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 June 30, 2002
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Commission File Number 000-26591
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RGC Resources, Inc.
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(Exact name of Registrant as Specified in its Charter)
VIRGINIA 54-1909697
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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
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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 June 30, 2002
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Common Stock, $5 Par Value 1,955,885
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
June 30, September 30,
ASSETS 2002 2001
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Current Assets:
Cash and cash equivalents $ 271,450 $ 885,678
Accounts receivable - (less allowance for
uncollectibles of $1,362,726 and
and $531,991, respectively) 4,914,654 7,155,930
Inventories 1,752,658 13,473,986
Prepaid gas service 4,846,267 -
Prepaid income taxes - 356,020
Deferred income taxes 2,172,462 3,468,168
Under-recovery of gas costs - 1,208,190
Unrealized gains on marked to market transactions 1,019,981 -
Other 666,168 428,113
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Total current assets 15,643,640 26,976,085
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Property, Plant And Equipment:
Utility plant in service 87,447,654 83,570,936
Accumulated depreciation and amortization (33,710,619) (31,559,291)
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Utility plant in service, net 53,737,035 52,011,645
Construction work-in-progress 2,065,633 2,048,565
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Utility Plant, Net 55,802,668 54,060,210
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Nonutility property 19,560,469 18,149,109
Accumulated depreciation and amortization (7,320,048) (6,311,673)
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Nonutility property, net 12,240,421 11,837,436
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Total property, plant and equipment 68,043,089 65,897,646
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Other Assets
Intangible assets, net of accumulated amortization 305,592 327,429
Other assets 666,264 369,969
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Total other assets 971,856 697,398
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Total Assets $ 84,658,585 $ 93,571,129
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See notes to condensed consolidated financial statements.
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2
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
June 30, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
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Current Liabilities:
Current maturities of long-term debt $ 129,590 $ 803,037
Borrowings under lines of credit 10,247,000 17,707,000
Dividends payable 557,461 536,385
Accounts payable 5,963,085 8,250,618
Income taxes payable 1,050,394 -
Customer deposits 584,684 531,288
Accrued expenses 4,095,999 3,776,490
Refunds from suppliers - due customers 49,855 116,758
Overrecovery of gas costs 2,642,959 1,539,782
Unrealized losses on marked to market transactions - 1,906,171
Total current liabilities 25,321,027 35,167,529
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Long-term Debt, Excluding Current Maturities 22,385,094 22,507,485
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Deferred Credits and Other Liabilities:
Deferred income taxes 3,696,871 4,836,121
Deferred investment tax credits 309,875 334,922
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Total deferred credits and other liabilities 4,006,746 5,171,043
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Stockholders' Equity:
Common stock, $5 par value; authorized,
10,000,000 shares; issued and outstanding
1,955,885 and 1,914,603 shares, respectively 9,779,425 9,573,015
Preferred stock, no par, authorized, 5,000,000
shares; 0 shares issued and outstanding
in 2002 and 2001 - -
Capital in excess of par value 11,309,177 10,736,536
Retained earnings 11,844,154 10,490,375
Accumulated comprehensive income (loss) 12,962 (74,854)
Total stockholders' equity 32,945,718 30,725,072
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Total Liabilities and Stockholders' Equity $ 84,658,585 $ 93,571,129
=================== ==================
See notes to condensed consolidated financial statements.
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3
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----------------- -------------- -------------- --------------
Operating Revenues:
Gas utilities $ 9,948,942 $ 11,464,101 $ 50,096,760 $ 78,323,332
Propane operations 1,560,298 1,844,375 9,427,237 13,623,230
Energy marketing 2,514,448 3,390,878 8,745,299 11,517,359
Other 151,664 301,768 505,044 1,171,222
----------------- -------------- -------------- --------------
Total operating revenues 14,175,352 17,001,122 68,774,340 104,635,143
----------------- -------------- -------------- --------------
Cost of Sales:
Gas utilities 6,177,527 7,868,102 34,117,294 60,440,588
Propane operations 839,495 1,105,317 4,832,260 8,015,387
Energy marketing 2,474,678 3,354,405 8,513,369 11,054,132
Other 81,567 181,886 267,995 838,533
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Total cost of sales 9,573,267 12,509,710 47,730,918 80,348,640
----------------- -------------- -------------- --------------
Operating Margin 4,602,085 4,491,412 21,043,422 24,286,503
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Other Operating Expenses:
Other operations 2,626,062 2,930,556 8,419,998 9,661,662
Maintenance 286,321 375,429 969,782 1,043,221
General taxes 338,812 371,014 1,181,333 2,017,329
Depreciation and amortization 1,291,181 1,239,310 3,917,920 3,713,936
----------------- -------------- -------------- --------------
Total other operating expenses 4,542,376 4,916,309 14,489,033 16,436,148
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Operating Income (Loss) 59,709 (424,897) 6,554,389 7,850,355
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Other Deductions, net (62,519) (24,319) (114,864) (85,534)
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Income (Loss) Before Interest and Income Taxes (2,810) (449,216) 6,439,525 7,764,821
----------------- -------------- -------------- --------------
Interest Expense 469,646 597,719 1,545,117 2,158,601
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Income (Loss) Before Income Taxes (472,456) (1,046,935) 4,894,408 5,606,220
----------------- -------------- -------------- --------------
Income Taxes (174,723) (400,334) 1,880,920 2,089,446
----------------- -------------- -------------- --------------
Net Income (Loss) $ (297,733) $ (646,601) $ 3,013,488 $ 3,516,774
================= ============== ============== ==============
Basic Earnings (Loss) Per Common Share $ (0.15) $ (0.34) $ 1.56 $ 1.86
================= ============== ============== ==============
Diluted Earnings (Loss) Per Common Share $ (0.15) $ (0.34) $ 1.56 $ 1.85
================= ============== ============== ==============
See notes to condensed consolidated financial statements.
