 220,000 decatherms ("DTH") for use during peak winter
periods. In addition, the Company has contracted for storage reserves from
Columbia, Tennessee Gas Pipeline Company and Virginia Gas Storage Company, with
a combined total of 2.7 BCF of underground storage capacity for Roanoke and
Bluefield. These reserves were available for summer 1997 storage injections
using spot market supply. The Company believes that its gas storage capacity
provides supply security with reduced exposure to potential supply
interruptions. It also offers the Company the flexibility to balance supply with
its highly-variable, weather-sensitive customer consumption patterns. In
addition, the 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.
Columbia continues to be the Company's primary transporter of natural
gas. Columbia historically has delivered approximately two-thirds of Roanoke
Gas' gas supply and 100% of Bluefield's gas supply. East Tennessee continues to
be the Company's other major source of supply. Historically, East Tennessee has
delivered approximately one-third of the Company's natural gas supply. The rates
paid for natural gas transportation and storage services purchased from Columbia
and East Tennessee are established by tariffs approved by the FERC. These
tariffs contain flexible pricing provisions which, in some instances, authorize
these suppliers to reduce rates and charges to meet price competition.
Roanoke Gas has a current peak day firm requirement of 94,315 DTH of
natural gas. The Company's multi-year firm transportation contracts with
Columbia and East Tennessee provide for the supply of 40,592 DTH per day. The
Company's multi-year firm storage contracts with Columbia provide for the supply
of an additional 25,364 DTH per day. Finally, the Company's LNG storage facility
in Botetourt County, Virginia has the capacity to provide up to an additional
33,000 DTH per day.
Bluefield and Commonwealth have a combined current peak day firm
requirement of 12,307 DTH of natural gas. Multi-year firm transportation
contracts with Columbia provide for the supply of 2,058 DTH per day, and a
multi-year firm storage contract with Columbia provides for the supply of an
additional 8,682 DTH per day. A new pipeline connection with Phoenix Energy
Sales Company, which is currently under construction and projected by management
to be completed in fiscal 1998, is expected to provide additional gas volumes of
up to 2,500 DTH per day.
The Company believes that its current supply, transportation and
storage contracts and arrangements position it to meet current customer
requirements, as well as to meet the gas supply requirements of future customer
growth. The Company believes that the parties with which it has contracted to
provide such services are reliable and able to fulfill their contractual
obligations. However, there can be no assurance that all of such parties will
fulfill their contractual obligations, in which case the Company may have
difficulty in arranging prompt and economical replacement supply, transportation
and/or storage.
Competition. The Company competes with other energy sources such as
fuel oil, electricity and coal. Competition is intense among the competing
energy sources and is based primarily on price. This is particularly true for
industrial applications, where sales are at risk to price competition in markets
which may switch to residual and other fuel oils.
Regulatory changes resulting from Order 636 have created competition
among suppliers or brokers of natural gas. Marketers can be expected to seek to
provide increasing volumes of natural gas to large users located within the
Company's service territories. Currently, the Company transports all
third-party, commodity gas sold to customers within its territories. Currently,
margins earned by the Company for such transportation services are the same as
the
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margins that would be earned by the Company on bundled supply and delivery sales
to the same customer. Deregulation of the energy industry is expected to
continue, and the form and effect of such deregulation is uncertain. The Company
expects that competition from other fuel sources, as well as from natural gas
brokers and marketers, may intensify in the future.
Roanoke Gas and Commonwealth currently hold the only franchises and
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 Virginia Commission,
are of perpetual duration, subject to compliance with regulatory standards.
Bluefield 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.
Supervision and Regulation. The Company's natural gas distribution
operations, which are composed of Roanoke Gas, Commonwealth and Bluefield, are
subject to regulation at the federal and state levels. Gas transmission between
Bluefield and Commonwealth is regulated by FERC, which regulates the prices,
terms and conditions of interstate pipeline transportation and sales of natural
gas. In addition, the Company monitors proceedings before FERC that affect the
Company's pipeline gas transporters, the Company's operations and other matters
which may affect the Company's business. At the state level, Roanoke Gas and
Commonwealth are regulated by the Virginia Commission, and Bluefield is
regulated by the West Virginia Commission. The Virginia Commission and the West
Virginia Commission regulate various matters, including rates charged for
services, financings, planning and safety matters. The Virginia Commission also
grants certificates of public convenience and necessity to distribute natural
gas in the Commonwealth of Virginia. An order of the Virginia Commission was
issued on January 7, 1998 authorizing the issuance of the Company's Common Stock
in the Offering.
In addition, certain municipalities and localities grant franchises for
the placement of natural gas distribution pipelines and the operation of a
natural gas distribution network for Roanoke Gas, Commonwealth and Bluefield.
The Company is also subject to standards prescribed under the Natural Gas
Pipeline Safety Act of 1968 with respect to design, installation, testing,
construction and maintenance of pipeline facilities.
Regulatory and Rate Case Proceedings. At September 30, 1997, the
Company had three rate case applications pending before the Virginia Commission
and the West Virginia Commission.
In May 1997, Bluefield filed a rate case with the West Virginia
Commission to primarily add certain utility plant investments to its rate base
and to recover costs associated with such utility plant. On December 1, 1997,
the Company and the West Virginia Commission filed a stipulated settlement which
would provide for approximately $133,000 of additional annual revenue.
Management expects the West Virginia Commission to approve the settlement, with
the new rates effective February 9, 1998.
In December 1996, Roanoke Gas filed a rate case with the Virginia
Commission to primarily add certain utility plant investments to its rate base
and to recover costs associated with such utility plant. Roanoke Gas placed the
rates requested into effect on January 1, 1997, subject to refund. A hearing on
the case was held in June 1997, in which the Virginia Commission staff
recommended an annual revenue increase based upon a return of 11.2% on common
equity. Roanoke Gas filed rebuttal in the case supporting an increase in annual
revenues based upon a return of 11.7% on common equity. However, the Company has
established reserves that are adequate to cover the refund to customers which
would be required if the case were decided based upon an 11.2% return on common
equity. A final order from the Virginia Commission is expected in the second or
third quarter of fiscal 1998.
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In June 1997, Commonwealth filed a rate case with the Virginia
Commission to primarily add certain utility plant investments to its rate base
and to recover costs associated with such utility plant. Commonwealth placed the
rates requested into effect in December 1997, subject to refund. The hearing for
this rate case has been scheduled for February 3, 1998, with an order expected
from the Virginia Commission in the second or third quarter of fiscal 1998. The
Company currently expects to settle this case for an annual revenue increase of
$65,000, based upon a 10.7% return on common equity.
Nonutility Operations
Propane. The Company, through Highland Propane, serves approximately
8,800 active propane accounts in southwestern Virginia and southern West
Virginia. Highland Propane's market areas currently extend east to Lynchburg,
Virginia, west to Marion, Virginia, north to Beckley, West Virginia, and south
to the North Carolina border and, in addition to the markets in the Company's
utility territories, include Bedford, Blacksburg, Christiansburg, Lexington,
Lynchburg and Radford, Virginia, and Beckley, Princeton and Lewisburg, West
Virginia. Propane sales are becoming an increasingly important aspect of the
Company's operations, with the annual growth rate of its propane customers
significantly exceeding the annual growth rate of its natural gas customers.
