SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
Commission File No. 0-367
ROANOKE GAS COMPANY
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(Exact name of Registrant as Specified in its Charter)
VIRGINIA 54-0359895
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
519 Kimball Ave., N.E., Roanoke, VA 24016
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(Address of Principal Executive Offices) (Zip Code)
(540) 777-4427
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(Registrant's Telephone Number, Including Area Code)
None
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(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at March 31, 1999
Common Stock, $5 Par Value 1,813,041 Shares
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
March 31, September 30,
ASSETS 1999 1998
======
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<S> <C> <C> <C> <C> <C> <C>
UTILITY PLANT:
Utility Plant in Service $72,435,457 $69,986,124
Accumulated Depreciation (25,521,967) (24,644,581)
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Utility Plant in Service, Net 46,913,490 45,341,543
Construction Work-In-Progress 1,178,485 1,674,543
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Utility Plant, Net 48,091,975 47,016,086
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NONUTILITY PROPERTY:
Propane 12,436,618 10,188,124
Accumulated Depreciation (3,504,617) (3,059,870)
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Nonutility Property, Net 8,932,001 7,128,254
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CURRENT ASSETS:
Cash and Cash Equivalents 546,620 84,037
Accounts Receivable - (Less Allowance
for Uncollectibles of $761,327
and $202,652, Respectively) 10,178,811 3,051,474
Inventories 3,068,187 7,969,730
Prepaid Income Taxes - 712,687
Deferred Income Taxes 2,676,179 1,868,888
Purchased Gas Adjustments - -
Other 433,043 451,027
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Total Current Assets 16,902,840 14,137,843
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OTHER ASSETS 1,001,513 852,737
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TOTAL $74,928,329 $69,134,920
=============== ===============
</TABLE>
See condensed notes to condensed consolidated financial statements.
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2
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<TABLE>
<CAPTION>
ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
March 31, September 30,
LIABILITIES 1999 1998
===========
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CAPITALIZATION:
Stockholders' Equity:
Common Stock - Par Value $5; Authorized,
3,000,000 Shares; Issued and Outstanding
1,813,041 and 1,794,416 Shares, Respectively $ 9,065,205 $ 8,972,080
Capital in Excess of Par Value 9,184,498 8,909,145
Retained Earnings 11,253,549 8,583,356
------------------ ------------------
Total Stockholders' Equity 29,503,252 26,464,581
Long-Term Debt (Less Current Maturities) 20,840,843 20,700,000
------------------ ------------------
Total Capitalization 50,344,095 47,164,581
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CURRENT LIABILITIES:
Current Maturities of Long-Term Debt 22,883 -
Notes Payable 4,213,000 4,584,000
Dividends Payable 490,152 476,140
Accounts Payable 5,215,456 6,968,594
Income Taxes Payable 2,142,885 -
Customers' Deposits 585,621 399,750
Accrued Expenses 4,936,575 4,224,693
Refunds From Suppliers - Due Customers 48,719 85,572
Purchased Gas Adjustments 2,890,056 1,269,829
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Total Current Liabilities 20,545,347 18,008,578
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DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred Income Taxes 3,605,194 3,508,838
Deferred Investment Tax Credits 433,693 452,923
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Total Deferred Credits and Other Liabilities 4,038,887 3,961,761
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TOTAL $74,928,329 $69,134,920
================== ==================
</TABLE>
See condensed notes to condensed consolidated financial statements.