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4
RGC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------- ------------ ------------- ------------
Net Income $ (297,733) $ (646,601) $ 3,013,488 $ 3,516,774
Reclassification of loss (income) transferred to net income (1,954) - 109,200 (93,509)
Unrealized gain (loss) on derivative financial instruments (91,946) (68,815) (21,384) 24,694
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Other comprehensive income (loss), net of tax (93,900) (68,815) 87,816 (68,815)
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Comprehensive income (loss) $ (391,633) $ (715,416) $ 3,101,304 $ 3,447,959
================ ============ ============= ============
5
RGC RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH AND NINE-MONTH
PERIODS ENDED JUNE 30, 2002 AND 2001
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UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (297,733) $ (646,601) $ 3,013,488 $ 3,516,774
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,337,700 1,261,186 4,037,383 3,779,563
Loss on disposal of property 45,392 6,595 42,757 2,140
Deferred taxes and investment tax credits 618,703 (32,504) 75,383 (1,808,032)
Changes in assets and liabilities which provided
(used) cash, exclusive of changes and noncash
transactions shown separately (1,544,781) 5,391,976 7,557,764 1,975,536
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Net cash provided by operating activities 159,281 5,980,652 14,726,775 7,465,981
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and nonutility property (1,867,977) (1,763,426) (6,255,968) (5,778,006)
Cost of removal of utility plant, net (16,468) (15,758) (40,516) (27,716)
Proceeds from disposal of equipment 42,013 6,423 70,901 39,333
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Net cash used in investing activities (1,842,432) (1,772,761) (6,225,583) (5,766,389)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt and capital leases (32,071) (6,580) (795,838) (19,392)
Net borrowings (repayments) under lines of credit 1,924,000 (4,212,000) (7,460,000) (1,097,000)
Cash dividends paid (553,872) (531,638) (1,638,633) (1,578,439)
Proceeds from issuance of stock 389,984 189,180 779,051 482,935
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Net cash provided by (used in) financing activities 1,728,041 (4,561,038) (9,115,420) (2,211,896)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 44,890 (353,147) (614,228) (512,304)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 226,560 562,092 885,678 721,249
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 271,450 $ 208,945 $ 271,450 $ 208,945
============= ============== ============= ==============
SUPPLEMENTAL INFORMATION:
Interest paid $ 611,662 $ 718,910 $ 1,740,637 $ 2,256,101
Income taxes paid, net $ 30,004 $ 619,000 $ 399,123 $ 1,978,021
6
RGC RESOURCES, INC. 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 necessary to
present fairly RGC Resources, Inc.'s financial position as of June 30,
2002 and the results of its operations and its cash flows for the three
months and nine months ended June 30, 2002 and 2001. Because of
seasonal and other factors, the results of operations for the nine
months ended June 30, 2002 are not indicative of the results to be
expected for the fiscal year ending September 30, 2002.
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. Certain reclassifications were made to
prior year balances to conform with current year presentations.
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. Effective November 1, 2001, Roanoke Gas Company and Bluefield Gas
Company (the Companies) entered into a contract with a third party,
Duke Energy Trading and Marketing (Duke Energy), to provide future gas
supply needs. Duke Energy has also assumed the management and
financial obligation of the Companies' firm transportation and storage
agreements. In connection with the agreement, the Companies exchanged
gas in storage at November 1, 2001 for the right to receive from Duke
Energy an equal amount of gas in the future as provided by the
agreement. As a result of this arrangement, natural gas inventories on
the balance sheet are replaced with a new classification called
"prepaid gas service." This contract expires on October 31, 2004.
5. On October 1, 2000, the Company adopted the provisions of SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended and interpreted. SFAS No. 133 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
adoption of the standard did not have a material impact on the results
of operations or other comprehensive income.
The Company's risk management policy allows management to enter into
derivatives for the purpose of managing commodity and financial market
risks of its business operations. The key market risks that RGC
Resources, Inc. would seek to hedge include the price of natural gas
and propane gas and the cost of borrowed funds.