From September 30, 1993 to September 30, 1997, the Company's propane customer
base grew at a compound annual rate of approximately 17%. Including the lease
and subsequent purchase of U.S. Gas, the Company's propane customer base
increased by approximately 38% in fiscal 1997. For fiscal 1997, propane and
other nonutility operations represented approximately 21% of the Company's total
net earnings.
Propane is a form of liquefied petroleum gas, which is typically
extracted from natural gas or separated during the crude oil refining process.
Although propane is gaseous at normal pressures, it is easily compressed into
liquid form for storage and transportation. Propane is a clean-burning fuel,
gaining increased recognition for its safety, efficiency, transportability and
ease of use relative to alternative forms of energy. Propane is sold primarily
in suburban and rural areas which are not served by natural gas pipelines.
Demand for propane is typically much higher in the winter months and is
significantly affected by seasonal temperature variations because of its use in
residential and commercial heating.
Highland Propane delivered approximately 6.6 million gallons of propane
in fiscal 1997, an increase of 10% from fiscal 1996 levels on 8% warmer average
weather. The increased volume is attributed to customer growth resulting from
market expansion, increased sales efforts in existing markets and the Company's
initial leasing, and ultimate purchase on December 9, 1997, of the propane
assets of U.S. Gas. The acquisition of U.S. Gas' assets accounted for
approximately 500 of the approximately 2,400 customer additions by Highland
Propane in fiscal 1997 and expanded Highland Propane into the growing markets of
the Bedford, Franklin and Smith Mountain Lake areas of Virginia.
Highland Propane purchases propane primarily from five suppliers, which
consist of major domestic oil companies and independent producers. The Company
believes that supplies of propane from these and other sources are readily
available for purchase by Highland Propane. The Company's propane supply
contracts generally are renewed annually and contain minimum and maximum volume
purchase provisions. A significant portion of the propane volumes covered under
these supply contracts is typically on a fixed price basis. The Company
currently has propane supply contracts which expire from March 31, 1998 through
June 30, 1998, and which provide for maximum total volume to be delivered to the
Company of approximately 7.0 million gallons over their terms. Highland Propane
owns 10 storage facilities, which provide total storage capacity of
approximately 414,000 gallons of propane. Management believes its propane supply
strategies have well positioned Highland Propane to provide adequate, economic
supply to current customers and to meet the demand of future customer growth.
Propane competes primarily with electricity and fuel oil as an energy
source. Propane is typically comparable in price to fuel oil and is generally
less expensive than electricity based on equivalent British thermal unit ("BTU")
value. Because natural gas has historically been less expensive than propane,
propane is generally not distributed in areas serviced by natural gas, except
for special applications.
18
<PAGE>
Highland Propane competes with over 15 propane distribution competitors
in its total market area, ranging from very small local companies to regional
operations of national companies. However, within each local market, there
typically are fewer than five active competitors. Competition is primarily based
on price, service, reliability and responsiveness to customer needs. Competition
is on a local basis, as transportation costs require distributors to be in the
proximity of their customers.
The Company's propane distribution activities are not subject to any
federal or state pricing regulation. Propane distribution operations are subject
to state and federal safety regulations relating to hook-up and placement of
propane tanks and distribution and handling of propane.
Other. In addition to propane operations, the Company, through Highland
Marketing, maintains a natural gas marketing business. Highland Marketing buys
interruptible supplies of spot gas and temporary interstate pipeline
transportation services, and resells them to large industrial customers that
contract with the local utility for delivery from the interstate pipeline to the
customer's meter. The natural gas marketing business is highly competitive with
relatively low margins; however, it also has a low cost of operation with
minimal facility and personnel requirements. Highland Marketing sold
approximately 1.2 BCF of natural gas in fiscal 1997, an increase of 14% over
fiscal 1996. In fiscal 1997, Highland Marketing generated net earnings of
approximately $56,000.
Properties
An integral component of the Company's business is its distribution,
transmission, storage and general property, plant and equipment. The Company
owns approximately 98 miles of transmission mains and approximately 955 miles of
distribution mains, which are constructed of plastic, coated steel, cast iron
and bare steel pipe and are used in the distribution of natural gas to the
Company's customers. The Company has undertaken a long-term program to replace
approximately 160 miles of cast iron and bare steel mains over the next 20
years. Under this program, the Company replaced approximately eight miles of
such older mains in fiscal 1997 with plastic or coated steel pipe and projects
the replacement of approximately eight miles of such older mains again in fiscal
1998. The Company's gas mains are primarily located under public highways and
streets, but are also located under private property over which the Company has
obtained easements or rights-of-way from the record holders of title. Other
distribution plant and equipment of the Company consists of meters and
regulation equipment. The Company believes its utility distribution plant is
adequate to serve its existing natural gas customers.
The Company owns an LNG storage facility, which is capable of storing
220,000 DTH of natural gas purchased during the summer for use during peak
winter demand periods. The Company also owns 10 propane storage facilities,
which are capable of storing up to 414,000 gallons of propane.
The Company owns a total of approximately 135 acres of land and 13
buildings containing primarily office and warehouse space, office equipment and
computer equipment and systems. In addition, the Company owns transportation
equipment, propane tanks and miscellaneous equipment. All of the Company's
property, plant and equipment is located in its southwestern Virginia and
southern West Virginia markets.
See discussion of environmental issues under "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Employees
At September 30, 1997, the Company had 155 full-time employees. As of
that date, 55 of the Company's service and distribution employees belonged to
the Oil, Chemical and Atomic Workers International Union, AFL-CIO Local No.
3-515, which has entered into a collective bargaining agreement with the
Company. The union has been in place at the Company since 1952. The current
collective bargaining agreement became effective on August 1, 1997 and will
expire on July 31, 1998. This collective bargaining agreement contains certain
new general terms and compensation provisions. While the Company considers its
employee relations to be satisfactory, and expects to
19
<PAGE>
negotiate a new collective bargaining agreement to become effective August 1,
1998, there can be no assurance that the Company and the union will arrive at a
mutually acceptable agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 21, 1997, certain
information regarding the beneficial ownership of Common Stock by each director,
director nominee for the Company's Annual Shareholders Meeting to be held on
January 26, 1998 (the "1998 Annual Meeting"), and all directors and executive
officers as a group. Unless otherwise noted in the footnotes to the table, the
named persons have sole voting and investment power with respect to all shares
of Common Stock shown beneficially owned by them.
To the Company's knowledge, no person is the beneficial owner of more
than 5% of the issued and outstanding Common Stock of the Company.
Shares of Common
Name of Stock Beneficially Owned
Beneficial Owner As of 11/21/971 Percent of Class
- ---------------- --------------- ----------------
Lynn D. Avis 8,760 *
Abney S. Boxley, III 3,707 *
Frank T. Ellett 5,869 *
Frank A. Farmer, Jr. 41,8972 2.71%
Wilbur L. Hazlegrove 35,6063 2.32%
J. Allen Layman 4,347 *
John H. Parrott 14,1464 *
Thomas L. Robertson 5,544 *
S. Frank Smith 5,871 *
John B. Williamson, III 8,1925 *
All Directors and Executive
Officers as a Group (14 persons) 147,2716 9.41%
- ---------------------------
* Less than 1%
1 Includes restricted shares purchased by directors pursuant to Restricted Stock
Plan for Outside Directors. 2 Includes 9,282 shares owned by spouse and includes
818 shares owned by Mr. Farmer's mother for which Mr.