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3
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<TABLE>
<CAPTION>
ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE-MONTH AND SIX-MONTH PERIODS
ENDED MARCH 31, 1999 AND 1998
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UNAUDITED
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
----------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas utilities $19,092,546 $18,619,490 $33,121,805 $36,702,651
Propane operations 3,935,263 3,130,843 6,350,196 5,843,703
----------------- ------------------ ---------------- ---------------
Total operating revenues 23,027,809 21,750,333 39,472,001 42,546,354
----------------- ------------------ ---------------- ---------------
COST OF GAS:
Gas utilities 12,042,015 11,763,128 20,763,662 23,744,016
Propane operations 1,695,103 1,482,679 2,796,869 2,832,533
----------------- ------------------ ---------------- ---------------
Total cost of gas 13,737,118 13,245,807 23,560,531 26,576,549
----------------- ------------------ ---------------- ---------------
OPERATING MARGIN 9,290,691 8,504,526 15,911,470 15,969,805
----------------- ------------------ ---------------- ---------------
OTHER OPERATING EXPENSES:
Gas utilities:
Other operations 1,767,255 2,058,056 3,728,083 3,997,279
Maintenance 183,067 330,660 491,788 642,713
Taxes - general 772,998 803,052 1,397,594 1,542,443
Taxes - income 1,071,466 846,912 1,476,720 1,485,085
Depreciation and amortization 767,390 713,802 1,521,108 1,425,682
Propane operations (including taxes -
income of $416,342, $320,812, $525,986
and $533,156, respectively 1,525,555 1,089,463 2,648,503 2,142,077
----------------- ------------------ ---------------- ---------------
Total other operating expenses 6,087,731 5,841,945 11,263,796 11,235,279
----------------- ------------------ ---------------- ---------------
OPERATING EARNINGS 3,202,960 2,662,581 4,647,674 4,734,526
----------------- ------------------ ---------------- ---------------
OTHER INCOME AND DEDUCTIONS:
Gas utilities:
Interest Income 96 919 96 919
Merchandising and jobbing, net 25,322 41,915 75,834 72,103
Other deductions (22,119) (25,071) (42,858) (51,713)
Taxes - income (3,293) (6,031) (13,742) (7,265)
Propane operations, net 21,086 4,908 60,752 68,416
----------------- ------------------ ---------------- ---------------
Total other income and deductions 21,092 16,640 80,082 82,460
----------------- ------------------ ---------------- ---------------
EARNINGS BEFORE INTEREST CHARGES 3,224,052 2,679,221 4,727,756 4,816,986
----------------- ------------------ ---------------- ---------------
INTEREST CHARGES:
Gas utilities:
Long-term debt 391,635 388,602 783,795 777,947
Other interest 72,446 125,183 167,406 304,615
Propane operations 69,034 41,972 128,859 66,726
----------------- ------------------ ---------------- ---------------
Total interest charges 533,115 555,757 1,080,060 1,149,288
----------------- ------------------ ---------------- ---------------
NET EARNINGS $ 2,690,937 $ 2,123,464 $ 3,647,696 $ 3,667,698
================= ================== ================ ===============
BASIC EARNINGS PER COMMON SHARE $ 1.49 $ 1.24 $ 2.02 $ 2.26
================= ================== ================ ===============
DILUTED EARNINGS PER COMMON SHARE $ 1.48 $ 1.24 $ 2.02 $ 2.25
================= ================== ================ ===============
CASH DIVIDENDS PER COMMON SHARE $ 0.270 $ 0.265 $ 0.540 $ 0.530
================= ================== ================ ===============
</TABLE>
See condensed notes to condensed consolidated financial statements.
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4
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<TABLE>
<CAPTION>
ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH AND SIX-MONTH
PERIODS ENDED MARCH 31, 1999 AND 1998
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UNAUDITED
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,690,937 $ 2,123,464 $ 3,647,696 $ 3,667,698
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,029,871 830,432 2,046,213 1,776,583
(Gain) loss on disposal of property (857) 8,109 (2,509) 8,109
Loss on sale of other assets - - - 566
Deferred taxes and investment tax credits (528,343) (987,196) (730,165) (1,735,313)
Changes in assets and liabilities which provided
cash, exclusive of changes and noncash
transactions shown separately 5,524,480 7,207,029 1,226,979 3,861,058
--------------- --------------- --------------- --------------
Net cash provided by operating activities 8,716,088 9,181,838 6,188,214 7,578,701
--------------- --------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (1,965,933) (1,850,975) (4,751,215) (4,108,272)
Cost of removal of utility plant, net (19,376) (11,815) (30,210) (32,418)
Proceeds from disposal of equipment 6,300 8,147 21,809 21,617
Proceeds from sale of other assets - - - 173,334
--------------- --------------- --------------- --------------
Net cash used in investing activities (1,979,009) (1,854,643) (4,759,616) (3,945,739)
--------------- --------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - - 1,700,000
Retirement of long-term debt and capital leases - (342,811) - (2,863,977)
Net repayments under lines of credit (5,961,000) (9,767,000) (371,000) (5,049,000)
Cash dividends paid (487,353) (417,226) (963,493) (814,753)
Proceeds from issuance of stock 193,979 3,847,461 368,478 4,024,629
Capital stock expense - (238,572) - (245,714)
--------------- --------------- --------------- --------------
Net cash used in financing activities (6,254,374) (6,918,148) (966,015) (3,248,815)
--------------- --------------- --------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 482,705 409,047 462,583 384,147
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 63,915 91,145 84,037 116,045
--------------- --------------- --------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 546,620 $ 500,192 $ 546,620 $ 500,192
=============== =============== =============== ==============
SUPPLEMENTAL INFORMATION:
Interest paid $ 170,011 $ 656,044 $ 1,060,164 $ 1,454,052
Income taxes paid (refunded), net $ (100,613) $ 1,161,620 $ (108,959) $ 1,260,623
NONCASH TRANSACTIONS:
</TABLE>
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.