The Company had entered into futures and swaps for the purpose of
hedging the price of propane in order to provide price stability during
the winter months. The Company's hedging activities are in accordance
with established risk management policies. The hedges qualify as cash
flow hedges; therefore, changes in the fair value are reported in Other
Comprehensive Income. For the three month and nine month periods ended
June 30, 2002, the Company recorded unrealized losses of $91,946 and
$21,384, respectively, related to hedging activities and reclassified
$1,954 in losses and $109,200 in gains, respectively, from Other
Comprehensive Income to net income as the hedges settled during the
quarter. For the three month and nine month periods ended June 30,
2001, the Company recorded an unrealized loss of $68,815 and an
unrealized gain of $24,694, respectively, related to propane derivative
contracts and reclassified $0 and $93,509 in losses, respectively, from
Other Comprehensive Income to net income. No portion of the hedges were
ineffective during the three months ended June 30, 2002 and 2001.
7
RGC RESOURCES, INC. AND SUBSIDIARIES
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CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED
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The Company also had entered into no-cost collar and price-cap
arrangements for the purchase of natural gas for the purpose of
providing price stability during the winter months. The fair value of
these instruments is recorded in the balance sheet with the offsetting
entry to over/under-recovery of gas costs. Net income and other
comprehensive income are not affected by the change in market value as
any cost incurred or benefit received from these instruments is
recoverable or refunded through the regulated natural gas purchased gas
adjustment (PGA) mechanism. Both the Virginia State Corporation
Commission (SCC) and the West Virginia Public Service Commission (PSC)
currently allow for full recovery of prudent costs associated with
natural gas purchases, and any additional costs or benefits associated
with the settlement of these instruments will be passed through to
customers when realized.
The unrealized gains on these marked to market derivatives at June 30,
2002 are composed of $998,750 of natural gas derivative hedges that are
subjected to refund through the PGA mechanism and $21,231 of propane
hedges that will flow through income when realized. All $21,231 of the
unrealized gain on propane hedges at June 30, 2002 is expected to be
realized during the next twelve months.
6. Basic 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 nine-month
periods ended June 30, 2002 were 1,950,538 and 1,933,070 compared to
1,903,562 and 1,894,189 for the same periods last year. The weighted
average number of shares outstanding assuming dilution were 1,950,538
and 1,936,326 for the three-month and nine-month periods ended June
30, 2002 compared to 1,903,562 and 1,897,741 for the same periods last
year. The difference between the 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.
7. RGC Resources, Inc.'s reportable segments are included in the following
table. The segments are comprised of regulated natural gas sales and
distribution, propane sales, energy marketing and other. The other
segment is composed of the heating and air conditioning business,
mapping services, information system services and certain corporate
eliminations.
8
RGC RESOURCES, INC. AND SUBSIDIARIES
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CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED
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Energy
Natural Gas Propane Marketing Other Total
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FOR THE THREE MONTHS ENDED JUNE 30, 2002
Operating revenues 9,948,942 1,560,298 2,514,448 151,664 14,175,352
Operating margin 3,771,415 720,803 39,770 70,097 4,602,085
Income (loss) before income taxes (32,241) (367,742) 32,897 (105,370) (472,456)
Gross additions to long-lived
assets 1,676,463 191,514 - - 1,867,977
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Operating revenues 11,464,101 1,844,375 3,390,878 301,768 17,001,122
Operating margin 3,595,999 739,058 36,473 119,882 4,491,412
Income (loss) before income taxes (444,139) (474,618) 29,144 (157,322) (1,046,935)
Gross additions to long-lived
assets 1,617,782 140,057 - 5,587 1,763,426
Energy
Natural Gas Propane Marketing Other Total
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FOR THE NINE MONTHS ENDED JUNE 30, 2002
Operating revenues 50,096,760 9,427,237 8,745,299 505,044 68,774,340
Operating margin 15,979,466 4,594,977 231,930 237,049 21,043,422
Income (loss) before income taxes 4,290,655 602,770 208,628 (207,645) 4,894,408
As of June 30, 2002:
Total assets 68,002,571 14,293,665 1,568,239 794,110 84,658,585
Gross additions to long-lived
assets 4,514,373 1,740,429 - 1,166 6,255,968
FOR THE NINE MONTHS ENDED JUNE 30, 2001
Operating revenues 78,323,332 13,623,230 11,517,359 1,171,222 104,635,143
Operating margin 17,882,744 5,607,843 463,227 332,689 24,286,503
Income (loss) before income taxes 4,117,285 1,460,443 438,222 (409,730) 5,606,220
As of June 30, 2001:
Total assets 73,707,772 13,539,616 1,859,613 1,870,378 90,977,379
Gross additions to long-lived
assets 4,007,777 1,762,343 - 7,886 5,778,006
9
RGC RESOURCES, INC. AND SUBSIDIARIES
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CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED
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8. Effective April 1, 2002, the Company renewed its line of credit
agreements with Wachovia Bank (formerly First Union National Bank.) The
new agreements provide for a two-tiered credit limit to accommodate the
seasonal demand for working capital. Total available credit from April
2002 through September 2002 is $20,500,000 and from October 2002
through March 2003 is $26,500,000. Interest rates are variable based
upon 30 day LIBOR. The line of credit agreements will expire March 31,
2003, unless extended.