Farmer holds power of attorney. Also includes 13,000 shares which Mr. Farmer
has the right to acquire through the exercise of stock options.
3 Includes 11,144 shares owned by spouse.
4 Includes 2,216 shares owned by spouse
5 Includes 6,500 shares which Mr. Williamson has the right to acquire through
the exercise of stock options. 6 Includes an aggregate of 30,000 shares which
executive officers have the right to acquire through the exercise of
stock options.
MANAGEMENT
The following table sets forth certain information with respect to the
directors and principal officers of Roanoke Gas at November 21, 1997. The Board
of Directors of Roanoke Gas consists of nine directors, divided into three
classes of equal size. The directors of the respective classes serve staggered
three-year terms. Officers are elected annually by the Board and serve at the
pleasure of the Board.
20
<PAGE>
<TABLE>
<CAPTION>
Served as Served as Principal Occupation or
Name, Age and Positions Director Executive Employment During Last
Held with the Company Since Officer Since Five Years
- ------------------------------------------- ------------ ---------------- ---------------------------------------------
<S> <C>
Class A Directors (Serving until 1998 Annual Meeting)
Abney S. Boxley, III, Age 39, Director 1994 --- President, W. W. Boxley Co. (crushed stone
supplier); Director, Valley Financial
Corporation
S. Frank Smith, Age 49, Director 1990 --- Executive Vice President, Coastal Coal
Sales, Inc. (marketers and sellers of coal)
John H. Parrott, Age 70, Director(1) 1983 --- President, John H. Parrott and Associates,
Inc. (construction consultants) since 1983;
prior thereto, Vice President, Olver,
Incorporated (consulting engineers and
environmental laboratories) 1986-1991
Class B Directors (Serving until 1999 Annual Meeting)
Lynn D. Avis, Age 63, Director 1986 --- President, Avis Construction Co., Inc.
(construction company)
J. Allen Layman, Age 45, Director 1991 --- President and Chief Executive Officer, R&B
Communications, Inc. (telecommunications)
Thomas L. Robertson, Age 54, Director 1986 --- President, Carilion Health System and
Carilion Medical Center; Director, Roanoke
Electric Steel Corporation
Class C Directors (Serving until 2000 Annual Meeting)
Frank T. Ellett, Age 59, Director 1983 --- President, Virginia Truck Center, Inc. (sale,
lease and service of heavy trucks)
F. A. Farmer, Jr., Age 65, President and 1979 1991 President and Chief Executive Officer of the
Chief Executive Officer of the Company; Company since January 1991 (retiring
Chairman of the Board of Directors(2) January 1998); Chairman of the Board of
Directors of the Company since January
1996
W. L. Hazlegrove, Age 68, Director and 1979 --- Of Counsel, law firm of Woods, Rogers &
General Counsel of the Company, 1984- Hazlegrove, P.L.C.; Vice President and
1994 General Counsel of the Company, 1984-
1994
Executive Officers Who Are Not Also Directors
John B. Williamson, III, Age 43, Vice --- 1993 Vice President-Rates & Finance of the
President- Rates and Finance(1)(2) Company since January 1993; Director of
Rates and Finance April 1992 to January
1993; prior thereto, Chief Administrator,
Botetourt County, Virginia
21
<PAGE>
<CAPTION>
Served as Served as Principal Occupation or
Name, Age and Positions Director Executive Employment During Last
Held with the Company Since Officer Since Five Years
- ------------------------------------------- ------------ ---------------- ---------------------------------------------
Roger L. Baumgardner, Age 55, Vice --- 1986 Vice President, Secretary and Treasurer
President, Secretary and Treasurer since 1986
Arthur L. Pendleton, Age 46, Executive --- 1987 Executive Vice President and Chief
Vice President and Chief Operating Operating Officer since January 1998; Vice
Officer since January 1998(2) President - Operations from January 1991 to
January 1998
- ------------------------------------
</TABLE>
(1) Mr. Parrott will retire as a director at the 1998 Annual Meeting. Mr.
Williamson has been nominated as a Class A director to fill the vacancy
created by Mr. Parrott's retirement.
(2) Mr. Farmer will retire as President and Chief Executive Officer of the
Company, effective as of February 1, 1998. On that date Mr. Williamson will
become President and Chief Executive Officer of the Company and Arthur L.
Pendleton will become Executive Vice President and Chief Operating Officer
of the Company. Mr. Farmer will continue to serve as the Chairman of the
Board of Directors of the Company.
DESCRIPTION OF COMMON STOCK
General
The total number of authorized shares of Common Stock of Roanoke Gas is
3,000,000 shares, $5 par value per share. As of January 21, 1998, there were
1,574,438 shares of Common Stock issued and outstanding, all of which were
validly issued, fully paid and nonassessable, and, upon issuance as described in
this Prospectus the shares of Common Stock offered hereby will be validly
issued, fully paid and nonassessable. No other class of stock is currently
authorized.
Dividend Rights
Holders of the Common Stock are entitled to receive pro rata dividends
if, when and as declared by the Board of Directors out of funds legally
available therefor. The Company's long-term debt instruments contain certain
restrictions on the payment of cash dividends. At September 30, 1997, under the
most limiting of such provisions, retained earnings in the amount of
approximately $4.4 million were unrestricted and available for the payment of
dividends. See "Price Range of Common Stock and Dividends."
Voting Rights
Each outstanding share of Common Stock is entitled to full voting
rights for the election of directors and for all other purposes with one vote
for each share of Common Stock held of record. Shareholders do not have
cumulative voting rights, which means that the holders of more than 50% of the
outstanding shares of the Common Stock voting as a group for the election of
directors can elect current classes of Roanoke Gas' directors and, except for
certain major corporate actions, such as mergers, dissolution, or sale of
substantially all of Roanoke Gas' assets other than in the ordinary course of
business and matters relating to the fundamental rights of shareholders set
forth above, can control the general business of the Company.
Liquidation Rights
In the event of any liquidation, dissolution, or winding up of the
Company, the holders of the Common Stock are entitled to receive pro rata all
the assets of Roanoke Gas available for distribution to its stockholders.
22
<PAGE>
Dividend Reinvestment Plan
Roanoke Gas maintains a Dividend and Reinvestment and Stock Purchase
Plan. All holders of Common Stock may participate in the DRP and may have cash
dividends on their shares of Common Stock automatically reinvested in additional
shares of Common Stock and may invest in additional shares of Common Stock by
making optional cash payments without the payment of brokerage commissions or
service charges. Roanoke Gas has reserved 400,000 shares of Common Stock, as
adjusted, for issuance under the DRP. As of January 21, 1998, approximately
183,098 of these shares were reserved but unissued. Proceeds received by Roanoke
Gas from sales of shares of Common Stock pursuant to the DRP have been added to
the general funds of Roanoke Gas and used for capital expenditures and working
capital needs. Participation in the DRP is offered only through a separate
prospectus available from Roanoke Gas.
Preferential, Preemptive, and Other Rights.
No holder of stock has any preferential, preemptive, or other rights to
purchase or subscribe to any shares of stock or other securities convertible
into stock.
