Diversification
The Propane Alternative
Positioning For Deregulation
Acquisition And Geographic Expansion
Trade Ally Relations
Saturation Program
Roanoke Gas Company
1998 ANNUAL REPORT
<PAGE>
Table Of Contents
1 Letter To Stockholders
2 An Interview With John Williamson, CEO
4 Review Of Operations
10 Management's Discussion & Analysis
16 1998 Financial Highlights
17 Independent Auditors' Report
18 Consolidated Balance Sheets
20 Consolidated Statements Of Earnings
21 Consolidated Statements Of Stockholders' Equity
22 Consolidated Statements Of Cash Flows
23 Notes To Consolidated Financial Statements
34 Summary Of Gas Sales & Statistics
35 Summary Of Capitalization Statistics
36 The Company's Board Of Directors And Officers
General Corporate Information - Inside Back Cover
Notice Of Annual Meeting - Back Cover
Southwest Virginia And Southern West Virginia's
Choice For Comfort And Economy
Natural Gas
Propane
[Map of Virginia and West Virginia showing Company's market area for natural
gas and propane.]
<PAGE>
Letter To Stockholders
Dear Stockholder:
I am pleased to report that the year ended September 30, 1998
produced several new records and numerous changes. On the records side, we
achieved our BEST earnings year ever in both net income and earnings per share.
Net income was $2.7 million, up 18 percent over last year, while per share
earnings of $1.60 were approximately 5 percent greater than the prior year. In
addition, dividends to shareholders were increased from $1.04 to $1.06 per
share.
The Company enjoyed excellent customer growth again in 1998 with over 4,500
new customer additions and 2,994 net customer additions for the year, a 7
percent growth rate and a 5 percent net growth rate. Natural gas new customer
additions increased approximately 3 percent and propane customers increased by
approximately 25 percent. New records were set in propane deliveries at 7.7
million gallons, up 17 percent. Natural gas volumes were up 1 percent on 6
percent warmer weather.
There were several significant changes and highlights this year.
On January 27, 1998, we sold 181,500 shares of stock through our first public
offering since the Company was capitalized in the 1940s. The offering was very
successful and permitted us to strengthen our balance sheet and lower our cost
of debt and composite interest rate. In a milestone in employee relations, we
made permanent a previously experimental skills based compensation plan for
bargaining unit employees when we implemented a two-year labor contract
effective August 1, 1998.
There were also personnel changes. On February 1, 1998, I took over as
President and Chief Executive Officer. At the same time, Arthur L. Pendleton was
promoted to Executive Vice President and Chief Operating Officer and John S.
D'Orazio was promoted to Vice President of Marketing and New Construction. In
May, Dale P. Moore joined us as Director of Rates, Regulatory Affairs and
Financial Planning. With the other experienced and talented managers already in
place, I feel we are building a strong team with which to grow the Company.
Our most significant change underway is a proposed corporate
reorganization into a holding company structure. In July, RGC Resources, Inc.
was chartered and is in position to become the holding company in our new
corporate structure. Subject to shareholder approval at the Annual Meeting and
receipt of regulatory approvals by the Securities and Exchange Commission and
the state regulatory commissions, we will implement the new structure. I believe
this change is critical in meeting several of our key business strategies, in
particular, positioning for deregulation, acquisition, and diversification.
We have continued our employment of technology and upgrading of computer
systems and recently installed, and are in the early stages of converting to, an
enhanced Customer Information and Billing System. The new system also
complements our Year 2000 compliance activities which include a mixture of
systems tests, upgrades and replacements. We added a second IBM AS/400 computer
to facilitate our Year 2000 readiness program and to provide for an offsite
emergency back-up system to ensure continuation of operations in the event of a
major disruption, system failure, or work site dislocation. We also rolled out a
new internet home page, which can be accessed at www.roanokegas.com.
We were busy on the regulatory front and implemented final rates following
state commission orders in all three natural gas operating
companies. The most recent order was issued in July in the Roanoke Gas case. The
rate relief in the Roanoke Gas rate case was not adequate given the extent of
our renewal program for replacing older portions of the distribution system. As
a consequence, we filed a new rate case on September 30 and anticipate placing
increased rates into effect, subject to refund, in March 1999. We had an
aggressive year in the renewal program, replacing over eight miles of cast iron
or bare steel mains and approximately 650 bare steel customer service lines.
I am pleased with the results of operations and the progress we have made
this year. I am excited about the opportunities the new millennium and a new
corporate structure will offer, and I look forward to continued deregulation
efforts in the energy sector of the economy. I believe we are taking the
necessary steps to position the Company to succeed in
changing markets.
I thank you for your interest in Roanoke Gas Company and for your continuing
decision to invest in company stock.
Sincerely,
/s/ John B. Williamson III
- ----------------------------------
John B. Williamson III
President and CEO
1998 Annual Report
1
<PAGE>
An Interview With John Williamson, CEO
Regarding The Proposed Corporate Restructuring
Q: Why do you believe reorganizing Roanoke Gas Company and its subsidiaries
under a holding company is necessary?
JBW: I believe that for this Company to realize its full potential it must be
positioned to grow not only natural gas and propane operations, but also expand
into other activities that are a good fit with the Company's experience,
marketing, and service capabilities. In our current structure, all activities
are under the utility company and are subject to the restrictions placed on
regulated public service corporations. With the establishment of a new holding
company, to be called RGC Resources, Inc., activities not specifically related
to utility operations can be organized and operated without the public service
corporation restrictions. The enhanced flexibility should facilitate our growth
and diversification efforts.
Q: How will Roanoke Gas Company, Bluefield Gas Company, and Diversified Energy
Company be affected by the corporate restructuring?
JBW: Each company will continue to exist and carry out its mission. Bluefield
Gas Company and Diversified Energy Company will operate as subsidiaries of RGC
Resources, Inc. rather than as subsidiaries of Roanoke Gas Company. Commonwealth
Public Service Corporation, which is currently a subsidiary of Bluefield Gas
Company for Bluefield operations in Virginia, will be merged into Roanoke Gas
Company so that there will be only one natural gas subsidiary in each state.
Roanoke Gas will also become a subsidiary of RGC Resources, Inc. In addition,
other subsidiaries may be formed under RGC Resources to carry out other
operations. Diversified Energy Company, trading as Highland Propane Company and
Highland Gas Marketing, could expand beyond selling propane and brokering
natural gas to industrial customers.
Q: How will a shareholder of Roanoke Gas Company be affected?
JBW: A shareholder will own stock in RGC Resources, Inc., and RGC Resources,
Inc. will own 100% of the common stock equity in Roanoke Gas Company, Bluefield
Gas Company, and Diversified Energy Company. The existing shares of Roanoke Gas
Company will be exchanged for an equivalent number of shares of RGC Resources,
Inc. The assets, earnings and customer base underlying a share of stock will be
the same. After the restructuring is complete, shareholders will receive shares
of RGC Resources, Inc. in exchange for their shares of Roanoke Gas Company. The
dividends per share and earnings per share of RGC Resources, Inc. will be
determined using criteria similar to that previously used by Roanoke Gas
Company. The primary difference will be the name change and a capital and
organizational structure that will enhance opportunities for growth and
diversification. RGC Resources stock will trade on the Nasdaq National Market
under the symbol RGCO.
Of course, you need to keep in mind that I am summarizing a complex
transaction. The Company's Proxy Statement for the 1999 Annual Meeting provides
detailed information about the proposed holding company structure and its
potential effects.
To be fully informed, each shareholder should read the entire Proxy Statement
carefully.
Q: Why will RGC Resources, Inc. have more authorized shares of stock than
Roanoke Gas Company?
JBW: To significantly grow the Company, additional equity capital may be needed.
Furthermore, having a larger number of authorized shares will facilitate issuing
new equity to help fund that growth. In addition, the Company may decide to
split the stock by providing a stock dividend to existing shareholders. We had
planned to increase the number of authorized shares of Roanoke Gas Company for
these purposes, even if a corporate restructuring was not envisioned.
Establishing RGC Resources, Inc. with a greater number of authorized shares from
the start, saves the time and cost of going through a separate process to
increase the number of authorized shares.
Roanoke Gas Company
2
<PAGE>
Q: Why do the articles of incorporation for RGC Resources, Inc. provide for the
possibility of issuing preferred stock?
JBW: There are no current plans to issue preferred stock. However, having the
opportunity for the Board of Directors to issue series of preferred stock
provides the Company with an important potential tool to facilitate
acquisitions. Preferred stock can be issued without voting rights, and the
dividend rate on preferred stock can be set lower than the rate on current
common stock. This could also lessen the likelihood of any dilution of earnings
or voting strength of existing common stock shareholders.
Q: How quickly will the restructuring occur?
JBW: We have filed applications for approval with the Securities and Exchange
Commission, the State Corporation Commission in Virginia, and the Public Service
Commission in West Virginia. Both state commissions have approved the
reorganization. The proposal will be submitted for shareholder approval at the
Annual Meeting in March 1999, and we anticipate regulatory approval shortly
thereafter. We currently are working to complete the reorganization in the
third fiscal quarter of 1999.
[FLOW CHARTS]
Present Corporate Structure Planned Corporate Structure
Shareholders Shareholders
| |
---- Roanoke Gas ---- Resources
| | | | | |
Diversified Resources Bluefield Roanoke Gas | Diversified
| |
Commonwealth Bluefield
1998 Annual Report
3
<PAGE>
Review Of Operations
Business Strategies
The cover of our Annual Report reflects our key business strategies. They
have been management's focus for the past year, and we believe they will remain
important Company themes into the new millennium.
Certainly, "acquisition and geographic expansion" are important to continued
growth and enhancing shareholder value and, when combined with "the propane
alternative," we feel the two strategies create the potential for significant
market growth. We acquired the propane assets of U.S. Gas in Bedford and
Franklin counties, Virginia, in December 1997. In 1998, we established new bulk
propane storage facilities in Rockbridge and Alleghany counties in Virginia, and
we added to our sales force to facilitate expansion. We are evaluating the
potential for extending natural gas service to the town of Rocky Mount near
Roanoke. A new pipeline now under construction for an additional natural gas
supply to Bluefield will enhance expansion opportunities there.
We have continued to focus on our "saturation program", which is designed to
optimize pipeline assets already in the ground. Over 50% of our new natural gas
customers in 1998 were conversions from other energy sources to natural gas and
were either located along existing mains or were served with minor line
extensions. We also continued to focus much of our marketing effort on our
"trade ally relations" strategy, so that builders, developers and heating and
plumbing contractors see us as an energy partner who responds quickly and
professionally to their needs in meeting their customers' demands.
We believe there will be further deregulation in the energy and utility
business, requiring significant management attention. We have installed and are
in the early stages of converting to an enhanced Customer Information and
Billing System as part of our "positioning for deregulation" strategy. This
system is expected to be followed by other enhancements to enable us to manage
the complexities of working with multiple natural gas commodity retailers,
accept electronic bill payments and offer internet access with respect to
customer and billing information. Our proposal to restructure to a holding
company ties together the strategies of "diversification" and "positioning for
deregulation". While future diversification will be done prudently and in areas
of our core competence, we believe exploring new opportunities are important to
our overall growth and improved shareholder value goals.
Financial
The Company established another new benchmark as it surpassed again the
previous year's earnings and posted net income of $2,726,879, or $1.60 per
share, for fiscal 1998. The previous year was also a record year with earnings
of $2,309,880 or $1.54 per share. The shareholders' investment in the Company
grew by $5,867,630 to $26,454,581, which amounts to $14.75 per share. At
September 30, 1998, the market value of the Company's stock was $19.50 per
share, or 132% of book value.
In November 1997, the directors voted to increase the regular quarterly
dividend from $0.26 to $0.265 per share effective February 1, 1998. The current
annual dividend of $1.06 per share is a 5.44% yield on the current market value
of the Company's stock and represents a payout of 66% based on earnings for
fiscal 1998.
In June 1998, the Company issued $5,000,000, 7.804%, First Mortgage Notes,
due in 2008. The proceeds of the First Mortgage Notes were used to replace the
outstanding First Mortgage Bonds, 10.00%, Series K (principal amount:
$1,350,000) and the outstanding First Mortgage Bonds, 10.375%, Series L
(principal amount: $1,994,000). This replacement is a "blend and extend"
arrangement that replaced 50-year-old covenants with modern covenants that
mirror recent debenture debt replacement. The ten-year bullet secured note
replaces the amortizing Series K and Series L First Mortgage Bonds. The
remainder of the proceeds of the First Mortgage Notes ($1,656,000) was used for
general corporate purposes.