9. Both Roanoke Gas Company and Bluefield Gas Company, subsidiaries of
RGC Resources, Inc., operated manufactured gas plants (MGPs) as a
source of fuel for lighting and heating until the early 1950's. A by-
product of operating MGPs was coal tar, and the potential exists for
on-site tar waste contaminants at the former plant sites. The extent
of contaminants at these sites, if any, is unknown at this time. An
analysis at the Bluefield Gas Company site indicates some soil
contamination. The Company, with concurrence of legal counsel, does
not believe any events have occurred requiring regulatory reporting.
Further, the Company has not received any notices of violation or
liabilities associated with environmental regulations related to the
MGP sites and is not aware of any off-site contamination or pollution
as a result of prior operations. Therefore, the Company has no plans
for subsurface remediation at the MGP sites. Should the Company
eventually be required to remediate either site, the Company will
pursue all prudent and reasonable means to recover any related costs,
including insurance claims and regulatory approval for rate case
recognition of expenses associated with any work required. A
stipulated rate case agreement between the Company and the West
Virginia Public Service Commission recognized the Company's right to
defer MGP clean-up costs, should any be incurred, and to seek rate
relief for such costs. If the Company eventually incurs costs
associated with a required clean-up of either MGP site, the Company
anticipates recording a regulatory asset for such clean-up costs to be
recovered in future rates. Based on anticipated regulatory actions and
current practices, management believes that any costs incurred related
to this matter will not have a material effect on the Company's
financial condition or results of operations.
10. Statement of Financial Accounting Standards (SFAS) No. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS," will be adopted by the Company as of
October 1, 2002. SFAS No. 142 requires that goodwill no longer be
amortized over an estimated useful life, as previously required.
Instead, goodwill balances will be subject to a fair-value-based
annual impairment assessment.
SFAS No. 143, "Accounting for Asset Retirement Obligations" will be
adopted by the Company as of October 1, 2002. SFAS No. 143 provides
the accounting requirements for retirement obligations associated
with tangible long-lived assets.
The Company has not yet determined the impact of these new standards on
its financial condition or results of operations.
10
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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RESULTS OF OPERATIONS
Consolidated net earnings (loss) for the three-month and nine-month periods
ended June 30, 2002 were $(297,733) and $3,013,488, respectively, compared to
$(646,601) and $3,516,774 for the same periods last year.
Total operating revenues for the three months ended June 30, 2002 decreased
$2,825,770, or 17 percent, from the same period last year due to much lower
energy prices. As the cost of energy represents well over 50 percent of the
average sales price of natural gas and propane gas, significant changes in the
cost of energy have a corresponding impact on total energy revenues. The
weather during the three months ended June 30, 2002 was colder than last year
as the total number of heating degree-days (an industry measure by which the
average daily temperature falls below 65 degrees Fahrenheit) increased by 25
percent compared to the same quarter last year. The increase in heating
degree-days resulted in a 7 percent increase in total regulated natural gas
deliveries. Propane deliveries, on the other hand, declined by 11 percent. The
preceding warm winter led to lower consumption resulting in fewer deliveries to
propane customers during the current quarter. Energy marketing revenues declined
by 26 percent due to a 26 percent decline in energy prices, partially offset by
a 5 percent increase in volumes. Other revenues declined by 50 percent due to
the significant scale-back in the heating and air conditioning operations and
absence of work for Application Resources, Inc. due to the current business
environment.
Total operating margin increased by $110,673, or more than 2 percent, for the
quarter ended June 30, 2002 compared to the same period last year. Regulated
natural gas margins increased by $175,416, or 5 percent, as total delivered
natural gas volumes (transporting and non-transporting) increased by more than 7
percent from last year's levels, due to colder weather. Propane margins declined
by $18,255, or more than 2 percent, compared to the same period last year. The
decline in propane margins resulted from an 11 percent decline in total propane
deliveries, partially offset by a 10 percent increase in per gallon margin. The
energy marketing division margin increased by $3,297, or 9 percent, due to a 5
percent increase in volumes sold and a 4 percent increase in per dekatherm
margin. Other margins declined by $49,785, or 42 percent, due to the scale-back
in the heating and air conditioning operations and reduced work levels in
Application Resources, Inc.
The table below reflects volume activity and heating degree-days.