Election of Directors
The Articles of Incorporation of Roanoke Gas provide that directors are
elected for terms of three years, with one-third of the seats of the Board of
Directors being subject to election each year. The holders of Roanoke Gas Common
Stock do not have cumulative voting rights in the election of directors.
Vacancies on the Company's Board of Directors may only be filled by a majority
of the directors then in office, whether or not a quorum. Directors may be
removed from office only for cause. These provisions may have the effect of
delaying or deterring a change in control of the Company. See also "State
Anti--Takeover Statutes."
Shareholder Protection Statutes
The Virginia Act includes two shareholder protection statutes, the
Affiliated Transactions Statute and the Control Share Acquisitions Statute,
which are applicable to Roanoke Gas.
The Affiliated Transactions Statute restricts certain transactions
("affiliated transactions") between a Virginia corporation having more than 300
shareholders of record and a beneficial owner of more than 10% of any class of
voting stock (an "interested shareholder"). An affiliated transaction is defined
in the Virginia Act as any of the following transactions with or proposed by an
interested shareholder: a merger; a share exchange; certain dispositions of
assets or guaranties of indebtedness other than in the ordinary course of
business; certain significant securities issuances; dissolution of the
corporation; or reclassification of the corporation's securities. Under the
statute, an affiliated transaction generally requires the approval of a majority
of disinterested directors and two-thirds of the voting shares of the
corporation other than shares owned by an interested shareholder during a
three-year period commencing as of the date the interested shareholder crosses
the 10% threshold. This special voting provision does not apply if a majority of
disinterested directors approved the acquisition of the more than 10% interest
in advance. After the expiration of the three-year moratorium, an interested
shareholder may engage in an affiliated transaction only if it is approved by a
majority of disinterested directors or by two-thirds of the outstanding shares
held by disinterested shareholders, or if the transaction complies with certain
fair price provisions. This special voting rule is in addition to, and not in
lieu of, other voting provisions contained in the Virginia Act and the Articles
of Incorporation of Roanoke Gas.
The Control Share Acquisitions Statute provides that, with respect to
Virginia corporations having 300 or more shareholders of record, shares acquired
in a transaction that would cause the acquiring person's aggregate share
ownership to meet or exceed any of three thresholds (20%, 33-1/3% or 50%) have
no voting rights unless such rights are granted by a majority vote of the shares
not owned by the acquiring person or any officer or employee-director of the
corporation. The statute sets out a procedure whereby the acquiring person may
call a special shareholder's meeting
23
<PAGE>
for the purpose of considering whether voting rights should be conferred.
Acquisitions pursuant to a merger or share exchange to which the corporation is
a party and acquisitions pursuant to a tender or exchange offer arising out of
an agreement to which the corporation is a party are exempt from the statute.
Application of the control share acquisition statute is automatic
unless a corporation "opts out" of its coverage by expressly providing in its
articles of incorporation or bylaws that the statute does not apply to
acquisitions of shares of such corporation. Roanoke Gas has not "opted out" of
the statute.
Roanoke Gas furnishes to its shareholders annual reports containing
audited financial statements and quarterly reports containing unaudited
financial information.
Transfer Agent and Registrar
The Transfer Agent and Registrar for Roanoke Gas Common Stock is First
Union National Bank of North Carolina, Corporate Trust Client Services, N.C. -
1153, 1525 West W. T. Harris Boulevard - 3C3, Charlotte, North Carolina
28288-1153.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
between Scott & Stringfellow, Inc. (the "Underwriter") and the Company, the
Underwriter has agreed to purchase from the Company, and the Company has agreed
to sell to the Underwriter, 165,000 shares of Common Stock.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriter's
obligation is such that it is committed to purchase and pay for all the shares
of Common Stock offered hereby if any are purchased.
The Underwriter proposes to offer the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain securities dealers at such price less a concession not
in excess of $0.45 per share of Common Stock to certain brokers and dealers. The
Underwriter may allow, and such selected dealers may reallow, a concession not
in excess of $0.10 per share of Common Stock to certain brokers and dealers.
The Company has granted the Underwriter an option for 30 days after the
date of this Prospectus to purchase up to 16,500 additional shares of Common
Stock, at the public offering price, less the underwriting discount, as set
forth on the cover page of the Prospectus. The Underwriter may exercise such
option only to cover over-allotments made in connection with the sale of the
165,000 shares of Common Stock offered hereby.
The Underwriter and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission (the "SEC"). In general, a
passive market maker may not bid for, or purchase, the Common Stock at a market
price that exceeds the highest independent bid. In addition, the net daily
purchases made by any passive market maker generally may not exceed the greater
of 30% of its average daily trading volume in the Common Stock during a
specified two month prior period, or 200 shares. A passive market maker must
identify passive-market making bids as such on the Nasdaq electronic
inter-dealer reporting system. Passive market making may stabilize or maintain
the market price of the Common Stock above independent market levels. The
Underwriter and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
In order to facilitate the offering of the Common Stock, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock. Specifically, the Underwriter may
overallot in connection with the offering, creating a short position in the
Common Stock for its own account. In addition, to cover
24
<PAGE>
overallotments or to stabilize the price of the Common Stock, the Underwriter
may bid for, and purchase, shares of Common Stock in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Common Stock in the offering, if
the syndicate repurchases previously distributed Common Stock in transactions to
cover syndicate short positions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriter is not required to engage
in these activities, and may end any of these activities at any time.
The Company has agreed not to issue, and all directors and executive
officers of the Company have agreed not to offer, sell or contract to sell or
otherwise dispose of, directly or indirectly, or announce an offering of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus, subject to certain limited exceptions, without the prior written
consent of the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriter may be required to make in respect thereof. The
Company also has agreed to pay the Underwriter a financial advisory fee of
$7,500 in connection with the Offering.
LEGAL OPINIONS
Legal matters in connection with the issuance of the Common Stock will
be passed upon by Woods, Rogers & Hazlegrove, P.L.C., Roanoke, Virginia. Wilbur
L. Hazlegrove, a director of the Company, is Of Counsel to Woods, Rogers &
Hazlegrove, P.L.C. The principals of the firm of Woods, Rogers & Hazlegrove,
P.L.C. beneficially owned as of January 6, 1998, in the aggregate, approximately
25,000 shares of Company Common Stock. Certain legal matters will be passed upon
for the Underwriter by Hunton & Williams, Richmond, Virginia.
EXPERTS
The consolidated financial statements of Roanoke Gas Company and
subsidiaries as of September 30, 1997 and 1996, and for each of the years in the
three-year period ended September 30, 1997, have been included and incorporated
by reference in this Prospectus and elsewhere in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included and incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the SEC. Reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities of the
SEC, at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as
the following Regional Offices: 7 World Trade Center, Suite 1300, New York, New
York 10048; and Citicorp Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such materials also can be obtained at
prescribed rates from the Public Reference Section of the SEC at the Washington
D.C. address given above. The SEC maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC, including the Company. The address of
such web site is http://www.sec.gov. In addition, such reports, proxy and
information statements and other information concerning the Company may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, DC 20006-1506. The Company's Common Stock
is included for quotation on the Nasdaq National Market under the symbol "RGCO."
This Prospectus constitutes a part of a registration statement on Form
S-2 (herein, together with all exhibits thereto, referred to as the
"Registration Statement") filed by the Company with the SEC under the Securities
Act with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth or incorporated
25
<PAGE>
by reference in the Registration Statement, as permitted by the rules and
regulations of the SEC. For further information with respect to the Company and
the securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed or incorporated by reference as part thereof.
