<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1997
REGISTRATION NO. 333-32009
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VIRGINIA GAS COMPANY
(Name of Small Business Issuer as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4923 87-0443823
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
200 EAST MAIN STREET
ABINGDON, VIRGINIA 24210
(540) 676-2380
(Address and Telephone Number of Principal Executive Offices)
------------------------------
200 EAST MAIN STREET
ABINGDON, VIRGINIA 24210
(540) 676-2380
(Address of Principal Place of Business or Intended Principal Place of Business)
------------------------------
MICHAEL L. EDWARDS
200 EAST MAIN STREET
ABINGDON, VIRGINIA 24210
(540) 676-2380
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
BRIGHT & BARNES, P.C. VENABLE, BAETJER, HOWARD & CIVILETTI
Two Leadership Square, Suite 810 LLP
Oklahoma City, Oklahoma 73102 1201 New York Avenue, N.W., Suite 1000
(405) 236-8016 Washington, DC 20005
Attn: Robert C. Bright, Esq. (202) 962-4800
Attn: Ariel Vannier, Esq.
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
VIRGINIA GAS COMPANY
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
<TABLE>
<CAPTION>
ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
--------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus.............................. Front of Registration Statement and Outside Front
Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page and Outside Back Cover Page
of Prospectus; Available Information
3. Summary Information and Risk Factors............... Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Inapplicable
6. Dilution........................................... Inapplicable
7. Selling Security Holders........................... Inapplicable
8. Plan of Distribution............................... Outside and Inside Front Cover Pages of Prospectus,
Underwriting
9. Legal Proceedings.................................. Business
10. Directors, Executive Officers, Promoters and
Control Persons.................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management....................................... Management
12. Description of Securities.......................... Outside Front Cover Page of Prospectus; Prospectus
Summary; Capitalization; Description of
Securities
13. Interest of Named Experts and Counsel.............. Inapplicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities...................................... Management; Underwriting
15. Organization Within Last Five Years................ Inapplicable
16. Description of Business............................ Business; Prospectus Summary
17. Management's Discussion and Analysis or Plan of
Operation........................................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............................ Business; Management's Discussion and Analysis of
Financial Condition and Results of Operations
19. Certain Relationships and
Related Transactions............................. Management
20. Market for Common Equity and Related Stockholder
Matters.......................................... Outside Front Cover Page of Prospectus; Dividend
Policy; Description of Securities; Common Stock
Price Range
21. Executive Compensation............................. Management
22. Financial Statements............................... Financial Statements
23. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure.............. Other Matters
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 28, 1997
PROSPECTUS
2,000,000 SHARES
VIRGINIA GAS COMPANY
COMMON STOCK
------------------
All of the 2,000,000 shares of Common Stock, par value $.001 per share
("Common Stock"), of Virginia Gas Company (the "Company") offered hereby are
being sold by the Company. The Common Stock trades on the Nasdaq National Market
under the symbol "VGCO." On July 22, 1997, the last reported price of the Common
Stock on the Nasdaq National Market was $9.75 bid and $10.625 asked. See "Price
Range of Common Stock."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $150,000.
(3) The Company has granted to the Underwriter a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $__________, $__________ and
$__________, respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriter subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriter
and to certain further conditions. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of Ferris, Baker Watts, Incorporated, 1720 Eye Street, N.W.,
Washington, D.C. or through the facilities of the Depository Trust Company, on
or about , 1997.
------------------------
FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS 1997
<PAGE>
VIRGINIA GAS COMPANY
The map to be included on the inside front cover page of the prospectus
depicts the existing storage facilities operated by the Company and the Early
Grove Affiliate in southwestern Virginia; the existing and proposed pipelines of
the Company and existing interstate pipelines; and natural gas production
fields. The map also depicts other local distribution companies service
territories.
The bottom of the inside front cover page depicts a schematic that
represents the different operations of the Company.
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING RISK FACTORS, AND FINANCIAL STATEMENTS INCLUDED ELSEWHERE
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
TO THE COMPANY ARE TO VIRGINIA GAS COMPANY AND ITS CONSOLIDATED SUBSIDIARIES.
FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS, SEE THE GLOSSARY ON
PAGE 39.
THE COMPANY
Virginia Gas Company (the "Company"), directly or through Affiliates, is
primarily engaged in the exploration, production, marketing, gathering, storage,
and distribution of natural gas, and distribution of propane gas. The Company's
principal assets are located in the Commonwealth of Virginia, a region which is
experiencing significant economic growth and increasing demand for natural gas
and has access to three major interstate gas pipeline systems.
The Company's existing and planned assets comprise: (i) interests in 85
natural gas wells with proved developed reserves of approximately 2.6 Bcf; (ii)
gathering systems with over 102 miles of pipeline with a current annual
throughput of over 1.67 Bcf, connected to the interstate pipeline systems of
East Tennessee Gas Company ("ETNG"), CNG Transmission Company ("CNG") and
Columbia Gas Transmission Company ("TCO"); (iii) two underground storage
facilities with current capacity of 2.2 Bcf; and (iv) 120 miles of intrastate
pipeline under development with planned aggregate daily throughput of
approximately 50 MMcf/d.
The Company's business has developed in response to the growing need for
natural gas storage, pipelines and distribution in its market area, resulting
principally from economic growth and the impact of deregulation. Deregulation
has given natural gas customers more flexibility in negotiating their natural
gas purchases and transportation contracts. The Company's pipeline connections
to the ETNG, CNG, and TCO pipeline systems, and to the Company's adjacent
storage facilities, combine to create a hub which provides opportunities for
more efficient gas distribution, including to local, growing markets. At
present, the Company's business primarily consists of: (i) producing, gathering
and marketing natural gas from wells, in which the Company has an ownership
interest, to municipal distributors, local distribution companies and major oil
and gas companies; (ii) storing natural gas for municipal distributors and local
distribution companies which have supplied their own gas, or purchased gas from
third parties or the Company; and (iii) distributing propane and natural gas
purchased from third parties or the Company to local industrial, commercial and
residential customers.
The Company's principal sources of revenue have varied from time to time
depending on its level of activity in any given segment of natural gas
operations. From 1987 through 1992, substantially all of the Company's income
was derived from exploration, development and production of natural gas and from
fees derived from managing wells. From 1993 through 1996, the Company's income
reflected the growth of its storage operations. Today, the Company is building
transmission pipelines and expanding its storage capacity and expects, beginning
in 1999, to derive income primarily from natural gas storage and transportation
fees.
The Company's objective is to enhance earnings and cash flow by becoming a
leading integrated natural gas company in its market area. The Company's
strategy to achieve this objective is to construct pipeline systems, increase
the utilization of its existing storage facilities and aggressively pursue
end-user customers.
3
<PAGE>
ORGANIZATION AND OFFICES; AFFILIATES
The Company was incorporated in Delaware in March 1987. The Company's
principal executive office is located at 200 East Main Street, Abingdon,
Virginia 24210 and its telephone number is (540) 676-2380. The Company's
underground natural gas storage facility (the "Early Grove Facility") and its
related gathering system are owned and operated through a 50% owned affiliate,
Virginia Gas Storage Company (the "Early Grove Affiliate"). The Company conducts
its natural gas distribution activities through another 50% owned affiliate,
Virginia Gas Distribution Company (the "Distribution Affiliate"). The Early
Grove Affiliate and the Distribution Affiliate are herein collectively referred
to as "Affiliates." See "Risk Factors--Relationship with Affiliates."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:...................... 2,000,000 shares of Common Stock
Common Stock to be outstanding after the
Offering:................................ 5,204,906 shares(1)
Use of Proceeds:........................... The development of transmission pipelines;
expansion of a storage facility; expansion of
propane distribution systems in southwestern
Virginia; development of exploration and
production facilities; and other general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol:............. VGCO
</TABLE>
- ------------------------
(1) Excludes 1,191,069 shares of Common Stock issuable upon exercise of
outstanding options and warrants at exercise prices ranging from $8.72 to
$10.00 per share.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary selected financial information should be read in
conjunction with, and is qualified in its entirety by, the more detailed
financial statements and notes thereto included elsewhere in this Prospectus.
The summary income statement data of the Company for the years ended December
31, 1994, 1995 and 1996 and the summary balance sheet data as of December 31,
1996 have been derived from the Consolidated Financial Statements of the Company
which have been audited by Arthur Andersen LLP, independent public accountants.
This data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- --------- ---------
INCOME STATEMENT DATA:
Operations Data:
Net revenues.................................. $1,236 $1,612 $2,023 $2,770 $ 979 $4,071
Operating income.............................. 310 354 415 549 68 587
Equity in earnings of affiliates.............. 137 193 267 340 208 131
Net income.................................... 302 420 474 608 207 427
Per Share Data:
Earnings per share............................ $ 0.47 $ 0.66 $ 0.62 $ 0.21 $ 0.07 $ 0.12
Weighted average shares outstanding........... 671 640 696 1,638 1,035 3,201
Other Data:
Depreciation, depletion and amortization...... $ 171 $ 191 $ 305 $ 387 $ 129 $ 374
EBITDA........................................ 648 1,019 1,515 2,153 839 1,656
Capital investment............................ 467 1,378 2,331 11,662 4,306 3,150
Interest expense.............................. 120 288 673 1,007 521 717
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
AS
BALANCE SHEET DATA: 1996 ACTUAL ADJUSTED(1)
--------- --------- -----------
<S> <C> <C> <C>
Net working capital............................................ $ (430) (519) 17,271
Property, plant and equipment, net............................. 16,343 19,163 19,163
Total assets................................................... 33,510 41,416 59,206
Long-term debt................................................. 12,138 21,137 21,137
Stockholders' equity........................................... 17,338 15,494 33,284
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered hereby (at an assumed price to the public of $9.75 per
share) and the application of the proceeds therefrom.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------
SELECTED OPERATING DATA: 1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gas stored (MMBtu)..................... 400,000 520,000 985,500 2,171,500
Gas storage daily maximum
deliverability (MMBtu)............... 3,724 7,846 11,531 55,997
Gas wells in operation (gross)......... 75 87 108 108
Total miles of pipeline................ 95 111 116 128
Distribution customers................. 88 123 145 203
</TABLE>
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE
SHARES OF COMMON STOCK OFFERED HEREBY.
COMPANY INDEBTEDNESS AND RESTRICTIVE COVENANTS. Through its participation
in tax exempt bond offerings of the Industrial Development Authorities of
Russell and Buchanan Counties, Virginia, the Company has incurred significant
long-term indebtedness to develop the exploration, gathering and production
operations, storage facilities and pipelines of the Company and its Affiliates.
A significant portion of the proceeds of such indebtedness was loaned to its
Affiliates. There can be no assurance that revenues from the Company's or the
Affiliates' operations will be sufficient to satisfy the Company's long-term
debt obligations.
The debt instruments contain restrictive covenants which, among other
things, may restrict the Company's ability to incur additional parity debt,
restrict the application of proceeds and require the Company to exercise control
over an Affiliate, which it may be unable to do. See "--Relationship with
Affiliates." In addition, the covenants may limit the development by the Company
or its Affiliates of certain aspects of their business. Failure to comply could
cause acceleration of the debt, could cause the Company's existing long-term
indebtedness to lose its tax exempt status, could require the Company to pay a
higher rate of interest and could preclude the Company from participating in
future tax exempt bond offerings offered by Industrial Development Authorities
of other counties in Virginia.
Should the Company not be permitted to participate in future tax exempt bond
offerings or default on any of its indebtedness, or should any of the Company's
Affiliates be unable to repay the Company as and when required for the portions
of the indebtedness received by them, the Company's assets would be at risk and
its ability to conduct its businesses as presently being, or proposed to be,
conducted would be severely curtailed. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
NEED FOR ADDITIONAL CAPITAL. The Company will require substantial
additional capital to expand and diversify its operations beyond its current
plans. In the event that additional capital or adequate financing is not
available for expenditures to be incurred by the Company, there can be no
assurance that the Company will be able to complete its current projects in the
event of cost overruns, or to continue to expand its operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPLETION OF PIPELINES. In 1996, the Company began the development of an
80-mile intrastate natural gas pipeline (designated "P-25"), by acquiring
certain land easements and other property rights. The Company has also filed an
application with the Virginia State Corporation Commission ("VSCC") for issuance
of a Certificate of Public Convenience and Necessity ("CPCN") which, among other
things, would grant the Company the right of eminent domain over property needed
to construct the pipeline, which may be necessary to obtain all necessary land
rights. At present, the Company is aware of no reason why a CPCN would not be
issued. However, should the issuance of a CPCN, or of other necessary
governmental licenses, franchises and permits, be delayed or should such
issuances not occur, the Company could experience a delay in, or could be
prevented from, constructing the P-25 pipeline, or could be required to incur
significant costs to reconfigure the pipeline. Such delays, cost increases, or
the inability of the Company to build the P-25 pipeline would have a material
adverse effect on the financial performance and the prospects of the Company.
Comparable requirements would apply to construction of an additional 40-mile
intrastate pipeline ("designated P-24"). The Company recently initiated
development of the P-24 pipeline. The uncertainties that exist with respect to
the P-25 pipeline, exist with respect to the P-24 pipeline.
6
<PAGE>
In addition, capital intensive projects such as pipeline construction
frequently encounter cost overruns as a result of factors including geography of
the project, timing of construction, and adverse weather conditions. There can
be no assurance that the Company's current cost estimates will prove accurate or
that adequate financing will be available to complete these projects. See
"Business--Regulation" and "Business--Business Activities--Pipeline Operations."
COMPETITION. The natural gas industry is highly competitive. While the
Company currently operates the only underground natural gas storage facilities
in Virginia, it is possible that other companies will engage in similar or
competing activities. The Company's pipeline operation has numerous competitors
in its geographic area of operations, many of which are larger pipeline
companies with more extensive pipeline networks. Many of these competitors,
particularly those affiliated with major integrated oil and interstate and
intrastate pipeline companies, have financial resources substantially greater
than those of the Company and have access to supplies of natural gas
substantially greater than those available to the Company. Although the
Company's plan to expand its pipeline operations is designed to meet presently
growing markets, other competitors may decide to provide pipelines to these
areas. It is also possible that large volume customers or gas suppliers will
attempt to construct gas facilities to connect to an interstate pipeline or
other source of gas supply in order to bypass the Company's systems and/or avoid
use of its storage facilities.
The Company also competes in the areas of exploration, production, marketing
and distribution of propane and natural gas with major oil and gas companies,
other independent oil and gas concerns and individual producers and operators,
and, in the area of utility services, with major utility companies. Many of
these competitors have substantially greater financial and other resources than
the Company. The Company's competition may have a material adverse effect on the
Company's ability to recover its capital costs and repay outstanding
indebtedness. See "Business--Competition."
GOVERNMENTAL REGULATION. The Distribution Affiliate's natural gas
distribution operations are regulated by the VSCC. The VSCC has issued a CPCN
which authorizes the Affiliate to conduct its natural gas distribution business
in designated areas. The VSCC also sets the price of utility services at levels
intended to enable the Distribution Affiliate to recover its cost of service
plus a rate of return.
The VSCC also regulates storage rates. In June 1996 the Company applied for
a CPCN with the VSCC in connection with its high deliverability salt cavern
storage facility in Saltville, Virginia (the "Saltville Facility"). In July 1996
the VSCC issued an order authorizing the Company to begin service on an interim
basis subject to certain rates. A hearing was held in December 1996 on the
Company's application. A final order has not been issued by the VSCC. The VSCC
could deny the Company's application or further limit the rates it may charge
for storage.
In the future, the Company will be required to obtain additional CPCNs to
conduct its proposed pipeline operations. The Company and the Distribution
Affiliate may also periodically petition the VSCC for adjustments to rates to
compensate for changed conditions. In the event the VSCC denies such requests or
fails to give approval of such requests on a timely basis, the Company's and the
Distribution Affiliate's ability to conduct their businesses or to generate
sufficient revenues from such operations could be adversely affected. Further,
any cancellation or revocation of the Company's or the Distribution Affiliate's
CPCN, or denial by the VSCC of the Company's current and future applications,
would result in the Company or the Distribution Affiliate ceasing storage,
pipeline or distribution operations in the affected areas or the inability to
expand such operations. See "Business--Regulation."
Common carriers such as the Company's pipelines are also subject to the
jurisdiction of certain other state and federal agencies with respect to
environmental and safety matters. Changes in regulations or rulings adverse to
the Company's financial interests or failure to comply with such regulations
could have a material adverse effect on the Company's ability to generate
revenue from its storage and pipeline operations and from the Distribution
Affiliate's distribution operations. See "Business--Regulation."
7
<PAGE>
UNCERTAINTY OF PROPANE AND NATURAL GAS PRICES, SUPPLIES AND DEMAND. The
Company's revenues, profitability and future rate of growth substantially depend
upon prevailing prices for propane and natural gas and adequacy of propane and
natural gas supplies, which, in turn, depend upon numerous external factors such
as various economic, political and regulatory developments, weather, and
competition from other sources of energy. The unsettled nature of the energy
markets makes it particularly difficult to estimate future prices of propane,
natural gas and natural gas liquids or the security of propane and natural gas
supplies. The prices of propane, natural gas and natural gas liquids are subject
to wide fluctuations, and there can be no assurance that future decreases in
such prices will not occur. The Company believes that it has developed multiple
sources of propane and natural gas supply. However, there can be no assurance
that these sources will meet the Company's forecasted demand in the future. As a
result of the factors referred to above, there also can be no assurance that the
Company's forecasted demand for its products and services will prove to be
accurate. All of these factors are beyond the control of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resource" and "Business--Regulation" and
"Business--Strategy."
UNCERTAINTY OF ESTIMATES OF NATURAL GAS RESERVES AND FUTURE NET
REVENUES. There are numerous uncertainties inherent in estimating quantities of
proved natural gas reserves, including many factors beyond the control of the
Company. This Prospectus contains estimates of proved and proved developed
natural gas reserves and future net revenues therefrom based on studies
performed by the Company's engineering staff. The Company has not engaged the
services of an independent petroleum engineering firm to confirm the Company's
estimates. The estimates included in this Prospectus are based on procedures
prescribed by Statement of Financial Accounting Standards No. 69 and accordingly
are based on sales prices, cost rates and statutory income tax rates in
existence at the date of the projections or year end and therefore are an
inherently imprecise indication of future net revenues. Actual future
production, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable natural gas reserves may vary substantially from those
assumed in the estimates. In addition, the Company's reserves valuations may be
subject to downward or upward revision based upon production history, results of
future development, prevailing natural gas prices and other factors. For
example, the value of the Company's reserves as of December 31, 1996, reflects
the prices of natural gas in the winter of 1996, which were approximately 25%
higher than in the prior recent heating seasons as a result of the severity of
weather conditions in the winter of 1995. See "Business--Exploration,
Production, Gathering and Marketing Operations."
RELATIONSHIP WITH AFFILIATES. The Company owns a 50% interest in the Early
Grove Affiliate and the Distribution Affiliate. The remaining 50% interest is
owned by one individual. The Company provides management services to these
Affiliates; however, there are no written management agreements governing the
operation of these Affiliates nor are there any agreements between the Company
and the individual owner relating to corporate governance, buy-sell matters or
"deadlock" issues. The inability of the Company and the other owner of the
Affiliates to agree on matters relating to the management and operation of those
Affiliates could have a material adverse effect on the financial condition of
the Company.
DEPENDENCE ON MAJOR CUSTOMERS. One of the Company's customers, United
Cities Gas Company, accounted for 31% of 1996 consolidated operating revenue and
25% of revenues for the six-month period ended as of June 30, 1997. In addition,
Knoxville Utilities Board and Hope Gas, Inc. accounted for 21% and 15%,
respectively, of revenues for the six-month period ended June 30, 1997. Two of
the Early Grove Affiliate's customers, Roanoke Gas Company and Knoxville
Utilities Board, which contract with the Early Grove Affiliate for natural gas
storage, accounted for 57% and 53% of the Early Grove Affiliate's operating
revenue for 1996 and for the six month period ended June 30, 1997, respectively.
For the six-month period in 1997, White Stone Company, W-L Construction Paving
Inc., and Buchanan General Hospital accounted for 39%, 12% and 21%,
respectively, of the operating revenues for the Distribution Affiliate. The loss
of these customers, or an adverse business or financial development affecting
any of
8
<PAGE>
these customers, could have a material adverse financial impact on the Company.
See "Business--Storage Operations."
OPERATING HAZARDS. The Company's storage, pipeline, gathering and
distribution operations are subject to the many hazards inherent in the natural
gas transmission and storage industry and in propane distribution. These include
damage to pipeline and storage facilities, related equipment and surrounding
properties caused by hurricanes, floods, fires and other acts of God,
inadvertent damage from construction and farm equipment, leakage of natural gas
and other hydrocarbons, fires and explosions and other hazards that could also
result in personal injury and loss of life, pollution and suspension of
operations. The Company's exploration and production operations involve a
variety of operating risks, including the risk of fire, explosions, blow-outs,
pipe failure, casing collapse, abnormally pressured formations, and
environmental hazards such as oil spills, gas leaks, ruptures and discharges of
toxic gases, the occurrence of any of which could result in substantial losses
to the Company due to injury and loss of life, severe damage to and destruction
of property, natural resources and equipment, pollution and other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations.
Any significant problems related to its facilities could adversely affect
the Company's ability to conduct its operations. The Company maintains insurance
against some, but not all, potential risks; however, there can be no assurance
that such insurance will be adequate to cover any losses or exposure for
liability. The occurrence of a significant event not fully insured against could
materially adversely affect the Company's operations and financial condition.
The Company cannot predict whether insurance will continue to be available at
premium levels that justify its purchase or whether insurance will be available
at all. See "Business--Operational Hazards and Insurance."
RELIANCE ON KEY PERSONNEL. The success of the Company will largely be
dependent upon the efforts and active participation of Michael L. Edwards. He is
party to an employment agreement with the Company. The unexpected loss of his
services could have a detrimental effect on the Company. See "Management."
DIVIDEND POLICY. The Company has paid cash dividends in each of the past
five fiscal years and in the current fiscal year. The primary objective of the
Company is to retain its earnings to support the growth of the Company.
Therefore, there can be no assurance that the Board of Directors of the Company
will authorize the Company to pay cash dividends on its Common Stock in the
future. See "Dividend Policy."
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate of
Incorporation provides that the approval of (i) any amendment to the Certificate
or the by-laws, (ii) the merger, dissolution, reorganization (including by share
exchange) or recapitalization of the Company, or (iii) the sale of all or
substantially all of the assets of the Company requires the affirmative vote of
the holders of 75% of the Company's issued and outstanding shares entitled to
vote thereon. This increases the percentage that would otherwise be required
under Delaware law to approve such actions. In addition, the Company's by laws
provide that members of the Company's Board of Directors are elected to terms
that are staggered. These provisions may make it more difficult to change
control of the Company or replace incumbent management. See "Description of
Securities--Certain Provisions of Certificate of Incorporation and Delaware Law"
and "Management --Executive Officers and Directors."
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, announcements of unanticipated operating
results by the Company and other events or factors, such as the sale of large
blocks of shares held by existing shareholders. See "--Limited Market for Common
Stock; Shares Eligible for Resale." In addition, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market price for certain companies in a manner often
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
9
<PAGE>
LIMITED MARKET FOR COMMON STOCK; SHARES ELIGIBLE FOR RESALE. The Company's
Common Stock is traded on the Nasdaq National Market under the symbol VGCO.
Average daily trading volume for the Common Stock as reported by Nasdaq for the
first half of 1997 was approximately 4,172 shares. Despite the increase in the
number of shares of Common Stock to be publicly held as a result of the
Offering, there can be no assurance that a more active trading market in the
Common Stock will develop. Because there is a small public float in the Common
Stock and it is thinly traded, sales of small amounts of Common Stock in the
public market could materially adversely affect the market price for the Common
Stock. Sales of Common Stock, or the perception that such sales could occur,
could materially adversely affect prevailing market prices for the Common Stock
and may make it more difficult for the Company to sell shares of Common Stock in
the future at times and for prices that it deems appropriate. Upon completion of
the Offering, the Company will have 5,204,906 shares of Common Stock outstanding
(5,504,906 shares if the Underwriter's over-allotment option is exercised in
full) and approximately 247,920 shares issuable upon the exercise of outstanding
employee stock options and, after August 3, 1997, an additional 789,849 shares
and, after October 4, 1997, 153,300 shares issuable upon the exercise of
warrants. The 2,000,000 shares of Common Stock sold in the Offering (2,300,000
shares if the Underwriter's over-allotment option is exercised in full) will be
freely transferable without restriction or registration under the Securities
Act, unless purchased by persons deemed to be affiliates of the Company (as that
term is defined under the Securities Act). Substantially all of the remaining
3,204,906 shares of Common Stock outstanding immediately following the Offering
(and 1,191,069 shares issuable upon exercise of options and warrants, when
exercisable) will be transferable without restriction or registration under the
Securities Act, except for approximately 1,293,188 outstanding shares and an
additional 619,954 shares issuable upon exercise of options and warrants held by
persons deemed to be affiliates of the Company (as that term is defined under
the Securities Act) which will be subject to the volume and other restrictions
under Rule 144. See "Shares Eligible for Future Sale."
ENVIRONMENTAL REGULATIONS. The production, handling, transportation and
disposal of natural gas by-products and propane are subject to regulation under
federal, state and local environmental laws. In most instances, the applicable
regulatory requirements relate to water and air pollution control and solid
waste management measures. Environmental assessments have not been performed on
all of the Company's properties. To date, expenditures for environmental control
facilities and for remediation have not been significant in relation to the
results of operations of the Company. The Company believes, however, that it is
likely that the trend in environmental legislation and regulations will continue
to be towards stricter standards, which could materially adversely affect the
Company's ability to conduct its operations. See "Business--Regulation."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION. Certain
statements contained in this Prospectus, such as those concerning the Company's
business strategy, acquisition and expansion plans, values and revenues, capital
requirements, governmental regulation and other statements regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Securities Act). Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." The Company
undertakes no obligation to publicly release the results of any revision of
those forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (at an assumed offering price of $9.75 per share) are estimated
to be approximately $17,790,000 ($20,481,000 if
10
<PAGE>
the Underwriter's over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and offering expenses payable by the
Company.
Net proceeds are expected to be used as follows: (i) $14,740,000 for the
development of the P-24 and P-25 pipelines; (ii) $2,050,000 for the expansion of
the Saltville Facility; (iii) $500,000 for the expansion of propane distribution
systems in southwestern Virginia, and (iv) $500,000 for the development of
exploration and production facilities. Any remaining amounts will be used for
general corporate purposes, including working capital. Pending the use of the
proceeds, the Company may invest the funds in short-term money market,
government and federal agency obligations, bank certificates of deposit and
savings deposits.
COMMON STOCK PRICE RANGE
The Common Stock is traded on the Nasdaq National Market under the symbol
"VGCO." There were approximately 800 stockholders of record and 26 warrant
holders of record as of June 30, 1997. The following table sets forth the high
and low closing prices, as reported by Nasdaq, for the quarters indicated (the
stock began trading on October 4, 1996):
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
<S> <C> <C>
HIGH LOW
------- -------
1996
Fourth
Quarter......... $ 7 3/4 $ 6 1/2
1997
First Quarter... 10 1/2 7 1/4
Second
Quarter......... 10 3/4 8 3/4
Third Quarter
(through July
22, 1997)....... 10 1/2 9 3/4
</TABLE>
On July 22, 1997, the last reported bid and asked prices of the Common Stock
on the Nasdaq National Market were $9.75 and $10.625, respectively.
11
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997, and as adjusted to give effect to the sale by the Company of
2,000,000 shares of Common Stock in the Offering (at an assumed price to the
public of $9.75 per share), and the application of the estimated net proceeds
therefrom, as if such transaction had occurred as of June 30, 1997. The table
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Current portion of long-term debt.................................................. $ 748,576 $ 748,576
------------- -------------
Long-term debt..................................................................... 21,136,694 21,136,694
------------- -------------
Stockholders' equity:
Preferred Stock, no par; $1,000 per share liquidation value; zero shares issued
and outstanding as of June 30, 1997............................................ -- --
Common Stock, par value $.001 per share; 10,000,000 shares authorized; 3,204,906
shares issued and outstanding; and 5,204,906 shares as adjusted for the
Offering(1).................................................................... 3,205 5,205
Additional paid-in capital....................................................... 13,751,471 31,539,471
Retained earnings................................................................ 1,739,799 1,739,799
------------- -------------
Total stockholders' equity......................................................... 15,494,475 33,284,475
------------- -------------
Total capitalization............................................................... $ 37,379,745 $ 55,169,745
------------- -------------
------------- -------------
</TABLE>
(1) Excludes 1,191,069 shares of Common Stock issuable upon exercise of
outstanding options and warrants at exercise prices ranging from $8.72 to
$10.00 per share.
DIVIDEND POLICY
The Company has paid cash dividends on its Common Stock in each of the past
five fiscal years. During the past two years dividends were paid to stockholders
of record as follows:
<TABLE>
<CAPTION>
DIVIDEND (PER
RECORD DATE SHARE)
- ------------------------------------------------------------- -------------------
<S> <C>
12/22/95..................................................... $ 0.2900
12/15/96..................................................... 0.0100
1/31/97..................................................... 0.0125
5/15/97..................................................... 0.0150
7/15/97..................................................... 0.0175
</TABLE>
The primary objective of the Company is to retain its earnings to support
the growth of the Company. Therefore, there is no assurance that the Board of
Directors of the Company will authorize the Company to pay cash dividends on its
Common Stock in the future.
12
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL AND OPERATING DATA
The following table presents selected consolidated financial and operating
data of the Company for each of the six month periods ended June 30, 1996 and
1997, and each of the four years in the period ended December 31, 1996. The
annual financial data for 1994, 1995 and 1996 has been derived from the
consolidated financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants. The financial statements, as of December 31,
1996, and for the years ended December 31, 1995 and 1996, and the report of
Arthur Andersen LLP, are included herein under the caption "Financial
Statements." In addition, this data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
Revenues:
Gas sales and well operations revenues........... $ 391,084 $ 489,180 $ 603,495 $ 698,645 $ 297,345 $2,077,017
Natural gas gathering and service revenues....... 52,245 104,250 133,794 103,768 51,872 50,883
Natural gas storage revenues..................... -- -- -- 769,025 -- 1,228,297
Management revenues.............................. 753,467 738,583 756,524 320,532 195,928 144,340
Interest income.................................. 30,701 280,182 526,797 877,748 433,763 564,331
Other income..................................... 8,732 -- 2,800 -- -- 6,082
--------- --------- --------- --------- --------- ---------
1,236,229 1,612,195 2,023,410 2,769,718 978,908 4,070,950
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Production expenses.............................. 312,036 361,610 65,029 105,910 43,445 100,665
Purchased gas expense............................ -- -- -- 28,537 -- 66,113
Operations and maintenance expense............... -- -- -- 173,445 -- 229,203
Cost of natural gas sold......................... -- -- -- -- -- 1,635,003
Depreciation and amortization.................... 170,380 190,792 305,216 387,116 129,047 373,590
General and administrative....................... 413,312 425,145 708,191 645,673 303,087 447,430
Other expense.................................... 269 -- 2,752 2,771 1,146 68,039
Interest expense................................. 119,624 288,073 673,251 1,006,800 520,824 717,155
--------- --------- --------- --------- --------- ---------
1,015,621 1,265,620 1,754,439 2,350,252 997,549 3,637,198
--------- --------- --------- --------- --------- ---------
Income (loss) before earnings of affiliated
companies and income taxes....................... 220,608 346,575 268,971 419,466 (18,641) 433,752
Equity in earnings of affiliated companies......... 136,945 193,416 267,484 339,927 207,942 131,201
--------- --------- --------- --------- --------- ---------
357,553 539,991 536,455 759,393 189,301 564,953
Provision (benefit) for income taxes............... 55,426 119,906 62,581 151,827 (17,543) 137,883
--------- --------- --------- --------- --------- ---------
Net income......................................... $ 302,127 $ 420,085 $ 473,874 $ 607,566 $ 206,844 $ 427,070
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Summary of operations-Affiliates:
Early Grove Affiliate
Revenues......................................... $1,118,531 $1,638,233 $2,779,048 $3,985,444 $2,060,751 $2,179,567
Expenses......................................... 782,768 1,260,152 2,293,665 3,309,706 1,660,317 1,954,971
--------- --------- --------- --------- --------- ---------
Net income....................................... $ 335,763 $ 378,081 $ 485,383 $ 675,738 $ 400,434 $ 224,596
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Company's equity share........................... $ 167,882 $ 189,041 $ 242,692 $ 337,869 $ 200,217 $ 112,298
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Distribution Affiliate
Revenues......................................... $ 274,930 $ 455,799 $ 719,188 $1,023,065 $ 496,435 $ 676,012
Expenses......................................... 336,803 447,048 669,603 1,018,950 480,985 638,206
--------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ (61,873) $ 8,751 $ 49,585 $ 4,115 $ 15,450 $ 37,806
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Company's equity share........................... $ (30,937) $ 4,375 $ 24,792 $ 2,058 $ 7,725 $ 18,903
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES SET FORTH IN THIS PROSPECTUS. DISCUSSIONS
INVOLVING THE EARLY GROVE AFFILIATE AND THE DISTRIBUTION AFFILIATE SHOULD BE
READ IN CONJUNCTION WITH THE VIRGINIA GAS STORAGE COMPANY FINANCIAL STATEMENTS
AND RELATED NOTES AND THE VIRGINIA GAS DISTRIBUTION COMPANY FINANCIAL STATEMENTS
AND RELATED NOTES SET FORTH IN THIS PROSPECTUS.