Quarter Quarter Increase/
Delivered Volumes 6/30/02 6/30/01 (Decrease) Percentage
------------- -------------- --------------- ------------
Regulated Natural Gas (DTH) 1,878,551 1,748,217 130,334 7%
Propane (Gallons) 1,427,733 1,604,856 (177,123) -11%
Highland Energy (DTH) 629,620 602,141 27,479 5%
Heating Degree Days 362 289 73 25%
(Unofficial)
11
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
Other operations expenses decreased by $304,494, or 10 percent, for the
three-month period ended June 30, 2002 compared to the same period last year.
The decrease was related to a substantial decline in bad-debt expense and
reduced payroll, partially offset by higher health insurance and other benefit
costs. The decline in bad debt expense correlates directly to much lower energy
costs compared to last year and significant improvement in delinquent customer
account balances. Last year's high energy prices and cold weather combined to
generate high energy bills for our customers. These extremely high customer
bills, combined with regulatory restrictions during last year's winter months,
which limited the periods when customer could be disconnected for nonpayment,
enabled delinquent balances to build to high levels last year. During the
current year, the warm winter reduced sales volumes but also provided for a more
timely disconnect process for delinquent customers. Both of these factors have
significantly reduced total bad debt expense and bad debt expense as a
percentage of sales. Maintenance expenses decreased by $89,108, or 24 percent,
as the Company has shifted its focus from general maintenance to a greater
emphasis on system renewal and expansion. This change in emphasis resulted in
the capitalization of a greater amount of Company labor and corresponding
benefits compared to the previous year. All critical maintenance continues to be
performed, while certain routine maintenance items have been reduced. Management
expects maintenance expenses to return to prior year levels next year, although
the current focus away from routine maintenance could result in some additional
maintenance costs in future periods.
General taxes decreased $32,202, or 9 percent, for the three-month period ended
June 30, 2002 compared to the same period last year primarily as a result of a
reduction in the business and occupation (B&O) tax related to the West Virginia
regulated operations and lower net payroll tax expense as a result of reduction
in staff and an increase in capitalized labor. The B&O tax is based upon gross
revenues, and Bluefield Gas Company's gross revenues decreased by 27 percent
compared to the same period last year.
Capital expenditures for adding new customers to the natural gas and propane
business and replacing older portions of the natural gas distribution system
have resulted in depreciation expense increasing by $51,871, or 4 percent.
Interest expense decreased by $128,073, or 21 percent, as the Company's average
total debt position for the current quarter decreased by more than 14 percent
and the average effective interest rate declined by 8 percent. The lower average
total debt for the quarter was attributable to the effect of reductions in the
cost of energy, warmer weather and the Company's asset management contract (see
Asset Management section below.) The asset management contract provides for a
withdrawal and injection plan that has allowed both Roanoke Gas and Bluefield
Gas to draw down the entire balances of their natural gas inventories by the end
of March and begin making equal injections over the following seven months. In
prior years, gas inventories were never fully withdrawn due to uncertainty in
energy demand. As of June 30, 2002, 25 percent less volume was in storage at a
unit price 30 percent lower than the same period last year. The warmer winter
weather and low energy costs have also reduced the levels of customer accounts
receivable balances. The reduction in the total average interest rate on Company
debt is attributable to the Company's variable rate line-of-credit agreements.
The effective interest rate for the quarter on the balances of these
lines-of-credit declined by 231 basis points, or 48 percent, from the same
period last year due to reductions in the 30 day LIBOR rate over the past year.
12
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
For the nine-month period ended June 30, 2002, total operating margin decreased
$3,243,081, or 13 percent, from the same period last year. Regulated natural gas
margin decreased $1,903,278, or 11 percent, as total natural gas deliveries
declined by 1,240,256 DTH, or 12 percent, from the same period last year, on
weather that had 18 percent fewer heating degree days. A portion of the
regulated natural gas margin decrease related to the elimination of the state
and local gross receipts tax on Virginia natural gas operations. Further details
of this change are provided below. Propane margins decreased $1,012,866, or 18
percent, as total gallons delivered declined by 16 percent. Propane margins were
also affected by the combination of the realization of derivative contract
losses and competitive pressures from other propane distributors. Energy
marketing margins declined $231,297 or 50 percent, on comparable volumes as
prior year results reflect the benefit of a fixed price contract that expired at
the end of March 2001. The energy marketing margins have returned to expected
levels during the current year.
The table below reflects volume activity and heating degree-days for the
respective periods.