Copies of the Registration Statement and exhibits thereto are on file at the
offices of the SEC and may be obtained upon payment of the prescribed fee or may
be examined without charge at the Public Reference Section of the SEC described
above. Statements contained in this Prospectus concerning the provisions of
documents filed with, or incorporated by reference in, the Registration
Statement as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, heretofore filed by the Company with the SEC (File No.
0-367) pursuant to the Exchange Act, is hereby incorporated by reference in this
Prospectus.
Any statement contained herein or in a document incorporated by
reference herein shall be deemed modified or superseded, for purposes of this
Prospectus, to the extent that a statement contained herein modifies or
supersedes such statement.
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any document described above (other than exhibits). Requests
for such copies should be directed to: Roger L. Baumgardner, Secretary, Roanoke
Gas Company, 519 Kimball Avenue, N.E., Roanoke, Virginia 24016, (540) 983-3855.
26
<PAGE>
<TABLE>
ROANOKE GAS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
<S> <C>
Page
----
Independent Auditors' Report...................................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and 1996................................ F-4
Consolidated Statements of Earnings for the years ended September 30, 1997, 1996 and 1995.... F-6
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1997, 1996
and 1995................................................................................. F-7
Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995.. F-8
Notes to Consolidated Financial Statements.................................................. F-10
</TABLE>
F-1
<PAGE>
This page intentionally left blank
F-2
<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, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
October 17, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Utility Plant:
In service $ 65,590,024 60,454,905
Accumulated depreciation and amortization (22,612,963) (20,822,398)
- -------------------------------------------------------------------------------------------------------------------
In service, net 42,977,061 39,632,507
Construction work-in-progress 1,088,083 1,277,999
- -------------------------------------------------------------------------------------------------------------------
Utility plant, net 44,065,144 40,910,506
- -------------------------------------------------------------------------------------------------------------------
Nonutility Property:
Propane 6,634,369 4,403,630
Accumulated depreciation and amortization (2,540,274) (2,070,405)
- -------------------------------------------------------------------------------------------------------------------
Nonutility property, net 4,094,095 2,333,225
- -------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 116,045 633,322
Accounts receivable, less allowance for
doubtful accounts of $368,345 in
1997 and $279,316 in 1996 4,188,984 3,857,407
Inventories 7,427,581 7,402,586
Prepaid income taxes 7,368 297,521
Deferred income taxes 1,206,995 379,356
Purchased gas adjustments 587,457 1,782,590
Other 420,674 479,926
- -------------------------------------------------------------------------------------------------------------------
Total current assets 13,955,104 14,832,708
- -------------------------------------------------------------------------------------------------------------------
Other Assets 478,915 844,660
- -------------------------------------------------------------------------------------------------------------------
$ 62,593,258 58,921,099
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<CAPTION>
Liabilities And Stockholders' Equity 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Capitalization:
Stockholders' equity:
Common stock, $5 par value. Authorized 3,000,000 shares; issued
and outstanding 1,527,486 and 1,475,843 shares in 1997 and 1996,
respectively $ 7,637,430 7,379,215
Capital in excess of par value 5,271,667 4,647,163
Retained earnings 7,687,854 6,948,623
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,596,951 18,975,001
Long-term debt, excluding current installments 17,079,000 20,222,124
- -------------------------------------------------------------------------------------------------------------------
Total capitalization 37,675,951 39,197,125
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current installments of long-term debt 3,143,124 669,423
Borrowings under lines of credit 7,129,000 6,652,500
Dividends payable 397,530 376,795
Accounts payable 5,512,348 4,931,467
Customer deposits 427,895 362,384
Accrued expenses 4,233,860 3,214,953
Refunds from suppliers - due customers 425,860 23,865
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 21,269,617 16,231,387
- -------------------------------------------------------------------------------------------------------------------
Deferred Credits And Other Liabilities:
Deferred income taxes 3,145,932 2,960,795
Deferred investment tax credits 492,357 531,792
Other deferred credits 9,401 -
- -------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,647,690 3,492,587
- -------------------------------------------------------------------------------------------------------------------
$ 62,593,258 58,921,099
- -------------------------------------------------------------------------------------------------------------------
F-5
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Earnings
Years Ended September 30, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Operating Revenues:
Gas utilities $ 57,842,181 60,067,407 44,061,737
Propane operations 7,205,645 5,703,466 4,549,410
- -------------------------------------------------------------------------------------------------------------------
Total operating revenues 65,047,826 65,770,873 48,611,147
- -------------------------------------------------------------------------------------------------------------------
Cost Of Gas:
Gas utilities 38,675,337 40,763,104 27,027,507
Propane operations 3,907,568 2,976,974 2,147,776
- -------------------------------------------------------------------------------------------------------------------
Total cost of gas 42,582,905 43,740,078 29,175,283
- -------------------------------------------------------------------------------------------------------------------
Operating Margin 22,464,921 22,030,795 19,435,864
- -------------------------------------------------------------------------------------------------------------------
Other Operating Expenses:
Gas utilities:
Other operations 8,049,833 8,056,211 7,726,611
Maintenance 1,462,764 1,868,280 1,233,066
Taxes - general 2,456,399 2,401,768 2,082,896
Taxes - income 857,964 963,895 711,437
Depreciation and amortization 2,533,912 2,294,447 2,133,488
Propane operations (including taxes - income of $309,137,
$177,059 and $224,017 in 1997, 1996 and 1995, respectively) 2,700,626 2,410,890 2,026,108
- -------------------------------------------------------------------------------------------------------------------
Total other operating expenses 18,061,498 17,995,491 15,913,606
- -------------------------------------------------------------------------------------------------------------------
Operating Earnings 4,403,423 4,035,304 3,522,258
- -------------------------------------------------------------------------------------------------------------------
Other Income (Deductions):
Gas utilities:
Interest income 8,204 274 26,652
Merchandising and jobbing, net 147,522 99,334 120,475
Other deductions (87,486) (120,539) (142,389)
Taxes - income (37,552) (22,486) (14,547)
Propane operations, net 116,222 121,157 189,458
- -------------------------------------------------------------------------------------------------------------------
Total other income (deductions) 146,910 77,740 179,649
- -------------------------------------------------------------------------------------------------------------------
Earnings Before Interest Charges 4,550,333 4,113,044 3,701,907
- -------------------------------------------------------------------------------------------------------------------
Interest Charges:
Gas utilities:
Long-term debt 1,740,998 1,621,661 1,680,078
Other 441,444 292,301 231,142
Propane operations 58,011 2,410 13,447
- -------------------------------------------------------------------------------------------------------------------
Total interest charges 2,240,453 1,916,372 1,924,667
- -------------------------------------------------------------------------------------------------------------------
Net Earnings $ 2,309,880 2,196,672 1,777,240
- -------------------------------------------------------------------------------------------------------------------
Net Earnings Per Share $ 1.54 1.51 1.26
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Stockholders' Equity
Years Ended September 30, 1997, 1996 and 1995
<CAPTION>
Capital In Total
Common Excess Of Retained Stockholders'
Stock Par Value Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
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
Net earnings - - 2,309,880 2,309,880