GENERAL
The Company derives revenues from its storage, exploration, production,
gathering, marketing and propane distribution operations. From its 50%
investment in the Early Grove Affiliate and the Distribution Affiliate, the
Company derives earnings from the storage, gathering and distribution operations
of these companies. The Company accounts for its investments in these companies
using the equity method.
The Company's growth has been stimulated by deregulation of the natural gas
industry and strong economic and population growth in the main markets in which
the Company competes, specifically eastern Tennessee and western Virginia.
Deregulation has given natural gas customers more flexibility in negotiating
their natural gas purchases and transportation contracts.
Most of the pipeline facilities on major interstate systems such as ETNG,
TCO and CNG are limited by capacity constraints as to the ability to deliver
additional peak-day volumes. The ability of companies to continue to supply
customers from traditional sources such as the Gulf Coast area are limited by
the high capital costs of building new pipelines and compression facilities. The
Company believes that local suppliers of natural gas, such as the Company, the
Early Grove Affiliate and the Distribution Affiliate possess a significant
advantage in delivering these services at a more economical rate due largely to
lower capital costs in developing natural gas delivery facilities.
In its exploration and production business, the Company has a revenue
interest in wells which generate revenues from sale of the well's natural gas
production. The Company also receives revenues from managing the construction,
drilling, development, and operation of natural gas facilities, including
management and operations fees. In its gas gathering business, revenues are
generated from its ownership interest in gathering pipelines for natural gas
traveling through its gathering systems. In its gas marketing operations, the
Company generates revenues from the sale of natural gas.
In its storage business, the Company receives fees for use of its storage
space in addition to injection and withdrawal fees, collectively referred to as
storage revenues. Storage charges to customers are in accordance with rates
included in tariffs approved by the VSCC.
In its propane distribution business, the Company generates revenues from
the sale of propane to industrial, commercial and residential customers.
With respect to the Early Grove Affiliate's gas gathering business, the
Company records its share of net income from fees received for natural gas
traveling through the Affiliate's gathering system and for storage fees. The
Early Grove Affiliate also sells gas during the heating season.
With respect to the Distribution Affiliate's distribution operations, the
Company records its share of net income from the difference between the prices
at which the Affiliate purchases natural gas and the prices at which it sells
natural gas to its customers. The prices at which the Distribution Affiliate
sells natural gas to its customers are in accordance with the rate schedules in
its tariff filed with the VSCC. The Distribution Affiliate purchases natural gas
under short-term contracts which reflect the market price of natural gas.
14
<PAGE>
FIRST SIX MONTHS OF 1997 AND 1996
OVERVIEW. During the six month period ended June 30, 1997, the Company
recorded net income of $427,000, compared to $207,000 for the same period in
1996, an increase of 106%. The net income per common share available to common
stockholders for the corresponding periods was $0.12 in 1997 compared with $0.07
in 1996. The number of weighted-average shares used in calculating income per
common share was 3,201,350 and 1,034,873 for the six months ended June 30, 1997
and 1996, respectively.
REVENUES. Total revenues increased 316% to $4.1 million for the six months
ended June 30, 1997 compared to $979,000 for the same period in 1996. Gas sales
and well operation revenues totaled $2.1 million for the first six months of
1997 compared to $297,000 for the same period in 1996. The increase primarily
reflects the formation of the Company's marketing operations during the first
quarter of 1997. Sales of natural gas during the first six months of 1997
totaled $1,826,000 on sales volumes of 689,000 MMBtu. Exploration and production
revenues, reflecting the Company's revenue interest in these sales of natural
gas, consisted of natural gas sales of $189,000, and well operation income of
$131,000 compared to $158,000 and $139,000, respectively, for the same period in
1996. Propane sales totaled $118,000 for the six months ended June 30, 1997.
There were no comparable propane sales for the same period in 1996 as these
operations were in the developmental stage.
Natural gas storage revenues totaled $1.2 million for the first six months
of 1997, compared to zero revenue for the same period in 1996. Initial
injections of customer gas into the Saltville Facility began in August 1996.
Contracted storage capacity for the current contract year is comprised of 10-day
(64%), 60-day (9%) and 90-day (27%) service.
Management revenues, interest and other income totaled $715,000 for the six
months ended June 30, 1997, compared with $630,000 for the same period in 1996,
an increase of 14%. The majority of the increase reflects an increase in
interest income of $131,000, offset by a decrease in management revenues of
$52,000.
COSTS AND EXPENSES. Total operating costs and expenses increased $2.4
million to $2.9 million for the six months ended June 30, 1997, compared to
$477,000 for the same period in 1996. Production and purchased gas expenses
increased to $167,000 in the six months ended June 30, 1997 from $43,000 for the
same period in 1996 as a result of increased production expenses in addition to
increased purchased gas expense attributed to the expanding propane distribution
operations.
Operations and maintenance expenses totaled $229,000 in 1997 compared to
zero for the same period in 1996, primarily reflecting operating costs incurred
in 1997 related to the Saltville Facility.
Cost of natural gas sold, related to the Company's marketing of natural gas,
totaled $1.6 million for the first six months of 1997 compared to zero for the
same period in 1996, reflecting the initiation of marketing operations and the
corresponding costs.
General and administrative costs were $447,000 for the first six months of
1997, an increase of 48% over the comparable 1996 total of $303,000, reflecting
the growth in Company operations during 1997 and the accompanying growth in
personnel and facilities.
Depreciation, depletion and amortization increased 189% to $374,000 for the
six months ended June 30, 1997 from $129,000 for the same period in 1996. The
increase reflects the recovery of costs for capital projects recently placed
into service, primarily the Saltville Facility.
INTEREST EXPENSE. Interest expense increased 38% to $717,000 during the
first six months of 1997 from $521,000 in the comparable 1996 period, due
primarily to additional tax-exempt bond financing. The Company capitalizes
interest on expenditures for significant projects while activities are in
progress to bring the assets to their intended use. Capitalized interest for the
six month periods ended June 30, 1997 and 1996 totaled $170,000 and $162,000,
respectively.
15
<PAGE>
EQUITY IN EARNINGS OF AFFILIATES. The Company has a 50% ownership interest
in two Affiliates which provide natural gas storage, gathering and distribution
services. The Company accounts for its investments in these companies using the
equity method. The Company's equity in the earnings of these Affiliates
decreased 37% to $131,000 for the first six months of 1997 from $208,000 for the
same period in 1996. The decrease reflects increased operations expenses related
to natural gas storage operations in addition to higher interest costs. The
increased costs were partially offset by increased usage during the period by
industrial customers of the Distribution Affiliate.
INCOME TAXES. Using the asset-and-liability method, deferred income taxes
reflect the temporary differences between assets and liabilities recognized for
financial reporting purposes and amounts recognized for income tax purposes. The
Company's provision for income taxes as a percentage of income before its equity
in earnings of Affiliates (the Company's equity in earnings of Affiliates is
reflected on a post-income tax basis) was 32% for the six month period ended
June 30, 1997. For the six months ended June 30, 1996, the Company's operations
reflected an income tax benefit.
EQUITY INVESTMENTS
NATURAL GAS STORAGE. Storage revenues from the Early Grove Facility for the
six months ended June 30, 1997 were $1,265,000 compared with storage revenues of
$877,000 for the same period in 1996 due to increased storage capacity at the
Early Grove Facility.
NATURAL GAS GATHERING. Gathering revenues totaled $159,000 for the first
six months of 1997 compared to $207,000 for the same period in 1996, reflecting
a decrease in natural gas throughput due partially to production decline and to
decreased peak winter service sales volume as a result of the milder seasonal
temperatures experienced during the first quarter 1997 as compared to the
corresponding period in 1996. Revenues from winter service sales totaled
$613,000 for the six months ended June 30, 1997, compared to $781,000 for the
same period in 1996. Purchased gas expenses related to these sales totaled
$511,000 and $664,000 for the six months ended June 30, 1997 and 1996,
respectively.
NATURAL GAS DISTRIBUTION. Distribution revenues for the first six months of
1997 were $419,000, an increase of $120,000 over revenues of $299,000 for the
same period in 1996 largely due to increased usage during the period by
industrial customers, and to decreased residential customer usage reflecting
milder seasonal temperatures. Purchased gas costs related to these sales totaled
$239,000 for the first six months in 1997 and $147,000 for the same period in
1996.
RESULTS OF OPERATIONS FOR YEARS 1996 AND 1995
OVERVIEW. During the year ended December 31, 1996, the Company recorded net
income of $608,000, compared to $474,000 for 1995. Net income per common share
available to common stockholders for the years was $0.21 in 1996 compared with
$0.62 in 1995. The number of weighted average shares used in calculating income
per common share was 1,637,576 and 695,669 for the years ended December 31, 1996
and 1995, respectively.
REVENUES. Total revenues increased 37% to $2.8 million for the year ended
December 31, 1996 compared to $2.0 million for 1995. Gas sales and well
operation revenues totaled $699,000 in 1996 compared to $603,000 in 1995, an
increase of 16%. This increase primarily reflects an increase in the average
sales price of natural gas to $2.53/Mcf in 1996 from $1.47/Mcf in 1995. Propane
operations, initiated during the second half of 1996, reflected sales totaling
$47,000 for the year ended December 31, 1996.
Natural gas gathering and service revenue decreased 22% to $104,000 for the
year ended December 31, 1996, compared to $134,000 in 1995, primarily as a
result of the Company's 1995 revision of its method of recording certain
gathering revenues. Gathering revenues for 1995 include $35,000 which would
16
<PAGE>
not have been recognized had this revision not been made. See Note 2 of Notes to
the Consolidated Financial Statements.
Natural gas storage revenue totaled $769,000 for the year ended December 31,
1996, compared to zero revenue in 1995. Initial injections of customer natural
gas into the Saltville Facility began in August 1996. Contracted storage
capacity for 1996 contract year totaled 583,000 MMBtu, consisting of 10-day
(59%), 60-day (10%), and 90-day (31%) service.
Management revenues, interest income and other revenue decreased 7% to $1.2
million in 1996, compared to $1.3 million in 1995, primarily as a result of
lower management fees related to the development of the Saltville Facility.
COSTS AND EXPENSES. Total operating costs and expenses increased 24% to
$1.3 million for the year ended December 31, 1996, compared to $1.1 million for
the same period in 1995. Total production and purchased gas expenses increased
107% to $134,000 in 1996 from $65,000 in 1995 as a result of increased
production expenses and the purchased gas expense related to the 1996
development of propane operations.
Operating and maintenance expense related to the Company's storage
operations were $173,000 in 1996, compared to zero in 1995.
General and administrative expense decreased 9% to $646,000 in 1996 from
$708,000 in 1995. This decrease was due primarily to the shift of certain
personnel and administrative functions from the corporate level to the
individual operating subsidiaries, including the Affiliates.
Depreciation, depletion and amortization increased 27% to $387,000 in 1996
from $305,000 in 1995 reflecting the recovery of costs for capital projects,
primarily the Saltville Facility, then recently placed into service.
INTEREST EXPENSE. Interest expense increased 50% to $1.0 million in 1996
from $673,000 in 1995 due primarily to additional tax-exempt bond financing and
a promissory note issued by the Company to purchase the interest of its joint
venture partner in the development of the Saltville Facility. The Company
capitalizes interest on expenditures for significant projects while activities
are in progress to bring the assets to their intended use. Capitalized interest
totaled $290,000 in 1996 and $93,000 in 1995.
EQUITY IN EARNINGS OF AFFILIATES. The Company's equity in the earnings of
Affiliates increased 27% to $340,000 for 1996 from $267,000 in 1995. The
increase primarily reflects increased storage revenues attributable to an
increase in leased storage capacity.
INCOME TAXES. The Company's provision for income taxes as a percentage of
income before equity in earnings of Affiliates (the Company's equity in earnings
of Affiliates is reflected on a post-income tax basis) was 36% in 1996 and 23%
in 1995.
EQUITY INVESTMENTS
NATURAL GAS STORAGE. Storage revenues from the Early Grove Facility totaled
$2.1 million in 1996, reflecting an increase in revenues of $900,000 over 1995
revenues of $1.2 million, due largely to an increase in leased storage capacity
at the Early Grove Facility.
NATURAL GAS GATHERING. Gathering revenues totaled $378,000 in 1996,
reflecting a decrease of $159,000 from 1995 gathering revenues of $537,000,
partially reflecting a decrease in system throughput during 1996. In addition,
$110,000 of 1995 revenue reflects the revision of the method of recording
certain gathering revenues. See Note 2 of Notes to the Virginia Gas Storage
Company's Financial Statements. Revenues from winter service sales totaled $1.1
million in 1996 compared to $888,000 in 1995 due to higher prevailing natural
gas sales prices. Purchased gas expenses related to these sales totaled $974,000
and $681,000 for 1996 and 1995, respectively.
17
<PAGE>
NATURAL GAS DISTRIBUTION. Distribution revenues increased to $629,000 in
1996 from $556,000 in 1995 partially due to an increase in residential and
commercial customers, reflecting 1996 expansions of distribution facilities in
Russell and Buchanan Counties and to an increase in the average sales price for
industrial customers. Purchased gas costs related to these sales totaled
$330,000 and $234,000 in 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
At June 30, 1997, the Company's working capital reflected a $519,000
deficit, a decrease from the $430,000 deficit at December 31, 1996. The
Company's current ratio was .87 at June 30, 1997, consistent with the ratio at
December 31, 1996. The combined working capital of the Early Grove Affiliate and
the Distribution Affiliate increased to a $1.4 million deficit at June 30, 1997
from the $600,000 deficit at December 31, 1996. The combined current ratio of
these companies was .58 at June 30, 1997.
INVESTING AND FINANCING ACTIVITIES
The Company's cash requirements in the past have been met out of cash
generated from operations, proceeds from the issuance of the Company's common
stock, amounts borrowed in conjunction with tax exempt bonds issued by the
Industrial Development Authorities of Russell and Buchanan Counties, Virginia in
addition to other borrowings. The Company's rapid pace of growth and the timing
of the completion of financing transactions periodically have limited the
Company's short term liquidity. On June 30, 1997, the Company had a cash balance
of $1,526,000 compared to $1,653,000 at December 31, 1996.
Capital investments of $3.2 million for the first six months of 1997 reflect
primarily continued development of the Saltville Facility ($1.7 million),
expansion of the Company's propane distribution operations ($1.1 million) and
development of the P-25 pipeline project ($200,000).
Capital investments of $11.6 million in 1996 reflect primarily the
development of the Saltville Facility ($10.3 million) and the P-25 pipeline
project ($900,000).
Capital investments of $2.3 million in 1995 reflect primarily the
development of the Saltville Facility ($800,000), development of other storage
facilities ($900,000) and development of the P-25 pipeline project ($400,000).
In October 1996, the Company completed an initial public offering of its
common stock. The offering resulted in the issuance of an additional 1,533,000
shares of common stock of the Company at $6 per share. Net proceeds realized
from the offering approximated $8 million.
In July 1996, the Company issued 42,000 shares of its common stock to an
officer of the Company. The net proceeds of the sale of these shares were
$252,000.
In May 1996, the Company issued 800,058 shares of its common stock to one
investor pursuant to a private placement. The net proceeds of the sale of these
shares was $4,401,317.
In September 1995, the Company issued and sold a total of 2,000 shares of
preferred stock in a private placement to a sole investor, Sirrom Capital
Corporation, at a price of $1,000 per share. Proceeds from the sale were used
for working capital, the retirement of debt and general corporate purposes. In
February 1997, the Company redeemed these shares at face value.
During 1995 the Company issued and sold a total of 124,316 shares of common
stock in conjunction with the exercise of stock options. Proceeds from the sales
totaled $496,000.
In February 1997 the Industrial Development Authority of Russell County (the
"Russell County Authority") issued its Subordinated Natural Gas Facilities
Revenue Bonds Series 1997 with principal of
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<PAGE>
$9,100,000 with interest at 9.5% per annum, repayable from 2002 to 2017.
Approximately $3.7 million of the proceeds was loaned by the Company to the
Distribution Affiliate pursuant to an unsecured note. The proceeds are being
used for construction of a natural gas distribution facility in and around the
town of Lebanon, Virginia and for related storage and pipeline facilities.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000
with interest at 9% per annum, repayable from 1999 to 2020. Approximately $3.7
million of the proceeds, received by the Company, was loaned to the Affiliates
pursuant to an unsecured note. Proceeds were used to extend existing natural gas
distribution facilities in and around the town of Grundy, Virginia, and for
related supporting pipeline gathering and storage facilities.
In November 1994, the Buchanan County Authority issued its Natural Gas
Revenue Bond Series A with principal of $4,250,000 with interest at an effective
rate of 8.88%, repayable from 1995 to 2017. The bonds were also issued in parity
with the Russell County Bonds discussed above. Approximately $3.6 million of the
proceeds, received by the Company, was loaned to the Affiliates. Proceeds were
used to construct a natural gas distribution facility in and around the town of
Grundy, Virginia, and for related supporting exploration and production,
pipeline, and storage facilities.
In January 1994, the Russell County Authority issued its Natural Gas Revenue
Bond Series A and B with combined principal of $3,000,000 at an effective
interest rate of 7.35% per annum, repayable from 1996 to 2023. Approximately
$2.6 million of the proceeds, received by the Company, were loaned by the
Company to the Affiliates. Proceeds were used to construct a natural gas
distribution facility in and around the town of Castlewood, Virginia, and for
related supporting exploration and production, pipeline and storage facilities
in the amount of $2,630,000 and to retire $370,000 of long-term debt.
19
<PAGE>
BUSINESS
OVERVIEW
Virginia Gas Company (the "Company"), directly or through Affiliates, is
primarily engaged in the exploration, production, marketing, gathering, storage,
and distribution of natural gas, and distribution of propane gas. The Company's
principal assets are located in the Commonwealth of Virginia, a region which is
experiencing significant economic growth and increasing demand for natural gas
and has access to three major interstate gas pipeline systems.
The Company's existing and planned assets comprise: (i) interests in 85
natural gas wells with proved developed reserves of approximately 2.6 Bcf; (ii)
gathering systems with over 102 miles of pipeline with a current annual
throughput of over 1.67 Bcf, connected to the interstate pipeline systems of
ETNG, CNG and TCO; (iii) two underground storage facilities with current
capacity of 2.2Bcf MMBtu; and (iv) 120 miles of intrastate pipeline under
development with planned aggregate daily throughput of approximately 50 MMcf/d.
The Company's business has developed in response to the growing need for
natural gas storage, pipelines and distribution in its market area, resulting
principally from economic growth and the impact of deregulation. Deregulation
has given natural gas customers more flexibility in negotiating their natural
gas purchases and transportation contracts. The Company's pipeline connections
to the ETNG, CNG, and TCO, and to the Company's adjacent storage facilities,
combine to create a hub which provides opportunities for more efficient gas
distribution, including to local, growing markets. At present, the Company's
business primarily consists of: (i) producing, gathering and marketing natural
gas from wells in which the Company has an ownership interest to municipal
distributors, local distribution companies and major oil and gas companies; (ii)
storing natural gas for municipal distributors and local distribution companies
which have supplied their own gas, or purchased it from third parties or the
Company; and (iii) distributing propane and natural gas purchased from third
parties or the Company to local industrial, commercial and residential
customers.
The Company's principal sources of revenue have varied depending on its
level of activity in any given segment of natural gas operations. From 1987
through 1992, substantially all of the Company's income was derived from
exploration, development and production of natural gas and from fees derived
from managing wells. From 1993 through 1996, the Company's income reflected the
growth of its storage operations. In 1996 and 1997, the Company initiated its
propane distribution and gas marketing operations, respectively. Today, the
Company is building transmission pipelines and expanding its storage capacity
and expects to derive future income primarily from natural gas storage and
transportation fees.
MARKET OVERVIEW
The Company anticipates that its business will benefit from the increasing
economic and natural gas consumption growth in the Commonwealth of Virginia and
surrounding states. The U.S. Department of Energy has forecasted that natural
gas consumption will continue a trend that has seen gas consumption rise 32%
nationwide and 77% in Virginia between 1986 and 1995. Management believes that
current upward trends in the economy, a favorable regulatory environment, the
deregulation of the industry which has resulted in end-users' ability to
purchase gas on a competitive basis from a greater variety of sources, and the
increasing availability of natural gas as a form of energy for residential,
commercial and industrial markets will enable the Company to expand into new
markets and to better develop its current markets. Management believes that it
is well positioned in its market area to capitalize on the opportunities
prevalent in the natural gas industry.
STRATEGY
The Company's objective is to enhance earnings and cash flow by becoming a
leading integrated natural gas company in its market area. The Company's
strategy to achieve this objective is to construct
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<PAGE>
pipeline systems, increase the utilization of its existing storage facilities,
and aggressively pursue end-user customers. The Company intends to implement
this strategy through the following steps:
CONSTRUCT PIPELINE SYSTEMS. The Company is currently in the process of
acquiring rights-of-way and receiving state approval for the construction of the
P-25 intrastate pipeline which will connect its Saltville Facility to growing
markets in Smyth, Wythe and Pulaski Counties in southwestern Virginia. The
Company also intends to build the P-24 intrastate pipeline which will connect
its Saltville Facility to the CNG interstate pipeline. These pipelines will
allow the Company to develop a transportation business, capture additional peak
storage business, connect to increased supply sources for existing and growing
markets and provide customers with greater flexibility in managing their gas
resources.
INCREASE UTILIZATION OF EXISTING STORAGE FACILITIES. Management believes
that the working gas capacities of the Saltville Facility and the Early Grove
Facility can be increased to 10 Bcf and 2.2 Bcf, respectively, from their
current capacities of 0.6 Bcf and 1.6 Bcf, respectively. By increasing storage
capacity through the opportunities created by the P-24 and P-25 pipelines, the
Company expects to be able to provide additional peak storage service to
existing and new customers and to thereby enhance the profitability of its
storage operations.
PURSUE END-USER CUSTOMERS. As a result of recent regulatory changes,
natural gas customers have more flexibility to negotiate their natural gas
purchases, storage services, and transportation contracts. The Company is
actively pursuing direct sales to these end-users, such as local distribution
companies, industrial plants and municipalities, which are seeking alternative
supplies to meet their energy needs. The Company is distributing propane to
offer alternative energy choices to customers in its service area who may elect
to use propane gas or who may not otherwise be serviced with natural gas.
BUSINESS ACTIVITIES
The Company's principal business activities are as follows:
STORAGE OPERATIONS
The Company has the only two underground natural gas storage facilities in
the Commonwealth of Virginia: The Saltville Facility, located in Smyth and
Washington counties, (owned by the Company) and the Early Grove Facility,
located in Scott and Washington Counties (owned by the Early Grove Affiliate).
Customers contract for storage for annual periods ranging from one to 15 years,
which includes the heating season months of November through March. Contract
storage fees are prorated and paid in equal amounts over a twelve-month period,
with additional payments for injection and withdrawal fees. These contracts are
subject to termination if the storage facility operating company fails to
perform.
The Company is continually assessing the feasibility of developing
additional natural gas storage facilities in its area of operation and is
analyzing available geological and geophysical data and land records related
thereto.
SALTVILLE FACILITY. The Company has developed a high deliverability salt
cavern storage facility in Saltville, Virginia for use as a high rate, peak
usage storage facility. The Saltville Facility utilizes caverns created in
underground salt beds to store natural gas. The Company's engineering staff
believes the ultimate working gas capacity of the Saltville Facility could be up
to 10 Bcf. In June 1996, the Company filed an application with the VSCC for a
CPCN for the operation of the Saltville Facility as a storage facility. In July
1996, the VSCC issued an order authorizing the Company to begin service on an
interim basis using the rates set forth in the application. These interim rates
for 10-day, 60-day and 90-day service are $5.64, $1.86 and $1.50 per MMBtu
stored, respectively, plus $0.05 per MMBtu injected and $0.05 per MMBtu
withdrawn. In August 1996, the Company injected the first working gas into the
field. Peak daily withdrawal rates of 40,000 MMBtu were achieved in January
1997. Current customer commitments total 657,400 MMBtu of capacity, the current
maximum capacity of the Saltville Facility, for the 1997/1998 heating season.
21
<PAGE>
An industry company has an option to jointly develop with the Company other
storage caverns that are not part of the current and proposed Saltville Facility
operations. This company's participation in such development will be on a
50%-50% basis.
The Company currently services contracts for storage with the following
entities (contracted storage is expressed per contract year that includes the
heating season beginning in the year stated; revenues are expressed per calendar
year and include injection and withdrawal fees):
UNITED CITIES GAS COMPANY. Contracted annual storage is for 300,000 MMBtu
through 2011. The estimated annual revenues expected to be generated from this
contract are $1,722,000.
KNOXVILLE UTILITIES BOARD. Contracted annual storage is for 40,000 MMBtu,
increasing in 1997 to 90,000 MMBtu through 2000. The estimated annual revenues
expected to be generated from this contract are $516,600.
CITIZENS GAS UTILITY DISTRICT. Contracted annual storage is for 3,000 MMBtu
through 2006. The estimated annual revenues expected to be generated from this
contract are $17,220.
CITY OF ETOWAH, TENNESSEE. Contracted annual storage is for 2,000 MMBtu
through 2007. The estimated annual revenues expected to be generated from this
contract are $11,480.
HAWKINS COUNTY UTILITY DISTRICT. Contracted annual storage is for 180,000
MMBtu of 90-day service through 2006 and 5,000 MMBtu of 10-day service through
2007. The estimated annual revenues expected to be generated from these
contracts are $316,700.
SEVIER COUNTY UTILITY DISTRICT. Contracted annual storage is for 60,000
MMBtu through 2006. The estimated annual revenues expected to be generated from
this contract are $117,600.
ALCOA. Contracted annual storage is for 17,400 MMBtu through 2002. The
estimated annual revenues expected to be generated from this contract are
$99,876.
EARLY GROVE FACILITY. The Early Grove Facility is an underground natural
gas storage facility owned and operated by the Early Grove Affiliate. The Early
Grove Affiliate has received a CPCN from the VSCC, which authorizes it to engage
in the sale, transportation (including storage), or assignment of natural gas
and to charge rates approved by the VSCC. The Early Grove Facility has 29
storage wells, a certificated area of 2,900 acres, and has received approval to
charge rates for 60-day, 90-day, 120-day and 150-day service of $1.86, $1.50,
$1.33 and $0.85 per MMBtu stored, respectively, plus $.05 per MMBtu injected and
$.05 per MMBtu withdrawn.
Contracted storage volume for 60-day, 90-day and 150-day service has
increased from 520,000 MMBtu for the 1994/1995 heating season to 1,560,000 MMBtu
for the 1996/1997 heating season. The deliverability of the Early Grove Facility
has been increased by reworking existing wells, drilling new wells, injecting
additional base gas, installing new compression equipment and increasing the
maximum operating pressure of the field to 2,000 PSI from 1,400 PSI. Peak
January deliverability has been increased from 1,000 MMBtu to over 16,000 MMBtu
per day from 1992 to 1997. Further improvements, including drilling new wells,
adding additional base gas and increasing the maximum operating pressure to up
to 2,400 PSI, are planned. Management believes these improvements would increase
the field's capacity to 2,200,000 MMBtu in the future.
The Early Grove Affiliate currently has contracts for storage with the
following entities (contracted storage is expressed per contract year that
includes the heating season beginning in the year stated; revenues are expressed
per calendar year and include injection and withdrawal fees):
KNOXVILLE UTILITIES BOARD. Contracted annual storage is for 450,000 MMBtu
for 1997 through 2002. The estimated annual revenues expected to be generated
from this contract are $720,000.
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<PAGE>
POWELL-CLINCH UTILITY DISTRICT. Contracted annual storage is for 525,000
MMBtu for 1997, increasing an additional 75,000 MMBtu for each subsequent year
up to 975,000 MMBtu for 2002 and remaining at up to 975,000 MMBtu for each year
through 2009. The estimated annual revenues expected to be generated from this
contract are $498,750 per year in 1997, increasing to a maximum of $926,250 in
2002.
ROANOKE GAS COMPANY. Contracted annual storage is for 180,000 MMBtu for
1997 through 2007. The estimated annual revenues expected to be generated from
this contract are $288,000.
UNITED CITIES GAS COMPANY. Contracted annual storage is for 180,000 MMBtu
through the 2000 contract year. The estimated annual revenues expected to be
generated from this contract are $352,800.
PUBLIC UTILITY DISTRICT OF JEFFERSON AND COCKE COUNTIES. Contracted annual
storage is for 150,000 MMBtu from 1997 through 2002. The estimated annual
revenues expected to be generated from this contract are $142,500.
PIPELINE OPERATIONS
In 1996, the Company initiated environmental and feasibility studies for the
construction of the P-25 pipeline which will connect the Company's Saltville
Facility to the ETNG interstate pipeline system and transport natural gas to
growing markets in Smyth, Wythe and Pulaski Counties in southwestern Virginia.
These areas currently are served only by the ETNG pipeline, which has
insufficient capacity to meet the area's needs.
The first phase of construction of the P-25 pipeline consists of 20 miles of
pipe connecting the Company's Saltville Facility to the ETNG interstate pipeline
system and twinning the ETNG line to the town of Marion. The remaining phases
will extend the P-25 pipeline from Marion, Virginia to Radford, Virginia. The
Company has entered into a 15-year contract with United Cities Gas Company, the
local distribution company ("UCGC") which serves Smyth, Wythe and Pulaski
Counties, to provide pipeline capacity to supply 20,000 MMBtu per day, or 67% of
expected pipeline capacity. The Company has filed for a CPCN with the VSCC and
expects a decision by late 1997 or early 1998. At present, the Company is aware
of no reason why a CPCN would not be issued. Tariffs would be set by the VSCC
and charged by the Company for reserved capacity in the pipeline. The Company
expects to complete obtaining land easements and permits and to begin
construction upon obtaining the CPCN. Assuming no unforeseen impediment to its
development, the Company expects the P-25 pipeline to commence operations in
late 1998.
The Company has recently initiated environmental studies and acquisitions of
rights-of-way for permits for the construction of the P-24 pipeline. When
completed, the P-24 pipeline would connect the Company's Saltville Facility to
the CNG interstate pipeline system. The P-24 pipeline is expected to provide a
strategic interconnect between the ETNG and CNG interstate pipeline systems and
would result in additional sources of natural gas supply for the Company's
Saltville Facility.