A capital lease obligation of $163,727 was incurred when the Company entered
into an equipment lease in February 1999.
5
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED
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1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly Roanoke Gas
Company's (the Company) financial position as of March 31, 1999 and
September 30, 1998, and the results of its operations and its cash flows
for the three and six months ended March 31, 1999 and 1998. The results
of operations for the six months ended March 31, 1999 are not indicative
of the results to be expected for the fiscal year ending September 30,
1999.
2. The condensed consolidated financial statements and condensed notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes thereto.
3. Quarterly earnings are affected by the highly seasonal nature of the
business as variations in weather conditions generally result in greater
earnings during the winter months.
4. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities,
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. SFAS No.133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires the
recognition of all derivative instruments as assets or liabilities in
the Company's balance sheet and measurement of those instruments at fair
value. The accounting treatment of changes in fair value is dependent
upon whether or not a derivative instrument is designated as a hedge and
if so, the type of hedge. The Company has entered into certain
arrangements for hedging the price of natural gas and propane gas for
the purpose of providing price stability during the winter months. The
Company has not fully analyzed the impact of the provisions of FAS No.
133 on the Company's financial statements.
5. Earnings per common share are based on the weighted average number of
shares outstanding during each period. The weighted average number of
shares outstanding for the three-month and six-month periods ended March
31, 1999 were 1,809,707 and 1,805,149 compared to 1,708,016 and
1,624,307 for the same periods last year. The weighted average number of
shares outstanding assuming dilution were 1,813,547 and 1,808,522 for
the three-month and six-month periods ended March 31, 1999 compared to
1,716,315 and 1,630,695 for the same periods last year. The difference
between the
6
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED
- ---------
weighted average number of shares for the calculation of basic and
diluted earnings per share relates to the dilutive effect associated
with the assumed issuance of stock options as calculated using the
Treasury Stock method.
6. 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 is unknown at this
time. An analysis at the Bluefield Gas Company site indicates some soil
contamination. The Company, with concurrence of legal counsel, does not
believe any events have occurred requiring regulatory reporting.
Further, the Company has not received any notices of violation or
liabilities associated with environmental regulations related to the MGP
sites and is not aware of any off-site contamination or pollution as a
result of prior operations. Therefore, the Company has no plans for
subsurface remediation at the MGP sites. Should the Company eventually
be required to remediate either site, the Company will pursue all
prudent and reasonable means to recover any related costs, including
insurance claims and regulatory approval for rate case recognition of
expenses associated with any work required. A stipulated rate case
agreement between the Company and the West Virginia Public Service
Commission recognized the Company's right to defer MGP clean-up costs,
should any be incurred, and to seek rate relief for such costs. If the
Company eventually incurs costs associated with a required clean-up of
either MGP site, the Company anticipates recording a regulatory asset
for such clean-up costs to be recovered in future rates. Based on
anticipated regulatory actions and current practices, management
believes that any costs incurred related to this matter will not have a
material effect on the Company's financial condition.
7. See Management's Discussion and Analysis for discussion of pending
reorganization of the Company into a holding company with three
subsidiaries.
7
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Results of Operations
Consolidated net earnings for the three-month period and six-month periods ended
March 31, 1999 were $2,690,937 and $3,647,696 compared to $2,123,464 and
$3,667,698 for the same period last year.
Operating margin for the three months ended March 31, 1999 increased $786,165,
or 9.2 percent, over the same period last year due to increases in delivered gas
volumes. Total natural gas deliveries increased by 94,390 MCF, or 2 percent.
Customer growth and weather that was 4 percent colder than the same period last
year accounted for the increase in volume. Propane deliveries increased by
886,354 gallons, or 29 percent, due to an ongoing aggressive marketing campaign
that continues to add new customers in the propane division and from the
addition of customers resulting from the propane acquisition completed in
December 1998. Total propane customer base has increased by 31 percent since
last March.
Other operations and maintenance expenses for the current quarter declined from
the same period last year as the Company implemented expense reductions in
response to the warm winter. Reductions occurred in non-essential areas of
operations and maintenance including office expenses, travel, professional
services and support services. Furthermore, the Company redirected its
maintenance program from repair to replacement where applicable. This change
allowed for expense reductions and served to complement the Company's renewal
program. As a result of the changes, total payroll and benefits charged to
operations and maintenance declined $194,542 from the same period last year as
more labor was utilized for capital projects and to assist propane operations.