In October of 1998 the Company filed an application with the Virginia State
Corporation Commission seeking approval for authority to issue common stock as
part of the Company's existing dividend reinvestment plan. The Company's
authority to issue stock as part of this plan was for a five-year period ending
November 10, 1998. On October 26, 1998, the Company was granted the requested
authority.
The Company has unsecured lines of credit through its cash management
system totaling $21,000,000, at indexed interest rates. These lines are subject
to annual renewal and do not require compensating balances. The average
month-end balance of short-term debt in 1998 was approximately $5,280,000. The
average interest rate paid on unsecured lines of credit during 1998 was 6.19%.
The components of this consolidated short-term debt are $3,058,000 for Roanoke
Gas at 6.05%, $1,508,000 for Bluefield Gas at 6.22%, and $714,000 for
Diversified Energy, doing business as Highland Propane, at 6.69%. The month-end
balance at September 30, 1998 was $4,584,000, at an average interest rate of
6.18%.
Please refer to "Management's Discussion & Analysis Of Financial Condition
And Results Of Operations" for additional information on the Company's capital
resources and for an analysis of changes in revenue and expenses.
Marketing & Sales
Roanoke Gas Company, Bluefield Gas Company and Diversified Energy, doing
business as Highland Propane Company, consolidated, experienced another year of
excellent customer growth with approximately 4,500 new customer additions or
3,000 net additions. This growth represents an overall new customer additions
rate of 7% or a net customer addition rate of 5%. On an individual company
basis, new customer additions were approximately 3% for Roanoke Gas Company, 4%
for Bluefield Gas Company, and 25% for Highland Propane. Highland Propane now
serves over 11,000 propane customers, nearly doubling its customer base in a
four-year period.
Roanoke Gas Company
4
<PAGE>
[CHART]
NATURAL GASS AND PROPANE
CUSTOMER GROWTH
1994 1995 1996 1997 1998
Natural Gas Customers 48544 49813 51094 52763 53556
Propane Customers 5684 6006 6410 8829 11004
On the natural gas side, conversions represented approximately 51% of the new
customer growth for Roanoke Gas Company and 82% for Bluefield Gas Company.
Highland Propane surpassed 2,800 tank installations in a single year for the
first time in the Company's history. These installations represent a 27%
increase over last year's installations and nearly tripled the 1996
installations. Tank installations were up in most geographic areas, with
Southwest Virginia leading the way with an increase of 52% from fiscal 1997,
followed by Roanoke with a 12% increase. Diversified Energy, doing business as
Highland Propane, expanded its marketing efforts in the outlying portions of the
current service area including Bedford County, Rockbridge County and Alleghany
County, Virginia, and Raleigh, Fayette and northern Greenbrier counties, West
Virginia.
The marketing strategy for both propane and natural gas continues to center
around maintaining strong trade ally relationships, establishing one-on-one
contacts with members of the sales team and providing real-time customer
service. This strategy has been the nucleus of our success, and the number of
trade allies continues to grow as we expand into new areas in Virginia and West
Virginia. As we continue to expand our trade ally base, we seek feedback from
the trade ally group to improve our sales and service to our customers.
Our commission sales force focuses on the addition of new gas customers
along existing gas mains or the addition of new residential and commercial
propane customers. Natural gas conversions exceed the 650 customer mark for the
third year in a row, and the number of new propane tank sets increased by more
than 600 over last year. In addition, we have expanded our commissioned sales
force, and now have new representatives in Bedford County and Covington,
Virginia and Rainelle, West Virginia.
The Company has been working closely with prospective industrial and
commercial customers, regional economic development groups and local
governments. We are excited about the future economic development potential of
area industrial parks and shell buildings under development.
The Company remains actively involved in various leadership positions within
the community, including but not limited to, the Roanoke Regional Chamber of
Commerce, Hollins University, Junior Achievement, United Way, The Virginia
Western Foundation, The Salvation Army, YMCA, Community School, Boys and Girls
Club of the Roanoke Valley, and the Roanoke Regional and New River Valley
Homebuilders Associations. The Company takes its community responsibilities
seriously and encourages its employees to become involved in community affairs.
Customer Service
Providing timely and accurate information to our customers is a key
corporate objective. We perform these functions within our Customer Service
Department using a blend of human resources and technology. As in the past, we
continue to serve our customers both by telephone and in person. Customer
Service centers are available in Rainelle and Bluefield, West Virginia and our
main Roanoke office. The Roanoke office also has the ability to receive overflow
calls from Bluefield. During the year, we answered 154,488 customer calls in the
Roanoke Customer Call Center. This is an average of 594 calls per work day. In
addition to customer calls, we served approximately 23,000 walk-in customers in
the Roanoke center.
We continue to experience excellent customer participation with programs
such as bank drafts, budgets, and HeatShare. Our Customer Service Department is
also very involved in the implementation of the new Customer Information System,
and we are currently planning for upgrades to our customer call management
system.
With many banks and credit unions in the Roanoke Gas and Bluefield Gas
service areas discontinuing their collection of utility payments, we have worked
diligently to promote our automatic bank draft program. In an effort to increase
the number of customers using bank draft, we have worked with local banks and
credit unions and provided a special bill insert to inform customers of this
convenient option. As a result of the program, approximately 9% of Roanoke Gas
customers and approximately 6% of Bluefield Gas customers are using the bank
draft option.
With a renewed emphasis on the budget billing program this year, Roanoke Gas
and Bluefield Gas have experienced increased utilization of our budget billing
program by customers interested in equal monthly payments. As a result,
approximately 25% of Roanoke Gas customers and approximately 19% of Bluefield
Gas customers now take advantage of the budget billing option.
Our HeatShare Program, which helps needy customers in the Roanoke Valley pay
their gas bills, had another very successful year. Approximately $50,000 was
collected from donations by the Company, its employees and customers. During the
sixteen-year history of the program, approximately $900,000 has been donated to
assist over 6,300 families.
The Company's Credit and Collection policies were reviewed and revised in
January of 1998 in an effort to decrease aged receivables, more aggressively
resolve past delinquencies and ultimately reduce bad
1998 Annual Report
5
<PAGE>
Review Of Operations
debt write-off amounts in future years. By implementing proactive
collection procedures, customer delinquencies are quickly identified and
resolved in a professional and effective manner. Our 1998 bad debt write-off
amounts reflect an increase over the prior year as a result of these
initiatives. However, the amount of past due balances carried into the new
fiscal year is reduced. The net result is a healthier receivable portfolio going
into 1999.
To continue to attain our goal of lowering aged receivables and reducing bad
debt write-offs, we are currently utilizing telephone and computer technologies
to increase outbound contacts and timely account followup. We have strengthened
outsourcing relationships to broaden the scope of our collection efforts. We
seek to send a fair but firm message to our customers that communicates both our
willingness to cooperate in resolving past due balances amicably and our
commitment to, when necessary, take appropriate actions to recover revenues lost
to delinquencies. We believe in the long run this approach is in the best
interest of all customers by keeping bad debt cost lower and minimizing the
impact of this cost on overall service rates.
Plant Additions
Capital additions for the fiscal year 1998 totaled approximately $9,584,000
for the consolidated companies, inclusive of additional assets acquired from the
purchase of U.S. Gas Company. Total additions were up 19% compared to 1997
fiscal year expenditures of $8,053,000. Accelerated growth, primarily within the
propane company, continues to drive the increased capital spending. Bluefield
Gas accounted for 9% of all capital expenditures at $866,000. Bluefield Gas
Company's capital expenditures represent an increase over the previous year of
42%. The larger expenditures in Bluefield are partially related to the
construction of two miles of 4" coated steel pipe that will connect Bluefield's
distribution system to the Phoenix Energy Sales Pipeline. This connection will
provide Bluefield with a second source of gas supply originating from the
Consolidated Natural Gas Gathering System near Coopers, West Virginia. Bluefield
Gas installed 227 new service lines and 2.9 miles of new mains in fiscal 1998,
compared to 149 new service lines and 1.3 miles of new mains in fiscal 1997.
Diversified Energy, doing business as Highland Propane, capital additions
for fiscal 1998 were 39% of the total additions, or approximately $3,691,000,
which was an increase of 58% over last year. New propane installations totaled
$2,662,000, compared to $1,919,000 in fiscal 1997. Highland Propane installed
2,890 new tank sets in fiscal 1998, compared to 2,280 last year, a 27% increase.
Roanoke Gas invested approximately $5,026,000 in capital additions, or 52%
of the total company capital additions. New business expenditures, including
mains, meters and new service lines, totaled $2,173,000 in fiscal 1998 compared
to $2,825,000 last year. Roanoke Gas installed 1,498 new service lines and 12.2
miles of new mains in fiscal 1998, compared to 1,518 new service lines and
18.6 miles of new mains last year. The increase in the number of services per
mile of main was a direct result of successful efforts to increase customer
saturation by converting homes along existing mains to natural gas.
The Company also increased its main replacement and service renewal outlays,
investing $1,656,000 in fiscal 1998, compared to $1,384,000 last year. During
fiscal 1998, the Company replaced 756 natural gas service lines and 9.1 miles of
main compared to previous year totals of 598 service lines and 8.1 miles of
main. In 1992, Roanoke Gas Company began an extensive 25-year facility
replacement program designed to reduce maintenance costs over the long term and
improve system integrity by replacing all cast iron and bare steel mains and
services with modern coated steel or plastic piping. During recent years,
Bluefield Gas Company was also added to the program. We remain on schedule for a
year 2017 target completion date.
[PHOTO]
Jack Cassell demonstrates the new electric monitoring sensors at the Company's
Liquefied Natural Gas (LNG) Plant. This equipment is part of a planned upgrade
at the LNG plant.
Other fiscal 1998 increases in plant additions included: $142,000 for new
electronic monitoring sensors at the Company's Liquefied Natural Gas (LNG)
Plant; $331,000 for new construction equipment and vehicle purchases; and
$724,000 for new computer equipment, software additions and upgrades.
For fiscal 1999, the Company has budgeted $8,500,000 for capital additions
and replacements. Major items will include $2,600,000 to support propane
customer growth, $2,900,000 for new natural gas customer additions, $1,300,000
to replace bare steel and cast iron mains and services, $600,000 for new
transportation equipment and $400,000 for information systems and technology
applications. The anticipated sources of these funds are depreciation and
amortization cash flow, earnings, and debt.
Roanoke Gas Company
6
<PAGE>
[GRAPH]
CAPITAL ADDITIONS
1994 1995 1996 1997 1998
Roanoke 4,463,672 4,463,672 4,281,600 5,118,473 5,026,350
Bluefield 572,032 572,032 580,896 608,105 866,088
Highland 573,588 573,588 677,877 2,326,223 3,346,176
[GRAPH]
NATURAL GAS
Year Natural Propane
1994 3.906208 0.435643
1995 3.255788 0.445386
1996 4.237287 0.496335
1997 4.359843 0.594844
1998 4.032359 0.475118
[GRAPH]
PROPANE
Natural Natural
Gulf Spot Gulf Spot
1994 2.039 0.2835
1995 1.562 0.3238
1996 2.378 0.3649
1997 2.544 0.4255
1998 2.344 0.2927
Energy Supply
One of the strongest El Nino events on record delivered unseasonably warm
winter weather to the majority of the United States during fiscal 1998. Our
Roanoke service area recorded 4,054 heating degree days for the fiscal year,
which was 4% fewer heating degree days than the long-term normal.
While the entire heating season turned out to be mild, cool to normal
weather existed over most of the U.S. during the fall of 1997. Cool weather in
conjunction with abnormally low natural gas storage levels combined to cause an
unusually early peak in natural gas commodity prices. However, the unseasonably
warm weather in January and February of 1998 resulted in a significant decline
in both natural gas and propane commodity prices. Gas commodity prices for the
monthly indexes relevant to Roanoke Gas decreased almost 7.5% over the previous
fiscal year. Commodity prices for propane also declined significantly late in
fiscal 1998.