Cash dividends ($1.04 per share) - - (1,570,649) (1,570,649)
Issuance of common stock (51,643 shares) 258,215 624,504 - 882,719
- -------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 $ 7,637,430 5,271,667 7,687,854 20,596,951
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Cash Flows
Years Ended September 30, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 2,309,880 2,196,672 1,777,240
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,247,015 2,810,314 2,563,128
Loss (gain) on disposal of utility plant and
nonutility property (961) (4,202) 4,823
Loss (gain) on sale of other asset 3,293 - (67,556)
Write-down of other asset 4,230 - -
Write-off of regulatory assets 132,523 - -
Decrease (increase) in purchased gas adjustments 1,195,133 (2,019,589) 931,422
Changes in assets and liabilities which provided
(used) cash, exclusive of changes and noncash
transactions shown separately 1,471,321 (3,608,875) 3,139,960
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,362,434 (625,680) 8,349,017
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to utility plant in service and under
construction and nonutility property (8,052,801) (5,522,977) (5,609,292)
Proceeds from disposal of property 50,094 42,511 70,403
Cost of removal of utility plant, net (158,855) (423,221) (122,523)
Proceeds from sale of other asset 141,969 - -
Proceeds from collection of note receivable - - 490,000
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,019,593) (5,903,687) (5,171,412)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt - - 2,700,000
Retirement of long-term debt and payments on
obligations under capital leases (669,423) (1,179,415) (1,124,703)
Net borrowings (repayments) under lines of credit 476,500 8,598,000 (3,793,000)
Proceeds from issuance of common stock 882,719 714,234 773,544
Common stock issuance costs - - (4,450)
Cash dividends paid (1,549,914) (1,473,025) (1,403,370)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (860,118) 6,659,794 (2,851,979)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (517,277) 130,427 325,626
Cash and Cash Equivalents, Beginning of Year 633,322 502,895 177,269
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 116,045 633,322 502,895
- -------------------------------------------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Changes in Assets and Liabilities Which Provided (Used)
Cash, Exclusive of Changes and Noncash Transactions
Shown Separately:
Accounts receivable and customer deposits, net $ (266,066) (346,566) (304,927)
Inventories (24,995) (2,054,592) 1,028,359
Prepaid income taxes 290,153 (297,521) 260,609
Other noncurrent assets 83,730 160,936 (277,339)
Accounts payable 580,881 (613,180) 224,166
Income taxes payable - (476,410) 476,410
Accrued expenses and other current assets, net 1,078,159 (111,608) 2,011,166
Refunds from suppliers - due customers 401,995 (658,986) 183,953
Deferred taxes, including amortization of deferred
investment tax credits (681,937) 789,052 (350,121)
Other deferred credits 9,401 - (112,316)
- -------------------------------------------------------------------------------------------------------------------
$ 1,471,321 (3,608,875) 3,139,960
- -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures Of Cash Flows Information:
Cash paid during the year for:
Interest $ 2,065,893 1,493,801 1,867,816
- -------------------------------------------------------------------------------------------------------------------
Income taxes, net of refunds $ 1,575,952 1,148,319 675,418
- -------------------------------------------------------------------------------------------------------------------
Noncash Transactions:
TheCompany refinanced $9,300,000 of current installments of long-term
debt and borrowings under lines of credit as long-term debt in 1996.
A capital lease obligation of $21,119 was incurred in 1995 when the
Company entered into an equipment lease.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(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 Diversified Energy Company, trading as Highland Propane Company and
Highland Gas Marketing. Roanoke Gas Company and Bluefield Gas Company are gas
utilities, which distribute and sell natural gas to residential, commercial and
industrial customers within their service areas. 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. Highland Gas Marketing brokers natural gas to several industrial
transportation customers of Roanoke Gas Company and Bluefield 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:
September 30,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Regulatory Assets:
Early retirement incentive plan costs $ 33,481 246,768
Statement 106 implementation cost - 18,884
Rate case costs 6,598 20,879
Franchise negotiation costs - 41,846
LNG tank painting costs - 25,720
Union organization costs - 29,325
Purchased gas adjustments 587,457 1,782,590
Statement 109 implementation - 20,484
Other - 12,938
- --------------------------------------------------------------------------------
$ 627,536 2,199,434
- --------------------------------------------------------------------------------
Regulatory Liabilities:
Refunds from suppliers - due customers 425,860 23,865
- --------------------------------------------------------------------------------
$ 425,860 23,865
- --------------------------------------------------------------------------------
F-10
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (continued)
During 1997, the Company wrote off regulatory assets totaling $132,523
upon management's determination that, for rate-making purposes, recovery of
these costs in future revenues was no longer probable.
All significant intercompany transactions have been eliminated in
consolidation.
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.
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 1997 and 1996 were
$915,192 and $863,480, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the years in which those temporary differences are
expected to be recovered or settled.
F-11
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (continued)
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.
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 Benefit 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.
The Company also provides certain health care, supplemental retirement
and life insurance benefits to active and retired employees. Postretirement
benefit costs are computed based upon the provisions of Statement of Financial
Accounting Standards No. 106.
Net Earnings Per Share
Net earnings per share are based on the weighted average number of
shares outstanding during the year (1,503,388 shares in 1997, 1,455,999 shares
in 1996 and 1,408,659 shares in 1995). The calculations of weighted average
shares outstanding for 1997 and 1996 do 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Stock Options
Prior to October 1, 1996, the Company accounted for its stock options
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
F-12
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (continued)
interpretations. As such, compensation expense was recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement 123),
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, Statement
123 allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings and pro forma net earnings per share
disclosures for stock option grants made in 1996 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of 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), on October 1, 1996.
Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of Statement 121 in 1997 did not have a material impact
on the Company's consolidated financial position, results of operations or
liquidity.
(2) Allowance for Doubtful Accounts
A summary of the changes in the allowance for doubtful accounts
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances, beginning of year $ 279,316 171,947 318,834
Provision for doubtful accounts 660,400 550,777 345,585
Recoveries of accounts written off 125,035 131,499 91,941
Accounts written off (696,406) (574,907) (584,413)
- -------------------------------------------------------------------------------------------------------------------
Balances, end of year $ 368,345 279,316 171,947
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Borrowings Under Lines of Credit
The Company had total short-term lines of credit of $20,000,000 in
1997, $18,000,000 in 1996 and $13,000,000 in 1995. The balances outstanding
under these lines of credit at September 30, 1997, 1996 and 1995 were
$7,129,000, $6,652,500 and $1,442,000, respectively. The highest month-end
balances outstanding under these lines of credit were $15,896,000, $7,587,000
and $7,186,000 in 1997, 1996 and 1995, respectively. The average month-end
balances outstanding were approximately $8,098,000, $4,453,000 and $2,809,000 in
1997, 1996 and 1995, respectively. The average interest rates on the lines of
credit were approximately 5.97 percent, 5.84 percent and 6.07 percent for 1997,
1996 and 1995, respectively. The lines are subject to annual renewal and do not
require compensating balances. The average interest rates were 6.14 percent,
5.71 percent and 6.27 percent on balances outstanding at September 30, 1997,
1996 and 1995, respectively.
