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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     December 31, 2002

Commission File Number     000-26591

RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

See notes to condensed consolidated financial statements.

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

See notes to condensed consolidated financial statements.

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001

UNAUDITED

See notes to condensed consolidated financial statements.

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001

UNAUDITED

See notes to condensed consolidated financial statements.

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS
ENDED DECEMBER 31, 2002 AND 2001

UNAUDITED

Notes: The Company executed an $8,000,000 intermediate term note in November 2002, which resulted in the reclassification of $8,000,000 from borrowings under lines of credit to long-term debt on the September 30, 2002 Balance Sheet as the Company met the requirements for making the reclassification.   The net repayments under lines of credit reflect the payoff of $8,000,000 on the line of credit net of $6,604,000 in additional borrowings for working capital needs.

See notes to condensed consolidated financial statements.

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS
UNAUDITED

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Consolidated net income for the three-month period ended December 31, 2002 was $1,538,137 compared to $840,775 for the same period last year.

Total operating revenues for the three months ended December 31, 2002 grew by nearly 25 percent compared to last year’s revenues due to significantly colder weather compared to the same period last year. The total number of heating-degree days (an industry measure by which the average daily temperature falls below 65 degrees Fahrenheit) increased by 36 percent.  Although the weather was much colder than last year, the heating degree-days for the three months ended December 31, 2002 were only 5 percent higher than the 30 year normal.  As a result of the colder weather, total regulated natural gas deliveries increased by more than 20 percent with non-transporting volumes reflecting a 26 percent increase in dekatherms sold.  Propane gallons delivered rose by 45 percent.  Energy marketing revenues declined by 13 percent on an 8 percent reduction in volumes.  Other revenues declined by 13 percent due to the decision to forego third-party sales in the Company’s mapping services operations (GIS Resources) and the absence of work for Application Resources due to the current business environment.

Total operating margin increased by $1,611,886, or 23 percent, for the quarter ended December 31, 2002 over the same period last year. Regulated natural gas margins increased by $753,898, or 14 percent, on a total delivered volume (transporting and non-transporting) increase of 623,121 dekatherms, or 20 percent, due to colder weather.  The regulated natural gas margins are composed of two components: volumetric sales and base charge.  The increase in volumetric margin was nearly 21 percent, which correlates with the 20 percent increase in volumes.  The base charge, which is a flat monthly fee billed to each natural gas customer, increased less than one percent due to a small increase in customers and the implementation of increased base charge rates placed into effect in December.  More information is included in the regulatory affairs section below.  Propane margins increased by $854,323, or 57 percent, on a 1,037,196, or 45 percent, gallon increase in deliveries over the same period last year.  In addition to the weather impact, the propane operations realized a $120,839 derivative gain used to reduce the cost of propane and improve margins, and an increased customer base contributed to the increase in gallons delivered.  The energy marketing division margin increased by $8,217, or nearly 13 percent, even though total sales volume declined by 51,317 dekatherms, or 8 percent.  The decline in volume was due to production cutbacks at the two largest customers of Highland Energy as a result of the current economic slowdown.  The impact from the decline in volume was more than offset by an increase in the unit margin realized on these sales. Other margins decreased by 5 percent due to the absence of sales from GIS Resources and Applications Resources.

The table below reflects volume activity and heating degree-days.

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operations expenses increased by $392,473, or 13 percent, for the three-month period ended December 31, 2002 compared to the same period last year.  The increase was related to significant increases in employee benefit costs and higher operating costs as a result of the colder weather.  Two-thirds of the increase relates to higher employee benefit costs primarily in the area of health insurance, where the Company is self-insured and has experienced higher than normal claims activity.  Much of the remaining increase in operations expenses related to higher costs associated with maintaining operations during the colder weather.  Maintenance expenses decreased by $1,986, or less than one percent, as the warmer weather last year allowed for more gas distribution system maintenance work to be completed.

General taxes increased $59,475, or 15 percent, for the three-month period ended December 31, 2002 compared to the same period last year, primarily as a result of higher level of payroll due to increases in operations and of property taxes because of increases in the taxable property basis.