While the average commodity prices have fallen over the past fiscal year,
natural gas remains a volatile commodity. To reduce volatility and provide a
more stable gas price for customers, the company uses a variety of hedging
mechanisms, including summer storage injections. As part of this program,
Roanoke Gas Company utilitized a financial hedging pilot program during the past
heating season. In the coming heating season, Roanoke Gas will continue its
pilot program for a second year, and Bluefield Gas will begin a pilot program in
West Virginia. The Company also uses fixed price contracts and financial hedges
to manage volatility in propane prices.
Roanoke Gas continues to use a mixture of long-term (one year or more),
mid-term (seasonal) and short-term (spot) gas acquisition contracts for the
Company's natural gas and propane supplies. The Company's objective is to create
a reliable and economical mixture of gas supply contracts without limiting its
ability to adapt to changing market conditions. Long-term suppliers currently
include Coral Energy, Cabot Oil and Gas, Engage Energy, Exxon, Columbia Energy
Services, Northridge Petroleum and Southern Company Energy Marketing.
Roanoke Gas Company regards storage supplies as an integral component
of its natural gas supply portfolio. The Roanoke and Bluefield operations
combined hold the rights to about 2.9 billion cubic feet (BCF) of natural gas
storage space. This storage includes pipeline and third party underground
facilities in both the Gulf coast and Appalachian areas, as well as its own LNG
storage in Botetourt County, Virginia.
1998 Annual Report
7
<PAGE>
Review Of Operations
[MAP OF ROANOKE AREA ENERGY SUPPLY]
[MAP OF BLUEFIELD AREA ENERGY SUPPLY]
Information Systems
Company systems and processes need to correspond to business strategies,
changing conditions and opportunities. As part of our plan of positioning the
Company for deregulation and diversification, the Company researched, analyzed,
and then started the implementation of a new Customer Information System (CIS).
The goal is to complete the implementation during the summer of 1999. In
addition to aligning Company systems with long-term business strategies,
considerable progress is being made on the Year 2000 issue to assure system
reliability and stability for continuing business into the new millennium.
The CIS includes all functions related to the customer. The Service Order
subsystem is used to perform all service work, such as installing the meter or
repairing an appliance. The Customer Contact subsystem allows tracking and
monitoring of all customer conversations. The Meter Reading and Billing
subsystems work together to properly bill the customer. The Collection process
enables our users to work with customers and collection agencies to minimize
customer payment problems.
[PHOTO]
Debbie Wright, Customer Service Associate, demonstrates the information system
that allows her to access real-time data on customers when they call us with an
inquiry.
The new CIS builds on an already highly functional system. Functionality
such as on-line real-time information, an extensive relational database ranging
from billing information to tracking detail of all customer contacts, and full
integration with the financial systems are fundamental. The new CIS allows for
enhancements to provide Specialized Gas Billing for a deregulated environment
and a flexible design to further improve employee efficiency. This platform
positions the Company's systems for the future. It is highly adaptable and
prepared for additional system modules such as Internet Commerce, Marketing and
Sales Management, and Multi-Entity Communications. As of September 30, 1998,
$175,500 has been spent on the Customer Information System and $324,500 will
be spent in fiscal 1999.
8
<PAGE>
Nonregulated Operations
Fiscal year 1998 marked the second consecutive year that propane customer
growth exceeded 25%. Diversified Energy Company, doing business as Highland
Propane Company, began operation in 1979, partially as a means to provide
propane gas service to future natural gas expansion areas and for selected
commercial applications. Over the years, propane has grown in popularity. With
new high efficiency propane gas appliances providing the warmth and comfort of
gas heat, propane has become the energy of choice for many residential and
commercial customers in areas not served by natural gas pipelines. Over the last
two years, the number of new propane customer additions exceeded that of natural
gas.
Highland Propane has expanded its service territory in both Virginia and
West Virginia. Geographic expansions were made east into Bedford County, one of
the fastest growing counties in Virginia, and north into Rockbridge, Alleghany
and Bath counties in Virginia. The West Virginia markets were extended into
Summers, Fayette and Raleigh counties. Our goal is to not only expand
geographically, but to increase the saturation of propane customers within the
existing service area. Over the past several years, we have installed additional
satellite storage facilities to serve as hubs that improve our delivery
efficiencies. These satellite facilities also provide target areas for us to
concentrate our saturation sales efforts. Storage facility installations added
in fiscal 1998 include Low Moor, near Covington, Virginia; Buena Vista, east of
Lexington, Virginia; and Bedford, Virginia. We have a total of 12 bulk storage
facilities located throughout our service area.
Total sales by the propane company were 7.7 million gallons with 4,054
Roanoke heating degree days in fiscal 1998, compared to 6.6 million gallons with
4,298 heating degree days in fiscal 1997. Increased customer growth offset the
warmer weather, resulting in a 17% increase in total gallons delivered.
Management is continually evaluating ways to improve efficiencies and reduce
overall operating expense. We are in the process of implementing a computer
aided graphic dispatch system to improve overall delivery services and enhance
current marketing efforts. The dispatch system will be based on Global
Positioning Satellite (GPS) technology and will produce detailed maps for all of
our delivery routes. These maps will not only serve as a delivery tool, but will
provide valuable information to help our sales staff improve market area
saturation.
Diversified Energy Company, doing business as Highland Gas Marketing, sold
just over 2 million decatherms of natural gas in 1998, an increase of 77% over
1997. The increase in sales was partially due to warmer weather, which resulted
in fewer days of natural gas supply interruptions for large volume industrial
users who use alternative sources of energy on extremely cold days. Highland Gas
Marketing buys interruptible supplies of spot gas and temporary interstate
pipeline transportation services, and resells them to large industrial customers
that contract with the local utility for delivery from the interstate pipeline
to the customer's meter. The natural gas marketing business is highly
competitive with relatively low margins; however, it also has a low cost of
operation with minimal facility and personnel requirements.
Market Price & Dividend Information
The Company's common stock is listed on the Nasdaq National Market under the
trading symbol RGCO. This provides shareholders, brokers and others with
immediate access to the latest bid and ask prices and creates greater liquidity
in the Company's stock. The table below sets forth the range of bid prices for
shares of the Company's common stock, as reported in the Nasdaq National Market.
Additionally, the firm of Scott & Stringfellow, Inc. has experienced research
analysts who are knowledgeable about the natural gas distribution utility
industry and includes Roanoke Gas Company in its equity research database.
Although the Company has paid continuous quarterly dividends to its
shareholders since August 1, 1944, and has increased dividends for the past
three 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 negatively affect the
Company's ability to pay dividends in the future. In addition, the Company's
long-term indebtedness contains restrictions on cumulative net earnings of the
Company and dividends previously paid. At September 30, 1998 and 1997,
respectively, the Company had 1,837 and 1,853 common shareholders of record in
conjunction with 1,794,416 and 1,527,486 common shares outstanding.
Range of Cash
Bid Prices Dividends
Declared
Fiscal Year Ended High Low
September 30,
1998
First Quarter $21.375 $17.500 $.265
Second Quarter 22.750 19.250 .265
Third Quarter 22.250 19.750 .265
Fourth Quarter 20.703 18.125 .265
1997
First Quarter $18.000 $16.750 $.26
Second Quarter 18.250 17.000 .26
Third Quarter 17.750 15.750 .26
Fourth Quarter 18.125 16.000 .26
1998 Annual Report
9
<PAGE>
Management's Discussion & Analysis
Of Financial Condition And Results Of Operations
Roanoke Gas Company and Subsidiaries
Selected Financial Data
Years Ended September 30,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $59,387,092 $65,047,826 $65,770,873 $ 48,611,147 $ 58,195,857
Operating Margin 23,279,585 22,464,921 22,030,795 19,435,864 19,902,497
Operating Earnings 4,717,026 4,403,423 4,035,304 3,522,258 3,537,267
Earnings Before Interest Charges 4,822,590 4,550,333 4,113,044 3,701,907 3,592,351
Net Earnings 2,726,879 2,309,880 2,196,672 1,777,240 1,677,098
Net Earnings Per Share 1.60 1.54 1.51 1.26 1.25
Cash Dividends Declared
Per Share 1.06 1.04 1.02 1.00 1.00
Book Value Per Share 14.75 13.48 12.86 12.25 11.88
Average Shares Outstanding 1,701,048 1,503,388 1,455,999 1,408,659 1,339,402
Total Assets 69,134,920 62,593,258 58,921,099 51,614,667 49,579,447
Long-Term Debt
(Less Current Portion) 20,700,000 17,079,000 20,222,124 17,504,047 16,414,900
Stockholders' Equity 26,464,581 20,596,951 18,975,001 17,555,172 16,424,919
Shares Outstanding At September 30, 1,794,416 1,527,486 1,475,843 1,432,512 1,382,343
</TABLE>
General
The core business of Roanoke Gas Company and its public utility affiliates
(collectively, the Company) is the distribution of natural gas to approximately
53,500 customers in the cities of Roanoke, Salem, and Bluefield, Virginia and
Bluefield, West Virginia, and the surrounding areas. This service is provided at
rates and for the terms and conditions set forth, approved and regulated by the
State Corporation Commission in Virginia (the Virginia Commission) and the
Public Service Commission in West Virginia (the West Virginia Commission). As a
public utility, the Company is required to ensure that it has adequate capacity
to serve the ongoing needs of its customers. To meet these needs, the Company
continues to expand its facilities to keep pace with the residential,
commercial, and industrial growth in its service areas. The Company continues to
experience customer growth and plans to meet the needs of its current and future
customers by attracting adequate investment capital and by filing and receiving
timely rate increases when needed from the state commissions.
The Company also serves approximately 11,000 propane accounts in
southwestern Virginia and southern West Virginia and serves natural gas
industrial transportation customers by brokerage of natural gas supplies through
its subsidiary, Diversified Energy Company, which trades as Highland Propane
Company and Highland Gas Marketing. Propane sales have become an important
aspect of the consolidated Company's operations, with the annual growth in
propane customers now exceeding the annual growth in natural gas customers.
While the demand for natural gas and propane continues to increase in the
Roanoke Gas and Bluefield Gas service territory, the weather normalized per
capita residential usage is declining due to energy conservation,
high-efficiency furnaces and appliances, and better- insulated homes. The effect
of such per capita declines, unless offset by new customer growth, a strong
revenue stream during the winter, or requested rate relief, could result in a
decline in the Company's net operating earnings as a percentage of the common
equity investment. Competition from alternative fuels and/or suppliers could
also impact the Company's profitability levels.
Roanoke Gas Company, Commonwealth Public Service Corporation, a subsidiary
of Bluefield Gas, and Bluefield Gas Company currently hold the only franchises
and/or certificates of public convenience and necessity to distribute natural
gas in their respective Virginia and West Virginia service areas. These
franchises are for multi-year periods and are effective through January 1, 2016
in Virginia and August 23, 2009 in West Virginia. While there are no assurances,
the Company believes that it will be able to negotiate acceptable franchises
when the current agreements expire. Certificates of public convenience are of
perpetual duration.
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: (i) obtaining adequate rate relief from regulatory
authorities on a timely basis; (ii) earning an adequate return on invested
capital on a
Roanoke Gas Company
10
<PAGE>
consistent basis; (iii) increasing expenses and labor costs and availability;
(iv) price competition from alternative fuels; (v) volatility in the price of
natural gas and propane; (vi) some uncertainty in the projected rate of growth
of natural gas and propane requirements in the Company's service area; (vii)
general economic conditions both locally and nationally; and (viii) developments
in electricity and natural gas deregulation and associated industry
restructuring. In addition, the Company's business is seasonal in character and
strongly influenced by weather conditions. Extreme changes in winter heating
degree days from the normal or mean can have significant short-term impacts on
revenues and gross margins.
Capital Resources & Liquidity
Roanoke Gas Company's primary capital needs are the funding of its
continuing construction program and the seasonal funding of its stored gas
inventories. The Company's capital expenditures for fiscal 1998 were a
combination of replacements and expansions, reflecting the need to replace older
cast iron and bare steel pipe with plastic pipe, while continuing to meet the
demands of customer growth. Total capital expenditures for fiscal 1998 were
approximately $9.6 million allocated as follows: $5.0 million for Roanoke Gas
Company, $.9 million for Bluefield Gas Company and $3.7 million for Highland
Propane Company. Depreciation cash flow provided approximately $3.6 million in
support of capital expenditures, or approximately 37% of total investment.