F-13
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(4) Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <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 $ 1,350,000 1,615,000
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 2,328,000 2,662,000
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% 7,200,000 7,200,000
Unsecured senior notes payable, with interest rate fixed at 7.66%,
with provision for retirement of $1,600,000 for each year beginning
December 1, 2014 through 2018 8,000,000 8,000,000
Obligations under capital leases, due in aggregate monthly payments
of $3,076, including imputed interest, through August 1998 31,624 64,547
Bluefield Gas Company:
Unsecured installment loan, with interest rate based on prime (8.75%
and 8.25% at September 30, 1997 and 1996, respectively), with
provision for retirement of $50,000 for each year through
1997 and a final payment of $12,500 on October 31, 1997 12,500 50,000
Unsecured note payable, with interest rate fixed at 7.28%,
with provision for retirement of $25,000 quarterly beginning
January 1, 2002 and a final payment of $1,000,000 on
October 1, 2003 1,300,000 1,300,000
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 20,222,124 20,891,547
Less current installments of long-term debt (3,143,124) (669,423)
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt, excluding current installments $ 17,079,000 20,222,124
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The above debt obligations contain various provisions including a
minimum interest charge coverage ratio and limitations on debt as a percentage
of total capitalization. The obligations also contain a provision restricting
the payment of dividends, primarily based on the earnings of the Company and
dividends previously paid. At September 30, 1997, approximately $4,400,000 of
retained earnings was available for dividends.
F-14
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(4) Long-term Debt (continued)
The aggregate annual maturities of long-term debt, including
obligations under capital leases, subsequent to September 30, 1997 are as
follows:
Years Ending September 30,
- --------------------------------------------------------------------
1998 $ 3,143,124
1999 599,000
2000 599,000
2001 599,000
2002 1,399,000
Thereafter 13,883,000
- --------------------------------------------------------------------
Total $ 20,222,124
- --------------------------------------------------------------------
<TABLE>
(5) Income Taxes
The details of income tax expense (benefit) are as follows:
Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Charged to other operating expenses - gas utilities:
Current:
Federal $ 1,561,779 206,399 1,104,505
State (15,946) (40,248) 48,649
- -------------------------------------------------------------------------------------------------------------------
Total current 1,545,833 166,151 1,153,154
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (668,660) 777,772 (370,870)
State 20,226 58,621 (32,198)
- -------------------------------------------------------------------------------------------------------------------
Total deferred (648,434) 836,393 (403,068)
- -------------------------------------------------------------------------------------------------------------------
Investment tax credits, net (39,435) (38,649) (38,649)
- -------------------------------------------------------------------------------------------------------------------
Total charged to other operating expenses - gas utilities 857,964 963,895 711,437
- -------------------------------------------------------------------------------------------------------------------
Charged to other income and deductions - gas utilities:
Current:
Federal 37,787 22,195 14,587
State 105 665 (40)
- -------------------------------------------------------------------------------------------------------------------
Total current 37,892 22,860 14,547
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (340) (374) -
State - - -
- -------------------------------------------------------------------------------------------------------------------
Total deferred (340) (374) -
- -------------------------------------------------------------------------------------------------------------------
Total charged to other income and deductions - gas utilities 37,552 22,486 14,547
- -------------------------------------------------------------------------------------------------------------------
Charged to other operating expenses - propane operations:
Current:
Federal 233,323 153,044 200,022
State 49,057 32,333 44,715
- -------------------------------------------------------------------------------------------------------------------
Total current 282,380 185,377 244,737
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 21,832 (6,052) (15,528)
State 4,925 (2,266) (5,192)
- -------------------------------------------------------------------------------------------------------------------
Total deferred 26,757 (8,318) (20,720)
- -------------------------------------------------------------------------------------------------------------------
Total charged to other operating expenses - propane operations 309,137 177,059 224,017
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 1,204,653 1,163,440 950,001
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(5) Income Taxes (continued)
Income tax expense for the years ended September 30, 1997, 1996 and 1995
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,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Net earnings $ 2,309,880 2,196,672 1,777,240
Income tax expense 1,204,653 1,163,440 950,001
- -------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 3,514,533 3,360,112 2,727,241
- -------------------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense 1,194,941 1,142,438 927,262
Increase (reduction) in income tax expense resulting from:
Amortization of deferred investment tax credits (39,435) (38,649) (38,649)
Other, net 49,147 59,651 61,388
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 1,204,653 1,163,440 950,001
- -------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 132,818 105,602
Accrued pension and medical benefits, due to accrual for
financial reporting purposes in excess of actual contributions 803,852 682,471
Accrued vacation and bonuses, due to accrual for financial reporting
purposes 173,731 164,542
Purchased gas adjustments, due to accrual for financial reporting
purposes in excess of actual payments to customers 176,972 -
Other 213,976 92,456
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,501,349 1,045,071
Less valuation allowance - -
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,501,349 1,045,071
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Utility plant, due to differences in depreciation 3,154,190 2,912,432
Purchased gas adjustments, due to actual payments to
customers in excess of accrual for financial reporting purposes 225,309 620,788
Prepaid expenses and other assets, due to capitalization for financial
reporting purposes 60,787 93,290
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,440,286 3,626,510
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 1,938,937 2,581,439
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(5) Income Taxes (continued)
The Company has determined that a valuation allowance for the gross
deferred tax assets was not necessary at September 30, 1997 and 1996, 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. (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>
Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Service cost for the current year $ 142,467 148,465 127,908
Interest cost on the projected benefit obligation 419,474 397,458 376,147
Actual return on assets held in the plan (1,030,919) (717,703) (988,813)
Net amortization and deferral of unrecognized gains and losses 647,436 372,234 727,706
Special termination benefits cost related to the early retirement
incentive plan - - 168,730
- -------------------------------------------------------------------------------------------------------------------
Net pension expense $ 178,458 200,454 411,678
- -------------------------------------------------------------------------------------------------------------------
The Plan's funded status is as follows:
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Actuarial present value of accumulated benefit obligation:
Vested $ (4,285,717) (4,241,528)
Nonvested (143,901) (30,872)
- -------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (4,429,618) (4,272,400)
Effect of anticipated future compensation levels and other events (1,510,433) (1,343,289)
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (5,940,051) (5,615,689)
Fair value of assets held in the plan 6,324,249 5,498,868
- -------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ 384,198 (116,821)
- -------------------------------------------------------------------------------------------------------------------
F-17
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(6) Employee Benefit Plans (continued)
The excess (deficiency) of plan assets over the projected benefit
obligation consists of the following:
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Net unrecognized gain from past experience different than assumed $ 1,709,103 1,283,944
Unamortized transition liability (329,977) (435,421)
Unrecognized prior service cost (75,503) (94,377)
Accrued pension cost included in the consolidated balance sheets (919,425) (870,967)
- -------------------------------------------------------------------------------------------------------------------
Total $ 384,198 (116,821)
- -------------------------------------------------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.75 percent for 1997,
1996 and 1995. The rates of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
5 percent in 1997 and 4 percent for compensation increases through December 31,
1996 and 5 percent for compensation increases thereafter in 1996 and 1995. The
assumed long-term rate of return on assets was 8.5 percent for 1997, 1996 and
1995.
In addition to pension benefits, the Company has a postretirement benefits
plan which provides certain health care, supplemental retirement and life
insurance benefits to active and retired employees who meet specific age and
service requirements. The plan is contributory. The Company has elected to fund
the plan over future years. Approximately 67 percent of the consolidated annual
cost of the plan is recovered from the Company's customers through rates.