General taxes declined for the current quarter compared to the same period last
year with most of the decrease associated with the capitalization of more
payroll taxes associated with more capital labor. Capital expenditures for
adding new customers to the distribution system and replacement of older
facilities have increased depreciation expense over last year's levels. Propane
operations expense experienced a $436,092 increase over the same period last
year with increases in propane delivery costs, marketing expenses, benefit
costs, management allocations and depreciation resulting from the exceptional
growth in customers and sales volumes in the Company's propane subsidiary.
Interest charges declined slightly from the same period last year due to the
refinancing of Series K and L First Mortgage debt last year in addition to
reductions in short-term interest rates during the current quarter.
8
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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For the six-month period ended March 31, 1999, operating margins decreased
$58,335, or 0.4 percent, from the same period last year. Natural gas deliveries
fell by 523,270 MCF, or 6.7 percent, from the same period last year, as weather
was 9.2 percent warmer. During the same period, propane volumes increased
793,910 gallons, or 13.8 percent. Customer growth has served to mitigate the
impact of the weather on propane gallons. As discussed above, growth in the
propane division continues to be a significant factor in the Company's
performance.
For the six-month period ended March 31, 1999, operations and maintenance
expenses declined $420,121 from the same period last year. These declines
correspond to the expense reductions discussed above. General taxes declined
$144,849 from the same period last year as revenue sensitive taxes decreased on
reduced natural gas revenues. The increase of $95,426 in depreciation
corresponds with the increases in capital additions. Propane operations expense
increased by $506,426 compared to the same period last year. The growth in the
customer base of propane has demanded more of the Company's resources to
properly serve the customers. Interest charges for the six-month period ended
March 31, 1999 as compared to the same period last year, are consistent with
differences defined above for the quarter.
The six-month earnings presented herein should not be considered as reflective
of the Company's consolidated financial results for the fiscal year ending
September 30, 1999. The total revenues during the first six months reflect
higher billings due to the weather sensitive nature of the gas business.
Improvement or decline in earnings depends primarily on temperature and weather
conditions during the remaining months. Furthermore, management will continue
with the austerity program by continuing to reduce budgets on all nonessential
operations. Critical operations and safety will remain a top priority, including
the Company's efforts to address the Year 2000 issue.
Regulatory Affairs
The Company currently has two rate case applications pending before regulatory
bodies. In Virginia, Roanoke Gas Company entered into a Stipulation with both
the Virginia State Corporation Commission Staff and the Office of the Attorney
General providing for an annual increase of approximately $433,500 in gross
revenues. All issues in the rate application were settled except for the
implementation of a surcharge to recover the carrying cost and depreciation on
non-revenue producing investment in distribution plant. The settlement is
subject to Commission approval. After the filing of the Stipulation, the Company
filed and received
9
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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approval of a motion to implement the settlement rates in May of 1999 and to
provide refunds dating back to February 28, 1999 when interim rates went into
effect. The Company has established reserves for the estimated refund in this
case. A final order is expected in late summer of this year.
In West Virginia, Bluefield Gas Company filed for a rate increase of $127,000.
The case is still in the early stages and testimony will be filed in April and
May with the hearing set for June. Rates from this proceeding are scheduled to
become effective on December 1, 1999.
In the federal regulatory arena, 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.
The West Virginia Public Service Commission has approved the reorganization
based upon an administrative law judge's approval on January 7, 1999. The
Virginia State Corporation Commission issued a final order on January 11, 1999
approving the requested merger and reorganization. The Securities and Exchange
Commission approved the Company's S-4 filing on January 28, 1999. The Company's
shareholders approved the reorganization at the Company's annual stockholders'
meeting held on March 31, 1999. The SEC issued its order authorizing the
acquisition of common stock of gas utility companies on April 1, 1999. The
reorganization is expected to be completed during the fourth quarter of fiscal
year 1999. Immediately following the reorganization, RGC Resources will file an
exemption statement to exempt itself and its subsidiaries from all provisions of
the Public Utility Holding Company Act, except with respect to certain
acquisitions and investments, under the "intrastate" exemption in Section
3(a)(1).
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
10
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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 remediation and conversions,
system testing and contingency planning.
The Company has conducted an extensive inventory to identify and categorize all
of its internal systems that 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 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. Most systems that have been upgraded have been in
production for a minimum of ten months. There is a plan in place to upgrade the
remaining internal system applications by the spring of 1999. 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. 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, remains 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. The Company believes that most of its vendors,
suppliers and major customers are dedicated to the problem with intentions of
completing their efforts in a timely manner. Employee awareness and planning are
a top priority of the Company's Year 2000 Task Force.