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 $22,158, or 2 percent.

Interest charges decreased by $8,942, or nearly 2 percent, even as the Company’s average total debt position for the current quarter increased by more than 3 percent over the same period last year. The increase in average total debt for the quarter was attributable to capital expenditures and a change from an under-collected position on billed gas costs at December 31, 2001 to an over-collected position at December 31, 2002.  Interest expense declined due to a reduction in overall interest rate on the Company’s debt from 5.285 percent to 5.085 percent.  The decline in average interest rate is due to the ongoing reductions in rates on the Company’s variable rate line-of-credit agreements. As the line-of-credit agreements are variable-rate instruments indexed to the 30 day LIBOR rate, the Company was able to benefit from reductions in the prime lending

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

rate.  The effective interest rate for the quarter on short-term debt declined by 45 basis points, or 17 percent, from the same period last year.

Income tax expense increased by $443,322, or 85 percent, as pre-tax income increased by nearly 84 percent.

The three-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2003.  The total revenues and margins during the first three 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 winter months.

Subsequent Event

On January 27, 2003, a break occurred on a natural gas main located in the Company’s Bluefield, WV service territory due to a ground shift attributable to much colder than normal temperatures.  As a result of the leak and its subsequent repair, service to approximately 4,300 customers was interrupted for periods ranging from several hours to 4 days.  The Company estimates that the cost to repair the gas line and to reestablish service to its customers at $280,000.   The Company is filing for rate relief of these additional costs through its planned rate application with the West Virginia Public Service Commission (PSC).  If the PSC approves the recovery of these additional costs in its rate application, the Company anticipates placing new billing rates into effect beginning in December 2003 to recover these costs over future periods.  However, there is no guarantee that the PSC will allow full or partial recovery of these costs.

In addition, the Company anticipates the possibility of claims being filed by customers for damage potentially done as a result of the interruption in service. The Company has notified its insurance provider of the incident and is awaiting determination of coverage.  The Company is advising customers to file claims related to the gas interruption with their homeowners or business insurance providers.  The Company believes the terms and conditions of its public utility service tariff in West Virginia largely protect it from service interruption claims; however, the Company does expect some potential additional costs related to claims being filed.  Such amounts are not currently estimable.

Critical Accounting Policies

The consolidated financial statements of RGC Resources, Inc. are prepared in accordance with accounting principles generally accepted in the United States of America.  The amounts of assets, liabilities, revenues and expenses reported in the Company’s financial statements are affected by estimates and judgments that are necessary to comply with generally accepted accounting principles.  Estimates used in the financial statements are derived from prior

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

experience, statistical analysis and professional judgments.  Actual results could differ from the estimates, which would affect the related amounts reported in the Company’s financial statements.   Although, estimates and judgments are applied in arriving at many of the reported amounts in the financial statements including provisions for pension and post-retirement medical benefits, provisions for medical self-insurance, valuation of bad debt reserves on accounts receivable, projected useful lives of capital assets and goodwill valuation, the following items may involve a greater degree of judgment.

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.  Determination of unbilled revenue relies on the use of estimates and historical data.

Derivatives – As discussed in “Qualitative and Quantitative Disclosures about Market Risk” section below, the Company hedges certain risks incurred in the normal operation of business through the use of derivative instruments.  The Company applies the requirements of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires the recognition of all derivative instruments as assets or liabilities in the Company’s balance sheet at fair value.  In most instances, fair value is based upon quoted futures prices for the commodities of propane and natural gas.  Changes in the commodity and futures markets will impact the estimates of fair value in the future.  Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the futures value used in determining fair value in prior financial statements.

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).

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

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Energy Costs

Colder weather and the threat of war with Iraq have brought about increased price levels for heating fuels. These higher price levels are especially true of natural gas and propane commodity prices. According to Energy Information Administration (EIA) data, October through December spot prices for natural gas and propane were much higher than last year, up 80% and 44% respectively.

To lessen the impact of price volatility, Roanoke Gas, Bluefield Gas and Highland Propane use a variety of hedging mechanisms. Summer storage injections, financial instruments and fixed price contracts were in place during the quarter, which have provided the company with lower fuel costs than could have been obtained utilizing spot market purchases.