NATURAL GAS AND PROPANE DISTRIBUTION OPERATIONS
The Company, through the Distribution Affiliate, owns and operates natural
gas distribution systems in Russell and Buchanan Counties in Virginia. The
Distribution Affiliate has a CPCN authorizing it to provide natural gas service
to Russell and Buchanan Counties. The Distribution Affiliate's tariffs to its
customers are set by the VSCC.
The Distribution Affiliate has a firm transportation service contract for a
ten-year term with ETNG for the heating season of November through March, and an
interruptible transportation contract with ETNG for the remainder of the year.
Any disruption accessing ETNG's pipeline could result in the Distribution
Affiliate's inability to serve its customers in the affected areas. See "Risk
Factors--Relationship with Other Pipeline Companies."
23
<PAGE>
The Distribution Affiliate recently completed construction of a 10-mile
pipeline providing service to the town of Lebanon in Russell County. The
Distribution Affiliate has entered into franchise agreements with the towns of
Richlands and Cedar Bluff in Tazewell County which adjoin the Distribution
Affiliate's current service areas and has applied to the VSCC for a CPCN to
provide natural gas service for Tazewell County and Dickenson County.
Restrictions under the Company's debt instruments may inhibit the Affiliate's
ability to develop these areas. See "Risk Factors--Company Indebtedness and
Restrictive Covenants."
The Company recently commenced distribution of propane gas in southwestern
Virginia. The Company believes that its ability to supply propane gas will
satisfy customers' desire for alternative fuel choices and will enable the
Company to expand market share by providing an alternative to natural gas in
areas where natural gas is not available. Because of shared costs and
similarities such as easily converted appliances, many natural gas utilities
provide both products to their customers. Customers often do not distinguish
between the two forms of gas when used in the home. The Company intends, in
part, to develop its propane distribution business through selective
acquisitions. In that regard, the Company acquired a portion of Blue Grass Oils
Incorporated's existing propane distribution business in Buchanan, Dickenson and
Russell Counties and in the western part of Tazewell County, Virginia in April
1997.
EXPLORATION, PRODUCTION, GATHERING AND MARKETING OPERATIONS
The Company's exploration and production operations consist of acquiring and
developing natural gas properties by acquiring mineral leases from landowners,
drilling and completing wells on the properties and building gas gathering
lines. These activities are typically organized on a joint venture basis with
third parties, with the Company acting as operator of the wells, retaining a
working interest in the project and receiving some promotional consideration.
The Company's net revenue interest in these wells typically averages 10 to 11%.
ACREAGE. The following table sets forth the gross and net acres of
developed and undeveloped natural gas mineral leases held by the Company as of
December 31, 1996. Undeveloped acreage includes leasehold interests which may
already have been classified as containing proved undeveloped reserves.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE(1) UNDEVELOPED ACREAGE
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
GROSS NET GROSS NET
------------- --------------- --------------- ---------------
Virginia.............................................. 11,096 3,537 2,239 2,239
West Virginia......................................... 257 21 -- --
------ ----- ----- -----
Total............................................. 11,353 3,558 2,239 2,239
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
- ------------------------
(1) Developed acreage is acreage assigned to producing wells for the spacing
unit of the producing formation. Developed acreage in certain of the
Company's properties that include multiple formations with different well
spacing requirements may be considered undeveloped for certain formations,
but has only been included as developed acreage in the presentation above.
GAS RESERVES. The Company has conducted an "in-house" estimate of the
Company's proved reserves, projected future production and estimated future net
revenues from production of proved reserves as of December 31, 1996. The
Company's estimates were based upon a review of production histories and other
geologic, economic, ownership and engineering data provided by the Company. In
determining the estimates of reserve quantities that are economically
recoverable, the Company used natural gas prices and estimated development and
production costs as of December 31, 1996. For further information concerning the
present value of future net revenues from the proved reserves, see Note 14 of
Notes to the Consolidated Financial Statements.
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<PAGE>
The following table sets forth gas reserve information estimated as of
December 31, 1996. The present values of estimated future net revenues
(discounted at 10% per annum) shown in the table are not intended to represent
the current market value of the proved reserves owned by the Company.
<TABLE>
<CAPTION>
PROVED RESERVES
---------------------------------------
<S> <C> <C> <C>
DEVELOPED UNDEVELOPED TOTAL
----------- --------------- ---------
Gas (MMcf)................................................................. 2,570 593 3,163
Present value of estimated future net revenues before income taxes (in
thousands)............................................................... $ 4,601 $ 1,194 $ 5,795
Present value of future net cash flow after income taxes (in thousands).... $ 2,848 $ 785 $ 3,633
</TABLE>
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth herein represent only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment and the existence of development plans. As a result,
estimates of different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of such estimates. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered. Further, the
estimated future net revenues from proved reserves and the present value thereof
are based upon certain assumptions, including geologic success, prices (which
are higher during the heating season), future production levels and costs, that
may not prove correct over time. Predictions about prices and future production
levels are subject to great uncertainty, and the meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they are based. Oil and gas prices have fluctuated widely in recent years. The
weighted average sales price utilized for the purposes of estimating the
Company's proved reserves and future net revenues therefrom as of December 31,
1996 was $4.23 per Mcf., which was a significantly higher price than present
prices due to seasonal changes and unusually high prices for the 1996/1997
heating season. The Company estimates that, if all other factors (including the
estimated quantities of economically recoverable reserves) were held constant, a
$0.10 per Mcf. decline in gas price from that used in the reserve reports would
reduce such present value by approximately $152,000. See "Risk
Factors--Uncertainty of Propane and Natural Gas Prices, Supplies and Demand."
PRODUCTION. All of the Company's wells produce primarily gas. The following
table sets forth the Company's gas production and sales data during the period
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Net production:
Gas (Mcf)................................................................................. 161,995 160,798
Average sales price per unit:
Gas (Mcf)................................................................................. $ 2.53 $ 1.47
Average net production cost ($/Mcf)....................................................... $ 0.22 $ 0.20
</TABLE>
The Company owned interests in 85 gross (21 net) natural gas wells as of
December 31, 1996. A well is categorized under state reporting regulations as an
oil well or a gas well based upon the ratio of gas to oil produced when it first
commenced production, and such designation may not be indicative of current
production.
DRILLING ACTIVITY. The Company has not drilled or completed any wells since
1994.
25
<PAGE>
OIL FIELD SERVICE OPERATIONS. The Company engages in the business of
supervising drilling operations and operating producing wells. As of December
31, 1996 the Company operated 80 wells located in Virginia and West Virginia. As
operator of producing wells, the Company is responsible for the maintenance and
verification of all production records, contracting for gas sales, distribution
of production proceeds and information, and compliance with various state and
federal regulations. Generally, the Company provides the routine day-to-day
production operations for producing wells and is paid for such services on a per
well, monthly fee basis.
GAS GATHERING OPERATIONS. The Early Grove Affiliate and the Company operate
various unregulated gas gathering systems located mainly in Dickenson and
Buchanan Counties in Virginia which connect the Company's operated wells to
interstate pipelines. The gathering systems consist of 102.6 miles of pipeline,
two 640 horsepower compressor stations and one 120 horsepower compressor
station. The gathering systems connect the Company's gas production to the ETNG,
CNG and TCO interstate pipeline systems as well as to the Distribution
Affiliate's distribution system. Total 1996 throughput for the Company's
gathering systems was 1.67 Bcf.
For such gas gathering services, the Company collects certain transportation
allowances from producers (owners of natural gas). Transportation allowances
vary depending upon contractual arrangements and currently range from $0.05 to
$0.50 per MMBtu.
MARKETING. In 1997 the Company commenced marketing operations of natural
gas. The Company currently markets and sells natural gas provided from
Company-operated wells and facilities. The Company anticipates that future
expansion of its marketing operations will include purchases of natural gas
supplies from third party sources, storing these supplies in its Saltville
Facility and marketing these supplies to its customers.
COMPETITION
The Company competes with major utility companies and pipeline companies in
the areas of utility services and pipeline operations. The deregulation of the
natural gas industry has provided the Company with marketing and transportation
opportunities; however, other pipeline companies, marketers and brokers with
resources far greater than the Company likewise are the beneficiaries of such
deregulation. While the Company and the Early Grove Affiliate currently own and
operate the only underground natural gas storage facilities in Virginia, it is
possible that other distribution and marketing companies could develop other
underground natural gas storage facilities and companies could rely on other
methods of storage such as above-ground stored liquefied natural gas. The
Company competes in the areas of exploration, production, transportation and
marketing of natural gas and distribution of propane with major oil companies,
other independent oil and gas concerns and individual producers and operators.
Many of the Company's competitors have substantially greater financial and other
resources than the Company.
REGULATION
VSCC REGULATION. The Company's and its Early Grove Affiliate's storage
operations are regulated primarily by the VSCC and the FERC, which has
jurisdiction over interstate sales of storage services. Storage rates are
subject to VSCC approval and are based on the cost of service of the facility,
which provide for an approved rate of return. A facility can apply for revised
rates based on actual costs if they are higher than previously anticipated and
conversely the VSCC may require a reduction in rates if returns are higher than
anticipated. Management believes that the rates currently in effect are adequate
to cover the cost of service and achieve the desired rate of return.
The Company's non-gathering pipeline operations will also be regulated by
the VSCC. In January 1997, the Company filed an application for a CPCN to
operate one of the pipelines. The Company has also filed with the VSCC proposed
transportation rates on the basis of revenues, expenses and investments.
26
<PAGE>
Substantially all of the operations conducted through these pipelines would
constitute common carrier pipeline activities. Such common carrier activities
are those under which transportation in the pipeline is available at tariff
rates published with the VSCC to any shipper of natural gas who requests such
services, provided that each product for which transportation is requested
satisfies the conditions and specifications for transportation.
The distribution operations of the Distribution Affiliate are also regulated
by the VSCC, which regulates the rates which may be charged to end-users,
setting them at levels sufficient to recover the cost of service to its
customers including an approved rate of return. Management believes the rates
currently in effect are adequate to cover the cost of service and achieve the
desired rate of return.
The Company's gathering facilities and propane distribution operations are
not subject to service or rate regulation from the VSCC.
FERC REGULATION. The Company's operations either are not governed by, or by
virtue of limited jurisdiction certificates having been issued by FERC, are
exempt from, further regulation by FERC under the Natural Gas Act.
ENVIRONMENTAL AND SAFETY REGULATION. The pipeline operations of the Company
are subject to various federal, state and local environmental laws. In
particular, operations in Virginia are subject to the Virginia Clean Air Act as
administered by the Virginia Department of Environmental Quality ("VDEQ"). The
Virginia Clean Air Act restricts emissions from wells, pipelines and processing
plants, and the VDEQ may curtail operations not meeting minimum standards. The
design, construction, operation and maintenance of the Company's jurisdictional
gas pipeline facilities are subject to the safety regulations established by the
United States Department of Transportation pursuant to the Natural Gas Pipeline
Safety Act of 1968, as amended, or by state agency regulations meeting the
requirements thereunder. The Company is also subject to other federal, state and
local laws covering the handling or discharge into the environment of materials
used by the Company, or otherwise relating to protection of the environment,
safety and health.
Expenditures for environmental control facilities and for remediation have
not been significant in relation to the results of operations of the Company.
The Company believes, however, that it is reasonably likely that the trend in
environmental legislation and regulations will continue to be toward stricter
standards. The Company is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on the
Company's results of operations, but there can be no assurance such standards
will not be adopted in the future.
The Company has designated an officer whose responsibility is to monitor
environmental compliance and potential environmental liabilities at its
facilities. No assessment has found any material environmental noncompliance or
cleanup liabilities the cost of which would have, in the aggregate, a material
effect on the Company's results of operations. However, assessments have not
been performed on all of the Company's facilities.
TITLE TO PROPERTIES
Substantially all of the properties comprising the Early Grove Facility and
the Saltville Facility are situated on land not owned by the Early Grove
Affiliate or the Company.
The Early Grove Affiliate's rights to develop and operate the Early Grove
Facility are derived from its ownership of mineral leasehold rights and from
surface easements.
The Company's rights to develop and operate the Saltville Facility are
derived from a deed from the Industrial Development Authority of the town of
Saltville. The deed provides the Company with rights to store gas, rights to use
any facilities and surface area for natural gas storage use and rights to remove
salts to create cavities for natural gas storage. The deed encompasses
approximately 11,000 acres of storage rights in Washington and Smyth Counties,
Virginia.
27
<PAGE>
The Company's existing pipelines, and gathering systems and distribution
systems are situated on land not owned by the Company but as to which the
Company and its Affiliates have easements from the landowners permitting the use
of such land for the construction and operation of pipeline facilities. The
Company has received or intends to receive franchises, easements, licenses,
permits and other authorizations to construct and operate proposed or future
pipelines, gathering systems and distribution systems within the jurisdiction of
various cities, counties and other government agencies and jurisdictions, as
well as along and across waterways and rights-of-way for federal, state, county
and city highways, streets and roads.
Substantially all of the Company's producing property interests are held
pursuant to leases from third parties. The Company has obtained title opinions
on substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the natural gas industry. The Company's producing properties are
subject to customary royalty interests, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such producing properties.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company and its Affiliates are subject to the usual
hazards incident to the storage, distribution, exploration for and production of
natural gas and the distribution of propane. These hazards can result in
substantial losses to the Company and its Affiliates due to personal injury and
loss of life, severe damage to and destruction of property and equipment,
pollution or environmental damage or suspension of operations. The Company and
its Affiliates maintain insurance coverage against such risks as are customarily
insured against by other businesses in the industry. For the Company, these
coverages include $2,000,000 ($1,000,000 per occurrence) of general liability
insurance (which insurance is provided in separate policies covering separate
operations), excess liability insurance in the amount of $25,000,000, workers'
compensation insurance and property and automobile insurance. Based on loss
experience, the Company believes that it and its Affiliates currently have
adequate insurance coverage. Their insurance, however, does not cover every
potential risk associated with the storage, distribution, drilling and
production of natural gas and the distribution of propane. In particular,
coverage is not obtainable for certain types of environmental hazards. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, would have a material adverse effect on the results of
operations of the Company. Moreover, no assurance can be given that the Company
and its Affiliates will be able to maintain adequate insurance in the future at
rates it considers reasonable.
LITIGATION
There is no pending nor, to the knowledge of the Company, any contemplated
litigation against the Company or its Affiliates which could have a material
adverse effect on their financial position or which is considered other than
routine litigation incidental to the Company's business.
OFFICE FACILITIES
The Company currently owns its headquarters office building in Abingdon,
Virginia, subject to a mortgage. This building contains 1,927 square feet of
office space. In addition, the Company leases 5,700 square feet of office space
in a building adjacent to its headquarters building.
EMPLOYEES
As of June 30, 1997, the Company employed 44 persons on a full time basis,
none of whom is covered by a collective bargaining agreement. The Company
considers its relations with its employees to be excellent.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Michael L. Edwards.......................... 44 Chairman of the Board and President
Karen K. Edwards............................ 39 Vice President, Secretary, Treasurer and Director
Frank A. Merendino, Jr...................... 36 Vice President of Operations
John D. Jessee.............................. 36 Vice President and Chief Financial Officer
Mark N. Witt................................ 38 Vice President of Strategic Planning
Allan R. Poole, II.......................... 50 Vice President and Director
Stacey D. Varney............................ 24 Vice President and Assistant Secretary
Peter C. Einselen........................... 57 Director
Charles A. Mills, III....................... 50 Director
</TABLE>
MICHAEL L. EDWARDS. Mr. Edwards has served as President and Chairman of the
Board of the Company since its formation in 1987. His term as a director expires
in 1999. Mr. Edwards also serves as President of each of the Company's
subsidiaries and its Affiliates. From 1983 to 1986 he served as Executive Vice
President and Director of Petroleum Development Corporation. Mr. Edwards is the
husband of Karen K. Edwards.
KAREN K. EDWARDS. Ms. Edwards has served as Vice President, Secretary,
Treasurer and Director of the Company since its formation in 1987. Her term as a
director expires in 1998. Ms. Edwards also serves as Vice President and
Secretary of each of the Company's subsidiaries and its Affiliates. She is the
wife of Michael L. Edwards.
FRANK A. MERENDINO, JR. Mr. Merendino has served as Vice President of
Operations of the Company since 1991. He was employed by the Company as
Engineering Manager in 1990. Mr. Merendino was employed as a production engineer
by Equitable Resources Exploration from 1986 to 1990. He was employed from 1984
to 1986 as a petroleum engineer by Doran & Associates.
JOHN D. JESSEE. Mr. Jessee has served as Vice President and Chief Financial
Officer of the Company since 1995. He was employed by Eastman Chemical Company
from 1994 to 1995. Mr. Jessee was employed by the Company as controller from
1992 to 1994. He was employed as controller of the golf division of The United
Company from 1989 to 1992. He was employed by Price Waterhouse from 1984 to
1989.
MARK N. WITT. Mr. Witt has served as Vice President of Strategic Planning
since 1994. He also served as Director of the Company from 1994 to May 1996.
From 1984 to 1994 Mr. Witt was employed as financial controller for global gas
for British Petroleum Co., PLC. From 1980 to 1984 he was employed by KPMG Peat
Marwick in Houston, Texas.
ALLAN R. POOLE, II. Mr. Poole has served as Vice President of the Company
since April 1996 and as a Director since September 1996. His term as a director
expires in 1998. Mr. Poole served as Vice President of Penn Virginia Resources
Corporation from 1989 to 1995. From 1978 to 1989 he was employed as regional
manager of Cabot Oil & Gas Corporation. Mr. Poole was employed as a senior
landman by Consolidated Gas Supply Corporation from 1971 to 1978.
STACEY D. VARNEY. Ms. Varney was recently appointed Vice President and has
served as Assistant Secretary of the Company since October 1996. In May 1995 she
joined the Company as Marketing Manager. Before joining the Company, she
graduated from Clinch Valley College of the University of Virginia and was
employed by Penn Virginia Oil and Gas Corporation in 1994 as an accountant.
29
<PAGE>
PETER C. EINSELEN. Mr. Einselen has served as a director of the Company
since May 1996. His term as director expires in 2000. Mr. Einselen has served as
Senior Vice President of Anderson & Strudwick Incorporated since 1990. From 1983
to 1990, he was employed by Scott & Stringfellow, Incorporated, Richmond,
Virginia.
CHARLES A. MILLS, III. Mr. Mills has served as a Director of the Company
since September 1996 and has been employed by Anderson & Strudwick Incorporated
as a Senior Vice President since 1986. He served as Chairman of the Board of
Anderson & Strudwick Incorporated from 1990 to 1992 and from 1994 to the
present. His term as a director of the Company expires in 2000. He has served as
a director of Humphrey Hospitality Trust, Inc. since 1994.
Directors of the Company receive $2,500 for attending each quarterly Board
of Directors meeting. The executive officers of the Company are elected annually
by the Board of Directors. The executive officers serve terms of one year or
until their resignation or removal.
The bylaws of the Company provide that the Board of Directors shall be
comprised of five persons divided into three classes of directors, with each
class serving staggered three year terms. The by laws may only be amended with
the approval of holders of 75% of the outstanding shares of stock of the
Company. The classification of the directors makes it more difficult for
shareholders to change the composition of the Board of Directors. The Company
believes, however, that the longer time required to elect a majority of a
classified board of directors will help ensure continuity and stability of the
Company's management and policies.
The classification provisions may also have the effect of discouraging a
third-party from accumulating large blocks of the Common Stock of the Company or
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its shareholders. Accordingly, shareholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case. See "Description of
Securities--Certain Provisions of Certificate of Incorporation and Delaware
Law."
Pursuant to a Shareholders' Agreement and Voting Trust entered into on May
31, 1996, between Michael L. Edwards, Karen K. Edwards and Dr. James T. Martin,
these shareholders assigned all of their shares to Michael L. Edwards as trustee
for a period of five years. Mr. Edwards is directed in the agreement to vote
these shares for three nominees for director selected by Mr. Edwards and two
nominees selected by Dr. Martin. Pursuant to this agreement Peter C. Einselen,
Senior Vice President of Anderson & Strudwick Incorporated, was elected as Dr.
Martin's nominee for director. Pursuant to this agreement, the Edwards' nominee,
Allan R. Poole, II, and Dr. Martin's nominee, Charles A. Mills, III, a Senior
Vice President and Chairman of the Board of Anderson & Strudwick Incorporated,
were each elected to serve as directors.
Anderson & Strudwick Incorporated received a fee of $348,028 as a result of
the sale of the Company's Common Stock to Dr. Martin and has underwritten four
tax exempt bond offerings through which the Company has borrowed $20,100,000. It
receives a fee equal to 0.125% of the outstanding principal amount of the bonds
for bondholder services. Anderson & Strudwick Incorporated received commissions
totaling $610,375 from the two bond offerings which closed during the last two
years. In addition Anderson & Strudwick Incorporated served as underwriter for
the Company's initial public offering of its Common Stock in 1996 for which it
received fees of $735,840 and warrants exercisable for 153,300 shares at an
exercise price of $9.90 per share, which are subject to a shelf registration
statement.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that, to the fullest extent permitted by
the Delaware General Corporation Law, no director shall be personally liable to
the Company or its shareholders for monetary damages for the breach of fiduciary
30
<PAGE>
duty in such capacity, except that liability is not eliminated (i) for breach of
the director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions by the director not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent
declaration of an unlawful dividend, stock purchase or redemption, or (iv) for
any transaction from which such director received an improper personal benefit.
In addition, the Company's bylaws provide generally for indemnification by the
Company for all officers, directors, employees or agents to the fullest extent
permitted by Delaware law.
The Company has been advised that insofar as any of the foregoing provisions
may be invoked to disclaim liability for damages arising under the Securities
Act, it is the opinion of the Securities and Exchange Commission that such
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
EXECUTIVE COMPENSATION
The following table presents information concerning the annual and long-term
compensation of the executive officers whose salary and bonus were greater than
$100,000 in 1996. This table presents compensation for services rendered in all
capacities to the Company in 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION(2)
- ----------------------------------------------------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C>
Michael L. Edwards................................... 1996 $ 150,000 $ 50,727 $ 2,889
President and Chief Executive Officer 1995 150,000 -- 1,524
1994 102,086 20,661 3,000
Frank A. Merendino, Jr............................... 1996 82,500 26,429 6,496
Vice President of Operations 1995 82,500 16,382 422
1994 75,000 8,728 1,174
John D. Jessee....................................... 1996 82,500 25,628 7,074
Vice President and Chief Financial Officer 1995 31,250 -- --
1994 34,567 7,312 --
</TABLE>
- ------------------------
(1) Amounts include cash compensation earned and received by the named officers
as well as amounts deferred under a 401(k) Savings Plan.
(2) Amounts shown include Company contributions to a 401(k) Savings Plan,
vehicle allowances and directors' fees.
EMPLOYMENT AGREEMENT
On May 23, 1996, the Company entered into a ten-year employment agreement
with Michael L. Edwards which provides for an annual salary of $155,000. Mr.
Edwards will also receive annual bonuses computed on the basis of 10% of the
Company's pre-tax earnings on all amounts from $1,000,000 to $1,999,999 and 15%
of the Company's pre-tax earnings on all amounts in excess of $2,000,000,
provided his bonus for 1996 was $50,000. Payment of this bonus has been
deferred. In the event Mr. Edwards' employment is terminated by the Company for
any reason other than for cause during the term of the employment agreement, at
the election of Mr. Edwards the Company will be obligated to purchase all or a
portion of the shares held by him and/or his wife at a price equal to 150% of
the market value of the Company's shares on the date of termination. In
addition, the Company will be obligated to pay Mr. Edwards in a lump sum all
salary amounts payable to Mr. Edwards through the term of the employment
agreement plus an additional $2,000,000.
31
<PAGE>
EMPLOYEE BENEFIT PLANS
The Company sponsors a qualified tax deferred savings plan in accordance
with the provisions of Section 401(k) of the Internal Revenue Code. Employees
may defer up to 20% of their compensation, subject to certain limitations.
Effective July 1, 1996, the Company matches 100% of permitted employee
contributions.
EMPLOYEE STOCK PURCHASE LOANS
On May 17, 1996, the Board of Directors of the Company approved a plan
whereby the Company made available to certain key employees five year
interest-free loans for the purpose of purchasing a total of 40,000 shares of
the Company's Common Stock at a purchase price of $6.00 per share, which was the
fair market value of the shares on that date. In the event an employee who has
been given a loan pursuant to this plan terminates his employment with the
Company at any time prior to the due date of the loan, the loan is then
immediately due and payable, with interest from the date of the loan at prime
rate plus 2%, compounded monthly. All certificates for shares issued under this
plan to a key employee shall be held by the Company as security until the loan
is paid in full. On July 31, 1996, the Company made a loan of $90,000 to Michael
L. and Karen K. Edwards to purchase 15,000 shares and $90,000 to Allan R. Poole
II, to purchase 15,000 shares.
KEY MAN INSURANCE
The Company maintains a key man life insurance policy in the amount of
$2,000,000 on the life of Michael L. Edwards. The Company is the beneficiary of
this policy.
32
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of Common
Stock held beneficially by the owners of more than five percent of the Company's
issued and outstanding Common Stock as of June 30, 1997 or by directors or
officers of the Company:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF
BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
- ------------------------------------------------------------------------------------- ----------- -----------------
<S> <C> <C>
Dr. James T. Martin.................................................................. 800,058 19.41%
Tupenny House
Tuckerstown, Bermuda
Michael L. and Karen K. Edwards...................................................... 746,226(1) 18.10%
200 East Main Street
Abingdon, Virginia 24210
Michael L. Edwards................................................................... 3,600 0.09%
200 East Main Street
Abingdon, Virginia 24210
Frank A. Merendino, Jr. ............................................................. 38,742(2) 0.94%
135 Douglas Lane
Bristol, Tennessee 37620
Mark N. Witt......................................................................... 136,316(3) 3.31%
288 Clubhouse Drive
Abingdon, Virginia 24211
John D. Jessee....................................................................... 4,200 0.10%
152 Kennedy Drive
Lebanon, Virginia 24266
Allan R. Poole, II................................................................... 57,000 1.38%
1032 Hanover Court
Kingsport, Tennessee 37660
Peter C. Einselen.................................................................... 5,000 0.12%
1 King Street
St. Augustine, Florida 32084
Charles A. Mills, III................................................................ 2,000 0.05%
3 Commercial Place, Suite 100
Norfolk Southern Tower
Norfolk, Virginia 23510
Includes all executive officers and directors as a group............................. 993,084 24.09%
</TABLE>
- ------------------------
(1) Includes 363,663 shares which may be issued to Mr. and Mrs. Edwards upon
exercise of a warrant.
(2) Includes 8,371 shares which may be issued to Mr. Merendino upon exercise of
a warrant.
(3) Includes 127,920 shares which may be issued to Mr. Witt upon exercise of an
option. Mr. Witt's option provides that he is entitled to purchase 2% of the
Company's outstanding Common Stock on a fully diluted basis.
33
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,204,906 shares of
Common Stock outstanding (5,504,906 shares if the Underwriters' over-allotment
option is exercised in full). The 2,000,000 shares sold in this Offering
(2,300,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely transferable without restriction, unless purchased by
persons deemed to be "affiliates" of the Company (as that term is defined under
the Securities Act). Substantially all of the remaining 3,204,906 shares of
Common Stock outstanding immediately following the Offering will be transferable
without restriction, except for approximately 1,293,188 shares owned by persons
deemed to be affiliates of the Company (as that term is defined under the
Securities Act) which will be subject to certain volume restrictions under Rule
144 under the Securities Act. A total of 943,149 shares are issuable upon
exercise of warrants at an exercise price of $9.90 per share registered pursuant
to a currently effective shelf registration (the "Registered Warrants").
Warrants representing 789,849 shares are exercisable commencing August 3, 1997.
Warrants representing 153,300 shares are exercisable on October 4, 1997. An
additional 247,920 shares of Common Stock are issuable pursuant to the exercise
of options, of which options for 127,920 shares are presently exercisable.
In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) including an affiliate, who has beneficially owned his
shares for one year, may sell in the open market within any three-month period a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 5,200 shares
immediately after this Offering, or 5,500 if the Underwriters' over-allotment
option is exercised in full) or (ii) the average weekly trading volume in the
Common Stock on the Nasdaq during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is deemed not
to have been an "affiliate" of the Company at any time during the 90 days
preceding a sale by such person and who has beneficially owned his shares for at
least two years, will be able to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradable without restrictions or registration under the Securities Act, unless
thereafter held by an "affiliate" of the Company.
The Company's executive officers and directors and certain stockholders of
the Company who collectively own an aggregate of 1,293,188 shares of Common
Stock have agreed that they will not, directly or indirectly, offer, sell,
contract to sell, make a short sale, pledge or otherwise dispose of any shares
of Common Stock (or any securities convertible into or exchangeable or
exercisable for any other rights to purchase or acquire Common Stock) for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Ferris, Baker Watts, Incorporated.
The Company has agreed that for a period of 180 days following the date of
this Prospectus it will not, without the prior written consent of Ferris, Baker
Watts, Incorporated, directly or indirectly, issue, offer, sell, offer to sell,
contract to sell, grant any option to purchase, pledge or otherwise dispose (or
announce any such issuance, offer, sale, offer of sale, contract of sale, grant
of any option to purchase, pledge or other dispostion) any shares of Common
Stock or any other equity securities of the Company except for the shares of
Common Stock offered hereby and shares issued pursuant to the exercise of
options or warrants outstanding on the date hereof.
After the 180-day period, the shares of Common Stock subject to the
restriction will be eligible for sale in the public market.
34
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company has authorized 10,000,000 shares of Common Stock, par value
$.001 per share. As of June 30, 1997 there were 3,204,906 shares of Common Stock
issued and outstanding. In addition, options and warrants for 1,191,069 shares
are currently outstanding. The holders of Common Stock are entitled to one vote
per share and to share ratably on a share for share basis with respect to any
dividends when, as and if declared by the Board of Directors out of legally
available funds. See "Dividend Policy." Upon the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, holders of Common
Stock are entitled to share ratably, after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights, except those rights granted to certain
option and warrant holders, and no right to convert their Common Stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock offered hereby will be, fully paid and nonassessable.
SHAREHOLDERS' AGREEMENT AND VOTING TRUST
A Shareholders' Agreement and Voting Trust (the "Voting Trust Agreement")
was entered into effective May 31, 1996, by the Company, Michael L. Edwards,
Karen K. Edwards and Dr. James T. Martin. Simultaneous with the execution of his
subscription for 800,058 shares of the Company's Common Stock, Dr. Martin
executed the Voting Trust Agreement providing for the delivery of his shares
along with those of Mr. and Ms. Edwards to Mr. Edwards as trustee for a period
of five years from the date of assignment. The Voting Trust Agreement provides
that Mr. Edwards as trustee must vote the shares at all meetings of the
Company's shareholders in favor of the election of two nominees to the Board of
Directors selected by Dr. Martin and three nominees to the Board of Directors
selected by Mr. Edwards. The withdrawal of the Common Stock pursuant to the
Voting Trust Agreement may only be accomplished by unanimous agreement of the
parties. The beneficial ownership of the shares underlying the Voting Trust
Agreement is assignable. Dividends payable on the underlying shares are
distributable by the trustee to the shareholders. If Dr. Martin decides to sell
5% or more of the outstanding shares of the Company held by him to a third
party, he must first give notice to the Company and offer the Company the right
to purchase the shares pursuant to a right of first refusal. If a purchaser
acquires 10% or more of the shares held by Dr. Martin, such purchaser must
become a party to the Voting Trust Agreement.