The following table presents the plan's funded status reconciled with the
amounts recognized in the Company's consolidated balance sheets:
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefits obligation:
Retirees $ 2,846,193 2,448,483
Fully eligible active plan participants 712,308 646,587
Other active plan participants 1,262,063 1,202,667
- -------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefits obligation 4,820,564 4,297,737
Plan assets at fair value, principally cash equivalents and mutual funds (995,411) (971,630)
- -------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefits obligation in excess of plan assets 3,825,153 3,326,107
Unrecognized net gain 938,540 1,322,715
Unrecognized transition obligation (3,796,800) (4,034,100)
- -------------------------------------------------------------------------------------------------------------------
Postretirement benefits cost included in accrued expenses $ 966,893 614,722
- -------------------------------------------------------------------------------------------------------------------
F-18
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(6) Employee Benefit Plans (continued)
Net periodic postretirement benefits cost includes the following
components:
<CAPTION>
Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Service cost for the current year $ 96,255 89,000 86,613
Interest cost on the accumulated postretirement
benefits obligation 325,036 363,000 320,992
Return on assets held in the plan (89,542) (40,000) (35,000)
Amortization of transition obligation 237,300 237,300 237,300
Net total of other components (25,201) (16,000) (7,583)
Special termination benefits cost related to the early
retirement incentive plan - - 242,319
- -------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 543,848 633,300 844,641
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, 10 percent, 10.5 percent and 11 percent
annual rates of increase in the per capita cost of covered benefits (i.e.,
medical trend rate) were assumed for 1997, 1996 and 1995, 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, 1997 by
approximately $577,834, or 12 percent, and the aggregate of the service and
interest cost components of net postretirement benefits cost by approximately
$68,513, or 16 percent.
The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 7.75 percent at September 30, 1997, 1996
and 1995.
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 of 1995 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 provided for plan cost recovery, in fiscal
year 1996. The Company recorded $139,482 and $71,695 of amortization expense
related to this regulatory asset during the years ended September 30, 1997 and
1996. The unamortized balance of the regulatory asset of $73,805, excluding the
balance relative to Bluefield Gas Company, was written off in 1997 (see note 1).
The Company also has a defined contribution plan covering all of its
employees who elect to participate. The Company made annual matching
contributions to the plan based on 70 percent in 1997 and 50 percent in 1996 and
1995 of the net participants' basic contributions (from 1 percent to 6 percent
of their total compensation). The annual cost of the plan was $217,466, $134,188
and $132,261 for 1997, 1996 and 1995, respectively.
F-19
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(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 Weighted Average Option Price
Shares Exercise Price Per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Options outstanding, September 30, 1996 13,000 15.500 15.500
Options granted 21,500 16.875 16.875
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 1997 34,500 16.357 15.500-16.875
- -------------------------------------------------------------------------------------------------------------------
</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, 1997.
The per share weighted-average fair values of stock options granted
during 1997 and 1996 were $1.08 and $1.63 on the dates of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1997-expected dividend yield of 5.78 percent, risk-free interest
rate of 6.29 percent, expected volatility of 10 percent and an expected life of
10 years; 1996-expected dividend yield of 5.83 percent, risk-free interest rate
of 6.44 percent, expected volatility of 42 percent and an expected life of 10
years.
The Company uses the intrinsic value method of APB Opinion No. 25 for
recognizing stock-based compensation in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under the provisions of Statement 123, the
Company's net earnings and net earnings per share would have been decreased to
the pro forma amounts indicated below:
Years Ended September 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Net earnings:
As reported $ 2,309,880 2,196,672
Pro forma 2,278,093 2,182,681
Net earnings per share:
As reported $ 1.54 1.51
Pro forma $ 1.52 1.50
- -------------------------------------------------------------------------------
(8) Related Party Transactions
Certain of the Company's directors render business services or sell
products to the Company. The significant services included legal fees of
approximately $182,000, $69,000 and $173,000 in 1997, 1996 and 1995,
respectively. The products included natural gas purchases of approximately
$3,052,000, $1,950,000 and $1,250,000 in 1997, 1996 and 1995, respectively. It
is anticipated that similar services and products will be provided to the
Company in 1998.
F-20
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(9) Quarterly Financial Information (Unaudited)
Quarterly financial data as previously reported for the years ended
September 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating revenues $ 22,412,424 24,580,783 9,894,442 8,160,177
- -------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) $ 1,840,530 2,394,999 261,537 (93,643)
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,331,276 1,831,756 (247,734) (605,418)
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ .90 1.22 (.16) (.42)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------------------
</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.
(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 1997, 1996 and 1995, 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,
1997 and 1996.
(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.
F-21
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(11) Franchises (continued)
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 1950s. 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
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
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 nine short-term contracts with seven natural gas
suppliers requiring the purchase of approximately 2,149,000 DTH of natural gas
at varying prices during the period October 1, 1997 through September 30, 1998.
The Company has also provided notice of bid awards to two natural gas suppliers,
and anticipates these notices to result in contracts to purchase an additional
1,703,000 DTH of natural gas at varying prices during fiscal year 1998. In
addition, the Company has short-term contracts with three propane suppliers
requiring the purchase of 2,952,500 gallons of propane during the period October
1, 1997 through September 30, 1998. Management does not anticipate that these
contracts will have a material impact on the Company's fiscal year 1998
consolidated results of operations.
During 1997, the Company entered into a purchase commitment to acquire
certain net assets of an area propane company. The total purchase price under
this commitment will be satisfied through the issuance of 35,097 shares of
Company common stock. The acquisition, which is expected to be consummated in
November 1997, will be accounted for under the purchase method of accounting.
F-22
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(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 certain 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 requiring disclosure under Statement 107 at September 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Carrying Approximate Carrying Approximate
Amounts Fair Values Amounts Fair Values
- -------------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 116,045 116,045 633,322 633,322
- -------------------------------------------------------------------------------------------------------------------
Total financial assets $ 116,045 116,045 633,322 633,322
- -------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Long-term debt $ 20,222,124 21,384,604 20,891,547 22,057,130
Borrowings under lines of credit 7,129,000 7,129,000 6,652,500 6,652,500
- -------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 27,351,124 28,513,604 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.
F-23
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995
(14) Fair Value of Financial Instruments (continued)
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.
F-24
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------- -----------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS 165,000 SHARES
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME [LOGO]
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY ROANOKE GAS COMPANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS COMMON STOCK
UNLAWFUL.
---------------------------
TABLE OF CONTENTS ------------------------------------
Page
----
PROSPECTUS
Prospectus Summary......................................3
The Company.............................................5 ------------------------------------
Use of Proceeds.........................................5
Price Range of Common Stock And Dividends...............6
Capitalization..........................................7
Selected Consolidated Financial And Operating
Information..........................................8
Management's Discussion And Analysis of Scott & Stringfellow, Inc.
Financial Condition And Results of Operations........9
Business...............................................14
Security Ownership of Certain Beneficial Owners
And Management......................................20
Management.............................................21 January 21, 1998
Description of Common Stock............................22
Underwriting...........................................24
Legal Opinions.........................................25
Experts................................................25
Available Information..................................25
Incorporation of Certain Documents by Reference........26
Index to Consolidated Financial Statements............F-1
- ----------------------------------------------------------- -----------------------------------------------------------
</TABLE>