Decreasing production brought about by low prices in the previous year and more demand for electric generation from natural gas may keep fuel prices high over the coming months. If EIA projections are correct, we would expect natural gas and propane prices to be higher over the coming quarters.

Regulatory Affairs

Both Roanoke Gas Company and Bluefield Gas Company implemented base rate increases effective December 1, 2002, as authorized by their respective regulatory commissions.

In late December 2002, the Virginia State Corporation Commission approved a joint stipulation filed by all parties associated with the Roanoke Gas Company rate case.  This final order approved a weather normalization adjustment mechanism, to begin next winter, which will stabilize the Company’s earnings from significant variations in weather.  The order also provided for liberalization in the Company’s main extension policy to reduce the burden to the customer for extending gas service and changed the definition of gas cost to include the gas cost component of bad debts and the carrying cost of prepaid gas service.  The latter provisions will reduce the impact of rising gas costs on bad debts and rising interest rates on debt used for funding prepaid gas service.

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is currently preparing an application for rate increase for Bluefield Gas Company to be filed in February and plans to file an application for rate increase for Roanoke Gas Company during the summer.

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 comprised 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 $1,891,849 and $2,621,045 for the three-month periods ended December 31, 2002 and 2001, respectively.

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

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 much colder weather, accounts receivable balances at December 31, 2002 are well ahead of the levels at December 31, 2001.

The Company increased the borrowing limits on its line of credit agreements.  Effective October 1, 2002, the Company’s total available lines of credit increased from $20,500,000 to $26,500,000.  The Company obtained the increase to provide additional working capital to fund inventory and accounts receivable balances and provide temporary financing for capital projects.  Interest rates are variable based upon 30 day LIBOR.  The line of credit agreements will expire March 31, 2003, unless extended.  The Company anticipates being able to extend the lines of credit.

During the quarter ended December 31, 2002, the Company executed a three-year $8 million note with Suntrust Bank for the purposes of refinancing a portion of Roanoke Gas Company’s short-term line of credit.  The note is a variable rate note based upon 30 day LIBOR rate; however, the Company subsequently entered into an interest rate swap to effectively convert the note into a fixed rate instrument.

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 December 31, 2002 were $15,595,000 compared to $19,188,000 for the same period last year.  Proceeds from the $8 million note were used to reduce the balances under the lines-of-credit which were partially offset by additional working capital requirements.

At December 31, 2002, the Company’s capitalization consisted of 48 percent in long-term debt and 52 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) failure to earn on a consistent basis an adequate return on invested capital; (ii) increasing expenses and labor costs and labor availability; (iii) price competition from alternative fuels; (iv) volatility in the price and availability of natural gas

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RGC RESOURCES, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and propane; (v) uncertainty in the projected rate of growth of natural gas and propane requirements in the Company’s service area; (vi) general economic conditions both locally and nationally; (vii) increases in interest rates; (viii) increased customer delinquencies and conservation efforts resulting from high fuel costs; (ix) developments in electricity and natural gas deregulation and associated industry restructuring; (x) significant variations in winter heating degree-days from normal; (xi) changes in environmental requirements and cost of compliance; (xii) impact of potential increased governmental oversight due to the financial collapse of Enron; (xiii) cost and availability of property and liability insurance in the wake of terrorism concerns and corporate failures; (xiv) ability to raise debt or equity capital in the wake of recent corporate financial irregularities;  (xv) impact of a potential war with Iraq, and (xvi) 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.

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RGC RESOURCES, INC. AND SUBSIDIARIES

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 December 31, 2002 would have resulted in a decrease in quarterly earnings of approximately $6,400.

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 $69,000.

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 November 2002 through March 2003.  Any cost 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 $375,000 for its natural gas derivative contracts.

ITEM 4 – CONTROLS AND PROCEDURES

Based on their evaluation of the Company’s disclosure controls and procedures (as defined by Rule 13a-14 (c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II – Other Information

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Part II – Other Information

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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.

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CERTIFICATION

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CERTIFICATION

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