PREFERRED STOCK
The Company has authorized 2,000 shares of Preferred Stock, no par value,
none of which is issued and outstanding.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") contains certain provisions that may have the effect of delaying,
deferring or preventing a change of control of the Company. Specifically, the
Certificate provides that to effect: (i) any amendment to the Certificate or the
bylaws; (ii) a merger, dissolution, reorganization (including by share exchange)
or recapitalization of the Company; or (iii) a sale of all or substantially all
of the assets of the Company, the stockholders of the Company must approve the
transaction by an affirmative vote of the holders of 75% of the Company's
capital stock entitled to vote thereon. This increases the percentage that would
otherwise be required under Delaware law to approve such actions, and thus may
make it more difficult to effect a takeover of the Company. Further, the
Company's by laws provides that members of the Company's Board of Directors are
elected to terms that are staggered.
35
<PAGE>
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
shareholder for a period of three years after that person became an interested
shareholder, unless: (i) prior to such time, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the shareholder becoming an interested shareholder; (ii) upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of shareholders, and not by written
consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting
stock which is not owned by the interested shareholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested shareholder; (ii) any
sale, transfer, pledge or other disposition involving the interested shareholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested shareholder
(except proportionately as a shareholder); (iv) any transaction involving the
corporation which has the effect of materially increasing the proportionate
share of the stock of any class or series of the corporation beneficially owned
by the interested shareholder; or (v) the receipt by the interested shareholder
of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested shareholder as any entity or person beneficially owning 15% or
more of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank of North Carolina, Charlotte, North Carolina.
36
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the form of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part (the "Underwriting Agreement"), the Company has
agreed to sell the number of shares of Common Stock to Ferris, Baker Watts,
Incorporated (the "Underwriter"), and the Underwriter has agreed to purchase the
aggregate number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Ferris, Baker Watts, Incorporated..........................................
-----------------
Total.................................................................... 2,000,000
-----------------
-----------------
</TABLE>
The nature of the Underwriter's obligations under the Underwriting Agreement
is such that all shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriter, must be purchased if
any are purchased. The Underwriting Agreement provides that the obligations of
the Underwriter to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such public offering price less a selling concession not in excess of
$ per share. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other underwriters or
to certain other brokers or dealers.
The Company has granted the Underwriter an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 300,000
shares of Common Stock to cover over- allotments, at the same price per share to
be paid by the Underwriter for the other shares offered hereby. The Underwriter
may purchase such shares only to cover over-allotments, if any, in connection
with the Offering made hereby.
The executive officers, directors and certain stockholders of the Company
have agreed that they will not offer, sell, contract to sell or grant an option
to purchase or otherwise dispose of any shares of Common Stock, options to
acquire shares of Common Stock or any securities exercisable for or convertible
into Common Stock owned by them, in the open market, for a period of 180 days
from the date of this Prospectus, without the prior written consent of the
Underwriter. The Company has agreed not to offer, sell or issue any shares of
Common Stock, options to acquire Common Stock or securities exercisable for or
convertible into shares of Common Stock for a period of 180 days after the date
of this Prospectus, without the prior written consent of the Underwriter, except
that the Company may issue securities upon the exercise of all outstanding stock
options and warrants.
The Company and the Underwriter have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act, which may
arise out of or be based upon any untrue statement or alleged untrue statement
of any material fact made by the indemnifying party and contained in this
Prospectus, the Registration Statement, any supplement or amendment thereto, or
any documents filed with state securities authorities, or any omission or
alleged omission of the indemnifying party to state a material fact required to
be stated in any such document or required to make the statements in any such
document, in light of the circumstances in which they are made, not misleading.
The Underwriter intends to make a market in the securities of the Company,
as permitted by applicable laws and regulations. The Underwriter, however, is
not obligated to make a market in such securities and any such market making may
be discontinued at any time at the sole discretion of the Underwriter.
37
<PAGE>
The Underwriter has informed the Company that it does not intend to confirm
any sales to accounts over which they exercise discretionary authority.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to one percent of the gross offering proceeds.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Bright & Barnes, a Professional
Corporation, Oklahoma City, Oklahoma. Venable, Baetjer, Howard & Civiletti LLP,
Washington, D.C. has acted as counsel for the Underwriter with respect to
certain legal matters relating to the Common Stock offered hereby.
EXPERTS
The financial statements of the Company, and the financial statements of
Virginia Gas Storage Company and Virginia Gas Distribution Company, as of
December 31, 1996, and for each of the two years in the period then ended,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
OTHER MATTERS
In January 1996 the Company retained Arthur Andersen LLP as its independent
public accountants. Another auditor had served in this capacity since 1992.
There were no disagreements with the former auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures at the time of the change or with respect to the Company's financial
statements which, if not resolved to the former auditors' satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports. The former auditors' reports did not contain an
adverse opinion or disclaimer of opinion and were not modified as to
uncertainty, audit scope or accounting principles. Prior to retaining Arthur
Andersen LLP, the Company had not consulted with Arthur Andersen LLP regarding
accounting principles.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission" or "SEC"). Such reports, proxy and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the public reference facilities
maintained by the commission at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such materials may also be obtained at prescribed
rates from the Public Reference Section of the Commission at its principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common
Stock is listed on the Nasdaq National Market. Documents filed by the Company
may also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Act, with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other documents referred to are not necessarily complete; with respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of
38
<PAGE>
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. A copy of the Registration Statement, and the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Public Regional Office of
the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048,
and copies of all or any part of the Registration Statement may be obtained from
such offices or by mail from the Public Reference Section of the Commission at
its principal office upon the payment of the fees prescribed by the Commission.
The Commission also maintains a World Wide Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
GLOSSARY
BCF. Billion cubic feet.
BLOW-OUT. A sudden, violent expulsion of oil, gas, and mud (and sometimes
water) from a drilling well, followed by an uncontrolled flow from the well. It
occurs when high pressure gas is encountered in the hole and sufficient
precautions have not been taken.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
CASING. Heavy steel pipe used to seal off fluids from the hole or to keep
the hole from caving in. There may be several strings of casing, one inside the
other, in a single well.
DELIVERABILITY. The amount of natural gas that a pipeline or producer is
able to deliver, limited either by terms of its supply contracts or its own
plant capacity.
DTH. One decatherm. One decatherm is equal to one million British thermal
units (10 therms).
GATHERING SYSTEMS. Pipelines and other equipment, including regulators,
compressors, dehydrators and associated equipment, needed to transport natural
gas from the wells to the transmission pipeline.
GROSS. A Gross number includes all acreage or wells in which the Company
owns an interest.
INJECTION. The introduction of gas under high pressure into a geological
formation.
MMBTU. One million British thermal units.
MBTU. One thousand British thermal units.
MCF. One thousand cubic feet.
MMCF. One million cubic feet.
NET. A Net number is the Gross number multiplied by the percentage interest
which the Company has in acreage or in wells.
PRESENT VALUE. When used with respect to gas reserves, present value means
the estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of December 31, 1996, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
39
<PAGE>
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of natural gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
PSI. Pounds per square inch.
SERVICE. The amount of gas necessary to fulfill customer supply contract
quantities for the periods indicated if the customer withdraws all contracted
gas at full contract amounts.
THERM. One hundred thousand British thermal units.
WORKING GAS. The portion of the storage volume that can be removed from a
storage reservoir for deliveries and still maintain pressure sufficient to meet
design deliverability.
WORKING INTEREST. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
40
<PAGE>
The map on the inside back cover highlights the two counties, Buchanan and
Russell, in southwestern Virginia, in which the Distribution Affiliate is
certificated to provide service by the VSCC and the two adjacent counties,
Tazewell and Dickensen, as to which the Distribution Affiliate has applied for
such certification. The map depicts: (i) the Company's natural gas gathering
systems located in Dickenson and Buchanan counties; (ii) Triangles depict the
Company's natural gas compression facilities located in Dickenson, Buchanan and
Washington counties; (iii) the interstate pipelines located in the Company's
area of operations; (iv) the Company's and its affiliates natural gas storage
facilities; and (v) other companies' pipelines in relation to the Company's.
[MAP]
41
<PAGE>
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity............................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
VIRGINIA GAS STORAGE COMPANY
Report of Independent Public Accountants................................................................. F-24
Balance Sheets........................................................................................... F-25
Statements of Income..................................................................................... F-26
Statements of Changes in Stockholders' Equity............................................................ F-27
Statements of Cash Flows................................................................................. F-28
Notes to Financial Statements............................................................................ F-29
VIRGINIA GAS DISTRIBUTION COMPANY
Report of Independent Public Accountants................................................................. F-37
Balance Sheets........................................................................................... F-38
Statements of Income..................................................................................... F-39
Statements of Changes in Stockholders' Equity............................................................ F-40
Statements of Cash Flows................................................................................. F-41
Notes to Financial Statements............................................................................ F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Company:
We have audited the accompanying consolidated balance sheet of Virginia Gas
Company and Subsidiaries as of December 31, 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Gas Company and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-2
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash........................................................................... $ 1,526,050 $ 1,652,838
Accounts receivable............................................................ 1,659,113 1,073,276
Notes receivable............................................................... 118,779 114,556
Other current assets........................................................... 232,689 134,862
------------- -------------
Total current assets................................................... 3,536,631 2,975,532
PROPERTY AND EQUIPMENT, NET........................................................ 19,162,628 16,343,480
INVESTMENT IN AFFILIATED COMPANIES................................................. 4,374,221 4,243,020
NOTES RECEIVABLE--AFFILIATED COMPANIES............................................. 12,956,871 9,371,062
OTHER ASSETS....................................................................... 1,385,805 577,309
------------- -------------
Total assets........................................................... $ 41,416,156 $ 33,510,403
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable.................................................................. $ 1,250,000 $ 250,000
Current portion of long-term debt.............................................. 748,576 1,244,490
Accounts payable............................................................... 1,582,564 1,197,555
Funds held for future distribution............................................. 304,388 544,475
Other current liabilities...................................................... 170,452 168,709
------------- -------------
Total current liabilities.............................................. 4,055,980 3,405,229
LONG-TERM DEBT..................................................................... 21,136,694 12,137,729
DEFERRED INCOME TAXES.............................................................. 729,007 629,914
------------- -------------
Total liabilities...................................................... 25,921,681 16,172,872
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock--No par, 2,000 shares authorized, issued and outstanding as of
December 31, 1996............................................................ -- 1,725,000
Common stock--par value $.001, 10,000,000 shares authorized, 3,204,906
(unaudited) and 3,150,744 shares issued and outstanding as of June 30, 1997
and December 31, 1996, respectively.......................................... 3,205 3,151
Additional paid-in capital..................................................... 13,751,471 14,152,137
Retained earnings.............................................................. 1,739,799 1,457,243
------------- -------------
Total stockholders' equity............................................. 15,494,475 17,337,531
------------- -------------
Total liabilities and stockholders' equity............................. $ 41,416,156 $ 33,510,403
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
------------------------ --------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ---------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue.............................................. $ 3,500,537 $ 545,145 $ 1,772,970 $ 1,493,813
Interest and other income...................................... 570,413 433,763 996,748 529,597
------------ ---------- ------------ ------------
4,070,950 978,908 2,769,718 2,023,410
------------ ---------- ------------ ------------
EXPENSES:
Production expenses............................................ 100,665 43,445 105,910 65,029
Purchased gas expense.......................................... 66,113 -- 28,537 --
Operation and maintenance expense.............................. 229,203 -- 173,445 --
Cost of natural gas sold....................................... 1,635,003 -- -- --
Depreciation, depletion, and amortization...................... 373,590 129,047 387,116 305,216
General and administrative..................................... 447,430 303,087 645,673 708,191
------------ ---------- ------------ ------------
2,852,004 475,579 1,340,681 1,078,436
------------ ---------- ------------ ------------
OTHER EXPENSE:
Interest....................................................... 717,155 520,824 1,006,800 673,251
Other.......................................................... 68,039 1,146 2,771 2,752
------------ ---------- ------------ ------------
785,194 521,970 1,009,571 676,003
------------ ---------- ------------ ------------
INCOME (LOSS) BEFORE EARNINGS OF AFFILIATED COMPANIES AND INCOME
TAXES.......................................................... 433,752 (18,641) 419,466 268,971
EQUITY IN EARNINGS OF AFFILIATED COMPANIES....................... 131,201 207,942 339,927 267,484
------------ ---------- ------------ ------------
INCOME BEFORE INCOME TAXES....................................... 564,953 189,301 759,393 536,455
PROVISION (BENEFIT) FOR INCOME TAXES............................. 137,883 (17,543) 151,827 62,581
------------ ---------- ------------ ------------
NET INCOME....................................................... $ 427,070 $ 206,844 $ 607,566 $ 473,874
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS...................... $ 370,015 $ 76,844 $ 347,566 $ 428,374
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
NET INCOME PER COMMON SHARE...................................... $ 0.12 $ 0.07 $ 0.21 $ 0.62
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED PAID-IN
STOCK COMMON STOCK CAPITAL RETAINED EARNINGS
----------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994....................... $ -- $ 1,792,741 $ -- $ 925,239
Issuance of 124,316 shares of common stock
pursuant to stock option agreements.......... -- 496,000 -- --
Issuance of 2,000 shares of preferred stock and
warrants covering 54,163 shares of common
stock........................................ 1,725,000 -- 275,000 --
Net income..................................... -- -- -- 473,874
Preferred stock dividends paid................. -- -- -- (45,500)
Common stock dividends paid.................... -- -- -- (212,430)
----------- -------------- -------------- -----------------
BALANCE, December 31, 1995....................... 1,725,000 2,288,741 275,000 1,141,183
Issuance of 800,058 shares of common stock..... -- 4,401,317 -- --
Issuance of 42,000 shares of common stock...... -- 42 251,958 --
Issuance of 40,000 shares of common stock to
officers and employees, net of notes
receivable of $240,000....................... -- 40 -- --
Issuance of 1,533,000 shares of common stock... -- 1,533 7,911,657 --
Payment for cancellation of warrant and
options...................................... -- -- (975,000) --
Net income..................................... -- -- -- 607,566
Preferred stock dividends paid................. -- -- -- (260,000)
Common stock dividends paid.................... -- -- -- (31,506)
Change from no par to $.001 par value of common
stock........................................ -- (6,688,522) 6,688,522 --
----------- -------------- -------------- -----------------
BALANCE, December 31, 1996....................... 1,725,000 3,151 14,152,137 1,457,243
Preferred stock dividends paid (unaudited)..... -- -- -- (57,055)
Common stock dividends paid (unaudited)........ -- -- -- (87,459)
Net income (unaudited)......................... -- -- -- 427,070
Costs related to stock issuance (unaudited).... -- -- (125,666) --
Issuance of 54,162 shares of common stock
pursuant to exercise of warrant
(unaudited).................................. -- 54 -- --
Redemption of 2,000 shares of preferred stock
(unaudited).................................. (1,725,000) -- (275,000) --
----------- -------------- -------------- -----------------
BALANCE, June 30, 1997
(unaudited).................................... $ -- $ 3,205 $ 13,751,471 $ 1,739,799
----------- -------------- -------------- -----------------
----------- -------------- -------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 427,070 $ 206,844 $ 607,566 $ 473,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization............ 373,590 129,047 387,116 305,216
Undistributed earnings of affiliated companies....... (131,201) (207,942) (339,927) (267,484)
Deferred income taxes................................ 99,093 (9,450) 141,596 27,693
(Increase) decrease in accounts receivable........... (585,837) 392,754 (180,903) (322,611)
(Increase) decrease in other current assets.......... (97,828) 94,754 66,720 (90,136)
Decrease in other assets............................. 84,342 6,438 20,477 78,359
Increase (decrease) in notes payable................. 1,000,000 (332,212) (332,212) 582,212
Increase (decrease) in accounts payable.............. 385,009 (850,758) (978,177) 1,692,954
(Decrease) increase in current liabilities........... (238,344) 107,108 190,145 (4,119)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities....................................... 1,315,894 (463,417) (417,599) 2,475,958
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (3,149,551) (2,581,313) (9,803,768) (1,314,286)
Issuance of notes receivable, net...................... (3,650,000) -- -- (3,721,911)
Payments received on notes receivable.................. 59,968 62,874 128,221 16,838
Investment in joint venture............................ -- -- -- (1,016,682)
------------ ------------ ------------ ------------
Net cash used in investing activities................ (6,739,583) (2,518,439) (9,675,547) (6,036,041)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal.............................. (1,214,222) (2,062,281) (2,731,952) (181,222)
Proceeds from new loans................................ 9,690,632 1,042,732 1,100,000 3,750,000
Redemption of preferred stock.......................... (2,000,000) -- -- --
Proceeds from issuance of common stock, net............ (125,666) 4,401,317 12,566,547 496,000
Proceeds from issuance of preferred stock, net......... -- -- -- 1,220,000
Purchase of warrants and options....................... -- -- (975,000) --
Payment of debt issuance costs......................... (350,579) (174,663) (54,719) (382,399)
Establishment of financing reserve funds............... (558,750) -- -- (46,244)
Dividends paid......................................... (144,514) (130,000) (291,506) (257,930)
------------ ------------ ------------ ------------
Net cash provided by financing activities............ 5,296,901 3,077,105 9,613,370 4,598,205
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH.......................... (126,788) 95,249 (479,776) 1,038,122
CASH, beginning of period................................ 1,652,838 2,132,614 2,132,614 1,094,492
------------ ------------ ------------ ------------
CASH, end of period...................................... $ 1,526,050 $ 2,227,863 $ 1,652,838 $ 2,132,614
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE:
Interest paid.......................................... $ 950,864 $ 684,966 $ 1,282,705 $ 656,833
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income taxes paid...................................... $ 11,158 $ 8,658 $ 26,158 $ 95,830
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Company (the "Company") was organized in 1987 under the laws of
the state of Delaware. The Company, directly or through affiliated companies, is
primarily engaged in the exploration, production, marketing, gathering, storage,
and distribution of natural gas, and distribution of propane gas, principally in
the southwestern counties of the Commonwealth of Virginia.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of June 30, 1997, and for the six
months ended June 30, 1997 and 1996, include, in the opinion of management, all
adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for 1996 include the accounts of three
wholly owned subsidiaries. The consolidated financial statements for 1995
include the accounts of one wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT IN AFFILIATED COMPANIES
The Company's investments in affiliated companies are accounted for using
the equity method. Investments carried at equity and the percentage interest
owned consist of Virginia Gas Storage Company (50 percent) and Virginia Gas
Distribution Company (50 percent).
F-7
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Combined financial information as of December 31, 1996, and for the years
ended December 31, 1996 and 1995, and as of June 30, 1997, and for the six
months ended June 30, 1997 and 1996 (unaudited), for investments in affiliated
companies accounted for by the equity method is as follows.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets..................................................................... $ 1,951,459 $ 2,386,057
Property and equipment, net........................................................ 20,327,578 16,079,543
Other assets....................................................................... 6,424,628 4,917,958
------------- -------------
$ 28,703,665 $ 23,383,558
------------- -------------
------------- -------------
Current liabilities................................................................ $ 3,343,700 $ 2,941,557
Long-term debt payable to:
Affiliated companies............................................................. 15,964,990 11,390,406
Third parties.................................................................... 9,617 13,870
Other liabilities.................................................................. 636,917 551,686
Stockholders' equity............................................................... 8,748,441 8,486,039
------------- -------------
$ 28,703,665 $ 23,383,558
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
JUNE 30 DECEMBER 31
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................. $ 2,855,579 $ 2,557,186 $ 5,008,509 $ 3,498,236
Income before income taxes............................... 397,581 630,125 1,030,079 821,876
Net income............................................... 262,402 415,884 679,853 534,968
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes natural gas sales and transmission revenues upon
delivery of natural gas to the common pipeline carrier.
In January 1997, the Company's wholly owned subsidiary, Virginia Gas
Marketing Company, began marketing natural gas services. These services include
the marketing of natural gas and are later expected to include natural gas
storage services. The initial source of natural gas supply will be provided by
Company -operated wells and initial future storage services will be provided by
facilities operated by the Company and/or its affiliated companies. Revenues
attributable to the marketing operations totaled $1.8 million for the six months
ended June 30, 1997.
F-8
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
During the year ended December 31, 1995, the Company and Virginia Gas
Storage Company revised their method of recording certain revenue. Prior to
1995, recognition of production and transmission revenues was deferred for three
months after the actual production and transmission of natural gas had occurred,
primarily to match the recognition of revenues with the period these revenues
were distributed to working interest parties and royalty owners. The policy
revision to record revenues on a current basis reflects the companies' ability
to estimate net revenues on a current basis. This change is reflected on a
prospective basis beginning in January 1995 and results in 15 months of
production and transmission revenues being recognized in 1995. The effect of
this change was to increase revenue and net income by $176,000 and $131,000,
respectively, for the year ended December 31, 1995.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted-average shares of
common stock and dilutive common stock equivalents (options and warrants)
outstanding during the respective periods. Net income available to common
stockholders is net income less dividends on preferred stock. The number of
weighted-average shares used in calculating income per common share was
1,637,576 and 695,669 for the years ended December 31, 1996 and 1995, and
3,201,350 (unaudited) and 1,034,873 (unaudited) for the six months ended June
30, 1997 and 1996, respectively, after retroactive effect of 103.1667 per share
stock split, as discussed in Note 9.
PROPERTY AND EQUIPMENT
The Company follows the successful efforts method of accounting for its
natural gas exploration activities. Under this method, geological and
geophysical costs and costs of carrying and retaining undeveloped properties are
expensed when incurred. All direct and certain indirect costs relating to
property acquisition, successful exploratory wells, development costs, and
support equipment and facilities are capitalized as the properties are obtained
or the facilities are placed into service. Costs of exploratory wells are
charged to expense if it is determined that proven reserves are not found.
Unproved gas properties that are individually significant are periodically
assessed for impairment of value, with losses recognized at the time of
impairment. The Company provides for depreciation, depletion, and amortization
of its investment in producing gas properties on a units-of-production method.
The remaining property and equipment is depreciated using the straight-line
method over estimated useful lives, ranging from 5 to 30 years. Maintenance and
repairs are charged to expense as incurred. Improvements and betterments are
capitalized.
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects
while activities are in progress to bring the assets to their intended use.
Interest capitalized totaled $290,398 and $92,851 for the years ended December
31, 1996 and 1995, respectively. Interest capitalized totaled $169,862
(unaudited) and $161,711 (unaudited) for the six months ended June 30, 1997 and
1996, respectively.
F-9
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995
issuance of the Buchanan County and the 1994 issuance of the Russell County and
Buchanan County, Virginia, Natural Gas Facilities Revenue Bonds by the
Industrial Development Authorities of the respective counties, reserve funds
have been established by the trustee for each issuance. Amounts in the reserve
funds will be used to make payments of principal and interest, whether at
maturity, by acceleration, call for redemption, or otherwise, where trust funds
accumulated by scheduled Company payments are insufficient to satisfy bond
requirements. Such amounts are invested in debt securities issued by the U.S.
Treasury and other U.S. government corporations and agencies. The Company
records these investments at cost and recognizes related interest as earned. The
carrying value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
FUNDS HELD FOR FUTURE DISTRIBUTION
Revenues are collected by the Company as operator and marketer of the gas
sold on behalf of the working interest parties and held for final distribution
to them and to landowners. Until these funds are distributed, they are recorded
as funds held for future distribution.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under
the asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 balances to conform
with the 1996 presentation.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Trade receivables................................................ $ 428,182 $ 451,436
Lease operating expenses receivable.............................. 138,089 145,528
Joint-interest receivables....................................... 64,098 64,098
Due from affiliated companies.................................... 1,028,744 412,214
------------ ------------
$ 1,659,113 $1,073,276
------------ ------------
------------ ------------
</TABLE>
The majority of the Company's accounts receivable are due from companies
predominately involved in the marketing and distribution of oil and gas
products.
F-10
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. NOTES RECEIVABLE--AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Note receivable from Virginia Gas Distribution Company; interest receivable at
9.5%; principal payable in maturities of $110,000 to $447,000 from 2002 to
2017............................................................................. $ 3,650,000 $ --
Note receivable from Virginia Gas Distribution Company; interest receivable at 9%;
principal payable in maturities of $4,000 to $263,000 from 1999 to 2020.......... 2,879,214 2,879,214
Note receivable from Virginia Gas Storage Company; interest receivable at 8.88%;
principal payable in maturities of $12,000 to $241,000 from 1995 to 2017......... 2,534,342 2,567,837
Note receivable from Virginia Gas Distribution Company; interest receivable at
7.35%; principal payable in maturities of $17,000 to $97,000 from 1996 to 2023... 1,276,560 1,284,833
Note receivable from Virginia Gas Storage Company; interest receivable at 7.35%;
principal payable in maturities of $13,000 to $77,000 from 1996 to 2023.......... 1,012,021 1,018,580
Note receivable from Virginia Gas Distribution Company; interest receivable at
8.88%; principal payable in maturities of $4,000 to $84,000 from 1995 to 2017.... 880,816 892,457
Note receivable from Virginia Gas Storage Company; interest receivable at 9%;
principal payable in maturities of $1,000 to $77,000 from 1999 to 2020........... 842,697 842,697
------------- -------------
13,075,650 9,485,618
Less--Current portion.............................................................. (118,779) (114,556)
------------- -------------
$ 12,956,871 $ 9,371,062
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Storage properties............................................................. $ 12,979,435 $ 9,226,332
Pipelines...................................................................... 1,050,139 1,039,035
Producing properties........................................................... 2,499,105 2,494,370
Propane facilities............................................................. 1,186,300 165,756
Wells, pipelines, and storage properties in progress........................... 2,235,350 3,973,172
Vehicles....................................................................... 282,921 217,955
Building and improvements...................................................... 182,029 150,898
Office equipment............................................................... 250,116 221,685
Well and pipeline equipment.................................................... 32,093 32,093
------------- -------------
20,697,488 17,521,296
Less--Accumulated depreciation, depletion, and amortization.................... (1,534,860) (1,177,816)
------------- -------------
$ 19,162,628 $ 16,343,480
------------- -------------
------------- -------------
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Deferred financing costs......................................................... $ 700,737 $ 455,350
Restricted cash and investments- reserve funds................................... 670,269 116,809
Other............................................................................ 14,799 5,150
------------ ------------
$ 1,385,805 $ 577,309
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Note payable to the Industrial Development Authority of Russell
County, Virginia; interest payable monthly at 9.5%, beginning
in March 1997; principal payable in maturities of $275,000 to
$1,115,000 from 2002 to 2017................................. $ 9,100,000 $ --
Note payable to the Industrial Development Authority of
Buchanan County, Virginia; interest payable monthly at 9%,
beginning in February 1996; principal payable in maturities
of $5,000 to $342,000 from 1999 to 2020...................... 3,750,000 3,750,000
Note payable to the Industrial Development Authority of
Buchanan County, Virginia; interest payable monthly at an
effective rate of 8.88%, beginning in December 1994;
principal payable in maturities of $20,000 to $386,000 from
1995 to 2017................................................. 4,056,389 4,110,000
Note payable to the Industrial Development Authority of Russell
County, Virginia; interest payable monthly at an effective
rate of 7.35%, beginning in February 1994; principal payable
in maturities of $35,000 to $205,000 from 1996 to 2023....... 2,700,417 2,717,917
Note payable to Tenneco Energy Resources Corporation; interest
at Morgan Guaranty prime rate plus 3%; payable in quarterly
installments of principal plus interest through 1997......... -- 975,000
Note payable with interest at 7%; payable in monthly
installments of principal and interest of $1,099; maturing in
February 1999, with a final payment of $95,336 secured by an
asset with a book value of $147,862 as of June 30, 1997...... 104,443 107,283
Note payable with interest at 9%; interest payable in
semiannual installments, maturing October 2024............... -- 100,000
Notes payable with interest at prime plus 2%; payable in
quarterly installments of principal and interest beginning
July 1997.................................................... 590,631 --
Note payable to the Industrial Development Authority of
Washington County, Virginia with interest at 9.25%; payable
in monthly installments of principal and interest of $2,872
through October 1999; secured by an asset with a book value
of $101,142 as of June 30, 1997.............................. 72,093 85,626
Note payable to Virginia Gas Distribution Company;
</TABLE>
F-13
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
interest payable at 9%; principal payable in maturities of
$1,000 to $91,000 from 1999 to 2020.......................... 965,000 1,000,000
Note payable to Virginia Gas Distribution Company; interest
payable at 7.35%; principal payable in maturities of $5,000
to $30,000 from 1996 to 2023................................. 392,788 395,333
Note payable to Virginia Gas Storage Company; interest payable
at 8%; balance due December 1997............................. 70,000 70,000
Notes payable through 2001 with interest from 8.95% to 10.75%;
secured by assets with a book value of $96,366 as of June 30,
1997......................................................... 83,509 71,060
------------- -------------
21,885,270 13,382,219
Less--Current portion.......................................... (748,576) (1,244,490)
------------- -------------
Long-term debt................................................. $ 21,136,694 $ 12,137,729
------------- -------------
------------- -------------
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with principal of $9,100,000. The bonds are
payable from and are secured by a promissory note issued by the Company to the
Russell County Authority. A portion of the proceeds was loaned to an affiliated
company and is being used to construct a natural gas distribution facility in
and around the town of Lebanon, Virginia, and for related storage and pipeline
facilities.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000.
The bonds are payable from and are secured by a promissory note issued by the
Company to the Buchanan County Authority. A portion of the proceeds was loaned
to affiliated companies and are being used to extend existing natural gas
distribution facilities in and around the town of Grundy, Virginia, and for
related supporting pipeline gathering and storage facilities.
In January 1994, the Russell County Authority issued its Natural Gas Revenue
Bond Series A and B with combined principal of $3,000,000. The bonds are payable
from and are secured by a promissory note issued by the Company to the Russell
County Authority. The proceeds were loaned by the Company to affiliated
companies to construct a natural gas distribution facility in and around the
town of Castlewood, Virginia, and for related supporting exploration and
production, pipeline and storage facilities in the amount of $2,630,000 and to
retire $370,000 of long-term debt.
In November 1994, the Buchanan County Authority issued its Natural Gas
Revenue Bond Series A with principal of $4,250,000. The bonds are payable from
and are secured by a promissory note issued by the Company to the Buchanan
County Authority. The bonds were also issued in parity with the Russell County
Bonds discussed above. A portion of the proceeds was loaned to affiliated
companies and are being used to construct a natural gas distribution facility in
an around the town of Grundy, Virginia, and for related supporting exploration
and production, pipeline, and storage facilities.
F-14
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LONG-TERM DEBT: (CONTINUED)
On February 29, 1996, the Company purchased the interest of its joint
venture partner in the development of the Saltville, Virginia, natural gas
storage facility. The purchase price of the interest was $2,225,000, with
consideration consisting of a $500,000 payment in March 1996 and the issuance of
a promissory note for $1,725,000. Interest accrues at the Morgan Guaranty prime
rate plus 3 percent. Quarterly installments of principal and interest were made
during 1996. In December 1996 the Company, in accordance with terms of the
Transfer Agreement and after providing adequate security to the lender, elected
to pay the remaining principal in quarterly installments of principal and
interest through 1997. The former joint venture partner retains the option to
jointly develop with the Company on a 50-50 percent basis any additional storage
caverns on the Saltville property.
As of December 31, 1996, principal payments on long-term debt for the next
five years are as follows:
<TABLE>
<S> <C>
1997............................................................ $1,244,490
1998............................................................ 202,867
1999............................................................ 356,189
2000............................................................ 187,355
2001............................................................ 256,345
</TABLE>
Based upon the borrowing rates currently available to the Company for loans
with similar terms and remaining maturities, the approximate fair value of
long-term debt at December 31, 1996, is approximately $12,972,000 and at June
30, 1997 is approximately $20,932,000 (unaudited).
8. STOCKHOLDERS' EQUITY:
References to the common stock of the Company in these financial statements
and in the accompanying notes reflect retroactive application of an increase in
the number of authorized shares from 20,000 to 10,000,000 and a 103.1667 per
share stock split, effected June 1996, by the shareholders of the Company. In
conjunction with the stock split, the shareholders also implemented a super
majority provision requiring the vote of 75 percent of the issued and
outstanding shares entitled to vote on any matters involving an amendment to the
certificate of incorporation or the bylaws; the merger, dissolution,
reorganization, or recapitalization of the Company; or the sale of all or
substantially all of the assets of the Company.