11
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The Company added a segregated test environment that included a second
AS/400 in 1998 and an additional network file server. This will not only help
facilitate the implementation of the new CIS system, but will also allow for
more thorough Year 2000 testing. The segregated test environment also upgrades
the Company's Disaster Recovery Planning by enabling an internal recovery
hot-site.
The Company is developing a contingency 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 contingency plans will
be developed and documented by the summer of 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 its Year 2000
compliance status. Likewise, the Company has held discussions with large-volume
customers concerning its Year 2000 issues.
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 year to complete its Year 2000 readiness plan.
12
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ROANOKE GAS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Environmental Issues
Both Roanoke Gas Company and Bluefield Gas Company operated manufactured gas
plants (MGPs) as a source of fuel for lighting and heating until the early
1950's. 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 is unknown at this time. An analysis at the
Bluefield Gas Company site indicates some soil contamination. The Company, with
concurrence of legal counsel, does not believe any events have occurred
requiring regulatory reporting. Further, the Company has not received any
notices of violation or liabilities associated with environmental regulations
related to the MGP sites and is not aware of any off-site contamination or
pollution as a result of prior operations. Therefore, the Company has no plans
for subsurface remediation at the MGP site. 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. A stipulated rate case agreement between the Company and
the West Virginia Public Service Commission recognized the Company's right to
defer MGP clean-up costs, should any be incurred, and to seek rate relief for
such costs. If the Company eventually incurs costs associated with a required
clean-up of either MGP site, the Company anticipates recording a regulatory
asset for such clean-up costs to be recovered in future rates. Based on
anticipated regulatory actions and current practices, management believes that
any costs incurred related to this matter will not have a material effect on the
Company's financial condition.
13
<PAGE>
Part II - Other Information
Item 2. Changes in Securities.
Pursuant to the Roanoke Gas Company Restricted Stock Plan for Outside
Directors (the "Restricted Stock Plan"), 40% of the monthly retainer
fee of each non-employee director of the Company is paid in shares of
unregistered common stock and is subject to vesting and
transferability restrictions ("restricted stock"). A participant can,
subject to approval of the Board, elect to receive up to 100% of his
retainer fee in restricted stock. The number of shares of restricted
stock is calculated each month based on the closing sales price of
the Company's common stock on the Nasdaq-NMS on the first day of the
month. The shares of restricted stock are issued in reliance on
section 3(a)(11) and section 4(2) exemptions under the Securities Act
of 1993 (the "Act") and will vest only in the case of the
participant's death, disability, retirement or in the event of a
change in control of the Company. Shares of restricted stock will be
forfeited to the Company by the participant's voluntary resignation
during his term on the Board or removal for cause as a director.
During the quarter ended March 31, 1999, the Company issued a total
of 422 shares of restricted stock pursuant to the Restricted Stock
Plan as follows:
Investment Date Price Number of Shares
---------- ---------- ----------------
1-1-99 $19.750 136.708
2-1-99 $19.750 146.835
3-1-99 $21.000 138.098
On March 31, 1999, the Company also issued the 213.429 shares of its
common stock as bonuses to certain employees and management personnel
as rewards for perfect attendance and performance. The 213.429 shares
were not issued in a transaction constituting a "sale" within the
meaning of section 2(3) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders
On March 31, 1999, the Company held its Annual Meeting of
Shareholders. At the meeting, Lynn D. Avis, J. Allen Layman and
Thomas L. Robertson were each re-elected as Class B directors until
the Annual Meeting of Shareholders to be held in 2002. For Lynn D.
Avis, 1,623,812 votes were cast in favor, and 14,031 votes were
withheld. For J. Allen Layman, 1,623,598 votes were cast in favor,
and 14,245 votes were withheld. For Thomas L. Robertson, 1,619,396
votes were cast in favor, and 18,447 votes were withheld. There were
no broker non-votes.
The shareholders also approved the terms of the Agreement and Plan of
Merger and Reorganization, as set forth in the Company's proxy
statement dated February 5,
14
<PAGE>
1999. 1,336,357 votes were cast in favor, 48,800 were voted against,
16,9191 abstained. There were 234,766 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended March 31, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROANOKE GAS COMPANY
Date: May 14, 1999 By: s/Roger L. Baumgardner
------------------------------------------
Roger L. Baumgardner
Vice President/Secretary, Treasurer
And Principal Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM ROANOKE
GAS COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOR THE
QUARTER ENDED MARCH 31, 1999, AS SET FORTH IN THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 48,091,975
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<CAPITAL-SURPLUS-PAID-IN> 9,184,498
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 29,503,252
0
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<LONG-TERM-DEBT-NET> 20,840,843
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