Historically, consolidated capital expenditures were $8.1 million in 1997 and
$5.5 million in 1996. It is anticipated that future capital expenditures will be
funded with the combination of depreciation cash flow, retained earnings, sale
of Company equity securities and issuance of debt.
At September 30, 1998, the Company had available lines of credit for its
short-term borrowing needs totaling $21 million, of which $4,584,000 was
outstanding. Short-term borrowing, in addition to providing limited capital
project bridge financing, is used to finance summer and fall gas purchases,
which are stored in the underground facilities of Columbia Gas Transmission
Corporation, Tennessee Gas Pipeline Company and Virginia Gas Storage Company, as
well as in the Company's above-ground LNG storage facility, to ensure adequate
winter supplies to meet customer demand. At September 30, 1998, the Company has
$7,051,044 in inventoried natural gas supplies.
Short-term borrowings, together with internally generated funds, long-term
debt and the sale of common stock through the Company's Dividend Reinvestment
and Stock Purchase Plan (Plan), have been adequate to cover construction costs,
debt service and dividend payments to shareholders. The terms of short-term
borrowings are negotiable, with average rates of 6.19% in 1998, 5.97% in 1997
and 5.84% in 1996. The lines do not require compensating balances. The Company
utilizes a cash management program, which provides for daily balancing of the
Company's temporary investment and short-term borrowing needs with interest
rates indexed to the 30-day LIBOR interest rate plus a premium. The program
allows the Company to maximize returns on temporary investments and minimize the
cost of short-term borrowings.
Stockholders' equity increased for the period by $5,867,630, reflecting an
increase of $895,502 in retained earnings, the sale of 181,500 shares of stock
through a public offering in January for net proceeds of $3,387,496, the net
issuance of $613,564 of common stock for U.S. Gas, Inc., and proceeds of
$971,068 of new common stock purchases through the Plan and the Restricted Stock
Plan For Outside Directors.
At September 30, 1998, the Company's consolidated capitalization was 56%
equity and 44% debt, compared to 50% equity and 50% debt at September 30, 1997.
Regulatory Affairs
During the past fiscal year, the Company received Final Orders in three rate
increase requests and two gas cost hedging proposals. On December 29, 1997, the
West Virginia Commission issued a Final Order authorizing a rate increase of
$132,800 effective for bills rendered on and after March 2, 1998 by Bluefield
Gas Company. On March 16, 1998, the Virginia Commission issued a Final Order
authorizing a rate increase of $65,917 for service rendered on and after
November 28, 1997 by Commonwealth Public Service Corporation. On August 6, 1998,
the Virginia Commission issued a Final Order in the Roanoke Gas Company rate
increase request authorizing an increase on $237,634 for services rendered on
and after January 1, 1997. Both increases in Virginia resulted in refunds to
customers which had been reserved.
With respect to gas cost hedging, the Virginia Commission approved a
two-year extension of Roanoke Gas Company's existing gas cost hedging pilot
program. On July 7, 1998, the West Virginia Commission's Division of
Administrative Law Judges issued a decision approving a two-year pilot gas cost
hedging program for Bluefield Gas Company. This decision became final on July
27, 1998. The pilot programs proposed to employ gas costs hedges for up to 50%
of its normal winter demand not supplied from storage. Both hedging programs are
intended to help protect against supply-related price volatility adversely
impacting customer billing rates.
Roanoke Gas Company filed an application with the Virginia Commission on
September 30, 1998 seeking an annual increase in non-gas rates of $877,000. This
request represents a 1.8% increase in billing rates and a 5.1% increase to the
non-gas margins. The Company expects this increase to become effective under
bond and subject to refund on February 28, 1999. A hearing is scheduled in April
1999, with an order anticipated in the fall of 1999. The Company is permitted to
put rates into effect, under bond, prior to the receipt of the Commission's
final order. Consequently, the Company will establish adequate reserves for this
refund.
In addition to the standard rate case items, the Virginia application
includes a proposal for a Distribution System Renewal Surcharge which would
provide a mechanism that the Company would use to recover the depreciation and
carrying costs of distribution system renewal expenses on a periodic basis. The
Company is also proposing a Revenue Stabilization Surcharge that would go into
effect during any
1998 Annual Report
11
<PAGE>
Management's Discussion & Analysis
Of Financial Condition And Results Of Operations
year in which the weather was 5% warmer or colder than the long-term normal
level. This surcharge will help protect both the customer and the Company from
major swings in revenue due to abnormal weather. In the current proceeding, the
Company is also proposing to move to therm billing for all customers. The therm
billing rates will not go into effect until after the issuance of the Final
Order in this proceeding.
While not part of the rate case, the Company has begun discussions with the
Staff of the Virginia Commission regarding area specific rates which will permit
timely recovery of the depreciation and carrying charges of main extensions into
previously unserved areas. Area specific rates are something the Company intends
to pursue in the future to facilitate the timely recovery of main extension
costs in rates.
Proposed Holding Company Reorganization
The Company filed a Form U-1 with the Securities and Exchange Commission on
October 16, 1998, seeking approval to reorganize the Company into a holding
company with three separate subsidiaries. The filing provides that the holding
company will be established as RGC Resources, Inc., and the subsidiaries will be
Roanoke Gas Company, Bluefield Gas Company, and Diversified Energy Company.
Included in the application for the new structure is a request for approval to
merge Commonwealth Public Service Corporation into Roanoke Gas Company, creating
a single public utility in the state of Virginia for the distribution of natural
gas. The Company expects a decision from the SEC in the summer of 1999.
In addition to the Form U-1 filing, the Company made simultaneous state
filings on October 21, 1998 seeking state approval of the proposed holding
company structure, as well as approval of the resulting affiliate agreements.
The Company has received approvals from both the Virginia and West Virginia
Commissions. Shareholders of Roanoke Gas also must approve the proposed
reorganization.
Results Of Operations
Fiscal Year 1998 Compared With Fiscal Year 1997
Operating Revenues - Operating revenues for the natural gas
utilities decreased $5,985,129 to $51,857,052 in 1998 from $57,842,181 in 1997.
The decrease is attributed to weather that was approximately 6% warmer in 1998
than in 1997 and a 7.5% decrease in the unit cost of natural gas. Operating
revenues for propane increased $324,395 to $7,530,040 in 1998 from $7,205,645 in
1997 due to a 25% increase in net customer growth even though revenues per
gallon decreased 10.9% due to the lower price of propane.
ENERGY VOLUMES - The volume of natural gas delivered to customers increased
71,436 MCF to 10,875,481 MCF in 1998 from 10,804,045 MCF in 1997. Although the
weather was approximately 6% warmer than last year, customer growth increased
throughput for the period. Propane sales volumes increased 1,134,318 gallons to
7,702,384 gallons in 1998 from 6,568,066 gallons in 1997. The increase is
attributable to the increase in the number of customers.
COST OF ENERGY - The cost of natural gas declined $6,204,265 to $32,471,072 in
1998 from $38,675,337 in 1997. The decrease was due to a 7.5% decrease in the
unit cost of natural gas and an increase in transportation volumes of 889,620
MCF. The cost of propane decreased $271,133 to $3,636,435 in 1998 from
$3,907,568 in 1997. The decrease in the unit cost was associated with an
abundant supply of propane due to weather that was approximately 4% warmer than
normal in the Company's service area and also warmer nationally.
OTHER OPERATING EXPENSES - Other operations and maintenance expenses decreased
$496,811 or 5.2% to $9,015,786 in 1998 from $9,512,597 in 1997. The decrease was
primarily the result of reductions in bad debt accruals ($209,827) and the
absence of regulatory asset write-offs which occurred in 1997 in the amount of
$306,809.
General taxes decreased $80,172 to $2,376,227 in 1998 from $2,456,399 in
1997. Increases in business license and merchants taxes, franchise taxes and
property taxes in the amount of $7,442 were more than offset by decreases in the
revenue-sensitive taxes (gross receipts and business and occupation taxes) in
the amount of $75,571.
Income taxes increased $242,542 to $1,100,506 in 1998 from $857,964 in
1997, due to higher pre-tax income in 1998.
Depreciation and amortization expenses increased $272,366
to $2,806,278 in 1998 from $2,533,912 in 1997 due to increased depreciation
related to normal additions to plant in service.
Other operating expenses - propane operations includes the operating and
maintenance expenses, taxes and depreciation of Highland Propane Company. These
costs increased to $3,263,762 in 1998 from $2,700,626 in 1997. The $563,136
increase was primarily attributable to growth in customers and propane assets
and the associated increase in volumes delivered. Depreciation on tanks and
equipment increased by $78,022, property and related taxes increased by $33,302,
transportation and delivery costs increased by $157,039, and sales expense
increased by $65,194 and a variety of other growth driven operating costs
increased associated with billing and collecting, accounting and management
overhead.
OTHER INCOME - Other income, net of other deductions, decreased $41,346 to
$105,564 in 1998 from $146,910 in 1997. The decrease was primarily associated
with rate refund expenses ($9,365) and the write-off of obsolete and damaged
propane tanks in the amount of $30,802.
INTEREST CHARGES - Total interest charges decreased $144,742 to $2,095,711 in
1998 from $2,240,453 in 1997. Interest charges were lower due to the payoff of
$2,500,000 in long-term debt in October 1997 and the use of the proceeds from
the issuance of 181,500 shares of common stock in January 1998.
NET EARNINGS AND DIVIDENDS - Net earnings for 1998 were $2,726,879 as
compared to $2,309,880 in 1997. The $416,999 increase in earning can be
attributed to cost management which resulted in operation and maintenance
expenditures for natural gas being $496,811 less than the prior year offsetting
increased propane operations related to customer growth and increased revenue
from customer growth combined with the full annual effect of rate increases
which produced an $814,664
Roanoke Gas Company
12
<PAGE>
increase to operating margin. Basic earnings per share of common stock were
$1.60 in 1998 compared to $1.54 in 1997. Dividends per share of common stock
were $1.06 in 1998 compared to $1.04 in 1997.
Fiscal Year 1997 Compared With Fiscal Year 1996
OPERATING REVENUES - Operating revenues for the natural gas utilities
decreased $2,225,226 to $57,842,181 in 1997 from $60,067,407 in 1996. The
decrease in revenues is attributed to weather that was approximately 8% warmer
in 1997 than in 1996. Operating revenues for propane increased $1,502,179 to
$7,205,645 in 1997 from $5,703,466 in 1996 due to the tremendous growth in the
number of customer additions and higher billing rates impacted by propane cost.
ENERGY VOLUMES - The volume of natural gas delivered to customers was down
365,903 MCF to 10,804,045 MCF in 1997 from 11,169,948 MCF in 1996 primarily
attributable to weather that was approximately 8% warmer than the weather in
1996. While customer growth was on par for the period, sales were down in all
categories, with the exception of transportation volumes, due to weather.
Propane sales volumes for 1997 were 6,568,066 gallons compared to 5,997,912
gallons in 1996, an increase of 570,154 gallons; again, indicative of the
increase in customer growth.
COST OF ENERGY - 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 a 3% decline in volume
and a 2% decrease in unit cost, both of which were impacted by weather that was
approximately 8% warmer in 1997 than in 1996. The cost of propane was up
$930,594 due to an increase in sales volume of 570,154 gallons associated with
customer growth and a 20% increase in unit cost.
OTHER OPERATING EXPENSES - Other operations and maintenance expenses decreased
$411,894 or 4.15% to $9,512,597 in 1997 from $9,924,491 in 1996. Although the
Company had increases in expenses associated with health insurance and bad debt
accruals and the write-off of regulatory assets in the amount of $309,716, these
were more than offset by reductions in post-retirement benefit expenses and
maintenance expenses, promotional advertising and increased capitalization of
labor and overheads associated with additional capital projects totaling
$727,789.
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), 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,
due to lower pre-tax income in 1997.
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 and an increase in depreciation rates associated with a depreciation
study.
Other operating expenses - propane operations includes the
operating and maintenance expenses, taxes and depreciation of Highland Propane
Company. These costs increased $289,736 to $2,700,622 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 - 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
income of $55,448 and the elimination of a write-down on nonutility property of
$26,870 which occurred in 1996.