Y-T-D Y-T-D Increase/
Delivered Volumes 6/30/02 6/30/01 (Decrease) Percentage
------------- -------------- --------------- ------------
Regulated Natural Gas (DTH) 9,251,594 10,491,850 (1,240,256) -12%
Propane (Gallons) 7,610,998 9,039,755 (1,428,757) -16%
Highland Energy (DTH) 1,850,943 1,820,873 30,070 2%
Heating Degree Days 3,486 4,268 (782) -18%
(Unofficial)
For the nine-month period ended June 30, 2002, other operations expenses
decreased $1,241,664 or 13 percent, from the same period last year. The decline
in expenses was primarily attributable to the decline in bad-debt expense as
total gross revenues declined by 34 percent from last year resulting from much
lower energy costs and significantly lower demand due to the warmer winter
weather. Furthermore, current year bad-debt expense reflects the deferral of
incurred bad debt expense following an agreement with the regulatory staff of
the State Corporation Commission of Virginia (SCC). The staff agreement provided
for the deferral of bad-debt expense as a regulatory asset in the amount of
$316,966 with this amount to be amortized over a three-year period beginning in
December 2002 to coincide with the anticipated implementation date of new rates
associated with the Company's pending rate filing. The Company has applied
Statement of Financial Accounting Standards No. 71, ACCOUNTING FOR THE EFFECTS
OF CERTAIN TYPES OF REGULATION, in recording the regulatory asset. Maintenance
expense declined $73,439, or 7 percent, due to greater emphasis placed on
facility renewal. This change in emphasis resulted in the capitalization of a
greater amount of Company labor and corresponding benefits compared to the
previous year. All critical maintenance continues to be performed, while certain
routine maintenance items have been reduced. Management expects maintenance
expenses to return to prior year levels next year, and the current focus on
capital projects may result in some additional maintenance costs in future
periods. General taxes declined by $835,996, or 41 percent, for the nine-month
period ended June 30, 2002 compared to the same period last year primarily as a
result of the elimination of state and local gross receipts tax on Virginia
public utilities by the Commonwealth of Virginia beginning January 1, 2001. A
consumption tax and a state income tax replaced the gross receipts tax. Virginia
gross receipts taxes were included in the Company's billing rates and recorded
as both operating revenues and general tax expense. The new consumption tax is
added to customer bills based on the volume of natural gas consumed. The Company
does not include the consumption tax in either operating revenues or general tax
13
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
expense. This tax is a pass-through from the customer to the Commonwealth of
Virginia and the localities in which the utility operates within Virginia. The
state income tax is included in the income tax amount. Bluefield Gas Company,
which operates in the state of West Virginia, continues to have a gross receipts
tax in the form of a business and occupation tax. Depreciation increased
$203,984, or more than 5 percent, on increased investment in utility and
non-utility property. Interest charges decreased by $613,484, or 28 percent, as
a result of significantly lower short-term interest rates on the Company's
variable line-of-credit arrangements and, to a lesser extent, lower overall
borrowing requirements during the period as a result of much lower energy costs.
The three-month and nine-month earnings presented herein should not be
considered as indicative of the Company's consolidated financial results for the
fiscal year ending September 30, 2002. The total revenues during the first nine
months reflect higher billings due to the weather sensitive nature of the gas
business. Improvement or decline in earnings depends primarily on weather
conditions during the remaining months.
CRITICAL ACCOUNTING POLICIES
Regulatory accounting - The Company's regulated operations follow the accounting
and reporting requirements of Statement of Financial Accounting Standards No.
71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. The economic
effects of regulation can result in a regulated company deferring costs that
have been or are expected to be recovered from customers 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 when such amounts are
reflected in rates. Additionally, regulators can impose liabilities upon a
regulated company for the amounts previously collected from customers and for
current collection in rates of costs that are expected to be incurred in the
future (regulatory liabilities).
Revenue recognition - The Company bills natural gas customers on a monthly cycle
basis; however, the billing cycle periods for most customers do not coincide
with the accounting periods used for financial reporting. The Company accrues
estimated revenue for natural gas delivered to customers not yet billed during
the accounting period.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates made by management
include projected useful lives of assets and collectibility and valuation of
accounts receivable among others. Actual results could differ from those
estimates.
14
RGC RESOURCES, INC. AND SUBSIDIARIES
- ------------------------------------
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
OPERATIONAL CHANGES
RGC Resources, Inc. is currently in the process of closing down GIS Resources,
Inc. Upon completion of certain outstanding contracts, the Company will be
completely shut down due to competition and low demand for its mapping services.
The workforce has been reduced from seven employees down to one.
RGC Resources, Inc. Board of Directors has given preliminary approval to
investigate the possibility of combining RGC Ventures, Inc. into Diversified
Energy Company. The possible combination of RGC Ventures, Inc., which contains
the heating and air conditioning operations of RGC Resources, Inc., would serve
to reduce or eliminate duplicate costs and provide a background for determining
whether the Company should continue in this line of business.
ASSET MANAGEMENT
Effective November 1, 2001, Roanoke Gas Company and Bluefield Gas Company (the
Companies) entered into a contract with a third party, Duke Energy Trading and
Marketing (Duke Energy), to provide future gas supply needs. Duke Energy has
also assumed the management and financial obligation of the Companies' firm
transportation and storage agreements. In connection with the agreement, the
Companies exchanged gas in storage at November 1, 2001 for the right to receive
an equal amount of gas in the future as provided by the agreement. As a result
of this arrangement, natural gas inventories on the balance sheet are replaced
with a new classification called "prepaid gas service." This contract expires on
October 31, 2004.