In October 1996, the Company completed an initial public offering of its
common stock. The offering resulted in the issuance of an additional 1,533,000
common shares of the Company at $6 per share. In connection with the offering,
the Company granted warrants to the underwriter to purchase, on a post-offering
basis, 153,300 shares of the Company's common stock at a purchase price equal to
165 percent of the public offering price, or $9.90 per share.
In September 1995, the Company issued for $2,000,000 cash consideration
2,000 shares of its Series A nonvoting preferred stock and warrants to purchase
common stock equal to 6 percent of the then outstanding common stock of the
Company (increasing 1 percent per year until September 29, 2000, and an
additional 10 percent per year thereafter through September 29, 2003, if the
preferred stock is not redeemed before then) all to one investment corporation.
The Company can redeem the preferred stock at any time with five days' notice to
the holder. The agreement under which the preferred stock and warrants were sold
contains a number of covenants, including requiring the preferred stock
purchaser's consent to certain transactions outside the ordinary course of
business, environmental compliance, and compliance
F-15
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
with covenants of other loan obligations. Dividends, whether declared or not,
accrue on the preferred stock at 13 percent per annum and are payable monthly.
The liquidation preference of the preferred stock is $2,000,000 plus unpaid
dividends. In February 1997, the Company redeemed the outstanding 2,000 shares
of preferred stock for the liquidation price of $2,000,000 plus unpaid
dividends.
Subordinated indebtedness of the Company in the amount of $780,000 was paid
from the proceeds of the preferred stock issuance during 1995, resulting in net
cash proceeds to the Company of $1,220,000. In conjunction with the issuance of
the subordinated indebtedness in April 1993, the Company issued a warrant
entitling the lender to purchase 76,756 shares of the Company's common stock at
$6.46 per share. The warrant is exercisable upon the earlier of repayment by the
Company of the debenture; the entering into a contract for the sale of all or
substantially all of the assets of the Company or any of its subsidiaries; a
bona fide offer being made by any person for, or the sale in one or more related
transactions of, more than 10 percent of the Company's then outstanding common
stock, or 10 percent of any of its subsidiaries' then outstanding common stock;
on February 28, 1998; the effective date of the first registration statement
filed by the Company covering an underwritten offering of any of its securities
to the general public; or the occurrence of an event of default under the terms
of the financing agreement. The warrant expires on February 28, 2003. Concurrent
with the issuance of the warrant, the Company has issued stock options to the
lender to purchase a number of common shares sufficient for the lender to
maintain 14 percent of the ownership of the Company's common stock on a fully
diluted basis. The options grant the lender the right to purchase the common
stock at 66 percent of issue price of any proposed common stock offerings and
were exercisable subject to the terms described earlier. The options expire on
February 28, 2003. In July 1996, the Company negotiated a release with the
lender and paid $975,000 to the lender in exchange for the cancellation of the
lender's warrant and options.
In May 1996, the Company completed a private placement for 800,058 shares of
the Company's common stock, resulting in net proceeds to the Company of
$4,401,317. All shares were sold to a single investor.
In August 1996, the company sold 42,000 shares of common stock to an officer
of the Company for $252,000 and made loans to eight employees totaling $240,000
related to the purchase of 40,000 shares of the Company's common stock.
In June 1996, the Company issued warrants on a pro rata basis to
shareholders of record of the Company as of May 17, 1996, to purchase an
aggregate of 735,686 shares of the Company's common stock at a purchase price
equal to 165 percent of the planned public offering price per share of $6, or
$9.90 per share. In conjunction with the terms of the agreement under which the
preferred stock and warrants were sold, the Company issued, in June 1996,
warrants to the preferred stockholder to purchase an aggregate of 54,163 shares
of the Company's common stock at a purchase price equal to 165 percent of the
planned public offering price per share of $6, or $9.90 per share.
9. STOCK OPTIONS:
The Company has granted certain management and directors stock options that
allow the individual to purchase previously unissued common shares at a set
price. The exercise prices of options granted approximate the estimated fair
market value, as determined by the Board of Directors, of the Company's common
stock as of the grant date. The Company is also obligated to grant options to a
member of
F-16
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. STOCK OPTIONS: (CONTINUED)
management upon issuance of additional shares of the Company's common stock to
ensure that his portion of the Company's common stock will not become diluted.
The Company's obligation is 2 percent of its common shares at December 31, 1996.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option plans. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant dates for awards, consistent
with the method of FASB Statement No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would not be
materially different from amounts reported for the years ended December 31, 1996
and 1995.
The Company estimates the fair value of each option grant on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of .67 percent and
risk free interest rate of approximately 6 percent for 1996 and 1995, and
expected lives of approximately 3 and 4 years for the options granted in 1996
and 1995, respectively. All options were granted prior to the Company's initial
public offering. Consequently, as permitted by SFAS No. 123, the Company has
excluded volatility from its fair value computations.
Changes in the options outstanding during the years ended December 31, 1996
and 1995, and for the six months ended June 30, 1997, were as follows.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
---------- ---------------
<S> <C> <C>
Outstanding, December 31, 1994..................................... 139,894 $ 4.09
Granted.......................................................... 14,650 $ 8.72
Exercised........................................................ (124,316) $ 3.99
Expired.......................................................... (15,578) $ 4.88
----------
Outstanding, December 31, 1995..................................... 14,650 $ 8.72
Granted.......................................................... 70,004 $ 8.72
----------
Outstanding, December 31, 1996..................................... 84,654 $ 8.72
----------
----------
Outstanding, June 30, 1997 (unaudited)............................. 84,654 $ 8.72
----------
----------
</TABLE>
As a result of the excess of exercise price over the share price during
1996, the Black-Scholes option-pricing model indicates that the fair value of
options granted in 1996 is zero. The weighted-average fair value of options
granted during 1995 was $1.95.
As of December 31, 1996, all outstanding options are exercisable, at an
exercise price of $8.72, and expire in 1999.
On July 1, 1997, the Company issued to certain of its officers and employees
options to purchase 120,000 shares of the Company's common stock at an exercise
price of $10 per share.
F-17
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
10. COMMITMENTS AND CONTINGENT LIABILITIES:
Certain of the Company's leases require the Company to pay minimum royalties
or rentals. The aggregate minimum royalty and rental payments on leases for the
next five years are as follows.
<TABLE>
<S> <C>
1997............................................................... $ 31,736
1998............................................................... 31,546
1999............................................................... 30,678
2000............................................................... 29,828
2001............................................................... 29,828
</TABLE>
The Company is subject to various Federal, state, and local laws and
regulations relating to the protection of the environment. The Company believes
that it is in compliance with these laws and regulations and does not expect to
incur significant capital expenditures in future years to maintain compliance.
11. SALES TO MAJOR CUSTOMERS
One of the Company's customers accounted for 31 percent of consolidated
operating revenue for the year ended December 31, 1996. One of the Company's
customers accounted for 25 percent, one customer accounted for 21 percent, while
another customer accounted for 15 percent, respectively, of operating revenue
for the six months ended June 30, 1997.
12. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
---------------------- ---------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal...................................... $ 35,564 $ (7,342) $ 10,231 $ 30,996
State........................................ 3,226 (751) -- 3,892
---------- ---------- ---------- ---------
38,790 (8,093) 10,231 34,888
---------- ---------- ---------- ---------
Deferred:
Federal...................................... 82,248 (7,120) 124,985 18,176
State........................................ 16,845 (2,330) 16,611 9,517
---------- ---------- ---------- ---------
99,093 (9,450) 141,596 27,693
---------- ---------- ---------- ---------
$ 137,883 $ (17,543) $ 151,827 $ 62,581
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
F-18
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INCOME TAXES: (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Deferred tax assets:
Minimum tax credit carryforwards................................ $ 104,609 $ 104,609
Net operating loss carryforward................................. 86,910 86,910
----------- ------------
Total......................................................... 191,519 191,519
----------- ------------
Deferred tax liabilities:
Capital assets.................................................. 920,526 821,433
----------- ------------
Net deferred tax liabilities.................................. $ 729,007 $ 629,914
----------- ------------
----------- ------------
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of
June 30, 1997, and there were no changes in the valuation allowance during the
years ended December 31, 1996 or 1995, or during the six months ended June 30,
1997 and 1996.
A reconciliation of the tax provision at the statutory Federal income tax
rate and the Company's actual provision for income tax is as follows.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
---------------------- ----------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Tax at statutory rate of 34%..................................... $ 192,084 $ 64,362 $ 258,194 $ 182,395
Equity in earnings of affiliated companies....................... (44,608) (70,700) (115,576) (90,945)
State income taxes, less Federal benefit......................... 11,337 (487) 10,963 7,030
Statutory depletion in excess of cost depletion.................. (13,526) (11,283) (26,693) (19,837)
Other, net....................................................... (7,404) 565 24,939 (16,062)
---------- ---------- ---------- ----------
$ 137,883 $ (17,543) $ 151,827 $ 62,581
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
In addition, the Company has minimum tax credits that can be carried forward
indefinitely to offset future regular tax. The aggregate amount of minimum tax
credits available at December 31, 1996, is $104,609.
13. SUPPLEMENTARY INFORMATION ON NATURAL GAS PRODUCING ACTIVITIES (UNAUDITED):
The following supplementary information regarding the gas producing
activities of the Company is presented in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 69. The amounts shown
include the Company's net working and royalty interests in all of its natural
gas operations. The Company has no material investments in unproved properties.
F-19
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
NATURAL GAS RESERVES
Users of this information should be aware that the process of estimating
quantities of proved and proved developed natural gas reserves is complex,
requiring significant subjective decisions in the evaluation of all available
geological, engineering, and economic data for each reservoir. The data for a
given reservoir may also change substantially over time as a result of numerous
factors including, but not limited to, additional development activity, evolving
production history, and continual reassessment of the viability of production
under varying economic conditions. Consequently, material revisions to existing
reserve estimates occur from time to time. Although every reasonable effort is
made to ensure that reserve estimates reported represent the most accurate
assessments possible, the significance of the subjective decisions required and
variances in available data for various reservoirs makes these estimates
generally less precise than other estimates presented in connection with
financial statement disclosures.
Proved reserves represent estimated quantities of natural gas that
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under economic and operating
conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered
through wells and equipment in place and under operating methods being utilized
at the time the estimates were made.
No major discovery or other favorable or adverse event subsequent to
December 31, 1996 is believed to have caused a material change in the estimates
of proved or proved developed reserves as of that date.
CAPITAL COSTS RELATING TO NATURAL GAS PRODUCING ACTIVITIES:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Proved natural gas properties..................................... $ 2,581,634 $ 2,573,132
Support equipment and facilities.................................. 32,093 31,882
------------ ------------
2,613,727 2,605,014
Less--Accumulated depreciation, depletion and amortization........ (668,526) (520,649)
------------ ------------
Net capitalized costs............................................. $ 1,945,201 $ 2,084,365
------------ ------------
------------ ------------
</TABLE>
COSTS INCURRED IN NATURAL GAS ACTIVITIES:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Proved property acquisition costs...................................... $ -- $ 320,241
Exploration costs...................................................... 2,688 4,202
Development costs...................................................... 8,502 270,091
--------- ----------
$ 11,190 $ 594,534
--------- ----------
--------- ----------
</TABLE>
RESULTS OF OPERATIONS FOR NATURAL GAS PRODUCING ACTIVITIES
The following table includes results solely from the production and sale of
natural gas and changes for property impairments. It excludes general and
administrative expenses and gains or losses on property
F-20
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
NATURAL GAS RESERVES (CONTINUED)
dispositions. The income tax expense is calculated by applying the statutory tax
rates to the revenues after deducting costs, which include depletion allowances
and giving effect to permanent differences and tax credits.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues.............................................................. $ 416,201 $ 236,204
Cost of natural gas sold.............................................. (42,349) (26,755)
Exploration costs..................................................... (2,688) (4,202)
Depreciation, depletion and amortization.............................. (168,977) (157,394)
Revenue adjustment (see Note 2)....................................... -- 72,992
---------- ----------
202,187 120,845
Income tax expense.................................................... (43,287) (21,876)
---------- ----------
Results of operations................................................. $ 158,900 $ 98,969
---------- ----------
---------- ----------
</TABLE>
The revenue adjustment for 1995 relates to the Company's revision of its
method of recording certain revenue, as discussed in Note 2.
NATURAL GAS RESERVES (UNAUDITED)
The following table presents the estimated natural gas reserves owned by the
Company. This information includes the Company's royalty and working interest
share of the reserves in southwestern Virginia. These reserves were estimated by
the Company; however, by their nature they are subject to upward and downward
revisions as additional information regarding fields and technology becomes
available. All reserves are located in the United States.
NATURAL GAS
PROVED DEVELOPED AND UNDEVELOPED RESERVES (UNAUDITED):
(THOUSANDS OF CUBIC FEET/MCF)
<TABLE>
<S> <C>
December 31, 1995................................................................ 4,072,782
Revisions of previous estimates................................................ (1,401,793)
Production..................................................................... (160,798)
Purchase of reserves........................................................... 654,025
---------
December 31, 1995................................................................ 3,164,216
Revisions of previous estimates................................................ 160,830
Production..................................................................... (161,995)
Purchase of reserves........................................................... --
---------
December 31, 1996................................................................ 3,163,051
---------
---------
Proved Developed Producing Reserves:
December 31, 1995.............................................................. 2,316,276
---------
---------
December 31, 1996.............................................................. 2,309,325
---------
---------
</TABLE>
F-21
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
NATURAL GAS RESERVES (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The following information relating to proved natural gas reserves has been
developed utilizing procedures prescribed by SFAS No. 69 and based on natural
gas reserve and production volumes estimated by the engineering staff of the
Company. It may be useful for certain comparison purposes but should not be
relied upon solely in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should the
Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The future cash flows presented below are based on sales prices, cost rates,
and statutory income tax rates in existence as of the date of the projection. It
is expected that material revisions to some estimates of natural gas reserves
may occur in the future, development and production of the reserves may occur in
periods other than those assumed, and actual prices realized and costs incurred
may vary significantly from those used.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
(UNAUDITED)
Future cash inflows............................................. $ 10,870,114 $ 5,505,812
Future production costs......................................... (1,804,856) (1,680,171)
Future development costs........................................ (196,300) (242,889)
------------- -------------
Future cash inflows before income taxes......................... 8,868,958 3,582,752
Future income tax expense....................................... (2,506,544) (1,057,790)
------------- -------------
Future net cash flows........................................... 6,362,414 2,524,962
10% annual discount for estimated timing of cash flows.......... (3,514,491) (1,416,025)
------------- -------------
Standardized measure of discounted future net cash flows........ $ 2,847,923 $ 1,108,937
------------- -------------
------------- -------------
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
(UNAUDITED)
Sales of natural gas, net of production costs..................... $ 2,372,780 $ 244,799
Development costs incurred during the period...................... 22,280 (56,189)
Purchase of minerals-in-place..................................... -- 362,994
Net change in income taxes........................................ (656,074) (168,055)
------------ ------------
Net increase (decrease)........................................... 1,738,986 383,549
Beginning of year................................................. 1,108,937 725,388
------------ ------------
End of year....................................................... $ 2,847,923 $ 1,108,937
------------ ------------
------------ ------------
</TABLE>
14. EMPLOYMENT COMMITMENTS:
On May 23, 1996, the Company entered into a ten-year employment contract
with its President and CEO (the "President"), which provides for an annual
salary of $155,000. The contract provides for a bonus
F-22
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
14. EMPLOYMENT COMMITMENTS: (CONTINUED)
to be paid based upon 10 percent of the Company's pretax earnings on all amounts
from $1,000,000 to $1,999,999 and 15 percent of the Company's pretax earnings on
all amounts in excess of $2,000,000. If the President is terminated by the
Company for any reason other than for cause during the term the term of the
employment contract, at the President's election, the Company would be obligated
to purchase all or a portion of the shares held by him and his family (749,826
shares as of June 30, 1997, of which 363,663 shares are issuable upon the
exercise of warrants exercisable at $9.90 per share) at a price equal to 150
percent of the market value of the Company's shares on the date of termination.
In addition, the Company would be obligated to pay the President in a lump sum
all salary amounts owed through the term of the employment agreement plus an
additional $2,000,000.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Storage Company:
We have audited the accompanying balance sheet of Virginia Gas Storage Company
as of December 31, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Gas Storage Company as
of December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-24
<PAGE>
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 189,868 $ 148,619
Accounts receivable............................................................ 1,069,968 1,233,227
Notes receivable............................................................... 70,000 570,000
Other current assets........................................................... 18,348 85,369
------------- -------------
Total current assets................................................... 1,348,184 2,037,215
PROPERTY AND EQUIPMENT, net........................................................ 14,542,439 13,323,883
OTHER ASSETS....................................................................... 965,018 956,099
------------- -------------
Total assets........................................................... $ 16,855,641 $ 16,317,197
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.............................................. $ 107,861 $ 104,915
Accounts payable............................................................... 1,364,582 2,193,010
Other current liabilities...................................................... 238,540 108,929
------------- -------------
Total current liabilities.............................................. 1,710,983 2,406,854
LONG-TERM DEBT..................................................................... 7,328,182 6,386,212
DEFERRED INCOME TAXES.............................................................. 619,435 551,686
------------- -------------
Total liabilities...................................................... 9,658,600 9,344,752
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock -- no par value, 50,000 shares authorized, 38,200 (unaudited)
shares issued and outstanding as of June 30, 1997; no par value, 50,000
shares authorized, 38,200 issued and outstanding as of December 31, 1996..... 5,640,000 5,640,000
Retained earnings.............................................................. 1,557,041 1,332,445
------------- -------------
Total stockholders' equity............................................. 7,197,041 6,972,445
------------- -------------
Total liabilities and stockholders' equity............................. $ 16,855,641 $ 16,317,197
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-25
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue.................................... $ 2,149,463 $ 1,952,499 $ 3,831,224 $ 2,696,594
Interest and other income............................ 30,104 108,252 154,220 82,454
------------ ------------ ------------ ------------
2,179,567 2,060,751 3,985,444 2,779,048
------------ ------------ ------------ ------------
EXPENSES:
Production expenses.................................. 110,139 132,654 222,808 277,167
Purchased gas expense................................ 510,502 664,087 974,277 680,857
Operation and maintenance expense.................... 404,381 109,361 374,579 294,249
Depreciation, depletion, and amortization............ 256,332 192,460 416,699 308,039
General and administrative........................... 392,535 278,163 700,296 356,979
------------ ------------ ------------ ------------
1,673,889 1,376,725 2,688,659 1,917,291
------------ ------------ ------------ ------------
OTHER EXPENSE:
Interest............................................. 165,380 77,309 272,941 115,010
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES............................... 340,298 606,717 1,023,844 746,747
PROVISION FOR INCOME TAXES............................... 115,702 206,283 348,106 261,364
------------ ------------ ------------ ------------
NET INCOME............................................... $ 224,596 $ 400,434 $ 675,738 $ 485,383
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS STORAGE
COMPANY'S EARNINGS..................................... $ 112,298 $ 200,217 $ 337,869 $ 242,692
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
------------ ------------
<S> <C> <C>
BALANCE, December 31, 1994............................................................ $ 2,000,000 $ 171,324
Issuance of 18,200 shares........................................................... 3,640,000 --
Net income.......................................................................... -- 485,383
------------ ------------
BALANCE, December 31, 1995............................................................ 5,640,000 656,707
Net income.......................................................................... -- 675,738
------------ ------------
BALANCE, December 31, 1996............................................................ 5,640,000 1,332,445
Net income (unaudited).............................................................. -- 224,596
------------ ------------
BALANCE, June 30, 1997 (unaudited).................................................... $ 5,640,000 $ 1,557,041
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
------------------------ ------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 224,596 $ 400,434 $ 675,738 $ 485,383
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion, and amortization.............. 256,332 192,460 416,699 308,039
Deferred income taxes.................................. 67,749 120,465 212,476 139,214
Decrease (increase) in accounts receivable............. 163,259 127,407 (304,140) (194,420)
Decrease (increase) in other current assets............ 67,021 (4,386) (22,353) (50,441)
Increase in other assets............................... (36,728) (12,183) (37,981) (31,946)
(Decrease) increase in accounts payable................ (828,428) (746,238) 1,092,591 64,109
Increase (decrease) in other current liabilities....... 129,611 (37,398) (58,690) (27,763)
----------- ----------- ----------- -----------
Net cash provided by operating activities........ 43,412 40,561 1,974,340 692,175
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (1,447,079) (1,643,823) (4,225,530) (2,870,185)
Payments received on notes receivable.................. 500,000 1,720,000 1,720,000 100,000
----------- ----------- ----------- -----------
Net cash (used in) provided by investing
activities..................................... (947,079) 76,177 (2,505,530) (2,770,185)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal.............................. (55,084) (57,936) (117,677) (23,006)
Proceeds from new loans................................ 1,000,000 500,000 500,000 1,342,697
Proceeds from issuance of common stock................. -- -- -- 500,000
Payment of financing issuance costs.................... -- -- -- (42,131)
Establishment of financing reserve funds............... -- -- -- (75,843)
----------- ----------- ----------- -----------
Net cash provided by financing activities........ 944,916 442,064 382,323 1,701,717
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................ 41,249 558,802 (148,867) (376,293)
Cash, beginning of period.................................. 148,619 297,486 297,486 673,779
----------- ----------- ----------- -----------
CASH, end of period........................................ $ 189,868 $ 856,288 $ 148,619 $ 297,486
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE:
Interest paid.......................................... $ 333,254 $ 328,356 $ 606,505 $ 450,501
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes paid...................................... $ 47,635 $ 79,024 $ 159,024 $ 123,349
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Storage Company (the "Company") was organized in 1992 under the
laws of the state of Virginia. The Company is 50 percent owned by Virginia Gas
Company ("VGC") and 50 percent owned by a private investor. The primary business
of the Company is to develop and operate natural gas storage and transmission
facilities.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of June 30, 1997, and for the six
months ended June 30, 1997 and 1996, include, in the opinion of management, all
adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes gas sales and transmission revenues upon delivery of
gas to the common pipeline carrier. Storage revenues are recognized evenly
throughout the contract terms with injection and withdrawal revenues recognized
as natural gas is injected or withdrawn from the storage facility.
During the year ended December 31, 1995, the Company revised its method of
recording certain revenue. Prior to 1995, recognition of transmission revenues
was deferred for three months after the actual transmission of natural gas had
occurred, primarily to match the recognition of revenues with the period these
revenues were distributed to the working interest owners. The policy revision to
record revenues on a current basis reflects the Company's ability to estimate
its net revenues on a current basis. This change is reflected on a prospective
basis beginning in January 1995 and results in 15 months of transmission
revenues being recognized in 1995. The effect of this change was to increase
revenue and net income by $110,000 and $43,000, respectively, for the year ended
December 31, 1995.
PROPERTY AND EQUIPMENT
All direct and indirect costs relating to property acquisition, development
costs and support equipment and facilities are capitalized as the properties are
obtained or the facilities are placed into service. The Company provides for
depreciation of property and equipment using the straight-line method over
estimated useful lives ranging from 5 to 30 years.
F-29
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects
while activities are in progress to bring the assets to their intended use.
Interest capitalized totaled $283,564 and $317,312 for the years ended December
31, 1996 and 1995, respectively. Interest capitalized totaled $148,176
(unaudited) and $201,047 (unaudited) in the six months ended June 30, 1997 and
1996, respectively.
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995
issuance of the Buchanan County and the 1994 issuance of the Russell County and
Buchanan County, Virginia, Natural Gas Facilities Revenue Bonds by the
Industrial Development Authorities of the respective counties, reserve funds
have been established by the trustee for each issuance. Amounts in the reserve
funds will be used to make payments of principal and interest, whether at
maturity, by acceleration, call for redemption, or otherwise, where trust funds
accumulated by scheduled Company payments are insufficient to satisfy bond
requirements. Such amounts are invested in debt securities issued by the U.S.
Treasury and other U.S. government corporations and agencies. The Company
records these investments at cost and recognizes related interest as earned. The
carrying value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under
the asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Trade receivables.................................................................... $ 224,622 $ 618,275
Receivables from affiliated companies................................................ 638,741 469,656
Pipeline operating expenses.......................................................... 51,854 54,944
Joint-interest receivables........................................................... 154,648 90,249
Other................................................................................ 103 103
------------ ------------
$ 1,069,968 $1,233,227
------------ ------------
------------ ------------
</TABLE>
F-30
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. NOTES RECEIVABLE:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Note receivable from shareholder; interest receivable at 8%; principal received as
consideration for the issuance of common shares. The note receivable from
shareholder was collected in March 1997............................................. $ -- $ 500,000
Note receivable from Virginia Gas Exploration Company; interest receivable at 8%;
principal balance due 1997.......................................................... 70,000 70,000
----------- ------------
70,000 570,000
Less-- Current portion................................................................ (70,000) (570,000)
----------- ------------
$ -- $ --
----------- ------------
----------- ------------
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Storage properties............................................................. $ 13,558,160 $ 12,095,480
Pipelines...................................................................... 2,024,621 2,026,091
Vehicles....................................................................... 108,242 133,742
Office equipment............................................................... 75,242 63,335
Wells and pipelines in progress................................................ 68,294 68,832
------------- -------------
15,834,559 14,387,480
Less-- Accumulated depreciation, depletion, and amortization................... (1,292,120) (1,063,597)
------------- -------------
$ 14,542,439 $ 13,323,883
------------- -------------
------------- -------------
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Restricted cash and investments-reserve funds......................................... $ 599,653 $ 582,233
Deferred debt issuance costs.......................................................... 357,873 365,707
Other................................................................................. 7,492 8,159
----------- ------------
$ 965,018 $ 956,099
----------- ------------
----------- ------------
</TABLE>
F-31
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. ACCOUNTS PAYABLE:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Trade payables....................................................................... $ 623,711 $1,827,867
Payable to affiliated companies...................................................... 740,871 365,143
------------ ------------
$ 1,364,582 $2,193,010
------------ ------------
------------ ------------
</TABLE>
8. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Amounts due affiliated companies...................................................... $ 42,519 $ 46,255
Funds held for future distribution.................................................... 144,603 8,120
Income taxes payable.................................................................. 36,047 17,569
Other................................................................................. 15,371 36,985
----------- ------------
$ 238,540 $ 108,929
----------- ------------
----------- ------------
</TABLE>
F-32
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Note payable to Virginia Gas Company; interest payable at 8.88%; principal payable in
maturities of $12,000 to $241,000 from 1995 to 2017................................ $ 2,534,342 $2,567,837
Note payable to Virginia Gas Company; interest payable at 7.35%; principal payable in
maturities of $13,000 to $77,000 from 1996 to 2023................................. 1,012,021 1,018,579
Notes payable to Virginia Gas Distribution Company; interest payable at 9%; principal
payable in maturities of $1,000 to $91,000 from 1999 to 2020....................... 1,000,000 1,000,000
Notes payable to Virginia Gas Distribution Company; interest payable at 9.5%;
principal payable in maturities of $30,000 to $123,000 from 2002 to 2017........... 1,000,000 --
Note payable to Virginia Gas Company; interest payable at 9%; principal payable in
maturities of $1,000 to $77,000 from 1999 to 2020.................................. 842,697 842,697
Notes payable to Virginia Gas Distribution Company; interest payable at 8.88%;
principal payable in maturities of $3,000 to $53,000 from 1995 to 2017............. 561,141 568,557
Notes payable to Virginia Gas Distribution Company; interest payable at 7.35%;
principal payable in maturities of $6,000 to $36,000 from 1996 to 2023............. 467,767 470,798
Notes payable through 1999 with interest from 8.0% to 12.75%; secured by assets with
a book value of $19,380 as of March 31, 1997....................................... 18,075 22,659
------------ ------------
7,436,043 6,491,127
Less-- Current portion............................................................... (107,861) (104,915)
------------ ------------
Long-term debt....................................................................... $ 7,328,182 $6,386,212
------------ ------------
------------ ------------
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with principal of $9,100,000. A portion
($1,000,000) of the proceeds was loaned to the Company by Virginia Gas
Distribution Company.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000. A
portion ($842,697) of the proceeds was allocated to the Company by VGC which was
used by the Company to construct natural gas storage facilities to support
natural gas distribution facilities owned by Virginia Gas Distribution Company.
In January 1994, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Natural Gas Revenue Bond
Series A and B with combined principal of $3,000,000. A portion ($1,330,000) of
the proceeds was allocated to the Company by an affiliated company, which was
used by the Company to construct natural gas storage and gathering facilities to
support natural gas distribution facilities owned by Virginia Gas Distribution
Company.
F-33
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. LONG-TERM DEBT: (CONTINUED)
In November 1994, the Buchanan County Authority issued its Natural Gas
Revenue Bond Series A with principal of $4,250,000. A portion ($2,655,306) of
the proceeds was allocated to the Company by VGC which was used by the Company
to construct natural gas storage and gathering facilities to support natural gas
distribution facilities owned by Virginia Gas Distribution Company.
As of December 31, 1996, principal payments on long-term debt for the next
five years are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 104,915
1998.............................................................. 109,450
1999.............................................................. 132,363
2000.............................................................. 89,441
2001.............................................................. 143,117
</TABLE>
10. SALES TO MAJOR CUSTOMERS:
One of the Company's customers accounted for 12 percent and 20 percent while
another customer accounted for 45 percent and 29 percent, respectively, of
operating revenue for the years ended December 31, 1996 and 1995. One customer
accounted for 10 percent of 1996 operating revenue while another customer
accounted for 12 percent of 1995 operating revenue. One of the Company's
customers accounted for 44 percent and 53 percent, respectively, of operating
revenue for the six months ended June 30, 1997 and 1996, while another customer
accounted for 12 percent of operating revenue for the six months ended June 30,
1996.
11. COMMITMENTS:
Certain of the Company's leases require the Company to pay minimum rentals.
The aggregate minimum rental payments on leases for the next five years are as
follows:
<TABLE>
<S> <C>
1997............................................................... $ 91,523
1998............................................................... 91,523
1999............................................................... 62,373
2000............................................................... 59,723
2001............................................................... 59,723
</TABLE>
F-34
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.......................................................... $ 47,953 $ 85,818 $ 135,630 $ 108,482
State............................................................ -- -- -- 13,668
---------- ---------- ---------- ----------
47,953 85,818 135,630 122,150
---------- ---------- ---------- ----------
Deferred:
Federal.......................................................... 67,749 120,465 212,476 139,214
State............................................................ -- -- -- --
---------- ---------- ---------- ----------
67,749 120,465 212,476 139,214
---------- ---------- ---------- ----------
$ 115,702 $ 206,283 $ 348,106 $ 261,364
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Deferred tax assets:
Minimum tax credit carryforwards...................................................... $ 4,656 $ 4,656
----------- ------------
Deferred tax liabilities:
Capital assets........................................................................ 624,091 556,342
----------- ------------
Net deferred tax liabilities.......................................................... $ 619,435 $ 551,686
----------- ------------
----------- ------------
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of
June 30, 1997, and there were no changes in the valuation allowance during the
years ended December 31, 1996 and 1995, or during the six months ended June 30,
1997 and 1996.
A reconciliation of the tax provision at the statutory Federal income tax
rate and the Company's actual provision for income tax is as follows.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax at statutory rate............................................ $ 115,702 $ 206,283 $ 348,106 $ 253,894
State income taxes, less Federal benefit......................... -- -- -- 10,961
Other, net....................................................... -- -- -- (3,491)
---------- ---------- ---------- ----------
$ 115,702 $ 206,283 $ 348,106 $ 261,364
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-35
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
13. RELATED-PARTY TRANSACTIONS:
With the exception of sales and storage fees charged to outside third
parties, a significant portion of the Company's transactions is with VGC and
affiliated companies.
VGC provides certain general and administrative services for the Company.