INTEREST CHARGES - Total interest charges increased $324,081 to $2,240,453
in 1997 from $1,916,372 in 1996. The increase was associated with increased
long-term and short-term debt financing. Additional long-term debt was acquired
to support natural gas plant growth which resulted in an increase of long-term
interest expense of $119,337. Interest expense on short-term debt increased
$204,744, which $55,601 of the increase attributable to short-term debt growth
supporting propane tank and equipment purchases. The remainder of the short-term
interest expense increased as a result of increased working capital needs for
higher gas inventories and average receivable balances coupled with interest
accruals on a rate refund reserve for the Roanoke Gas Company pending rate case.
NET EARNINGS AND DIVIDENDS - Net earnings for 1997 were $2,309,880 as
compared to $2,196,672 for 1996. Basic earnings per share of common stock were
$1.54 in 1997 compared to $1.51 in 1996. Dividends per share of common stock
were $1.04 in 1997 compared to $1.02 in 1996. The $113,208 increase in earnings
can be attributed to cost containment, customer growth and rate increases.
Maintenance expense was $405,516 less than the prior year while customer growth
and rate increases resulted in a $434,126 higher operating margin.
[GRAPH]
COMPARISON
Net Income to HDD (Heating Degree Days)
1994 1995 1996 1997 1998
Net Income 1677098 1777240 2196672 2309880 2726879
HDD 4416 3791 4696 4298 4054
Accounting Changes
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share (Statement 128) in 1998. Statement 128 supersedes APB Opinion
No. 15, Earnings Per Share, and
1998 Annual Report
13
<PAGE>
Management's Discussion & Analysis
Of Financial Condition And Results Of Operations
specifies the computation, presentation and
disclosure requirements for basic and diluted earnings per share (EPS) for
entities with publicly held common stock or potential common stock.
Recent Accounting Developments
The Financial Accounting Standards Board has 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 the Statements will have a material
impact on its consolidated financial position, results of operations or
liquidity.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires the recognition of all
derivative instruments as assets or liabilities in the Company's balance sheet
and measurement of those instruments at fair value. The accounting treatment of
changes in fair value is dependent upon whether or not a derivative instrument
is designated as a hedge and if so, the type of hedge.
The Company has entered into certain arrangements for hedging the price
of natural gas and propane gas for the purpose of providing price stability
during the winter months. The Company has not fully analyzed the impacts of the
provisions of SFAS No. 133 on the Company's financial statements.
Impact Of Inflation
The cost of natural gas represented approximately 68% for fiscal 1998 and
72% for fiscal 1997 and 1996 of the total operating expenses of the Company's
gas utilities operations. However, under the present regulatory Purchased Gas
Adjustment mechanisms, the increases and decreases in the cost of gas are passed
through to the Company's customers.
Inflation impacts the Company through increases in non-gas costs such as
insurance, labor costs, supplies and services used in operations and maintenance
and the replacement cost of plant and equipment. The rates charged to natural
gas customers to cover these costs can only be increased through the regulatory
process via a rate increase application. In addition to stressing performance
improvements and higher gas sales volumes to offset inflation, management must
continually review operations and economic conditions to assess the need for
filing and receiving adequate and timely rate relief from the state commissions.
[GRAPH]
MCF Delivered
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
MCF 10267038 9961877 11169948 10804045 10875481
</TABLE>
[GRAPH]
Gallons of Propane Delivered
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Gallons Delivered of Propane 5012830 4822277 5997912 6568066 7702384
</TABLE>
Year 2000
Roanoke Gas Company has made significant progress in addressing the Year
2000 issue. The Year 2000 concern is caused by the movement from 1999 to the
year 2000. Many computer-based systems rely on the last two numbers of the date
to distinguish the year, and many of these systems will not recognize "00" as an
acceptable date. Even if systems will accept "00" as an appropriate date, many
systems will not distinguish the year 2000 from year 1900. Like all other
companies that use application software and rely on a computer-based
infrastructure that includes microprocessor systems, the Year 2000 issue affects
many areas of the Company's operations. The Company has formed a Year 2000 Task
Force comprised of a comprehensive group of employees who have developed a
written plan that addresses communications, system conversions, system testing,
and contingency planning.
Roanoke Gas Company
14
<PAGE>
The Company has conducted an extensive inventory to identify and categorize
all of its internal systems which may be date sensitive. These internal systems
control, monitor, or assist in the operation of the Company, its equipment and
machinery. Generally, these systems contain microprocessor chips, integrated
circuits, or computer boards. The Company identified date-sensitive applications
in customer service, operations, financial systems, end-user applications,
storage and distribution systems, meters, telecommunications, vehicles, building
controls and other areas. With these systems identified, each system is reviewed
to determine how it can be tested. When applicable, manufacturers of each item
are contacted concerning available compliance information. An industry
consultant is assisting the Company with this phase.
The Company started upgrading internal systems in the winter of 1996 and
completed the majority of the upgrades by the fall of 1997. These systems cover
the entire scope of the business, ranging from the Payroll System to the
Customer Information System. There is a plan in place to upgrade the remaining
internal system applications by the spring of 1999. Most of these systems have
been in production for a minimum of ten months. With baseline validation
complete, testing for the Year 2000 and other key dates has begun. In October
1998, the Company set up a training and testing lab, and operating system
testing was completed in November 1998. The Company began performing tests on
all software applications in December 1998, and such testing is scheduled to be
completed in the spring of 1999. The Company intends to perform necessary
remediation on systems that fail in March 1999. Over 70% of the Company's
systems have successfully completed testing and were found to be Year 2000
compliant. The remaining 30%, which includes the propane system, remain to be
tested.
Roanoke Gas has made considerable progress in upgrading its information
systems to be Year 2000 compliant. Essentially, all of the core IBM AS/400
systems have been upgraded, with the exception of propane, which should be
completed by mid-1999. All Local Area Network (LAN) and Wide Area Network (WAN)
systems have been upgraded. The remaining systems are believed to be compliant
or a plan is in place to reach compliance. We believe that most of our
vendors, suppliers and major customers are dedicated to the problem with
intentions of completing their efforts in a timely manner. Though our list of
systems seems complete, management continues to search for systems throughout
the Company that may need attention. Employee awareness and contingency planning
are a top priority of the Company's Year 2000 task force.
The Company added a segregated test environment that included a second
AS/400 and an additional network file server. This should help facilitate the
implementation of the new CIS, allow thorough Year 2000 testing and improve the
test environment for all systems development. The segregated test environment
also upgrades the Company's Disaster Recovery Planning by enabling an internal
recovery hot-site.
The Company is developing a plan to identify the areas with the highest
potential risk of Year 2000 exposure and determining the functions that need
contingency plans. The Company anticipates that the resulting contingency plans
will be developed and documented by the spring of 1999.
The Virginia Commission and the West Virginia Commission are both closely
monitoring the Year 2000 conversions of all utilities in their respective
states. On July 1, 1998 the Virginia Commission Staff initiated a process which
required all utilities to file a summary of their progress toward Year 2000
compliance on July 22, 1998 with quarterly updates beginning in October 1998.
The West Virginia Commission issued General Order No. 253 on April 30, 1998 and
a Year 2000 Survey. The Order required survey responses by July 31, 1998, with
semi-annual updates beginning in January 1999.
The Company maintains emergency operating plans for problems that could
arise from both internal and external sources. With regard to internal systems,
the Company believes that it has identified and is addressing the Year 2000
compliance of the systems that pose the most significant risk to its ability to
provide safe and reliable service to customers. Externally, the Company has
initiated discussions with suppliers of interstate transportation capacity and
relies on their testing and remediation methods to continue the supply of
natural gas to its distribution system. Furthermore, the Company has received
and responded to letters from many of its customers concerning our Year 2000
compliance status. Likewise, the Company has held discussions with large-volume
customers concerning their Year 2000 concerns. The Company intends to
continually monitor any new developments.
The Company believes that it is taking reasonable measures to ensure the
safe and uninterrupted delivery of natural gas. There can be no guarantee that
the systems of other companies and external services, such as water,
electricity, and telephone, on which the Company's operations rely, will be
timely converted, or will be converted in a manner compatible with the Company's
systems. If this were to occur, it would create a significant barrier to
providing service to the Company's customers and could result in material
increases in operating expenses and lost revenues.
To date, the Company has spent approximately $35,000 on Year 2000
remediation activities. The Company projects that it will spend an additional
$109,000, over and above otherwise planned upgrades to systems and hardware,
over the course of the next two years to complete its Year 2000 readiness plan.
1998 Annual Report
15
<PAGE>
Management's Discussion & Analysis
Of Financial Condition And Results Of Operations
[PHOTO]
Don Jones, Project Engineer, fills his car with clean, efficient compressed
natural gas. Driving automobiles powered by natural gas is cleaner for our
environment.
Environmental Issues
Both Roanoke Gas Company and Bluefield Gas Company operated manufactured gas
plants (MGPs) as a source of fuel for lighting and heating until the early
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 analysis at the Roanoke Gas Company MGP site. An analysis at
the Bluefield Gas Company site indicates some soil contamination. 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 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 recognized the Company's right to defer MGP cleanup costs,
should any be incurred, and to seek rate relief for such costs. If the Company
eventually incurs costs associated with a required cleanup of either MGP site,
the Company anticipates recording a regulatory asset for such cleanup costs
which are anticipated to be recovered 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.