REGULATORY AFFAIRS
Bluefield Gas Company filed a base rate case with the West Virginia Public
Service Commission on February 4, 2002. On July 12, 2002, after completion of a
field audit, the Company met with Commission staff and reached a settlement of
$88,000 as additional annual non-gas revenue requirements. Pursuant to a final
Commission Order, the proposed rate increase will become effective December 1,
2002.
Roanoke Gas Company filed a base rate case on June 17, 2002 with the Virginia
State Corporation Commission requesting a non-gas rate increase of approximately
$1.2 million. This increase incorporates the three-year benefit of the
Distribution System Renewal Surcharge of approximately $587,000 annually. Also
included in this rate filing is a request for a revenue stabilization factor
that would serve as a means to reduce volatility in revenues and gross margins
during periods of extreme weather fluctuations and a proposal to liberalize the
extension of gas service policy in order to reduce the financial burden on
customers seeking natural gas service. The field audit began the last week of
July with a hearing scheduled on December 10, 2002. New rates will be placed
into effect, subject to refund, on December 1, 2002. A final order from the
Commission is not expected until 2003.
15
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
ENVIRONMENTAL ISSUES
Both Roanoke Gas Company and Bluefield Gas Company, subsidiaries of RGC
Resources, Inc., operated manufactured gas plants (MGPs) as a source of fuel for
lighting and heating until the early 1950's. A by-product of operating MGPs was
coal tar, and the potential exists for on-site tar waste contaminants at the
former plant sites. The extent of contaminants at these sites, if any, is
unknown at this time. An analysis at the Bluefield Gas Company site indicates
some soil contamination. The Company, with concurrence of legal counsel, does
not believe any events have occurred requiring regulatory reporting. Further,
the Company has not received any notices of violation or liabilities associated
with environmental regulations related to the MGP sites and is not aware of any
off-site contamination or pollution as a result of prior operations. Therefore,
the Company has no plans for subsurface remediation at the MGP sites. Should the
Company eventually be required to remediate either site, the Company will pursue
all prudent and reasonable means to recover any related costs, including
insurance claims and regulatory approval for rate case recognition of expenses
associated with any work required. A stipulated rate case agreement between the
Company and the West Virginia Public Service Commission recognized the Company's
right to defer MGP clean-up costs, should any be incurred, and to seek rate
relief for such costs. If the Company eventually incurs costs associated with a
required clean-up of either MGP site, the Company anticipates recording a
regulatory asset for such clean-up costs to be recovered in future rates. Based
on anticipated regulatory actions and current practices, management believes
that any costs incurred related to this matter will not have a material effect
on the Company's financial condition or results of operations.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary capital needs are for the funding of its continuing
construction program and the seasonal funding of its accounts receivable and gas
prepayment requirements under the asset management contract. The Company's
construction program is composed of a combination of replacing old bare steel
and cast iron pipe with new plastic or coated steel pipe and expansion of
natural gas and propane service to new customers. Total capital expenditures
were $1,867,977 and $6,255,968 for the three-month period and nine-month periods
ended June 30, 2002, respectively, compared to $1,763,426 and $5,778,006 for the
same periods last year.
The Company also funds seasonal levels of gas prepayments and accounts
receivables. From April through October, the Company prepays its asset manager
for the right to receive additional natural gas in the colder winter months.
This gas prepayment replaces the old underground natural gas storage that was
used prior to the new asset management contract. A majority of the Company's
sales and billings occur during the winter. As a result, accounts receivable
balances increase during these months and decrease during the summer months. Due
to the decline in wholesale gas costs and warmer weather, accounts receivable
balances and accounts payable balances at June 30, 2002 are well below the
levels at June 30, 2001.
Effective April 1, 2002, the Company renewed its line of credit agreements with
Wachovia Bank (formerly First Union National Bank.) The new agreements provide
for a two-tiered credit limit to accommodate the seasonal demand for working
capital. Total available credit from April 2002 through September 2002 is
$20,500,000 and from October 2002 through March 2003 is $26,500,000. Interest
rates are variable based upon 30 day LIBOR. The line of credit agreements will
expire March 31, 2003, unless extended.
16
RGC RESOURCES, INC. AND SUBSIDIARIES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------
OPERATIONS
- ----------
Short-term borrowings, together with internally generated funds and the sale of
Common Stock through the Company's Dividend Reinvestment and Stock Purchase
Plan, have been used to cover construction costs, debt service, dividend
payments and inventories. Total outstanding balances on the Company's
lines-of-credit at June 30, 2002 were $10,247,000 compared to $12,198,000 for
the same period last year. Reductions in energy costs have reduced the funding
requirements for natural gas prepayments and accounts receivable. Furthermore,
the Company's construction program has been funded in part by the Company's
lines-of-credit over the past few years. As a result, the Company is continuing
its evaluation of the need for longer-term financing in the upcoming months.
At June 30, 2002, the Company's capitalization consisted of 41 percent in
long-term debt and 59 percent in common equity.