These services include professional services, insurance coverage and
administrative services (with associated costs). Accordingly, management fees of
$105,000 and $180,000 have been charged to the Company by VGC for the years
ended December 31, 1996 and 1995, respectively, and zero and $90,000 for the six
months ended June 30, 1997 and 1996. Other transactions with affiliated
companies include purchases of natural gas, natural gas storage and technical
services provided for and by affiliated companies.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Distribution Company:
We have audited the accompanying balance sheet of Virginia Gas Distribution
Company as of December 31, 1996, and the related statements of income, changes
in stockholders' equity, and cash flows for the years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Virginia Gas Distribution
Company as of December 31, 1996, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-37
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.............................................................................. $ 34,529 $ 16,166
Accounts receivable............................................................... 393,717 151,752
Other current assets.............................................................. 148,783 154,920
Notes receivable.................................................................. 26,246 26,004
------------- ------------
Total current assets............................................................ 603,275 348,842
PROPERTY AND EQUIPMENT, net......................................................... 5,785,139 2,755,660
NOTES RECEIVABLE.................................................................... 4,360,450 3,413,066
DEFERRED TAX ASSET.................................................................. -- 1,995
OTHER ASSETS........................................................................ 1,099,160 546,798
------------- ------------
Total assets.................................................................... $ 11,848,024 $7,066,361
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 40,376 $ 39,240
Accounts payable.................................................................. 1,563,010 462,095
Other current liabilities......................................................... 29,331 33,368
------------- ------------
Total current liabilities....................................................... 1,632,717 534,703
LONG-TERM DEBT...................................................................... 8,646,425 5,018,064
DEFERRED INCOME TAXES............................................................... 17,482 --
------------- ------------
Total liabilities............................................................... 10,296,624 5,552,767
------------- ------------
STOCKHOLDERS' EQUITY:
Common stock -- no par value, 100,000 shares authorized, 75,000 (unaudited) shares
issued and outstanding as of June 30, 1997; no par value, 75,000 issued and
outstanding as of December 31, 1996............................................. 1,500,000 1,500,000
Retained earnings................................................................. 51,400 13,594
------------- ------------
Total stockholders' equity...................................................... 1,551,400 1,513,594
------------- ------------
Total liabilities and stockholders' equity...................................... $ 11,848,024 $7,066,361
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-38
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue........................................... $ 419,421 $ 299,092 $ 629,280 $ 556,052
Interest income............................................. 211,303 161,284 320,836 129,249
Other income................................................ 45,288 36,059 72,949 33,887
---------- ---------- ---------- ----------
676,012 496,435 1,023,065 719,188
---------- ---------- ---------- ----------
EXPENSES:
Purchased gas expense....................................... 238,996 146,573 330,332 234,297
Operation and maintenance expense........................... 38,386 22,365 55,032 50,563
Depreciation, depletion, and amortization................... 50,751 38,037 78,013 76,162
General and administrative.................................. 73,348 82,440 191,619 125,982
---------- ---------- ---------- ----------
401,481 289,415 654,996 487,004
---------- ---------- ---------- ----------
OTHER EXPENSE:
Interest.................................................... 200,955 170,125 358,158 147,915
Other....................................................... 16,293 13,487 3,676 9,140
---------- ---------- ---------- ----------
217,248 183,612 361,834 157,055
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES...................................... 57,283 23,408 6,235 75,129
PROVISION FOR INCOME TAXES...................................... 19,477 7,958 2,120 25,544
---------- ---------- ---------- ----------
NET INCOME...................................................... $ 37,806 $ 15,450 $ 4,115 $ 49,585
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS DISTRIBUTION
COMPANY'S EARNINGS............................................ $ 18,903 $ 7,725 $ 2,058 $ 24,792
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK (DEFICIT)
------------ ----------
<S> <C> <C>
Balance, December 31, 1994.............................................................. $ 1,500,000 $ (40,106)
Net income............................................................................ -- 49,585
------------ ----------
Balance, December 31, 1995.............................................................. 1,500,000 9,479
Net income............................................................................ -- 4,115
------------ ----------
Balance, December 31, 1996.............................................................. 1,500,000 13,594
Net income (unaudited)................................................................ -- 37,806
------------ ----------
Balance, June 30, 1997 (unaudited)...................................................... $ 1,500,000 $ 51,400
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED
ENDED JUNE 30 DECEMBER 31
------------------------ ------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 37,806 $ 15,450 $ 4,115 $ 49,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion, and amortization.............. 50,751 38,037 78,013 76,162
Deferred income taxes.................................. 19,477 7,062 2,120 22,197
(Increase) decrease in accounts receivable............. (241,965) (24,680) 52,074 (108,776)
Decrease (increase) in receivable from affiliate....... -- 1,562,500 1,562,500 (1,562,500)
Decrease (increase) in other current assets............ 6,137 21,779 (3,220) (81,914)
Increase in other assets............................... (14,246) (8,648) (25,239) (6,973)
Increase (decrease) in accounts payable................ 1,100,915 (169,198) 227,747 68,609
(Decrease) increase in other current liabilities....... (4,037) (65,645) (70,345) 82,471
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities................................... 954,838 1,376,657 1,827,765 (1,461,139)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (3,070,452) (180,853) (674,263) (412,178)
Loans made to affiliated companies....................... (1,000,000) (1,500,000) (1,500,000) (500,000)
Payments received on notes receivable.................... 52,374 83,998 98,200 20,741
----------- ----------- ----------- -----------
Net cash used in investing activities.......... (4,018,078) (1,596,855) (2,076,063) (891,437)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal................................ (20,503) (20,392) (42,223) (4,644)
Proceeds from new loans.................................. 3,650,000 -- -- 2,881,314
Payment of financing costs............................... (219,394) -- -- (66,368)
Establishment of financing reserve funds................. (328,500) -- -- (259,129)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................... 3,081,603 (20,392) (42,223) 2,551,173
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................ 18,363 (240,590) (290,521) 198,597
CASH, beginning of period.................................. 16,166 306,687 306,687 108,090
----------- ----------- ----------- -----------
CASH, end of period........................................ $ 34,529 $ 66,097 $ 16,166 $ 306,687
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................ $ 349,996 $ 316,564 $ 533,085 $ 97,181
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes paid........................................ $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Distribution Company (the "Company") was organized during 1992
under the laws of the state of Virginia. The Company is 50 percent owned by
Virginia Gas Company ("VGC") and 50 percent owned by a private investor. The
primary business of the Company is to develop and operate natural gas
distribution systems, located primarily in the southwestern counties of the
Commonwealth of Virginia.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of June 30, 1997, and for the six
months ended June 30, 1997 and 1996, include, in the opinion of management, all
adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in the period the natural gas is delivered to
the customer.
PROPERTY AND EQUIPMENT
All direct and indirect costs relating to property acquisition, development
costs, and support equipment and facilities are capitalized as the properties
are obtained or the facilities are placed into service. The Company provides for
depreciation of property and equipment using the straight-line method over
estimated useful lives ranging from 5 to 30 years.
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects
while activities are in progress to bring the assets to their intended use.
Interest capitalized totaled $74,927 and $25,930 for the years ended December
31, 1996 and 1995, respectively. Interest capitalized totaled $145,580
(unaudited) and $46,439 (unaudited) for the six months ended June 30, 1997 and
1996, respectively.
F-42
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995
issuance of the Buchanan County and the 1994 issuance of the Russell County and
Buchanan County, Virginia, Natural Gas Facilities Revenue Bonds by the
Industrial Development Authorities of the respective counties, reserve funds
have been established by the trustee for each issuance. Amounts in the reserve
funds will be used to make payments of principal and interest, whether at
maturity, by acceleration, call for redemption, or otherwise, where trust funds
accumulated by scheduled Company payments are insufficient to satisfy bond
requirements. Such amounts are invested in debt securities issued by the U.S.
Treasury and other U.S. government corporations and agencies. The Company
records these investments at cost and recognizes related interest as earned. The
carrying value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under
the asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
3. NOTES RECEIVABLE
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Note receivable from Virginia Gas Storage Company; interest receivable at 8.88%;
principal due in maturities of $3,000 to $53,000 from 1995 to 2017................. $ 561,141 $ 568,557
Notes receivable from Virginia Gas Storage Company; interest receivable at 9%;
principal due in maturities of $1,000 to $91,000 from 1999 to 2020................. 1,000,000 1,000,000
Note receivable from Virginia Gas Pipeline Company; interest receivable at 9%;
principal due in maturities of $1,000 to $91,000 from 1999 to 2020................. 965,000 1,000,000
Note receivable from Virginia Gas Storage Company; interest receivable at 9.5%;
principal due in maturities of $30,000 to $123,000 from 2002 to 2017............... 1,000,000 --
Note receivable from Virginia Gas Storage Company; interest receivable at 7.35%;
principal due in maturities of $6,000 to $36,000 from 1996 to 2023................. 467,767 470,798
Note receivable from Virginia Gas Exploration Company; interest receivable at 7.35%;
principal due in maturities of $5,000 to $30,000 from 1996 to 2023................. 392,788 395,333
Other................................................................................ -- 4,382
------------ ------------
4,386,696 3,439,070
Less--Current portion................................................................ (26,246) (26,004)
------------ ------------
$ 4,360,450 $3,413,066
------------ ------------
------------ ------------
</TABLE>
F-43
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Pipelines............................................................................ $ 5,447,065 $2,343,856
Project and construction in progress................................................. 570,059 555,232
Other property and equipment......................................................... 56,802 104,386
------------ ------------
6,073,926 3,003,474
Less--Accumulated depreciation and amortization...................................... (288,787) (247,814)
------------ ------------
$ 5,785,139 $2,755,660
------------ ------------
------------ ------------
</TABLE>
5. OTHER ASSETS:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Restricted cash and investments-reserve funds........................................ $ 734,895 $ 396,285
Deferred debt issuance costs......................................................... 361,610 147,191
Other................................................................................ 2,655 3,322
------------ ------------
$ 1,099,160 $ 546,798
------------ ------------
------------ ------------
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Note payable to Virginia Gas Company; interest payable at 9.5%; principal payable in
maturities of $110,000 to $447,000 from 2002 to 2017............................... $ 3,650,000 $ --
Note payable to Virginia Gas Company; interest payable at 9%; principal payable in
maturities of $4,000 to $263,000 from 1999 to 2020................................. 2,879,214 2,879,214
Note payable to Virginia Gas Company; interest payable at 7.35%; principal payable in
maturities of $17,000 to $97,000 from 1996 to 2023................................. 1,276,561 1,284,833
Note payable to Virginia Gas Company; interest payable at 8.88%; principal payable in
maturities of $4,000 to $84,000 from 1995 to 2017.................................. 880,816 892,457
Note payable through 1997 with interest, secured by an asset with a book value of
$1,505............................................................................. 210 800
------------ ------------
8,686,801 5,057,304
Less--Current portion................................................................ (40,376) (39,240)
------------ ------------
Long-term debt....................................................................... $ 8,646,425 $5,018,064
------------ ------------
------------ ------------
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with
F-44
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
principal of $9,100,000. A portion ($3,650,000) of the proceeds was allocated to
the Company by VGC and is being used to construct a natural gas distribution
facility in and around the town of Lebanon, Virginia.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000. A
portion ($2,879,214) of the proceeds was allocated to the Company by VGC which
was used by the Company to extend existing natural gas distribution facilities
in and around the town of Grundy, Virginia.
In January 1994, Russell County Authority issued its Natural Gas Revenue
Bond Series A and B with combined principal of $3,000,000. A portion
($1,300,000) of the proceeds was allocated to the Company by VGC which was used
by the Company to construct a natural gas distribution facility in and around
the town of Castlewood, Virginia.
In November 1994, the Buchanan County Authority issued its Natural Gas
Revenue Bond Series A with principal of $4,250,000. A portion ($922,857) of the
proceeds was allocated to the Company by VGC which was used by the Company to
construct a natural gas distribution facility in and around the town of Grundy,
Virginia.
As of December 31, 1996, principal payments on long-term debt for the next
five years are as follows:
<TABLE>
<S> <C>
1997............................................... $ 39,240
1998............................................... 41,347
1999............................................... 74,435
2000............................................... 81,048
2001............................................... 102,339
</TABLE>
7. SALES TO MAJOR CUSTOMERS:
One of the Company's customers accounted for 35 percent and 35 percent, one
customer accounted for 20 percent and 23 percent, while another customer
accounted for 14 percent and 16 percent, respectively, of operating revenue for
the years ended December 31, 1996 and 1995. One of the Company's customers
accounted for 39 percent and 37 percent, one customer accounted for 12 percent
and 14 percent, while another customer accounted for 21 percent and 22 percent,
respectively, of operating revenue for the six months ended June 30, 1997 and
1996.
F-45
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal........................................... $ -- $ 896 $ -- $ 3,347
State............................................. -- -- -- --
--------- --------- --------- ---------
-- 896 -- 3,347
--------- --------- --------- ---------
Deferred:
Federal........................................... 19,477 7,062 2,120 22,197
State............................................. -- -- -- --
--------- --------- --------- ---------
19,477 7,062 2,120 22,197
--------- --------- --------- ---------
$ 19,477 $ 7,958 $ 2,120 $ 25,544
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforward................................. $ 128,657 $ 128,657
----------- ------------
Deferred tax liabilities:
Capital assets.................................................. 146,139 126,662
----------- ------------
Net deferred tax (liabilities) assets......................... $ (17,482) $ 1,995
----------- ------------
----------- ------------
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of
June 30, 1997, and there were no changes in the valuation allowance during the
years ended December 31, 1996 or 1995, or during the six months ended June 30,
1997 and 1996, respectively.
The Company's actual provision for income tax as of December 31, 1996 and
1995, and for the six months ended June 30, 1997 and 1996, approximates the tax
provision at the statutory Federal income tax rate.
9. RELATED-PARTY TRANSACTIONS:
With the exception of sales to outside third parties, a significant portion
of the Company's transactions is with VGC and affiliated companies.
VGC provides certain general and administrative services for the Company.
These services include professional services, insurance coverage and
administrative services (with associated costs). Accordingly, management fees of
$14,000 and $24,000 have been charged to the Company by VGC for the years ended
December 31, 1996 and 1995, respectively, and zero and $12,000 for the six
months ended June 30, 1997 and 1996. Other transactions with affiliated
companies include purchases of natural gas, natural gas storage and technical
services provided for and by affiliated companies.
F-46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Common Stock Price Range.................................................. 11
Capitalization............................................................ 12
Dividend Policy........................................................... 12
Selected Consolidated Financial and Operating Data........................ 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 14
Business.................................................................. 20
Management................................................................ 29
Shares Eligible for Future Sale........................................... 34
Description of Securities................................................. 35
Underwriting.............................................................. 37
Legal Matters............................................................. 38
Experts................................................................... 38
Other Matters............................................................. 38
Available Information..................................................... 38
Glossary.................................................................. 39
Financial Statements...................................................... F-1
</TABLE>
------------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
VIRGINIA GAS COMPANY
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1997
FERRIS, BAKER WATTS
Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's Bylaws provide that the Registrant shall
indemnify its officers, directors and employees to the full extent permitted by
Section 145 of the Delaware General Corporation Law.
Section 9 of the Underwriting Agreement filed as Exhibit 1.1 hereto provides
for reciprocal indemnification between the Registrant and Ferris, Baker Watts,
Incorporated against certain liabilities in connection with the offering
contemplated by this Registration Statement, including liabilities under the
Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the Securities being registered. All of the amounts shown are estimates
except the SEC registration fee and the NASD filing fee. The SEC registration
fee is based on the average price of the Company's Common Stock as of July 22,
1997.
<TABLE>
<S> <C>
SEC Registration Fee......................................... $ 7,100
NASD Filing Fee.............................................. 2,843
NASDAQ Listing Fee........................................... 17,500
Blue Sky Fees and Expenses................................... 7,557
Accounting Fees and Expenses................................. 20,000
Legal Fees and Expenses...................................... 70,000
Printing Expenses............................................ 20,000
Transfer Agent's Fees........................................ 5,000
---------
Total.................................................. $ 150,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Registrant during the past three years that were not registered under the
Act.
1. The following shares of Common Stock have been privately placed during
the past three years:
<TABLE>
<CAPTION>
TOTAL OFFERING
DATE NUMBER OF SHARES PURCHASER PRICE
- --------------------------- ----------------- ---------------------------------------------- ------------------
<S> <C> <C> <C>
August 3, 1996............. 15,000 Michael L. and Karen K. Edwards $ 90,000
August 3, 1996............. 15,000 Allan R. Poole, II 90,000
August 3, 1996............. 4,200 John D. Jessee 25,200
August 3, 1996............. 2,000 Mark N. Witt 12,000
August 3, 1996............. 2,000 Frank A. Merendino, Jr. 12,000
August 3, 1996............. 1,000 Lydia J. Sinemus 6,000
August 3, 1996............. 800 Bradley L. Swanson 4,800
July 30, 1996.............. 42,000 Allan R. Poole, II 252,000
May 31, 1996............... 800,058 Dr. James T. Martin 4,800,345
November 1, 1994........... 20,634 Marlene Kissler and Eric Verzuh, JT 200,000
</TABLE>
These shares were sold to employees of the Company, relatives and accredited
investors in reliance on Section 4(2) of the Act based on the limited number of
purchasers, their sophistication and close
II-1
<PAGE>
relationship to principals of the Company and access to information regarding
the Company as a result of these relationships.
2. The following shares of Common Stock have been issued as the result of
the exercise of stock options:
<TABLE>
<CAPTION>
TOTAL OFFERING
DATE NUMBER OF SHARES PURCHASER PRICE
- --------------------------- ----------------- --------------------------------------------- ------------------
<S> <C> <C> <C>
December 29, 1995.......... 5,159 David Street $ 25,000
December 21, 1995.......... 23,212 Frank A. Merendino, Jr. 45,000
December 20, 1995.......... 4,127 Scott R. Colson 8,000
December 20, 1995.......... 4,127 Sara L. Colson 8,000
December 13, 1995.......... 82,534 Marlene Kissler and Eric Verzuh, JT 400,000
July 5, 1995............... 5,159 Frank A. Merendino, Jr. 10,000
December 29, 1994.......... 32,292 Joan M. Edwards 62,600
December 29, 1994.......... 6,396 Mark N. Witt 12,400
</TABLE>
These stock options were issued to employees of the Company, relatives and
accredited investors and were issued in reliance on Section 4(2) of the Act
based on the limited number of purchasers, their sophistication and close
relationship to principals of the Company and access to information regarding
the Company as a result of these relationships. No underwriters were involved in
these transactions.
3. On September 28, 1995, 2,000 shares of the Registrant's Series A
Preferred Stock were issued to Sirrom Capital Corporation for an aggregate
purchase price of $2,000,000. This sale was made in reliance on Section 4(2) of
the Act. Sirrom Capital Corporation is a venture capital firm which qualifies as
an accredited investor and is extremely sophisticated. Sirrom Capital
Corporation had access to all the records of the Company before its purchase of
this stock. No underwriter was involved in this transaction. This Preferred
Stock was redeemed in February 1997.
4. On September 28, 1995, Registrant issued a warrant to Sirrom Capital
Corporation to purchase 54,163 shares of Registrant's Common Stock, at a
purchase price of $.0001 per share. The warrant was issued in consideration of
the purchase of the Series A Preferred Stock by Sirrom Capital Corporation.
Sirrom Capital Corporation is a venture capital firm which qualifies as an
accredited investor and is extremely sophisticated. This warrant was excercised
in February 1997. Sirrom Capital Corporation had access to all the records of
the Company before its purchase of this security. No underwriter was involved in
the transaction and the sale was made in reliance on Section 4(2) of the Act.
5. As of June 30, 1997, Registrant had options issued and outstanding to an
officer of the Company to purchase up to 2% of Registrant's Common Stock, or
127,920 shares, at an exercise price of $8.72 per share. No underwriter was
involved in the transaction and the option was issued in consideration of the
employee's services. The option was issued in reliance on Section 4(2) of the
Act. As an officer of the Company this option holder had full access to
information about the Company and is sophisticated.
6. As of July 1, 1997, Registrant had options issued and outstanding to
seven officers and employees of the Company to purchase 120,000 shares of the
Registrant's Common Stock at an exercise price of $10.00 per share. No
underwriter was involved in the transactions and the options were issued in
consideration of the employees' services. The options were issued in reliance on
Section 4(2) of the Act. As officers and employees of the Company the option
holders had full access to information about the Company and are sophisticated.
ITEM 27. EXHIBITS
The following is a complete list of Exhibits filed or incorporated by
reference as part of this Registration Statement.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Virginia
Gas Company's Form SB-2 Registration No. 333-5362-NY)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to Virginia Gas Company's Form SB-2 Registration No.
333-5362- NY)
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Virginia Gas Company's
Form SB-2 Registration No. 333-5362-NY)
4.2 Loan Agreement between Industrial Development Authority of Russell County and Virginia Gas Company dated
as of February 1, 1997
4.3 Promissory Note between Industrial Development Authority of Russell County and Virginia Gas Company dated
as of February 1, 1997
4.4 Loan Agreement between Industrial Development Authority of Buchanan County, Virginia and Virginia Gas
Company dated as of November 1, 1994
4.5 Promissory Note between Industrial Development Authority of Buchanan County, Virginia and Virginia Gas
Company dated as of November 1, 1994
5.1 Opinion of Bright & Barnes a Professional Corporation as to the legality of the securities being
registered
9.1 Shareholders' Agreement and Voting Trust (incorporated by reference to Exhibit 9.1 to Virginia Gas
Company's Form SB-2 Registration No. 333-5362-NY)
10.1 Series A Preferred Stock Securities Purchase Agreement by and between Virginia Gas Company and Sirrom
Capital Corporation (incorporated by reference to Exhibit 10.1 to Virginia Gas Company's Form SB-2
Registration No. 333- 5362-NY)
10.2 Stock Purchase Warrant issued by Virginia Gas Company to Sirrom Capital Corporation (incorporated by
reference to Exhibit 10.2 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.3 Placement Agreement between Virginia Gas Company and Anderson & Strudwick Incorporated (incorporated by
reference to Exhibit 10.3 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.4 Employment Agreement between Virginia Gas Company and Mark N. Witt (incorporated by reference to Exhibit
10.5 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.5 Employment Agreement between Virginia Gas Company and Michael L. Edwards (incorporated by reference to
Exhibit 10.6 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.6 Warrant to Anderson & Strudwick Incorporated (incorporated by reference to Exhibit 4.2 to Virginia Gas
Company's Form SB-2 Registration No. 333-5362-NY)
10.7 Lease Agreement between J.D. Morefield, et. al. and Virginia Gas Company (incorporated by reference to
Exhibit 10.7 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.8 Firm Storage Service Agreement between Virginia Gas Storage Company and Roanoke Gas Company dated as of
March 19, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<C> <S>
10.9 Firm Storage Service Agreement between Virginia Gas Storage Company and Powell-Clinch Utility District
(incorporated by reference to Exhibit 10.9 to Virginia Gas Company's Form SB-2 Registration No.
333-5362-NY)
10.10 Firm Storage Service Agreement between Virginia Gas Storage Company and the Public Utility District of
Jefferson and Cocke Counties, Tennessee (incorporated by reference to Exhibit 10.10 to Virginia Gas
Company's Form SB-2 Registration No. 333-5362-NY)
10.11 Gas Storage Agreement between Virginia Gas Storage Company and United Cities Gas Company (incorporated by
reference to Exhibit 10.11 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.12 Firm Gas Storage Agreement between Virginia Gas Storage Company and Knoxville Utilities Board
(incorporated by reference to Exhibit 10.12 to Virginia Gas Company's Form SB-2 Registration No.
333-5362-NY)
10.13 Winter Service Firm Natural Gas Sales Agreement between Virginia Gas Storage Company and Knoxville
Utilities Board (incorporated by reference to Exhibit 10.13 to Virginia Gas Company's Form SB-2
Registration No. 333- 5362-NY)
10.14 Agreement for Construction, Ownership and Operation of the Haysi Gathering System between Virginia Gas
Storage Company and Penn Virginia Resources Corporation (incorporated by reference to Exhibit 10.14 to
Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.15 Interruptible Gathering Service Agreement between Columbia Gas Transmission Corporation and Virginia Gas
Storage Company (incorporated by reference to Exhibit 10.15 to Virginia Gas Company's Form SB-2
Registration No. 333-5362-NY)
10.16 Transfer Agreement between Virginia Gas Company and Tenneco Energy Resources Corporation (incorporated by
reference to Exhibit 10.16 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.17 Promissory Note in principal amount of $1,725,000 in favor of Tenneco Energy Resources Corporation
(incorporated by reference to Exhibit 10.17 to Virginia Gas Company's Form SB-2 Registration No.
333-5362-NY)
10.18 Firm Storage contract between Virginia Pipeline Company and United Cities Gas Company (previously filed)
10.19 Pipeline Balancing Agreement between East Tennessee Natural Gas Company and Virginia Gas Pipeline Company
(incorporated by reference to Exhibit 10.19 to Virginia Gas Company's Form SB-2 Registration No.
333-5362-NY)
10.20 Warrant to Shareholders (incorporated by reference to Exhibit 10.20 to Virginia Gas Company's Form SB-2
Registration No. 333-5362-NY)
10.21 Amendment to Transfer Agreement between Virginia Gas Company and Tenneco Energy Marketing Company,
successor-in-interest to Tenneco Energy Resources Corporation (incorporated by reference to Exhibit 10.17
to Virginia Gas Company's Form 10-KSB for the fiscal year ended December 31, 1996)
10.22 Firm Storage Service Agreement between Virginia Gas Storage Company and Sevier County Utility District
(incorporated by reference to Exhibit 10.22 to Virginia Gas Company's Form 10-KSB for the fiscal year
ended December 31, 1996)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<C> <S>
10.23 Firm Storage Service Agreement between Virginia Gas Storage Company and Natural Gas Utility District of
Hawkins County (incorporated by reference to Exhibit 10.23 to Virginia Gas Company's Form 10-KSB for the
fiscal year ended December 31, 1996)
10.24 Firm Storage Service Agreement between Virginia Gas Pipeline Company and Citizens Gas Utility District
(incorporated by reference to Exhibit 10.24 to Virginia Gas Company's Form 10-KSB for the fiscal year
ended December 31, 1996)
10.25 Firm Gas Storage Agreement between Virginia Gas Pipeline Company and Knoxville Utilities Board
(incorporated by reference to Exhibit 10.25 to Virginia Gas Company's Form 10-KSB for the fiscal year
ended December 31, 1996)
10.26 Underwriting Agreement between Virginia Gas Company and Anderson Strudwick Incorporated (incorporated by
reference to Exhibit 1.1 to Virginia Gas Company's Form SB-2 Registration No. 333-5362-NY)
10.27 Description of Stock Options issued to named executive officers (previously filed)
10.28 Amendment to the Firm Storage Service Agreement between Virginia Gas Storage Company and Powell-Clinch
Utility District dated as of January 16, 1996
10.29 Firm Storage Service Contract between Virginia Gas Storage Company and Hawkins County Utility District
dated as of February 25, 1997
10.30 Firm Storage Service Contract between Virginia Gas Pipeline Company and ALCOA dated as of June 30, 1997
10.31 Gas Transportation Agreement between Virginia Gas Distribution Company and East Tennessee Gas Company
dated as of November 1, 1997 (previously filed)
21.1 Subsidiaries and Affiliates of the Registrant (incorporated by reference to Exhibit 21.1 to Virginia Gas
Company's Form 10-KSB for the fiscal year ended December 31, 1996)
23.1 Consent of Bright & Barnes a Professional Corporation (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP (previously filed)
24.1 Powers of Attorney (included in signature page previously filed)
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to Virginia Gas Company's Form 10-KSB
for the fiscal year ended December 31, 1996)
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of
II-5
<PAGE>
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement;
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to provisions of its Certificate of Incorporation, its Bylaws, or the
Delaware General Corporation Law, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be a part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide the underwriters, at
the closing specified in the underwriting Agreement, certificates in such
denominations and registered in the such names as required by the underwriters
to permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to the Form SB-2 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Abingdon, Commonwealth of
Virginia, on July 28, 1997.
VIRGINIA GAS COMPANY
BY: /S/ MICHAEL L. EDWARDS
-----------------------------------------
Michael L. Edwards
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO THE FORM SB-2 REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ MICHAEL L. EDWARDS Officer and Chairman of
- ------------------------------ the Board of Directors July 28, 1997
Michael L. Edwards (Principal Executive
Officer)
/s/ KAREN K. EDWARDS* Vice President, Secretary,
- ------------------------------ Treasurer and Director July 28, 1997
Karen K. Edwards
/s/ PETER C. EINSELEN* Director
- ------------------------------ July 28, 1997
Peter C. Einselen
/s/ JOHN D. JESSEE* Vice President and
- ------------------------------ Principal Financial July 28, 1997
John D. Jessee Officer
*By: /s/ MICHAEL L. EDWARDS
-------------------------
Michael L. Edwards
ATTORNEY-IN-FACT
II-7
<PAGE>
2,000,000 Shares
VIRGINIA GAS COMPANY
Common Stock
(Par Value $0.001 Per Share)
UNDERWRITING AGREEMENT
July __, 1997
Ferris, Baker Watts, Incorporated
As Representative of the
Several Underwriters Identified
In Schedule I Hereto,
1729 Eye Street, N.W.
Washington, D.C. 20006
Ladies and Gentlemen:
Section 1. Introduction. Virginia Gas Company, a
Delaware corporation (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the Underwriters named in
Schedule I hereto (the "Underwriters"), for which Ferris, Baker Watts,
Incorporated is acting as representative (the "Representative"), an aggregate
of 2,000,000 shares and, at the election of the Underwriters, up to 300,000
additional shares of Common Stock, par value $0.001 per share ("Stock"), of
the Company. The 2,000,000 shares to be sold by the Company are herein
called the "Firm Shares" and the 300,000 additional shares to be sold by the
Company are herein called the "Optional Shares." The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 3
hereof are herein collectively called the "Shares."
Section 2. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form SB-2 (File No.
333-___________) under the Securities Act of 1933, as amended (the "Act"),
with respect to the Shares, including a form of prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Act and the rules and regulations of the Securities and
Exchange Commission (the "Commission") thereunder (the "Rules and
Regulations"). Such registration statement has been filed with the
Commission under the Act and one or more amendments to such registration
statement may also have been so filed. After the execution of this
Agreement, the Company shall file with the Commission a Prospectus (as
hereinafter defined) which
<PAGE>
shall have been provided to and approved by the Representative prior to the
filing thereof. As used in this Agreement, the term "Registration Statement"
means such registration statement, as amended and revised at the time when such
registration statement becomes effective, including all financial schedules and
exhibits thereto and any information omitted therefrom pursuant to Rule 430A
under the Act and included in the Prospectus (as hereinafter defined). The term
"Preliminary Prospectus" means each prospectus subject to completion contained
in such Registration Statement or any amendment thereto at the time the
Registration Statement was or is declared effective, or such prospectus subject
to completion filed pursuant to Rule 424(a) under the Act which omits the
information permitted under Rule 430A. The term "Prospectus" means a
prospectus, including any amendments or supplements thereto, relating to the
Registration Statement that includes all the information contained in the most
recently filed Preliminary Prospectus in addition to such information which may
have been omitted in any Preliminary Prospectus pursuant to Rule 430A under the
Act. To the extent the Company relies on Rule 462(b) under the Act ("Rule
462(b)") to increase the maximum aggregate offering price, the Company shall
have made in a timely manner any filing required under Rule 462(b) and such
filing shall be in compliance with such Rule. Copies of the Registration
Statement, any amendment thereto and any Preliminary Prospectus filed with the
Commission have been delivered by the Company to the Representative on behalf of
the Underwriters. The Registration Statement and any post-effective amendment
thereto have been declared effective by the Commission. No stop order
suspending the effectiveness of the Registration Statement, any post-effective
amendment thereto or Rule 462(b) Registration Statement, if any, has been issued
and no proceeding for that purpose has been initiated or threatened by the
Commission.