Roanoke Gas Company & Subsidiaries
1998 Financial Highlights
Operating Revenues - Gas $51,857,052
Propane Revenues - Propane $ 7,530,040
Other Revenues - Gas Marketing $ 6,519,467
Merchandising And Jobbing $ 587,030
Interest Income $ 28,872
Gross Revenues $66,522,461
Net Earnings $ 2,726,879
Net Earnings Per Share $ 1.60
Dividends Per Share - Cash $ 1.06
Total Customers - Natural Gas 53,582
Total Customers - Propane 11,004
Customers Per Employee 409
Total Natural Gas Deliveries - MCF 10,875,481
Total Propane Sales - Gallons 7,702,384
Total Payroll Chargeable To Operations & Construction $ 5,876,183
Total Additions To Plant $ 9,238,614
Roanoke Gas Company
16
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
of Roanoke Gas Company:
We have audited the accompanying consolidated balance sheet of Roanoke Gas
Company and subsidiaries (the "Company") as of September 30, 1998, and the
related statements of earnings, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Company for the
years ended September 30, 1997 and 1996 were audited by other auditors whose
report, dated October 17, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Charlotte, North Carolina
October 20, 1998
1998 Annual Report
17
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Utility Plant:
In service $ 69,986,124 65,590,024
Accumulated depreciation and amortization (24,644,581) (22,612,963)
- --------------------------------------------------------------------------------------------------
In service, net 45,341,543 42,977,061
Construction work-in-progress 1,674,543 1,088,083
- --------------------------------------------------------------------------------------------------
Total utility plant, net 47,016,086 44,065,144
- --------------------------------------------------------------------------------------------------
Nonutility Property:
Propane 10,188,124 6,634,369
Accumulated depreciation and amortization (3,059,870) (2,540,274)
- --------------------------------------------------------------------------------------------------
Total nonutility property, net 7,128,254 4,094,095
- --------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 84,037 116,045
Accounts receivable, less allowance for doubtful accounts of
$202,652 in 1998 and $368,345 in 1997 3,051,474 4,188,984
Inventories 7,969,730 7,427,581
Prepaid income taxes 712,687 7,368
Deferred income taxes 1,868,888 1,206,995
Underrecovery of gas costs - 587,457
Other 451,027 420,674
- --------------------------------------------------------------------------------------------------
Total current assets 14,137,843 13,955,104
- --------------------------------------------------------------------------------------------------
Other Assets 852,737 478,915
- --------------------------------------------------------------------------------------------------
Total Assets $ 69,134,920 62,593,258
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Roanoke Gas Company
18
<PAGE>
<TABLE>
<CAPTION>
Liabilities And Stockholders' Equity 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization:
Stockholders' equity:
Common stock, $5 par value. Authorized 3,000,000 shares; issued and outstanding
1,794,416 and 1,527,486 shares in 1998 and 1997, respectively $ 8,972,080 7,637,430
Capital in excess of par value 8,909,145 5,271,667
Retained earnings 8,583,356 7,687,854
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 26,464,581 20,596,951
Long-term debt, excluding current maturities 20,700,000 17,079,000
- --------------------------------------------------------------------------------------------------------------------
Total capitalization 47,164,581 37,675,951
Current Liabilities:
Current installments of long-term debt - 3,143,124
Borrowings under lines of credit 4,584,000 7,129,000
Dividends payable 476,140 397,530
Accounts payable 6,968,594 5,512,348
Customer deposits 399,750 427,895
Accrued expenses 4,224,693 4,233,860
Refunds from suppliers - due customers 85,572 425,860
Overrecovery of gas costs 1,269,829 -
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,008,578 21,269,617
Deferred Credits And Other Liabilities:
Deferred income taxes 3,508,838 3,145,932
Deferred investment tax credits 452,923 492,357
Other deferred credits - 9,401
- --------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,961,761 3,647,690
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 69,134,920 62,593,258
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 Annual Report
19
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Earnings
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues:
Gas utilities $ 51,857,052 57,842,181 60,067,407
Propane operations 7,530,040 7,205,645 5,703,466
- --------------------------------------------------------------------------------------------------
Total operating revenues 59,387,092 65,047,826 65,770,873
- --------------------------------------------------------------------------------------------------
Cost Of Gas:
Gas utilities 32,471,072 38,675,337 40,763,104
Propane operations 3,636,435 3,907,568 2,976,974
- --------------------------------------------------------------------------------------------------
Total cost of gas 36,107,507 42,582,905 43,740,078
- --------------------------------------------------------------------------------------------------
Operating Margin 23,279,585 22,464,921 22,030,795
- --------------------------------------------------------------------------------------------------
Operating Expenses:
Gas utilities:
Operations 7,583,583 8,049,833 8,056,211
Maintenance 1,432,203 1,462,764 1,868,280
Taxes - general 2,376,227 2,456,399 2,401,768
Taxes - income 1,100,506 857,964 963,895
Depreciation and amortization 2,806,278 2,533,912 2,294,447
Propane operations (including income taxes of
$326,206, $309,137 and $177,059 in 1998,
1997 and 1996, respectively) 3,263,762 2,700,626 2,410,890
- --------------------------------------------------------------------------------------------------
Total operating expenses 18,562,559 18,061,498 17,995,491
- --------------------------------------------------------------------------------------------------
Operating Earnings 4,717,026 4,403,423 4,035,304
- --------------------------------------------------------------------------------------------------
Other Income (Deductions):
Gas utilities, net 67,759 68,240 (20,931)
Propane operations, net 80,248 116,222 121,157
Taxes - income (42,443) (37,552) (22,486)
- --------------------------------------------------------------------------------------------------
Total other income (deductions) 105,564 146,910 77,740
- --------------------------------------------------------------------------------------------------
Earnings Before Interest Charges 4,822,590 4,550,333 4,113,044
- --------------------------------------------------------------------------------------------------
Interest Charges:
Gas utilities:
Long-term debt 1,550,734 1,740,998 1,621,661
Other 398,409 441,444 292,301
Propane operations 146,568 58,011 2,410
- --------------------------------------------------------------------------------------------------
Total interest charges 2,095,711 2,240,453 1,916,372
- --------------------------------------------------------------------------------------------------
Net Earnings $ 2,726,879 2,309,880 2,196,672
- --------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.60 1.54 1.51
- --------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding - Basic 1,701,048 1,503,388 1,455,999
- --------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 1.60 1.53 1.51
- --------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding - Diluted 1,706,902 1,504,915 1,458,899
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Roanoke Gas Company
20
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Stockholders' Equity
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Capital In Total
Common Excess Of Retained Stockholders'
Stock Par Value Earnings Equity
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net earnings - - 2,726,879 2,726,879
Cash dividends ($1.06 per share) - - (1,831,377) (1,831,377)
Issuance of common stock (266,930 shares) 1,334,650 3,637,478 - 4,972,128
- -------------------------------------------------------------------------------------------------------
Balances, September 30, 1998 $ 8,972,080 8,909,145 8,583,356 26,464,581
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1998 Annual Report
21
<PAGE>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Cash Flows
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 2,726,879 2,309,880 2,196,672
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,577,872 3,247,015 2,810,314
Loss (gain) on asset disposition 40,380 6,562 (4,202)
Write-off of regulatory assets - 132,523 -
Decrease (increase) in over/underrecovery of gas costs 1,857,286 1,195,133 (2,019,589)
Deferred taxes and investment tax credits (338,421) (681,937) 789,052
Other noncash items, net (284,466) 93,131 160,936
Changes in assets and liabilities which provided (used) cash:
Accounts receivable and customer deposits, net 1,109,365 (266,066) (346,566)
Inventories (542,149) (24,995) (2,054,592)
Prepaid income taxes and other current assets (735,672) 349,405 (596,257)
Accounts payable and accrued expenses 1,447,079 1,599,788 (902,462)
Refunds from suppliers - due customers (340,288) 401,995 (658,986)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,517,865 8,362,434 (625,680)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to utility plant and nonutility property (9,238,614) (8,052,801) (5,522,977)
Cost of removal of utility plant, net (70,949) (158,855) (423,221)
Proceeds from sales of assets 225,159 192,063 42,511
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,084,404) (8,019,593) (5,903,687)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 3,356,000 - -
Retirement of long-term debt (2,878,124) (669,423) (1,179,415)
Net borrowings (repayments) under lines of credit (2,545,000) 476,500 8,598,000
Proceeds from issuance of common stock 4,601,069 882,719 714,234
Common stock issuance costs (246,647) - -
Cash dividends paid (1,752,767) (1,549,914) (1,473,025)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 534,531 (860,118) 6,659,794
- ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (32,008) (517,277) 130,427
Cash and Cash Equivalents, Beginning of Year 116,045 633,322 502,895
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 84,037 116,045 633,322
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures Of Cash Flows Information:
Cash paid during the year for:
Interest $ 2,148,861 2,065,893 1,493,801
- ----------------------------------------------------------------------------------------------------------------
Income taxes, net of refunds $ 2,512,897 1,575,952 1,148,319
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Noncash transactions:
The Company refinanced $9,300,000 of current installments of long-term
debt and borrowings under lines of credit as long-term debt in 1996.
The assets of a propane company were acquired in December 1997 in exchange
for 34,317 shares of stock for a total value of $617,706.
In June 1998, the Company refinanced the remaining balances of Series K
and Series L First Mortgage Bonds in the amount of $3,344,000 into a
First Mortgage Note due July 1, 2008.
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Roanoke Gas Company
22
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(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, operating as Highland Propane Company and
Highland Gas Marketing. Roanoke Gas Company and Bluefield Gas Company are gas
utilities which distribute and sell natural gas to residential, commercial and
industrial customers within their service areas. Highland Propane Company
distributes and sells propane in southwestern Virginia and southern West
Virginia. Highland Gas Marketing brokers natural gas to several industrial
transportation customers of Roanoke Gas Company and Bluefield Gas Company.
The primary business of the Company is the distribution of natural gas to
residential, commercial and industrial customers in Roanoke, Virginia;
Bluefield, Virginia; Bluefield, West Virginia; and the surrounding areas. The
Company distributes natural gas to its customers at rates and charges regulated
by the State Corporation Commission in Virginia and the Public Service
Commission in West Virginia.
All significant intercompany transactions have been eliminated in
consolidation.
During 1998, 1997 and 1996, no single customer accounted for more than 5
percent of the Company's sales, and no account receivable from any customer
exceeded five percent of the Company's total accounts receivable at September
30, 1998 and 1997.
Regulation
The Company's regulated operations meet the criteria, and accordingly,
follow the accounting and reporting requirements of Statement of Financial
Accounting Standards ("SFAS") No. 71, Accounting for the Effects of Certain
Types of Regulation. The economic effects of regulation can result in 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 are as follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Regulatory Assets:
Early retirement incentive costs $ 20,520 33,481
Rate case costs 1,163 6,598
Underrecovery of gas costs - 587,457
Other 19,515 -
- --------------------------------------------------------------------------------------------------
Total Regulatory Assets $ 41,198 627,536
- --------------------------------------------------------------------------------------------------
Regulatory Liabilities:
Refunds from suppliers - due customers $ 85,572 425,860
Overrecovery of gas costs 1,269,829 -
- --------------------------------------------------------------------------------------------------
Total Regulatory Liabilities $ 1,355,401 425,860
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
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.
Utility Plant
Utility plant is stated at original cost. The cost of additions to utility
plant includes direct charges and overhead. The cost of depreciable property
retired, plus cost of removal, less salvage is charged to accumulated
depreciation. Maintenance, repairs, and minor renewals and betterments of
property are charged to operations.
Depreciation and Amortization
Provisions for depreciation are computed principally on composite
straight-line rates for financial statement purposes and on accelerated rates
for income tax purposes. Depreciation and amortization for financial statement
purposes are provided on annual composite rates ranging from 2 percent to 33
percent. The annual composite rates are determined by periodic depreciation
studies.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
1998 Annual Report
23
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(1) Summary Of Significant Accounting Policies (continued)
Inventories
Inventories consist primarily of propane and natural gas, which are valued
at the lower of average cost or market.
Unbilled Revenues
The Company bills its natural gas customers on a monthly cycle basis,
although certain large industrial customers are billed at or near the end of
each month. The Company records revenue based on service rendered to the end of
the accounting period. The amounts of unbilled revenue receivable included in
accounts receivable on the consolidated balance sheets at September 30, 1998 and
1997 were $795,338 and $915,192, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the years in which those
temporary differences are expected to be recovered or settled. The Company and
its subsidiaries file a consolidated federal income tax return. Federal income
taxes have been provided by the Company on the basis of the separate company
income and deductions.
Bond Expenses
Bond expenses are being amortized over the lives of the bonds using the
bonds outstanding method.
Over/Underrecovery of Gas Costs
Pursuant to the provisions of the Company's Purchased Gas Adjustment (PGA)
clause, increases or decreases in gas costs are passed on to its customers.
Accordingly, the difference between actual costs incurred and costs recovered
through the application of the PGA is reflected as a net deferred charge or
credit. At the end of the deferral period, the balance of the net deferred
charge or credit is amortized over the next 12-month period as amounts are
reflected in customer billings.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. SFAS No. 128 supersedes APB Opinion No. 15, Earnings
per Share, and specifies earnings per share (EPS) for entities with publicly
held common stock. Prior period EPS has been restated to conform to the new
statement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Options
On October 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 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, SFAS No. 123 allows entities to continue to apply
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and provide pro forma net earnings and pro forma net earnings per share
disclosures for stock option grants, as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosures.
Reclassifications
Certain reclassifications were made to prior year balances to conform with
current year presentations.
Roanoke Gas Company
24
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(2) Allowance For Doubtful Accounts
A summary of the changes in the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
Years Ended September 30,
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, beginning of year $ 368,345 279,316 171,947
Provision for doubtful accounts 481,297 660,400 550,777
Recoveries of accounts written off 188,309 125,035 131,499
Accounts written off (835,299) (696,406) (574,907)
- --------------------------------------------------------------------------------------------------
Balances, end of year $ 202,652 368,345 279,316
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(3) Borrowings Under Lines Of Credit A summary of short-term lines of credit
follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Lines of credit $ 21,000,000 20,000,000
Outstanding balance 4,584,000 7,129,000
Highest month-end balances outstanding 12,929,000 15,896,000
Average month-end balances 5,280,000 8,098,000
Average rates of interest during year 6.19% 5.97%
Average rates of interest on balances outstanding 6.18% 6.14%
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(4) Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Roanoke Gas Company:
First Mortgage bonds, collateralized by utility plant:
Series K, 10%, due July 1, 2002, retired during 1998 $ - 1,350,000
Series L, 10.375%, due April 1, 2004, retired during 1998 - 2,328,000
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% 4,700,000 7,200,000
Unsecured senior notes payable, interest 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 interest,
through August 1998 - 31,624
First Mortgage notes payable, interest fixed at
7.804% due July 1, 2008 5,000,000 -
- --------------------------------------------------------------------------------------------------
Bluefield Gas Company:
Unsecured installment loan, with interest rate based on
prime 8.75% at September 30, 1997, with provision for
retirement of $50,000 for each year and a final
payment of $12,500 on October 31, 1997 - 12,500
Unsecured note payable, interest at 7.28%, with provision
for retirement of $25,000 quarterly beginning
January 1, 2002 and a final payment of $1,125,000 on
October 1, 2003 1,300,000 1,300,000
- --------------------------------------------------------------------------------------------------
continued
</TABLE>
1998 Annual Report
25
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(4) Long-term Debt (continued)
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Highland Propane Company:
Unsecured note payable, interest at 7%, with provision
for retirement on December 31, 2007 $ 1,700,000 -
- --------------------------------------------------------------------------------------------------
Total long-term debt 20,700,000 20,222,124
Less current maturities - (3,143,124)
- --------------------------------------------------------------------------------------------------
Total long-term debt, excluding current maturities $20,700,000 17,079,000
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</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, 1998, approximately $4,500,000 of retained
earnings were available for dividends.