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) temporary rate freezes in both regulated
jurisdictions; (ii) inability to obtain authorization for adequate and timely
rate relief from the respective state commissions (iii) failure to earn on a
consistent basis an adequate return on invested capital; (iv) increasing
expenses and labor costs and labor availability; (v) price competition from
alternative fuels; (vi) volatility in the price and availability of natural gas
and propane; (vii) uncertainty in the projected rate of growth of natural gas
and propane requirements in the Company's service area; (viii) general economic
conditions both locally and nationally; (ix) increases in interest rates; (x)
increased customer delinquencies and conservation efforts resulting from high
fuel costs; (xi) developments in electricity and natural gas deregulation and
associated industry restructuring; (xii) significant variations in winter
heating degree-days from normal; (xiii) changes in environmental requirements
and cost of compliance; (xiv) impact of increased governmental regulation and
oversight due to the financial collapse of Enron; (xv) cost and availability of
property and liability insurance in the wake of terrorism concerns and corporate
failures; (xvi) ability to raise debt or equity capital in the wake of recent
corporate financial irregularities; and (xvii) new accounting standards issued
by the Financial Accounting Standards Board, which could change the accounting
treatment for certain transactions. All of these factors are difficult to
predict and many are beyond the Company's control. Accordingly, while the
Company believes its forward-looking statements to be reasonable, there can be
no assurance that they will approximate actual experience or that the
expectations derived from them will be realized. When used in the Company's
documents or news releases, the words, "anticipate," "believe," "intend,"
"plan," "estimate," "expect," "objective," "projection," "forecast" or similar
words or future or conditional verbs such as "will," "would," "should," "could"
or "may" are intended to identify forward-looking statements.
Forward-looking statements reflect the Company's current expectations only as of
the date they are made. We assume no duty to update these statements should
expectations change or actual results differ from current expectations.
17
Part II - Other Information
Item 2. Changes in Securities.
Pursuant to the RGC Resources 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 Directors of the Company (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 upon (i) the participant's voluntary resignation during his
term on the Board or (ii) removal for cause. During the quarter ended
June 30, 2002, the Company issued a total of 489.840 shares of
restricted stock pursuant to the Restricted Stock Plan as follows:
Investment Date Price Number of Shares
4-1-2002 $19.750 163.545
5-1-2002 $19.600 164.795
6-1-2002 $20.000 161.500
On April 1, 2002, May 1, 2002 and June 1, 2002, the Company issued a
total of 279.432 shares of its common stock as bonuses to certain
employees and management personnel as rewards for performance. The
279.432 shares were not issued in a transaction constituting a "sale"
within the meaning of Section 2(3) of the Act.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks associated with interest rates
and commodity prices. Interest rate risk is related to the Company's
outstanding long-term and short-term debt. Commodity price risk is
experienced by the Company's regulated natural gas operations, propane
operations and energy marketing business. The Company uses derivative
commodity instruments to hedge price exposures for these operations.
The Company's risk management policy, as authorized by the Company's
Board of Directors, allows management to enter into derivatives for the
purpose of managing commodity and financial market risks of its
business operations.
The Company is exposed to market risk related to changes in interest
rates associated with its borrowing activities. A hypothetical 10
percent increase in market interest rates applicable to the Company's
variable rate debt outstanding at June 30, 2002 would have resulted in
a decrease in quarterly earnings of approximately $5,500.
The Company manages the price risk associated with purchases of natural
gas and propane by using a combination of fixed price contracts, spot
market purchases and derivative commodity instruments including
futures, swaps and collars. With respect to propane gas, a hypothetical
10 percent reduction in market price would result in a decrease in fair
value for the Company's propane gas derivative contracts of
approximately $96,000.
With respect to the Company's hedging activities for the price of
natural gas, the Company had entered into swap arrangements for the
purchase of natural gas for the upcoming winter months. Any cost
18
incurred or benefit received from the derivative arrangement is
recoverable or refunded through the regulated natural gas purchased gas
adjustment (PGA) mechanism. Both the Virginia State Corporation
Commission and the West Virginia Public Service Commission currently
allow for full recovery of prudent costs associated with natural gas
purchases, and any additional costs or benefits associated with the
settlement of the derivative contract will be passed through to
customers when realized. A hypothetical 10 percent reduction in the
market price of natural gas would result in a decrease in fair value of
approximately $499,000 for its natural gas derivative contracts.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
99.1 Certification pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 of John B.
Williamson, III, dated August 14, 2002.
99.2 Certification pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 of Howard T.
Lyon, dated August 14, 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended June 30, 2002.
19
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 there unto duly authorized.
RGC Resources, Inc.
Date: August 14, 2002 By: s/ Howard T. Lyon
Howard T. Lyon
Controller and Treasurer
Principal Financial Officer
20
EXHIBIT INDEX
Number Description
99.1 Certification pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of John B. Williamson, III, dated August
14, 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Howard T. Lyon, dated August 14, 2002.
21