(b) The Commission has not issued any order preventing
or suspending the use of any Preliminary Prospectus and has not instituted or
threatened to institute any proceedings with respect to such an order. Each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the Rules and
Regulations, and did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through the Representative expressly for use therein.
(c) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to the
requirements of the Act and the Rules and Regulations of the Commission
thereunder. The Registration Statement and any post-effective amendment
thereto, as of the applicable effective date or dates, and each Prospectus,
as of the date each such prospectus is filed and at all times subsequent
thereto up to and including the Closing Date (as defined in Section 5 hereof)
and the Option Closing Date (as defined in Section 5 hereof), do not contain
an untrue statement of a
-2-
<PAGE>
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through the Representative expressly for use
therein.
(d) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of Delaware
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by reason
of the failure to be so qualified in any such jurisdiction. Each of Virginia
Gas Pipeline Company, Virginia Gas Marketing Company, Virginia Gas
Exploration Company and Virginia Gas Propane Company (each a "Subsidiary" and
together the "Subsidiaries") and each of Virginia Gas Distribution Company
and Virginia Gas Storage Company (each an "Affiliate" and together the
"Affiliates") of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its jurisdiction
of incorporation and each has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or conducts
any business so as to require such qualification, (except for those
jurisdictions in which the failure to so qualify has not had and will not
have a Material Adverse Effect (as hereinafter defined)) and has all power
and authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged. "Material Adverse Effect"
means when used in connection with the Company or any Affiliate, any
development, change or effect that is materially adverse to the business,
properties, assets, net worth, condition (financial or other), results of
operations or, insofar as can be reasonably foreseen, prospects of the
Company and its Subsidiaries, taken as a whole, or of any Affiliate, as the
case may be.
(e) The Company has the duly authorized capitalization
as set forth under the caption "Capitalization" in the Prospectus or most
recently filed Preliminary Prospectus and will have the adjusted
capitalization set forth therein at the Closing Date (as defined in Section
5(a) below), based on the assumptions set forth therein. All of the issued
shares of capital stock of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable. As of the Closing Date, the
securities of the Company conform to the description of the Stock contained
in the Prospectus. With respect to each Subsidiary of the Company, all of
the issued and outstanding shares of capital stock are fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims. With respect to each Affiliate, all
of the issued shares of capital stock of each Affiliate owned by the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims, and the percentage owned by the
Company of all of the outstanding shares of
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capital stock of each such Affiliate is as set forth in the Prospectus or most
recently filed Preliminary Prospectus. Other than as disclosed in the
Prospectus, there are no holders of the securities of the Company having rights
to registration thereof or pre-emptive rights to purchase capital stock of the
Company. Except as created hereby or referred to in the Prospectus or most
recently filed Preliminary Prospectus, there are no outstanding options,
warrants, rights or other arrangements requiring the Company at any time to
issue any capital stock.
(f) The unissued Shares to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and non-assessable and will
conform to the description of the Stock contained in the Prospectus. Good
and marketable title to the Shares will pass to the Underwriters on the
Closing Date free and clear of any lien, encumbrance, security interest,
claim or other restriction whatsoever. The Company has received, subject to
notice of issuance, approval to have the Shares listed on The Nasdaq National
Market ("NNM") and the Company knows of no reason or set of facts which is
likely to adversely affect such approval.
(g) The financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus
or the most recent Preliminary Prospectus fairly present in all material
respects the financial condition, results of operations, stockholders' equity
and cash flows of the Company on a consolidated basis and of each Affiliate
at the respective dates and for the respective periods specified therein.
Such financial statements and the related notes and schedules thereto have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise
noted therein) and such financial statements as are audited have been
examined by Arthur Andersen, LLP, who are independent public accountants
within the meaning of the Act and the Rules and Regulations, as indicated in
their reports filed therewith. The selected financial information and
statistical data set forth under the captions "Prospectus Summary --Summary
Financial Information," "Capitalization," "Selected Consolidated Financial
and Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" in the Prospectus or the
most recent Preliminary Prospectus fairly present, on the basis stated in the
Prospectus or such Preliminary Prospectus, the information included therein
and have been properly derived from the financial statements and other
operating records of the Company and the Subsidiaries and Affiliates.
(h) None of the Company, Subsidiaries and Affiliates
have sustained since the date of the latest audited financial statements
included in the Prospectus (or most recent Preliminary Prospectus) any
material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus; and, since the respective dates
as of which
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information is given in the Registration Statement and the Prospectus (or
Preliminary Prospectus), there has not been any change in the capital stock or
long-term debt of the Company or any of its Subsidiaries or any of its
Affiliates or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its Subsidiaries and Affiliates, otherwise than as set forth or
contemplated in the Prospectus.
(i) The Company and its Subsidiaries and Affiliates have
filed all necessary foreign, federal, state and local income, franchise and
other material tax returns and has paid all taxes shown as due thereunder and
the Company has no knowledge of any tax deficiency which might be assessed
against the Company, any Subsidiary or Affiliate which, if so assessed, would
be reasonably expected to have a Material Adverse Effect on the Company or
any Affiliate.
(j) The Company and each Subsidiary and Affiliate
maintains insurance of the types and in amounts which it reasonably believes
to be adequate for its business in such amounts and with such deductibles as
are customary for companies in the same or similar business, all of which
insurance is in full force and effect.
(k) Other than as set forth in the Prospectus or
the most recent Preliminary Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its Subsidiaries or
Affiliates is a party or of which any property of the Company or any of its
subsidiaries is the subject which (A) questions the validity of the capital
stock of the Company or this Agreement or of any action taken or to be taken
by the Company pursuant to or in connection with this Agreement, (B) is
required to be disclosed in the Registration Statement or Prospectus, or (C)
if determined adversely to the Company or any of its subsidiaries, could
reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect on the Company or any Affiliate and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others. Any such proceedings that
are set forth in the Final or such Preliminary Prospectus are accurately
summarized therein in all material respects.
(l) The Company has full legal right, power and
authority to enter into this Agreement and to consummate the transactions
provided for herein. This Agreement has been duly authorized, executed and
delivered by the Company and, assuming it is a binding agreement of yours,
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting the enforcement of creditors' rights and the application of
equitable principles relating to the availability of remedies and except as
rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws).
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<PAGE>
(m) The Company's execution and performance of this
Agreement, including application of the net proceeds of the offering, if and
when received, as described in the Prospectus under the caption "Use of
Proceeds" as described in the Prospectus or the most recent Preliminary
Prospectus, will not violate any provision of the Company's Articles of
Incorporation or Bylaws or any law, rule or regulation applicable to the
Company or any of its Subsidiaries or Affiliates of any government, court,
regulatory body, administrative agency or other governmental body having
jurisdiction over the Company or any Subsidiary or Affiliate or any of its
respective businesses or properties, and will not result in the breach, or be
in contravention, of any loan agreement, lease, franchise, license, note,
bond, other evidence of indebtedness, indenture, mortgage, deed of trust,
voting trust agreement, stockholders' agreement, note agreement or other
agreement or instrument to which the Company or any Subsidiary or Affiliate
is a party or by which their respective property is or may be subject, or any
statute, judgment, decree, order, rule or regulation applicable to the
Company or any of its Subsidiaries or Affiliates of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its Subsidiaries or Affiliates or any of their
respective businesses, activities or properties, except those, if any, that
are described in the Prospectus (or most recent Preliminary Prospectus) or
those which would not singly or in the aggregate have a Material Adverse
Effect on the Company or any Affiliate.
(n) All executed agreements or copies of executed
agreements filed as exhibits to the Registration Statement to which the
Company, a Subsidiary or Affiliate is a party or by which it is or may be
bound or to which any of its assets, properties or businesses is or may be
subject have been duly and validly authorized, executed and delivered by the
Company, the Subsidiaries or the Affiliates and constitute the legal, valid
and binding agreements of such party, enforceable against it in accordance
with their respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
relating to enforcement of creditors' rights generally, and general equitable
principles relating to the availability of remedies, and except as rights to
indemnity or contribution may be limited by federal or state securities laws
and the public policy underlying such laws). The descriptions in the
Prospectus and Preliminary Prospectus of contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by the Act and the Rules and Regulations, and there are no contracts
or other documents which are required by the Act or the Rules and Regulations
to be described in the Prospectus or filed as exhibits to the Registration
Statement which are not described or filed as required, and the exhibits
which have been filed are complete and correct copies of the documents of
which they purport to be copies.
(o) The Company and its Subsidiaries and Affiliates have
good and marketable title in fee simple to all real property and personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property, and do not
interfere with the use made and proposed to be made of such property by the
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<PAGE>
Company, its Subsidiaries or Affiliates and any real property and buildings held
under lease by the Company, its Subsidiaries and Affiliates are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company, its Subsidiaries and Affiliates and any
property held by the Company, its Subsidiaries or Affiliate pursuant to any
other form of agreement or instrument, which constitutes a valid and enforceable
agreement or instrument entitling the Company, its Subsidiary or the Affiliate,
as the case may be, to use the property in the manner set forth or contemplated
by the Prospectus.
(p) No consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except for
the registration under the Act of the Shares and the registration of the
Stock under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), each of which has been made or obtained, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, such approval as may be
required from the NNM to have the Shares listed thereon and such approval as
may be required by the National Association of Securities Dealers in
connection with the terms and conditions set forth in this Agreement.
(q) Neither the Company nor any of its Subsidiaries or
Affiliates is in violation of its Certificate of Incorporation or Bylaws;
neither the Company nor any of its Subsidiaries or Affiliates is (or, as a
result of the passage of time or based on its projected plans of operations,
will be) in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument to which it
is a party or by which it or any of its properties may be bound, which
default may reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect, or which could in any way, individually or in the
aggregate, impair or delay the consummation of the transactions contemplated
by this Agreement or the offering of the Shares in the manner contemplated by
the Prospectus.
(r) The statements set forth in the Prospectus (or
Preliminary Prospectus) under the caption "Description of Securities,"
insofar as they purport to constitute a summary of the terms of the Stock,
and under the captions "Shares Eligible For Future Sale," and "Underwriting"
(except, with respect to the statements under the caption "Underwriting," for
information furnished in writing to the Company by the Underwriters through
the Representative expressly for use therein) insofar as they purport to
describe the provisions of the laws and the provisions of documents referred
to therein, are accurate and fairly summarize such provisions in all material
respects.
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<PAGE>
(s) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or an
entity "controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act").
(t) Each of the Company and its Subsidiaries and
Affiliates owns or is licensed or otherwise has sufficient right to use the
proprietary knowledge, inventions, patents, trademarks, service marks, trade
names, logo marks and copyrights ("Intellectual Property") currently used in
the conduct of their business, except for those patents, trademarks, service
marks, trade names, logo marks or copyrights with respect to which the
failure to own or license same would not have a Material Adverse Effect on
the Company or any Affiliate. To the best knowledge of the Company, none of
the activities engaged in by the Company or its Subsidiaries or Affiliates
infringes upon or otherwise conflicts with Intellectual Property rights of
others, except for any such conflicts that would not have a Material Adverse
Effect on the Company or on any Affiliate and no claims have been asserted
against the Company, any Subsidiaries or any Affiliate by any person with
respect to the use of any such Rights or challenging or questioning the
validity or effectiveness of any such Rights.
(u) No labor disturbance by, or labor dispute with, the
employees of the Company, its Subsidiaries or Affiliates exists or is
threatened or imminent which may have a Material Adverse Effect on the
Company or any Affiliate.
(v) Since its inception, the Company has not incurred
any liability arising under, or as a result of the application of ,the
provisions of the Act.
(w) The Company, its Subsidiaries and Affiliates have
not violated any applicable environmental, safety, health or similar law
applicable to the business of the Company, nor any federal or state law
relating to discrimination in the hiring, promotion or pay of employees, nor
any applicable federal or state wages and hours law, nor any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, the consequences of which violation
would reasonably be expected to have a Material Adverse Effect on the Company
or any Affiliate.
(x) Each of the Company and its Subsidiaries and
Affiliates hold all franchises, licenses, permits, approvals, certificates
and other authorizations from federal, state and other governmental or
regulatory authorities necessary to the ownership, leasing and operation of
its properties or required for the present conduct of its business or for the
conduct of its business as contemplated by the Prospectus, and such
franchises, licenses, permits, approvals, certificates and other governmental
authorizations are in full force and effect and each of the Company and its
Subsidiaries and Affiliates is in compliance therewith in all material
respects except where the failure so to obtain, maintain or comply would not
have a Material Adverse Effect on the Company or any Affiliate.
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<PAGE>
(y) The books, records and accounts and systems of
internal accounting controls of the Company currently comply with the
requirements of Section 13(b)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(z) Neither the Company nor any of its officers,
directors or affiliates (within the meaning of the Rules and Regulations) has
taken, directly or indirectly, any action designed to stabilize or manipulate
the price of any security of the Company, or which has constituted or which
might in the future reasonably be expected to, cause or result in,
stabilization or manipulation of the price of any security of the Company, to
facilitate the sale or resale of the Shares or otherwise.
(aa) The minute books of the Company, its Subsidiaries
and Affiliates are current and contain a materially correct and complete
record of all corporate action taken by the respective Boards of Directors
and stockholders of the Company and the Subsidiaries and Affiliates and all
signatures contained therein are true signatures of the persons whose
signatures they purport to be.
(ab) Except as described in the Prospectus, the Company
is unaware of any loss or threatened loss of any key customer, supplier, or
account which is material to the Company, its Subsidiaries or Affiliates.
(ac) The employee benefit plans, including employee
welfare benefit plans of the Company and the Subsidiaries and Affiliates
("Employee Plans") have been operated in compliance with the applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Internal Revenue Code of 1986, as amended (the "Code"), all
regulations, rulings and announcements promulgated or issued thereunder and
all other applicable governmental laws and regulations (except to the extent
such noncompliance would not have a Material Adverse Effect on the Company or
an Affiliate). No reportable event under Section 4043(b) of ERISA or any
prohibited transaction under Section 406 of ERISA has occurred with respect
to any employee benefit plan maintained by the Company or its Subsidiaries or
Affiliates. There are no pending or, to the Company's knowledge, threatened
claims by or on behalf of any employee benefit plan, by any employee or
beneficiary covered under any such plan or by any governmental agency or
otherwise involving such plans or any of their respective fiduciaries (other
than for routine claims for benefits). All Employee Plans that are group
health plans have been operated in compliance with the group health plan
continuation coverage requirements of Section 4980B of the Code in all
material respects.
Section 3. Purchase of Securities by the Underwriters.
On the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set forth,
(A) the Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $_______, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (B) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional
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<PAGE>
Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Company, at the purchase price per share set forth in
clause (A) of this Section 3, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so
as to eliminate fractional shares)
The Company hereby grants to the Underwriters the right
to purchase at their election up to 300,000 Optional Shares, at the purchase
price per share set forth in the paragraph above, for the sole purpose of
covering over-allotments in the sale of the Firm Shares. Any such election
to purchase Optional Shares may be exercised only by written notice from the
Representative to the Company, given within a period of 30 calendar days
after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares
are to be delivered, as determined by you but in no event earlier than the
Closing Date (as defined in Section 5 hereof) or, unless you and the Company
otherwise agree in writing, no earlier than two nor later than ten business
days after the date of such notice.
Section 4. Offering of the Shares by the Underwriters.
Upon the authorization by the Representative of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
Section 5. Delivery of and Payment for the Shares.
(a) The Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered in such names as the Representative may request upon at least
forty-eight hours' prior notice to the Company shall be delivered by or on
behalf of the Company to the Representative, for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor in Federal (same day) funds. The Company will cause
the certificates representing the Shares to be made available for checking
and packaging at least twenty-four hours prior to the Closing Date (as
defined below) with respect thereto at the office of Ferris, Baker Watts,
Incorporated, 1720 Eye Street, N.W., Washington, D.C. 20006 (the "Designated
Office"). The time and date of such delivery and payment shall be, with
respect to the Firm Shares, at ________ a.m., EST, on ______________, 1997 or
such other time and date as the Representative and the Company may agree
upon, and, with respect to the Optional Shares, ______ a.m., EST, on the date
specified by the Representative in the written notice of the Underwriters'
election to purchase such Optional Shares, or such other time and date as the
Representative and the Company may agree upon. Such time and date for
delivery of the Firm Shares is herein called the "Closing Date", such time
and date for delivery of the Optional Shares, if not the Closing Date, is
herein called the "Option Closing Date."
(b) The documents to be delivered at the Closing
Date or the Option Closing Date, as the case may be, by or on behalf of the
parties hereto pursuant to Section
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8 hereof, including the cross-receipt for the Shares and any additional
documents requested by the Underwriters will be delivered at the offices of
Venable, Baetjer and Howard, LLP, 1800 Mercantile Bank & Trust Building, Two
Hopkins Plaza, Baltimore, Maryland 21201 (the "Closing Location"), and the
Shares will be delivered at the Designated Office, on the Closing Date or the
Option Closing Date, as the case may be.
(c) A meeting will be held at the Closing Location at
2:00 p.m., EST, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be, or at such other time as is mutually
agreed upon by the parties hereto, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be
available for review by the parties hereto.
Section 6. Covenants of the Company. The Company
covenants and agrees with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and within
the time period required by Rule 424(b). During any time when a prospectus
relating to the shares is required to be delivered under the Act, the Company
will comply with all requirements imposed upon it by the Act and the Rules
and Regulations to the extent necessary to permit the continuance of sales of
or dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented. With respect to any
registration statement, prospectus, amendment, or supplement to be filed with
the Commission in connection with the Shares, the Company will provide a copy
of each such document to the Representative a reasonable time prior to the
date such document is proposed to be filed with the Commission and will not
file any such document without the consent of the Representative. In the
event that the Registration Statement is effective at the time of execution
of this Agreement but the total number of Shares subject to this Agreement
exceeds the number of Shares covered by the Registration Statement, the
Company will promptly file with the Commission on the date hereof a
registration statement pursuant to Rule 462(b) in accordance with the
requirements of such Rule and will make payment of the filing fee therefor in
accordance with the requirements of Rule 111(b) under the Act.
(b) The Company will advise the Representative promptly
(A) when the Registration Statement, as amended, has become effective; (B) if
the provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A; (C)
when any post-effective amendment to the Registration Statement becomes
effective; (D) of any request made by the Commission for amending the
Registration Statement, for supplementing any Preliminary Prospectus or
Prospectus or for additional information; and (E) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto or any order preventing or
suspending the use of any
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Preliminary Prospectus or Prospectus or any amendment or supplement thereto or
the institution or threat of any investigation or proceeding for that purpose,
and will use its best efforts to prevent the issuance of any such order and, if
issued, to obtain the lifting thereof as soon as possible.
(c) The Company will cooperate with the Representative,
its counsel and the Underwriters in qualifying or registering the Shares for
sale, or obtaining an exemption therefrom, under the Blue Sky laws of such
jurisdictions as the Representative shall designate, and will continue such
qualifications or registrations or exemptions in effect so long as reasonably
requested by the Representative to effect the distribution of the Shares.
The Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not presently qualified.
(d) The Company consents to the use of the Prospectus
(and any amendment or supplement thereto) by the Underwriters and all dealers
to whom the Shares may be sold, in connection with the offering or sale of
the Shares and for such period of time thereafter as the Prospectus is
required by law to be delivered in connection therewith. If, at any time
when a prospectus relating to the Shares is required to be delivered under
the Act, any event occurs as a result of which the Prospectus, as then
amended or supplemented, would include any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein not misleading, or if it becomes necessary at any time to amend or
supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company promptly will so notify the Representative and,
subject to Section 7(a) hereof, will prepare and file with the Commission an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, each such amendment or supplement to be reasonably satisfactory
to counsel to the Underwriters.
(e) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on the day after
the end of the fiscal quarter of the Company during which the effective date
of the Registration Statement occurs (90 days in the event that such quarter
is the Company's last fiscal quarter), the Company will make generally
available to its security holders, in the manner specified in Rule 158(b) of
the Rules and Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the Act
or the Rules and Regulations, covering a period of at least 12 consecutive
months after the effective date of the Registration Statement.
(f) During a period of five years after the date hereof,
the Company will deliver to the Representative:
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(i) as soon as practicable after filing with the
Commission, all such reports, forms or other documents as may be required
from time to time, under the Act, the Rules and Regulations, the Exchange Act
and the rules and regulations thereunder;
(ii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iii) as soon as they are available, copies of
all reports and financial statements furnished to or filed with the National
Association of Securities Dealers, Inc. ("NASD") or any securities exchange
or market;
(iv) every press release and every material news
item or article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company; and
(v) any additional information of a public nature
concerning the Company or its business which the Representative may
reasonably request.
During such five-year period the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and will be accompanied by similar financial
statements for any significant subsidiary or affiliate which is not so
consolidated.
(g) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Stock.
(h) The Company will furnish, without charge, to the
Representative or on the Representative's order, at such place as the
Representative may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto, and any registration statement filed pursuant to Rule 462(b) (two of
which copies will be signed and will include all financial statements and
exhibits) and the Prospectus, and all amendments and supplements thereto in
each case as soon as available and in such quantities as the Representative
may reasonably request. The Company will provide or cause to be provided to
the Representative and upon request to each Underwriter, a copy of the report
on Form SR filed by the Company if required by Rule 463 under the Act.
(i) Except pursuant to this Agreement, the Company will
not, directly or indirectly, without the prior written consent of the
Representative issue, offer, sell, offer to sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose (or announce any issuance,
offer, sale, offer of sale, contract of sale, grant of any option to
purchase, pledge or other disposition) of any shares of Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Stock for a period of 180 days after the
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date hereof, other than issuances pursuant to the exercise of stock options or
warrants outstanding on the date hereof.
(j) The Company will cause the Shares to be duly
approved for listing on the NNM prior to the Closing Date. The Company shall
take all necessary and appropriate action such that the Common Shares are
authorized for quotation on the NNM as soon as practicable after the
effectiveness of the Registration Statement and the Common Shares shall
remain so authorized for at least thirty-six (36) months thereafter.
(k) Neither the Company nor any of its officers or
directors, nor affiliates of any of them (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to, cause or result in, or
which will constitute, stabilization or manipulation of the price of any
securities of the Company.
(l) The Company will apply the net proceeds of the
offering received in the manner set forth under the caption "Use of Proceeds"
in the Prospectus.
(m) The Company will timely file all such reports, forms
or other documents as may be required from time to time, under the Act, the
Rules and Regulations, the Exchange Act and the rules and regulations
thereunder, and all such reports, forms and documents so filed will comply as
to form and substance with the applicable requirements under the Act, the
Rules and Regulations, the Exchange Act and the rules and regulations
thereunder.
(n) Except as described in the Prospectus, the Company
will not, prior to the Option Closing Date, incur any liability or
obligation, direct or contingent, or enter into any material transaction,
other than in the ordinary course of business or, if there is no Option
Closing Date, then prior to the First Closing Date.
(o) The Company will not acquire any of the Company's
capital stock prior to the Option Closing Date nor will the Company declare
or pay any dividend or make any other distribution upon its capital stock
payable to its holders of record on a date prior to the Option Closing Date
or, if there is no Option Closing Date, then prior to the Closing Date.
(p) The Company will comply or cause to be complied with
the conditions to the obligations of the Underwriters set forth in Section 8
hereof.
(q) The Company shall promptly prepare and file with the
Commission, from time to time, such reports as may be required to be filed by
the Rules and Regulations.
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Section 7. Expenses.
(a) If the Underwriters purchase the Firm Shares, in
accordance with the terms of this Agreement, the Company will pay the
Representative out of the first proceeds of the offering contemplated hereby
a non-accountable expense allowance of one percent (1%) of the gross proceeds
raised from this offering to compensate the Representative for its expenses
in connection with the transactions contemplated by this Agreement.
(b) If the purchase of the Firm Shares as herein
contemplated is not consummated for any reason other than the Underwriters'
default under this Agreement or other than by reason of Section 11(a), the
Company shall reimburse the several Underwriters for their out-of-pocket
expenses (including but not limited to reasonable counsel fees and
disbursements) in connection with any investigation made by them, and any
preparation made by them in respect of marketing of the Shares or in
contemplation of the performance by them of their obligations hereunder.
Section 8. Conditions of the Underwriters' Obligations.
The obligations of each Underwriter to purchase and pay for the Shares set
forth opposite the name of such Underwriter in Schedule I is subject to the
continuing accuracy of the representations and warranties of the Company
herein as of the date hereof and as of the Closing Date and the Option
Closing Date, if any, as if they had been made on and as of the Closing Date
or the Option Closing Date, as the case may be; the accuracy on and as of the
Closing Date and the Option Closing Date, as applicable, of the statements of
officers of the Company made pursuant to the provisions hereof; the
performance by the Company on and as of the Closing Date and the Option
Closing Date, as applicable, of their respective covenants and agreements
hereunder; and the following additional conditions:
(a) The Registration Statement shall have been declared
effective, and the Prospectus (containing the information omitted pursuant to
Rule 430A) shall have been filed with the Commission not later than the
Commission's close of business on the second business day following the date
hereof or such later time and date to which the Representative shall have
consented. No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the
knowledge of the Company or the Representative, shall be contemplated by the
Commission. The Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representative shall not have advised the
Company that the Registration Statement, or any amendment thereto, contains
an untrue statement of fact which, in the Representative's opinion, is
material, or omits to state a fact which, in the Representative's opinion, is
material and is required to be stated therein or is necessary to make the
statements therein not misleading, or that the Prospectus, or any supplement
thereto, contains an untrue statement of fact which in the Representative's
opinion, is
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material, or omits to state a fact which, in the Representative's opinion, is
material and is required to be stated thein or is necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading
(c) On or prior to the Closing Date and the Option
Closing Date, if any, the Representative shall have received from counsel to
the Underwriters, such opinion or opinions with respect to the issuance and
sale of the Firm Shares, the Registration Statement and the Prospectus and
such other related matters as the Representative reasonably may request and
such counsel shall have received such documents and other information as they
request to enable them to pass upon such matters.
(d) On the Closing Date and the Option Closing Date, if
any, the Underwriters shall have received the opinion, dated the Closing
Date, of Bright & Barnes, P.C., counsel to the Company, to the effect set
forth below:
(i) The Company, each Subsidiary and each Affiliate
(A) is a duly organized and validly existing corporation in good standing
under the laws of its respective jurisdiction of incorporation with full
power and authority (corporate and other) to own or lease its properties and
to conduct its business as described in the Prospectus, and (B) is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which it owns or leases property or is subject to no
material liability or disability by reason of the failure to be so qualified
in any such jurisdiction.
(ii) The Company has authorized capital stock as set
forth in the Prospectus; the securities of the Company conform in all
material respects to the description thereof contained in the Prospectus; the
outstanding shares of Stock have been duly authorized and validly issued by
the Company, are fully paid and nonassessable, and are free of any preemptive
or other rights to subscribe for any of the Shares pursuant to the Company's
certificate or bylaws or any agreement known to such counsel after reasonable
investigation and due inquiry. The Company has duly authorized the issuance
and sale of the Shares to be sold by it hereunder; such Shares, when issued
by the Company and paid for in accordance with the terms hereof, will be
validly issued, fully paid and non assessable and will conform in all
material respects to the description thereof contained in the Prospectus.
(iii) The shares have been duly approved for
listing on the NNM.
(iv) The Registration Statement is effective under
the Act. Any required filing of a registration statement pursuant to Rule
462(b) has been made in the manner and within the time period required by
Rule 462(b). The Prospectus has been filed with the Commission pursuant to
the appropriate subparagraph of Rule 424(b) under the Act and no stop order
suspending the effectiveness of the Registration Statement or
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any amendment thereto has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best knowledge of such counsel, are
threatened or contemplated under the Act.
(v) The registration statement originally filed with respect to
the Shares and each amendment thereto, each Preliminary Prospectus and
Prospectus and, if any, each amendment and supplement thereto (except for the
financial statements, schedules and other financial data included therein, as to
which such counsel need not express any opinion), complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
(vi) The descriptions and summaries contained in the Prospectus
of contracts and other documents, are accurate and fairly represent in all
material respects the information required to be shown by the Act and the Rules
and Regulations. To the best knowledge of such counsel, there are no contracts
or documents which are required by the Act to be described in the Prospectus or
to be filed as exhibits to the Registration Statement which are not described or
filed as required by the Act and the Rules and Regulations.
(vii) To the best knowledge of such counsel, there is not
pending or threatened against the Company any action, suit, proceeding or
investigation before or by any court, regulatory body, or administrative agency
or any other governmental agency or body, domestic or foreign, of a character
required to be disclosed in the Registration Statement or the Prospectus which
is not so disclosed therein.
(viii) The statements set forth in the Prospectus under the
captions "Business," "Management," "Shares Eligible for Future Sale," and
"Description of Securities," insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred to therein, provide a fair
summary of such legal matters, documents and proceedings which is accurate in
all material respects.
(ix) The Company has full legal right, power, and authority to
enter into this Agreement and to consummate the transactions provided for
herein. This Agreement has been duly authorized, executed and delivered by the
Company. This Agreement, assuming due authorization, execution and delivery by
each other party hereto, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or by
general principles of equity relating to the availability of remedies and except
as rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.
(x) The Company's execution or delivery of this Agreement, its
performance hereof, its consummation of the transactions contemplated herein or
its application of the net proceeds of the offering in the manner set forth
under the caption
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"Use of Proceeds" in the Prospectus will not conflict with or result in any
breach or violation of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon, any property or asset of the Company or any Subsidiary or
Affiliate pursuant to the terms of (A) the certificate or bylaws of the Company
or any Subsidiary or Affiliate; (B) the terms of any indenture, mortgage, deed
of trust, voting trust agreement, stockholders agreement, note agreement or
other agreement or instrument known to such counsel after reasonable
investigation, to which the Company or any Subsidiary or Affiliate is a party or
by which it is or may be bound or to which any of its properties may be subject;
(C) any statute, rule or regulation of any regulatory body or administrative
agency or other governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or Affiliate or any of their
businesses, activities or properties; or (D) any order or decree of any
government, arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having such jurisdiction.
(xi) No consent, approval, authorization or order of any court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign has been or is required for the Company's performance of
this Agreement or the consummation of the transactions contemplated hereby,
except such as may be required under federal securities laws in connection with
the purchase and distribution by the Underwriters of the Shares.
(xii) To the best of such counsel's knowledge, the conduct of
the businesses of the Company or of any Subsidiary or Affiliate is not in
violation of any federal, state or local statute, administrative regulation or
other law, which violation could have a Material Adverse Effect on the Company
or any Affiliate. The Company and each Subsidiary and Affiliate possess all
licenses, permits, approvals and other governmental authorizations required for
the conduct of its business, as described in the Prospectus except where the
absence of any such license, permit, approval or authorization would not be
likely, in the opinion of such Counsel, to have a Material Adverse Effect on the
Company or any Affiliate. Such licenses, permits and other governmental
authorizations possessed by the Company or its Subsidiaries or Affiliates are in
full force and effect and, to such counsel's knowledge after due inquiry, the
Company and each Subsidiary and Affiliate is in all material respects complying
therewith. To such counsel's knowledge, after due inquiry, there is no reason
why the Company would not receive, or would be unlikely to receive such
licenses, permits, approvals and other governmental authorization as would be
required for the conduct of the Company's business as contemplated by the
Prospectus.
(xiii) To the knowledge of such counsel, each of the Company,
its Subsidiaries and Affiliates, as the case may be, has good and marketable
title, except as otherwise stated in the Prospectus, to all the real property
owned by the Company or a Subsidiary or Affiliate as set forth in the
Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind or nature whatsoever except those, if any, referred to in the Prospectus
(or reflected in the financial statements included therein) or which, in
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the aggregate, are not material to the Company and its business or any Affiliate
and its business and do not materially affect the value of such property; and
the real properties held or used by the Company or a Subsidiary or Affiliate
under material leases or other material agreements as set forth in the
Prospectus are held by it under valid, subsisting and enforceable leases or
other agreements with respect to which neither the Company nor any Subsidiary or
Affiliate is in default, except to the extent that the enforceability of the
rights and remedies of the Company or a Subsidiary or Affiliate under any such
lease or other agreement may be limited by bankruptcy, insolvency, or similar
laws generally affecting the rights of creditors and by equitable principles
limiting the right to specific performance or other equitable relief.