The aggregate annual maturities of long-term debt, subsequent to September
30, 1998 are as follows:
Years Ending September 30,
- --------------------------------------------------------------------------------
2001 $ 775,000
2002 100,000
2003 2,125,000
Thereafter 17,700,000
- --------------------------------------------------------------------------------
Total $20,700,000
================================================================================
Roanoke Gas Company
26
<PAGE>
Roanoke Gas Company And Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(5) Income Taxes
The details of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charged to operating expenses - gas utilities:
Current:
Federal $ 1,566,868 1,561,779 206,399
State 54,764 (15,946) (40,248)
- ----------------------------------------------------------------------------------------------------
Total current 1,621,632 1,545,833 166,151
- ----------------------------------------------------------------------------------------------------
Deferred:
Federal (447,054) (668,660) 777,772
State (34,638) 20,226 58,621
- ----------------------------------------------------------------------------------------------------
Total deferred (481,692) (648,434) 836,393
Investment tax credits, net (39,434) (39,435) (38,649)
Total charged to operating expenses - gas utilities 1,100,506 857,964 963,895
- ----------------------------------------------------------------------------------------------------
Charged to other operating expenses - propane operations:
Current 139,592 282,380 185,377
Deferred 186,614 26,757 (8,318)
- ----------------------------------------------------------------------------------------------------
Total charged to other operating expenses - propane operations 326,206 309,137 177,059
Charged to other income and deductions - gas utilities:
Current 46,353 37,892 22,860
Deferred (3,910) (340) (374)
- ----------------------------------------------------------------------------------------------------
Total charged to other income and deductions - gas utilities 42,443 37,552 22,486
- ----------------------------------------------------------------------------------------------------
Total income tax expense $ 1,469,155 1,204,653 1,163,440
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Income tax expense for the years ended September 30, 1998, 1997 and 1996
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,
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 2,726,879 2,309,880 2,196,672
Income tax expense 1,469,155 1,204,653 1,163,440
- -------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 4,196,034 3,514,533 3,360,112
- -------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense 1,426,652 1,194,941 1,142,438
Increase (reduction) in income tax expense
resulting from:
Amortization of deferred investment tax credits (39,434) (39,435) (38,649)
Other, net 81,937 49,147 59,651
- -------------------------------------------------------------------------------------------------------
Total income tax expense $ 1,469,155 1,204,653 1,163,440
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
1998 Annual Report
27
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(5) Income Taxes (continued)
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectibles $ 74,740 132,818
Accrued pension and medical benefits 909,898 803,852
Accrued vacation 172,707 173,731
Over/underrecovery of gas costs 430,529 (225,309)
Provision for rate refund - 176,972
Costs on gas held in storage 245,902 96,574
Other 35,112 48,357
- ---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,868,888 1,206,995
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Utility plant basis differences 3,508,489 3,145,361
Other 349 571
- ---------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,508,838 3,145,932
- ---------------------------------------------------------------------------------------------------
Net deferred tax liability $ 1,639,950 1,938,937
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
Roanoke Gas Company
28
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(6) Employee Benefit Plans
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and employee compensation. Plan assets are invested principally in cash
equivalents and corporate stocks and bonds. Company contributions are intended
to provide not only for benefits attributed to date but also for those expected
to be earned in the future.
Pension expense includes the following components:
<TABLE>
<CAPTION>
Years Ended September 30,
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for the current year $ 157,705 142,467 148,465
Interest cost on the projected benefit obligation 444,696 419,474 397,458
Actual return on assets held in the plan (1,005,797) (1,030,919) (717,703)
Net amortization and deferral of unrecognized gains and losses 525,244 647,436 372,234
- --------------------------------------------------------------------------------------------------------
Net pension expense $ 121,848 178,458 200,454
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Plan's funded status is as follows:
<TABLE>
<CAPTION>
September 30,
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ (5,556,051) (4,285,717)
Nonvested (147,969) (143,901)
- -----------------------------------------------------------------------------------------------------
Accumulated benefit obligation (5,704,020) (4,429,618)
Effect of anticipated future compensation levels and other events (2,285,221) (1,510,433)
- -----------------------------------------------------------------------------------------------------
Projected benefit obligation (7,989,241) (5,940,051)
Fair value of assets held in the plan 7,069,755 6,324,249
- -----------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation $ (919,486) 384,198
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The excess (deficiency) of plan assets over the projected benefit
obligation consists of the following:
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrecognized gain due to past experience different than assumed $ 297,949 1,709,103
Unamortized transition liability (224,533) (329,977)
Unrecognized prior service cost (56,629) (75,503)
Accrued pension cost included in the consolidated balance sheet (936,273) (919,425)
- ----------------------------------------------------------------------------------------------------
Total $ 919,486 384,198
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.75 percent for 1998 and
7.75 percent for 1997 and 1996. The rates of increase in future compensation
levels used in determining the actuarial present value of the projected
obligation in 1998, 1997 and 1996 were 4 percent for compensation increases
through December 1996 and 5 percent for compensation increases thereafter. The
assumed long-term rate of return on assets was 8.5 percent for 1998, 1997 and
1996.
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 74 percent of the consolidated annual
cost of the Plan is recovered from the Company's customers through rates.
1998 Annual Report
29
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(6) Employee Benefit Plans (continued)
The following table presents the plan's funded status reconciled with the
amounts recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees $ 3,141,831 2,846,193
Fully eligible active plan participants 964,981 712,308
Other active plan participants 1,662,990 1,262,063
- --------------------------------------------------------------------------------------------------
Total accumulated postretirement benefits obligation 5,769,802 4,820,564
Plan assets at fair value, principally cash equivalents and mutual
funds (1,164,820) (995,411)
- --------------------------------------------------------------------------------------------------
Accumulated postretirement benefits obligation in excess of plan
assets 4,604,982 3,825,153
Unrecognized net gain 216,562 938,540
Unrecognized transition obligation (3,559,500) (3,796,800)
- --------------------------------------------------------------------------------------------------
Postretirement benefits cost included in accrued expenses $ 1,262,044 966,893
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefits cost includes the following components:
<TABLE>
<CAPTION>
Years Ended September 30,
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for the current year $ 86,436 96,255 89,000
Interest cost on the accumulated postretirement
benefits obligation 362,179 325,036 363,000
Return on assets held in the plan (148,414) (89,542) (40,000)
Amortization of transition obligation 237,300 237,300 237,300
Net total of other components 61,882 (25,201) (16,000)
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 599,383 543,848 633,300
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 6.75 percent, 7.75 percent and 7.75
percent for 1998, 1997, and 1996, respectively.
For measurement purposes, 9 percent, 10 percent and 10.5 percent annual
rates of increase in the per capita cost of covered benefits (i.e., medical
trend rate) were assumed for 1998, 1997 and 1996, respectively; the rates were
assumed to decrease gradually to 5.25 percent by the year 2006 and remain at
that level thereafter. The medical trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed medical cost
trend rate by one percentage point each year would increase the accumulated
postretirement benefits obligation as of September 30, 1998 by approximately
$682,946 or 12 percent, and the aggregate of the service and interest cost
components of net postretirement benefits cost by approximately $80,326, or 16
percent.
The Company also has a defined contribution plan covering all of its
employees who elect to participate. The Company made annual matching
contributions to the plan based on 70 percent in 1998 and 1997 and 50 percent in
1996 of the net participants' basic contributions (from 1 to 6 percent of their
total compensation). The annual cost of the plan was $206,766, $217,466 and
$134,188 for 1998, 1997 and 1996, respectively.
Roanoke Gas Company
30
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(7) Common Stock Options
During 1996, the Company's stockholders approved the Roanoke Gas Company Key
Employee Stock Option Plan (the "Plan"). The Plan provides for the issuance of
common stock options to officers and certain other full-time salaried employees
to acquire a maximum of 50,000 shares of the Company's common stock. The Plan
requires each option's exercise price per share to equal the fair value of the
Company's common stock as of the date of grant.
The aggregate number of shares under option pursuant to the 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> <C> <C>
Options outstanding, September 30, 1996 13,000 $ 15.500
Options granted 21,500 16.875
- ----------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 1997 34,500 16.357 $ 15.500-16.875
Options granted 15,500 20.625
Options exercised (13,000) 16.346
- ----------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 1998 37,000 $ 18.149 $ 15.500-20.625
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Under the terms of the Plan, the options become exercisable six months
from the grant date and expire 10 years subsequent to the grant date. All
options outstanding were fully vested and exercisable at September 30, 1998 and
1997.
The per share weighted-average fair values of stock options granted during
1998, 1997 and 1996 were $2.85, $1.08 and $1.63, respectively, on the dates of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 5.14% 5.78% 5.83%
Risk-free interest rate 4.33% 6.29% 6.44%
Expected volatility 21.00% 10.00% 42.00%
Expected life 10 years 10 years 10 years
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
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 SFAS No. 123, the
Company's 1998 net earnings and basic earnings per share would have been
$2,697,709 and $1.58; 1997 net earnings and basic earnings per share would have
been $2,278,093 and $1.52; and 1996 net earnings and basic earnings per share
would have been $2,182,681 and $1.50.
1998 Annual Report
31
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(8) Related Party Transactions
Certain of the Company's directors render services or sell products to the
Company. The significant services relate to legal fees charged to the Company of
approximately $185,000, $182,000 and $69,000 in 1998, 1997 and 1996,
respectively. The products included natural gas purchases of approximately
$6,052,000, $3,052,000 and $1,950,000 in 1998, 1997 and 1996, respectively. It
is anticipated that similar services and products will be provided to the
Company in 1999.
(9) Environmental Matters
Both Roanoke Gas Company and Bluefield Gas Company operated manufactured
gas plants (MGPs) as a source of fuel for lighting and heating until the early
1950's. A by-product of operating MGPs was coal tar, and the potential exists
for on-site tar waste contaminants at the former plant sites. The extent of
contaminants at these sites, if any, is unknown at this time. An analysis of the
Bluefield Gas Company site indicates some soil contamination. The Company, with
concurrence of legal counsel, does not believe any events have occurred
requiring regulatory reporting. Further, the Company has not received any
notices of violation or liabilities associated with environmental regulations
related to the MGP sites and is not aware of any off-site contamination or
pollution as a result of prior operations. Therefore, the Company has no plans
for subsurface remediation at the MGP sites. Should the Company eventually be
required to remediate either site, the Company will pursue all prudent and
reasonable means to recover any related costs, including insurance claims and
regulatory approval for rate case recognition of expenses associated with any
work required. A stipulated rate case agreement between the Company and the West
Virginia Public Service Commission recognized the Company's right to defer MGP
cleanup costs at the Bluefield site, should any be incurred, and to seek rate
relief for such costs. If the Company eventually incurs costs associated with a
required cleanup of either MGP site, the Company anticipates recording a
regulatory asset for such cleanup costs to be recovered in future rates. Based
on anticipated regulatory actions and current practices, management believes
that any costs incurred related to this matter will not have a material effect
on the Company's financial condition.
(10) Commitments
The Company has short-term contracts with natural gas suppliers requiring
the purchase of approximately 4,420,000 dekatherms of natural gas at varying
prices during the period October 1, 1998 through September 30, 1999. In
addition, the Company has short-term contracts with propane suppliers requiring
the purchase of approximately 4,415,000 gallons of propane during the period
October 1, 1998 through September 30, 1999. Management does not anticipate that
these contracts will have a material impact on the Company's fiscal year 1999
consolidated results of operations.
(11) Fair Value Of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the estimated fair values of certain financial
instruments. SFAS No. 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 carrying amount of cash and cash equivalents and borrowings under
lines of credit are a reasonable estimate of fair value due to their short-term
nature and because the rates of interest paid on borrowings under lines of
credit approximate market rates.
The fair value of long-term debt is estimated by discounting the future
cash flows of each issuance at rates currently offered to the Company for
similar debt instruments of comparable maturities. The carrying amounts and
approximate fair values are as follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
Carrying Approximate Carrying Approximate
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt 20,700,000 24,287,744 20,222,124 21,384,604
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of September
30, 1998 and 1997 are not necessarily indicative of the amounts the Company
could have realized in current market exchanges.
Roanoke Gas Company
32
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended September 30, 1998, 1997 and 1996
(11) Fair Value Of Financial Instruments (continued)
Derivative and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
the recognition of all derivative instruments as assets or liabilities in the
Company's balance sheet and measurement of those instruments at fair value. The
accounting treatment of changes in fair value is dependent upon whether or not a
derivative instrument is designated as a hedge and if so, the type of hedge.
The Company has entered into certain arrangements for hedging the
price of natural gas and propane gas for the purpose of providing price
stability during the winter months. The Company has not fully analyzed the
impact of the provisions of SFAS No. 133 on the Company's financial statements.
(12) Quarterly Financial Information (Unaudited)
Quarterly financial data for the years ended September 30, 1998 and 1997
is summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 20,796,021 21,750,333 8,982,316 7,858,422
- --------------------------------------------------------------------------------------------------
Operating earnings (loss) $ 2,071,945 2,662,581 153,192 (170,692)
- --------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,544,234 2,123,464 (281,216) (659,603)
Basic earnings (loss) per share $ 1.00 1.24 (.16) (.48)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <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)
Basic earnings (loss) per share $ .90 1.22 (.16) (.42)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</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.
1998 Annual Report
33
<PAGE>
Roanoke Gas Company and Subsidiaries
Summary Of Gas Sales And Statistics
Years Ended September 30,
<TABLE>
<CAPTION>
Revenues: 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential Sales $ 30,396,540 $ 32,595,261 $ 33,981,835 $ 25,078,211 $ 29,844,636
Commercial Sales 18,764,195 19,879,180 20,219,289 14,313,723 16,979,230
Interruptible Sales 695,279 3,892,301 4,569,766 3,513,181 5,607,002
Transportation Gas Sales 1,715,032 1,107,922 943,215 909,515 610,682
Backup Services 97,552 173,655 190,310 107,652 222,025
Late Payment Charges 156,634 157,369 135,838 115,130 194,156
Miscellaneous 31,820 36,493 27,154 24,325 67,576
Propane 7,530,040 7,205,645 5,703,466 4,549,410 4,670,550
- -------------------------------------------------------------------------------------------------------------------
Total $ 59,387,092 $ 65,047,826 $ 65,770,873 $ 48,611,147 $ 58,195,857
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 2,726,879 $ 2,309,880 $ 2,196,672 $ 1,777,240 $ 1,677,098
- -------------------------------------------------------------------------------------------------------------------
MCF Delivered:
- -------------------------------------------------------------------------------------------------------------------
Residential 4,633,403 4,651,819 5,108,553 4,204,222 4,701,703
Commercial 3,228,452 3,230,714 3,385,962 2,834,884 2,981,888
Interruptible 172,270 959,146 1,088,921 1,240,658 1,521,663
Transportation Gas 2,822,856 1,933,236 1,549,854 1,660,504 1,022,892
Backup Service 18,500 29,130 36,658 21,609 38,892
- -------------------------------------------------------------------------------------------------------------------
Total 10,875,481 10,804,045 11,169,948 9,961,877 10,267,038
- -------------------------------------------------------------------------------------------------------------------
Gallons Delivered (Propane) 7,702,384 6,568,066 5,997,912 4,822,277 5,012,830
- -------------------------------------------------------------------------------------------------------------------
Heating Degree Days 4,054 4,298 4,696 3,791 4,416
- -------------------------------------------------------------------------------------------------------------------
Number Of Customers:
- -------------------------------------------------------------------------------------------------------------------
Residential 48,265 47,539 46,007 44,873 43,734
Commercial 5,272 5,181 5,043 4,896 4,767
Interruptible And Interruptible
Transportation Service 45 43 44 44 43
- -------------------------------------------------------------------------------------------------------------------
Total 53,582 52,763 51,094 49,813 48,544
- -------------------------------------------------------------------------------------------------------------------
Gas Account (MCF):
- -------------------------------------------------------------------------------------------------------------------
Natural Gas Purchases And Storage 11,316,714 11,406,613 11,756,089 10,453,696 10,795,928
Gas Made - Propane - - - - 14,008
- -------------------------------------------------------------------------------------------------------------------
Total Available 11,316,714 11,406,613 11,756,089 10,453,696 10,809,936
- -------------------------------------------------------------------------------------------------------------------
Natural Gas Deliveries 10,875,481 10,804,045 11,169,948 9,961,877 10,267,038
Storage - LNG 69,343 106,892 142,297 118,393 134,893
Company Use And Miscellaneous 37,998 49,444 54,140 46,532 50,356
System Loss 333,892 446,232 389,704 326,894 357,649
- -------------------------------------------------------------------------------------------------------------------
Total Gas Available 11,316,714 11,406,613 11,756,089 10,453,696 10,809,936
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 69,134,920 $ 62,593,258 $ 58,921,099 $ 51,614,667 $ 49,579,447
- -------------------------------------------------------------------------------------------------------------------
Long-Term Obligations $ 20,700,000 $ 17,079,000 $ 20,222,124 $ 17,504,047 $ 16,414,900
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Roanoke Gas Company
34
<PAGE>
Roanoke Gas Company and Subsidiaries
Summary Of Capitalization Statistics
Years Ended September 30,
<TABLE>
<CAPTION>
Common Stock: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares Issued 1,794,416 1,527,486 1,475,843 1,432,512 1,382,343
Basic Earnings Per Share $1.60 $1.54 $1.51 $1.26 $1.25
Dividends Paid Per Share (Cash) $1.06 $1.04 $1.02 $1.00 $1.00
Dividends Paid Out Ratio 66.3% 67.5% 67.5% 79.4% 80.0%
Number Of Shareholders 1,836 1,853 1,713 1,699 1,625
- ------------------------------------------------------------------------------------------------------------
Capitalization Ratios:
- ------------------------------------------------------------------------------------------------------------
Long-Term Debt,
Including Current Installments 43.9 49.5 52.4 51.6 51.0
Stockholders' Equity 56.1 50.5 47.6 48.4 49.0
- ------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
- ------------------------------------------------------------------------------------------------------------
Long-Term Debt,
Including Current Installments $ 20,700,000 $ 20,222,124 $20,891,547 $ 18,683,462 $17,087,046
Stockholders' Equity 26,464,581 20,596,951 18,975,001 17,555,172 16,424,919
- ------------------------------------------------------------------------------------------------------------
Total Capitalization
Plus Current Installments $ 47,164,581 $ 40,819,075 $39,866,548 $ 36,238,634 $33,511,965
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1998 Annual Report
35
<PAGE>
Roanoke Gas Company
Board Of Directors
Lynn D. Avis
Avis Construction Company
President
Abney S. Boxley III
W. W. Boxley Company
President
Frank T. Ellett
Virginia Truck Center, Inc.
President
Frank A. Farmer, Jr.
Chairman Of The Board
Wilbur L. Hazlegrove
Law Firm Of Woods, Rogers & Hazlegrove,
P.L.C. Member
J. Allen Layman
R & B Communications, Inc.
President & CEO
Thomas L. Robertson
Carilion Health System &
Carilion Medical Center
President
S. Frank Smith
Coastal Coal Co., L.L.C.
Vice President
John B. Williamson III
President & CEO
Officers
John B. Williamson III
President & CEO
Arthur L. Pendleton
Executive Vice President & COO
Roger L. Baumgardner
Vice President, Secretary & Treasurer
John S. D'Orazio
Vice President - Marketing & New Construction
Jane N. O'Keeffe
Assistant Vice President - Human Resources
J. David Anderson
Assistant Secretary & Assistant Treasurer
Bluefield Gas Company
Board of Directors
Roger L. Baumgardner
Roanoke Gas Company
Vice President, Secretary & Treasurer
Arthur L. Pendleton
Roanoke Gas Company
Executive Vice President & COO
John C. Shott
Paper Supply Company
President
Scott H. Shott
Paper Supply Company
Secretary & Treasurer
John B. Williamson III
Roanoke Gas Company
President & CEO
Officers
John B. Williamson III
President
John S. D'Orazio
Vice President - Marketing & New Construction
Arthur L. Pendleton
Vice President - Operations
Roger L. Baumgardner
Secretary & Treasurer
Diversified Energy Company
T/A Highland Propane Company & Highland Gas Marketing
Board of Directors
Roger L. Baumgardner
Roanoke Gas Company
Vice President, Secretary & Treasurer
Frank T. Ellett
Virginia Truck Center, Inc.
President
Arthur L. Pendleton
Roanoke Gas Company
Executive Vice President & COO
S. Frank Smith
Coastal Coal Co., L.L.C.
Vice President
John B. Williamson III
Roanoke Gas Company
President & CEO
Officers
John B. Williamson III
President
John S. D'Orazio
Vice President - Marketing & New Construction
Arthur L. Pendleton
Vice President - Operations
Roger L. Baumgardner
Secretary & Treasurer
36
Roanoke Gas Company
<PAGE>
Corporate Mission Statement
Roanoke Gas Company provides superior customer and stockholder value
by being the preferred choice for safe, dependable, efficient, economical energy
and services in the market it serves.
Corporate Information
Corporate Office
Roanoke Gas Company
519 Kimball Avenue, N.E.
P.O. Box 13007
Roanoke, VA 24030
(540) 777-4GAS (4427)
Fax (540) 777-2636
Auditors
Deloitte & Touche LLP
1100 Carillon
227 West Trade Street
Charlotte, NC 28202-1675
Common Stock Transfer Agent, Registrar,
Dividend Disbursing Agent & Dividend
Reinvestment Agent
First Union National Bank of North Carolina
First Union Customer Information Center
Corporate Trust Client Services NC-1153
1525 West W.T. Harris Boulevard - 3C3
Charlotte, NC 28288-1153
Common Stock
Roanoke Gas Company's common stock is listed on the Nasdaq National Market
under the trading symbol RGCO.
Direct Deposit Of Dividends &
Safekeeping Of Stock Certificates
Shareholders can have their cash dividends deposited automatically into
checking, saving or money market accounts. The shareholder's financial
institution must be a member of the Automated Clearing House. Also, Roanoke Gas
Company offers safekeeping of stock certificates for shares enrolled in the
dividend reinvestment plan. For more information about these shareholder
services, please contact the Transfer Agent, First Union National Bank of North
Carolina.
10-K Report
A copy of Roanoke Gas Company's latest annual report to the Securities and
Exchange Commission on Form 10-K will be provided without charge upon written
request to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
Roanoke Gas Company
P.O. Box 13007
Roanoke, VA 24030
Shareholder Inquiries
Questions concerning shareholder accounts, stock transfer requirements,
consolidation of accounts, lost stock certificates, safekeeping of stock
certificates, replacement of lost dividend checks, payment of dividends, direct
deposit of dividends, initial cash payments, optimal cash payments and name or
address changes should be directed to the Transfer Agent, First Union National
Bank. All other shareholder questions should be directed to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
Roanoke Gas Company
P.O. Box 13007
Roanoke, VA 24030
Financial Inquiries
All financial analysts and professional investment managers should direct
their questions and requests for financial information to:
Roger L. Baumgardner
Vice President, Secretary & Treasurer
Roanoke Gas Company
P.O. Box 13007
Roanoke, VA 24030
Access up-to-date information on Roanoke Gas Company and its subsidiaries at
www.roanokegas.com
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Notice Of Annual Meeting
The annual meeting of stockholders
of Roanoke Gas Company will be held
at the Executive Offices of the Company,
519 Kimball Avenue, N. E.,
Roanoke, Virginia at 9:00 a.m.,
Wednesday, March 31, 1999.
[Roanoke Gas Logo]
Your Choice for Comfort and Economy.
Transfer Agent and Dividend Disbursing Agent
First Union National Bank of North Carolina
First Union Customer Information Center
Corporate Trust Client Services NC-1153
1525 West W. T. Harris Boulevard - 3C3
Charlotte, North Carolina 28288-1153
1-800-829-8432
Roanoke Gas Company trades on Nasdaq as RGCO.