(xiv) Each of the businesses conducted by the Company or any
Subsidiary or Affiliate are either not subject to regulation by the Federal
Energy Regulatory Commission under the Natural Gas Act or have qualified for an
exemption therefrom and continue to be so qualified.
(xv) To the best of such counsel's knowledge, upon due inquiry,
the Company and each Subsidiary and Affiliate are not in material violation of
any applicable federal, state or local environmental law.
(xvi) The Prospectus fairly and accurately describes each
permit, consent, and authorization, the absence of which would have a Material
Adverse Effect on the Company and its ability to complete the P-25 and P-24
pipelines, to expand the storage capacities of the Saltville and Early Grove
facilities, and otherwise to expand the business operations of the Company, its
Subsidiaries and Affiliates as described in the Prospectus.
In addition, such counsel shall state that, based upon reasonable
inquiry nothing has come to such counsel's attention that causes such counsel to
believe that either the Registration Statement as of the date it is or was
declared effective and as of the Closing Date or the Option Closing Date, as the
case may be, or the Prospectus as of the date thereof and as of the Closing Date
or the Option Closing Date, as the case may be, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein ore necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any belief with respect to
the financial statements, schedules and other financial or statistical data).
In rendering any such opinions, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
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(e) On or prior to the Closing Date and the Option Closing Date, if
any, counsel to the Underwriters shall have been furnished such documents,
certificates and opinions as they may reasonably require in order to evidence
the accuracy, completeness or satisfaction of any of the representations or
warranties of the Company or conditions herein contained.
(f) At the time that this Agreement is executed by the Company the
Underwriters shall have received from Arthur Andersen LLP a letter as of the
date of this Agreement in form and substance satisfactory to the Representative
(the "Original Letter"), and on the Closing Date and the Option Closing Date, if
any, the Underwriters shall have received from such firm a letter dated the
Closing Date or Option Closing Date, as applicable, stating that, as of a
specified date not earlier than five days prior to the date of such letter,
nothing has come to the attention of such firm to suggest that the statements
made in the Original Letter are not true and correct.
(g) On the Closing Date, and the Option Closing Date, if any, the
Underwriters shall have received a certificate, dated the Closing Date or the
Option Closing Date, as applicable, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date (or
Option Closing Date), and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this Agreement on its part
to be performed or satisfied at or prior to the Closing Date (or Option Closing
Date);
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best knowledge of each of such
persons, are contemplated or threatened under the Act and any and all filings
required by Rule 424, Rule 430A and Rule 462(b) have been timely made;
(iii) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and neither the
Prospectus (or any supplement thereto) or any Preliminary Prospectus includes or
included any untrue statement of a material fact or omits or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
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(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and including
the Closing Date (or the Option Closing Date), the Company has not incurred,
other than in the ordinary course of its business or as described in the
Prospectus or in an amended or supplemented Prospectus, any material liabilities
or obligations, direct or contingent; the Company has not purchased any of its
outstanding capital stock or paid or declared any dividends or other
distributions on its capital stock; the Company has not entered into any
transactions not in the ordinary course of business; and there has not been any
change in the capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in short-term borrowings in the ordinary
course of business) of the Company or any material adverse change to the
business, properties, assets, net worth, condition (financial or other), results
of operations or, insofar as can be reasonably foreseen, prospects of the
Company; the Company has not sustained any material loss or damage to its
property or assets, whether or not insured; there is no litigation which is
pending or threatened against the Company which is required under the Act or the
Rules and Regulations to be set forth in an amended or supplemented Prospectus
which has not been set forth; and there has not occurred any other event
required to be set forth in an amended or supplemented Prospectus which has not
been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at the date of
this certificate.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date and the Option Closing Date, as applicable, there has not been (i)
any change or decrease specified in the letter or letters referred to in
paragraph (f) of this Section 8 or (ii) any change, or any development involving
a prospective change, in the business or properties of the Company which change
or decrease in the case of clause (i) or change or development in the case of
clause (ii) makes it impractical or inadvisable in the Representative's judgment
to proceed with the public offering or the delivery of the Shares as
contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 6(c) hereof has been issued on or prior to
the Closing Date or the Option Closing Date, as the case may be, and no
proceedings for that purpose have been instituted or, to your knowledge or that
of the Company, have been or are contemplated.
(j) The Representative shall have received from each person who is a
director or officer of the Company or who owns more than five percent (5%) of
the outstanding shares of Stock (either directly or through exercise of
currently exercisable stock options or warrants), assuming exercise of currently
exercisable stock options and warrants on a fully diluted basis, an agreement to
the effect that such person will not,
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directly or indirectly, without the prior written consent of the Representative,
on behalf of the Underwriters, offer, sell, offer to sell, contract to sell,
grant any option to purchase, pledge or otherwise dispose (or announce any
offer, sale, offer of sale, contract of sale, grant of an option to purchase,
pledge or other disposition) of any shares of Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Stock for a
period of 180 days after the date of this Agreement.
(k) The Shares shall have been duly authorized for listing on the
NNM.
(l) The Company shall have furnished the Underwriters with such
further opinions, letters, certificates or documents as the Representative or
counsel for the Underwriters may reasonably request.
All opinions, certificates, letters and documents to be furnished by the
Company will comply with the provisions hereof only if they are reasonably
satisfactory in all material respects to the Underwriters and to counsel for the
Underwriters. The Company shall furnish the Underwriters with manually signed
or conformed copies of such opinions, certificates, letters and documents in
such quantities as you reasonably request. The certificates delivered under
this Section 8 shall constitute representations, warranties and agreements of
the Company as to all matters set forth therein as fully and effectively as if
such matters had been set forth in Section 2 of this Agreement.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at either the Closing Date or the Option Closing Date is not so
satisfied, this Agreement at the Representative's election will terminate upon
notification to the Company without liability on the part of any Underwriter
(including the Representative) or the Company, except for the expenses to be
paid by the Company pursuant to Section 7 hereof and except to the extent
provided in Section 9 hereof.
Section 9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof), to which such Underwriter or such controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities, or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements not misleading and will reimburse, as incurred,
such Underwriter or such controlling persons in connection with investigating,
defending or appearing as a third
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party witness in connection with any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises out
of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in any of such documents in reliance upon and in
conformity with information furnished in writing to the Company on behalf of
such Underwriter through the Representative expressly for use therein, and
provided, further, that such indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) from whom the person asserting any
such loss, claim, damage, liability or action purchased Shares which are the
subject thereof to the extent that any such loss, claim, damage, liability or
action (i) results from the fact that such Underwriter failed to send or give a
copy of the Prospectus (as amended or supplemented) to such person at or prior
to the confirmation of the sale of such Shares to such person in any case where
such delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (as amended and supplemented),
unless such failure resulted from non-compliance by the Company with Section
6(h) hereof. The indemnity agreement in this paragraph (a) shall be in addition
to any liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages or liabilities
(and actions in respect thereof) to which the Company or any such director,
officer, or controlling person may become subject, under the Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing by
that Underwriter through the Representative to the Company expressly for use
therein; and will reimburse, as incurred, all legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. The Company acknowledges that the statements with respect
to the public offering of the Shares set forth in the paragraphs under the
caption "Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement
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contained in this paragraph (b) shall be in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the failure so to notify the indemnifying party shall
not relieve the indemnifying party from any liability which it may have to any
indemnified party otherwise than under paragraph (a) or (b) of this Section 8 to
the extent that the indemnifying party was not adversely affected by such
omission. In case any such action is brought against an indemnified party and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties against which a claim is to be made will be
entitled to participate therein and, to the extent that it or they may wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party has reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and otherwise to participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses (other than the reasonable costs of investigation)
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party has employed such counsel in connection
with the assumption of such different or additional legal defenses in accordance
with the proviso to the immediately preceding sentence, (ii) the indemnifying
party has not employed counsel reasonably satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified, on the other hand, from the offering of
the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and
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the party to be indemnified, on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. In any case where the
Company is a contributing party and the Underwriters are the indemnified party,
the relative benefits received by the Company on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Shares (before deducting
expenses) bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), the Underwriters shall not
be required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by the Underwriters hereunder. The
Underwriters' obligations to contribute pursuant to this paragraph (d) are
several in proportion to their respective underwriting obligations, and not
joint. No person guilty of fraudulent misrepresentations (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
paragraph (d), (i) each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter and (ii) each director of
the Company, each officer of the Company who has signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which claim for
contribution may be made against another party or parties under this paragraph
(d), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation (x) it or
they may have hereunder or otherwise than under this paragraph (d) or (y) to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may otherwise have.
Section 10. Representations, etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and
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<PAGE>
payment for the Shares. Any successors to the Underwriters shall be entitled to
the indemnity, contribution and reimbursement agreements contained in this
Agreement.
Section 11. Effective Date and Termination.
(a) This Agreement shall become effective at ______ a.m., EST, on the
first business day following the date hereof, or at such earlier time after the
Registration Statement becomes effective as the Representative, in its sole
discretion, shall release the Shares for the sale to the public unless prior to
such time the Representative shall have received written notice from the Company
that it elects that this Agreement shall not become effective, or the
Representative shall have given written notice to the Company that the
Representative on behalf of the Underwriters elect that this Agreement shall not
become effective; provided, however, that the provisions of this Section 11 and
of Section 7 and Section 9 hereof shall at all times be effective. For purposes
of this Section 11(a), the Shares to be purchased hereunder shall be deemed to
have been so released upon the earlier of notification by the Representative to
securities dealers releasing such Shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 7 and 9
hereof) may be terminated by the Representative by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or the Option Closing Date, or if any of the representations or
warranties of the Company are not accurate in any respect or if the covenants,
agreements or conditions of, or applicable to the Company herein contained have
not been complied with in any respect or satisfied within the time specified on
the Closing Date or the Option Closing Date, respectively, or if prior to the
Closing Date or the Option Closing Date:
(i) the Company shall have sustained a loss by strike, fire,
flood, accident or other calamity of such a character as to interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss was insured;
(ii) trading in the Stock shall have been suspended by the
Commission or the NNM or trading in securities generally on the New York Stock
Exchange or the NNM shall have been suspended or a material limitation on such
trading shall have been imposed or minimum or maximum prices shall have been
established on either such exchange or market;
(iii) a banking moratorium shall have been declared by New
York or United States authorities;
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<PAGE>
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak or
escalation of any other insurrection or armed conflict involving the United
States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or condition (financial or other) of the Company that, in
each case, in the Representative's judgment makes it impracticable or
inadvisable to make or consummate the public offering, sale or delivery of the
Company's Shares on the terms and in the manner contemplated in the Prospectus
and the Registration Statement.
(c) Termination of this Agreement under this Section 12 or Section 13
after the Firm Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 7 and 9 hereof.
Section 12. Substitution of Underwriters. If one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 8 or
11 hereof) to purchase and pay for (a) in the case of the Closing Date, the
number of Firm Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to the Representative of such Firm Shares in accordance with the
terms hereof or (b) in the case of the Option Closing Date, the number of
Additional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to the Representative of such Additional Shares in accordance with
the terms hereof, and the number of such Shares shall not exceed 10% of the Firm
Shares or Additional Shares required to be purchased on the Closing Date or the
Option Closing Date, as the case may be, then, each of the non-defaulting
Underwriters shall purchase and pay for (in addition to the number of such
Shares which it has severally agreed to purchase hereunder) that proportion of
the number of Shares which the defaulting Underwriter or Underwriters shall have
so failed or refused to purchase on such Closing Date or Option Closing Date, as
the case may be, which is the percentage set forth next to each such
Underwriter's name on Schedule I. In such case, the Representative, on behalf
of the Underwriters, shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, to a date not exceeding seven full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than for
a reason sufficient to justify the termination of this Agreement under the
provisions of Section 8 or 11 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
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<PAGE>
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Additional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Additional Shares in accordance with the terms
hereof, and the number of such Shares shall exceed 10% of the Firm Shares or
Additional Shares required to be purchased by all the Underwriters on the
Closing Date or the Option Closing Date, as the case may be, then (unless within
48 hours after such default arrangements to your satisfaction shall have been
made for the purchase of the defaulted Shares by an Underwriter or Underwriters)
and subject to the provisions of Section 11(b) hereof, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or on
the part of the Company except as otherwise provided in Sections 7 and 9 hereof.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this paragraph. Nothing in this Section
12, and no action taken hereunder, shall relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
Section 13. Notices. All communications hereunder shall be in writing
and if sent to the Representative shall be mailed or delivered or sent by
facsimile transmission and confirmed by letter to Ferris, Baker Watts,
Incorporated at 100 Light Street, 8th Floor, Baltimore, Maryland 21202,
Attention: Steven L. Shea (facsimile number: (410) 659-4632) or, if sent to the
Company, shall be mailed or delivered or sent by facsimile transmission and
confirmed by letter to the Company at 200 East Main Street, Abingdon, Virginia
35320, attention: Michael L. Edwards (facsimile number: (540) 676-0151).
Section 14. Successors. This Agreement shall inure to the benefit of
and be binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representatives, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons, if
any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters
will be deemed a successor because of such purchase.
Section 15. Applicable Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of Maryland,
without giving effect to the choice of law or conflict of law principles
thereof. Each party hereto consents to the jurisdiction of each court in which
any action is commenced seeking indemnity or contribution pursuant to Section 9
above and agrees to accept, either directly or through an agent, service of
process of each such court.
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<PAGE>
Section 16. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which together shall be deemed to be one and the same instrument.
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<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us ___ counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Virginia Gas Company
By:_________________________________
Name:____________________________
Title:_____________________________
Accepted as of the date hereof
FERRIS, BAKER WATTS, INCORPORATED
___________________________
___________________________
___________________________
By: FERRIS, BAKER WATTS, INCORPORATED
On behalf of each of the Underwriters
By:___________________________
Name:
Title:
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<PAGE>
SCHEDULE I
NUMBER OF SHARES TO BE
PURCHASED BY EACH UNDERWRITER
Number of Firm Shares to
be Purchased from the
Name of Underwriter Percentage Company
Ferris, Baker Watts,
Incorporated
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<PAGE>
LOAN AGREEMENT
between
INDUSTRIAL DEVELOPMENT AUTHORITY OF RUSSELL COUNTY
and
VIRGINIA GAS COMPANY
Dated as of February 1, 1997
NOTE: THIS LOAN AGREEMENT AND AN EXECUTED NOTE IN THE FORM
DESCRIBED HEREIN HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY INTEREST
IN FAVOR OF, CRESTAR BANK, AS TRUSTEE UNDER AN INDENTURE OF TRUST DATED AS OF
THE DATE HEREOF, WITH THE INDUSTRIAL DEVELOPMENT AUTHORITY OF RUSSELL COUNTY, AS
AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION CONCERNING SUCH SECURITY
INTEREST MAY BE OBTAINED FROM THE TRUSTEE AT ITS PRINCIPAL
CORPORATE TRUST OFFICE IN RICHMOND, VIRGINIA.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions and Rules of Construction
Section 1.1. Definitions............................................ 2
Section 1.2. Rules of Construction.................................. 5
ARTICLE II
Representations
Section 2.1. Representations by Authority............................. 5
Section 2.2. Representations by Corporation........................... 6
ARTICLE III
Construction of Project; Loan of Bond Proceeds
Section 3.1. Agreement To Construct Project........................... 8
Section 3.2. Financing of Project..................................... 9
Section 3.3. Repayment to Authority; Repayment to Corporation......... 9
Section 3.4. Corporation To Provide Funds To Complete Project......... 9
Section 3.5. Limitation of Authority's Liability...................... 10
Section 3.6. Disclaimer of Warranties................................. 10
Section 3.7. Compliance with Indenture................................ 10
ARTICLE IV
Payments on the Note
Section 4.1. Amounts Payable.......................................... 11
Section 4.2. Payments Assigned........................................ 11
Section 4.3. Default in Payments...................................... 12
Section 4.4. Corporation's Obligations Unconditional.................. 12
Section 4.5. Advances by Authority or Underwriter..................... 13
Section 4.6. Rebate Requirement....................................... 13
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<PAGE>
ARTICLE V
Special Covenants
Section 5.1. Insurance Requirements................................... 14
Section 5.2. Examination of Books and Records......................... 15
Section 5.3. Financial Statements and Other Information............... 15
Section 5.4. Damage, Destruction, Condemnation and Loss of Title...... 16
Section 5.5. Indemnification.......................................... 17
Section 5.6. Maintenance and Modification of Project.................. 19
Section 5.7. Tax Exemption............................................ 19
Section 5.8. Investment and Use of Trust Funds........................ 22
Section 5.9. Notice of Other Defaults; Compliance with Other Documents 23
Section 5.10. Corporate Status......................................... 23
Section 5.11. Priority of Indebtedness; Additional Indebtedness........ 23
Section 5.12. Limitations on Liens..................................... 24
Section 5.13. Limitations on Payment of Dividends...................... 24
Section 5.14. Ownership of Stocks and Project.......................... 24
Section 5.15. Continuing Disclosure Requirements....................... 24
Section 5.16. Subordination Discontinuance Requirements................ 25
ARTICLE VI
Events of Default and Remedies
Section 6.1. Event of Default Defined................................. 25
Section 6.2. Remedies on Default...................................... 26
Section 6.3. Application of Amounts Realized in Enforcement of Remedies 27
Section 6.4. No Remedy Exclusive...................................... 27
Section 6.5. Attorneys' Fees and other Expenses....................... 27
Section 6.6. No Additional Waiver Implied by One Waiver............... 27
ARTICLE VII
Prepayment of the Note
Section 7.1. Option To Prepay the Note and Terminate Loan Agreement
in Certain Events...................................... 28
Section 7.2. Option To Prepay the Note in Whole....................... 28
Section 7.3. Option To Prepay the Note in Part........................ 29
Section 7.4. Obligation To Prepay the Note............................ 29
Section 7.5. Amount Required for Prepayment........................... 29
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<PAGE>
ARTICLE VIII
Miscellaneous
Section 8.1. Term of Loan Agreement................................... 29
Section 8.2. Notices.................................................. 30
Section 8.3. Amendments to Loan Agreement and Note.................... 30
Section 8.4. Successors and Assigns................................... 31
Section 8.5. Severability............................................. 31
Section 8.6. Applicable Law; Entire Understanding..................... 31
Section 8.7. Limitation of Liability of Directors of Authority........ 31
Section 8.8. Counterparts............................................. 31
Testimonium............................................................ 32
Signatures............................................................. 32
Receipt................................................................ 33
Exhibit A - Specimen Note
Exhibit B - Specimen Company Note
Exhibit C - Arbitrage Rebate Instructions
iii
<PAGE>
THIS LOAN AGREEMENT, dated as of February 1, 1997,
between the INDUSTRIAL DEVELOPMENT AUTHORITY OF RUSSELL COUNTY, a political
subdivision of the Commonwealth of Virginia (the "Authority"), and VIRGINIA
GAS COMPANY, a Delaware corporation (the "Corporation"),
W I T N E S S E T H:
WHEREAS, the Authority is a political subdivision of the
Commonwealth of Virginia created pursuant to the Industrial Development and
Revenue Bond Act, Chapter 33, Title 15.1 of the Code of Virginia of 1950, as
amended (the "Act"), and is empowered by the Act, among other things, to
issue its bonds and to loan the proceeds from the sale and issuance of such
bonds to be applied to pay the costs of acquiring, improving, constructing
and equipping industrial and commercial facilities and to refund obligations
previously issued for such purposes;
WHEREAS, at the request of the Corporation, Virginia Gas
Distribution Company, a Virginia corporation (the "Distribution Company"),
and Virginia Gas Storage Company, a Virginia corporation (the "Storage
Company"), the Authority issued its $3,000,000 Natural Gas Facility Revenue
Bonds (Virginia Gas Company Project) Series 1994 A and B on January 6, 1994
(the "Russell Senior Bonds") for the purpose of providing funds, together
with other available funds to (i) acquire, improve, construct and equip a
natural gas distribution facility and supporting assets (the "Castlewood
Project") to serve natural gas customers in and near the Town of Castlewood
in Russell County, Virginia, (ii) fund certain reserves, and (iii) pay
certain costs of issuance of the Russell Senior Bonds. The proceeds of the
Russell Senior Bonds were loaned by the Authority to the Corporation and the
Corporation evidenced such loan by issuing to the Authority the Corporation's
$3,000,000 Promissory Note (the "Russell Senior Note");
WHEREAS, at the request of the Corporation, the
Distribution Company, the Storage Company and Virginia Gas Exploration
Company, a Virginia corporation (the "Exploration Company"), the Industrial
Development Authority of Buchanan County, Virginia (the "Buchanan Authority")
issued its $4,250,000 Natural Gas Facilities Revenue Bonds (Virginia Gas
Company Project) Series 1994 on November 15, 1994 (the "Buchanan Senior
Bonds") for the purpose of providing funds, together with other available
funds to (i) acquire, improve, construct and equip a natural gas distribution
facility and supporting assets (the "Grundy Project") to serve natural gas
customers in and near the Town of Grundy in Buchanan County, Virginia, (ii)
fund certain reserves, and (iii) pay certain costs of issuance of the
Buchanan Senior Bonds. The proceeds of the Buchanan Senior Bonds were loaned
by the Buchanan Authority to the Corporation and the Corporation evidenced
such loan by issuing to the Buchanan Authority the Corporation's $4,250,000
Promissory Note (the "Buchanan Senior Note");
WHEREAS, at the request of the Corporation, the
Distribution Company, the Storage Company and the Exploration Company, the
Buchanan Authority issued its $3,750,000
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<PAGE>
Senior Subordinated Natural Gas Facilities Revenue Bonds (Virginia Gas Company
Project) Series 1995 on December 15, 1995 (the "Buchanan Senior Subordinated
Bonds") for the purpose of providing funds, together with other available funds
to (i) acquire, improve, construct and equip additional portions of the Grundy
Project, (ii) fund certain reserves, and (iii) pay certain costs of issuance of
the Buchanan Senior Subordinated Bonds. The proceeds of the Buchanan Senior
Subordinated Bonds were loaned by the Buchanan Authority to the Corporation and
the Corporation evidenced such loan by issuing to the Buchanan Authority the
Corporation's $3,750,000 Promissory Note (the "Buchanan Senior Subordinated
Note");
WHEREAS, at the request of the Corporation, the
Distribution Company, the Storage Company and the Exploration Company, the
Authority made a $100,000 Borrower Loan to the Corporation, on behalf of
itself and the Distribution Company, the Storage Company and the Exploration
Company, on October 1, 1996 (the "Russell Borrower Loan") from the proceeds
of its $100,000 Issuer Loan (the "Russell Issuer Loan") for the purpose of
providing funds, together with other available funds to (i) acquire, improve,
construct and equip a natural gas distribution facility and supporting assets
(the "Lebanon Project") to serve natural gas customers in and near the Town
of Lebanon in Russell County, Virginia, and (ii) pay certain costs of
issuance of the Russell Issuer Loan;
WHEREAS, at the request of the Corporation, the
Distribution Company and Virginia Gas Pipeline Company, a Virginia
corporation (the "Pipeline Company"), the Authority has been asked to issue
its $9,100,000 Subordinated Natural Gas Facilities Revenue Bonds (Virginia
Gas Company Project) Series 1997 (the "Bonds") for the purpose of providing
funds, together with other available funds to (i) acquire, improve, construct
and equip additional portions of the Lebanon Project, (ii) prepay in full the
outstanding principal balance of the Russell Issuer Loan, (iii) fund certain
reserves and (iv) pay certain costs of issuance of the Bonds; and
WHEREAS, although the Corporation will be primarily
liable to make the payments due on the Note, as hereinafter described, the
Corporation will not own any portion of the Lebanon Project. The natural gas
distribution facilities comprising a portion of the Lebanon Project are owned
and operated by the Distribution Company and the natural gas pipeline and
storage facilities comprising a portion of the Lebanon Project are owned and
operated by the Pipeline Company;
NOW, THEREFORE, for and in consideration of the premises
and the mutual covenants hereinafter contained, the parties hereto covenant
and agree as follows:
ARTICLE I
Definitions and Rules of Construction
2
<PAGE>
Section 1.1. Definitions. Except as set forth below or
unless the context otherwise requires, all undefined capitalized terms shall
have the meanings assigned them in the Indenture. Words and terms defined in
the preamble hereto shall have the meaning set forth therein. The following
words and terms shall have the following meanings unless the context
otherwise requires:
"Adverse Tax Action" shall mean any action or omission to
take action reasonably within the control of the actor, the result of which
is to subject interest on the Bonds to inclusion in gross income for federal
income tax purposes; provided, that no Adverse Tax Action shall be deemed to
have occurred if the interest on any Bond becomes taxable to the Holder
thereof who is a "substantial user" of the Lebanon Project or a "related
person" within the meaning of Section 147(a) of the Code.
"Bond Purchase Agreement" shall mean the Bond Purchase
Agreement dated February 20, 1997 among the Authority, the Corporation and
the Underwriter, pursuant to which the Bonds are sold to the Underwriter,
including all amendments or supplements thereto.
"Certificate" shall mean each and every Certificate of
Public Convenience and Necessity or other permit or certificate issued to one
or more of the Companies by the Virginia State Corporation Commission or the
Federal Energy Regulatory Commission relating to the operation of the natural
gas facilities comprising a portion of the Lebanon Project.
"Event of Default" shall mean with respect to this Loan
Agreement each of those events set forth in Section 6.1 of this Loan
Agreement.
"Lebanon Project" shall mean the acquisition, improvement,
construction and equipping of a natural gas distribution facility to serve the
general public in and near the Town of Lebanon in Russell County, including
certain natural gas pipeline and storage facilities that directly support the
distribution facilities. The pipeline and storage facilities are located
primarily in Scott County, Washington County and Smyth County.
"Loan Agreement" shall mean this Loan Agreement,
including all amendments and supplements hereto.
"Net Proceeds" shall mean the gross proceeds from any
insurance recovery or condemnation award remaining after payment of
attorneys' fees, fees and expenses of the Trustee and all other expenses
incurred in the collection of such gross proceeds.
"Note" shall mean the Corporation's Promissory Note in
the original principal amount of $9,100,000, dated the date of the Bonds, in
the form of Exhibit A attached hereto, issued hereunder and delivered to the
Authority to evidence certain of the obligations of the Corporation
hereunder, and all amendments, supplements or substitutions thereto or
therefor.
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<PAGE>
"Payment of the Bonds" shall mean payment in full of the
principal of, premium, if any, and interest on all Bonds and all fees
necessary to provide for the discharge of the Indenture or provision for such
payment to discharge the Indenture as provided therein.
"Permitted Liens" shall mean as of any particular time,
(a) liens for ad valorem taxes and special assessments not then delinquent;
(b) utility, access and other easements and rights-of-way, mineral rights,
restrictions and exceptions, which, in the opinion of an architect, engineer
or surveyor will not interfere with or impair the operation of the Lebanon
Project or other assets owned by the Corporation, the Distribution Company or
the Pipeline Company; (c) such minor defects, irregularities, encumbrances,
easements, right-of-way and licenses as normally exist with respect to the
subject property and as do not interfere with or impair the operation of the
Lebanon Project or other assets owned by the Corporation, the Distribution
Company or the Pipeline Company for its intended use; (d) liens arising by
reason of good faith deposits in connection with leases of real estate, bids
or contracts (other than contracts for the payment of money), deposits to
secure public or statutory obligations, liens to secure, or in lieu of,
surety, stay or appeal bonds, and deposits as security for the payment of
taxes or assessments or other similar charges; (e) any judgment lien against
the Corporation, the Distribution Company or the Pipeline Company so long as
such judgment is being contested in good faith and execution thereon is
stayed, or provision for payment of the judgment has been made in accordance
with applicable law or by the deposit with the applicable court, the Trustee
or with a commercial bank or trust company of cash, security or other
property acceptable to the Trustee; (f) any liens of mechanics, materialmen,
laborers, suppliers or vendors for work or services performed or materials
furnished in connection with any property that are not due and payable or
that are not delinquent, the amount or validity of which are being contested
in good faith and execution thereon is stayed or that have been due for less
than ninety (90) days; (g) any lien existing on the date of authentication
and delivery of the Bonds; provided, that no such lien may be increased,
extended, renewed or modified to apply to any property not subject to such
lien on such date or to secure indebtedness not outstanding on such date,
unless such lien as increased, extended, renewed or modified otherwise
qualifies as a Permitted Lien hereunder; (h) purchase money liens on property
securing indebtedness that was assumed in connection with the acquisition of
such property; provided, that no such lien may be increased, extended,
renewed or modified with respect to such indebtedness unless such lien as
increased, extended, renewed or modified otherwise qualifies as a Permitted
Lien hereunder; and (i) any lien on the property of the Corporation granted
in favor of or securing indebtedness to any of its wholly-owned subsidiaries,
and vice versa.
"Prime Rate" shall mean the rate per year announced from
time to time by Crestar Bank as its prime rate, with any change in the Prime
Rate being effective as of the date such announced prime rate is changed.
The Prime Rate is not necessarily the best or lowest rate of interest offered
by such bank.
"Rebate Amount" shall have the meaning set forth in
Exhibit C, as it may be amended from time to time.
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<PAGE>
"Rebate Amount Certificate" shall have the meaning set
forth in Exhibit C, as it may be amended from time to time.
"Subsidiaries" shall mean any corporations for which
fifty percent (50%) or more of the capital stock is owned by the Corporation.
Section 1.2. Rules of Construction. The following rules
shall apply to the construction of this Loan Agreement unless the context
otherwise requires:
(a) Singular words shall connote the plural number as
well as the singular and vice versa. Any references herein to the masculine
gender include the feminine and neuter genders, and vice versa.
(b) Words importing the redemption or calling for
redemption of Bonds shall not be deemed to refer to or connote the payment of
Bonds at their stated maturity.
(c) All references herein to particular articles or
sections are references to articles or sections of this Loan Agreement unless
otherwise indicated. The words "hereof," "herein," "hereto," "hereby," and
"hereunder" refer to the entire Loan Agreement.
(d) The headings and table of contents herein are solely
for convenience of reference and shall not constitute a part of this Loan
Agreement nor shall they affect its meaning, construction or effect.
ARTICLE II
Representations
Section 2.1. Representations by Authority. The
Authority makes the following representations:
(a) The Authority is an industrial development authority
duly established under the Act, and is a political subdivision of the
Commonwealth of Virginia having those corporate powers enumerated under the
Act, has the power to enter into this Loan Agreement, the Bond Purchase
Agreement and the Indenture and the transactions contemplated hereby and
thereby and to perform its obligations hereunder and thereunder. The
Lebanon Project constitutes and will constitute an "authority facility"
within the meaning of the Act.
(b) By proper corporate action the Authority has duly
authorized the execution and delivery of this Loan Agreement, the Bond
Purchase Agreement, the Indenture and the Bonds, the performance of its
obligations hereunder and thereunder and the issuance of the Bonds and,
simultaneously with the execution and delivery of this Loan Agreement, has
duly
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<PAGE>
executed and delivered the Bond Purchase Agreement and the Indenture and
issued and sold the Bonds.
(c) The execution and delivery of, and the performance
of the obligations and agreements of the Authority set forth in, this Loan
Agreement, the Bond Purchase Agreement, the Indenture and the Bonds are
within the power and authority of the Authority and have been duly authorized
by the Authority and will not contravene any provision of any judgment, order
or decree to which the Authority is subject or contravene or constitute a
default under any contract, agreement or other instrument to which the
Authority is a party.
(d) The Authority is not in violation of the Act or, to
its knowledge, any existing law, rule or regulation applicable to it which
would affect its existence or the matters referred to in the preceding
subsections (b) and (c).
(e) All actions of the Authority with respect to the
issuance of the Bonds occurred at meetings held after notice given in
accordance with the Authority's procedures and applicable law, which were
open to the public and at which quorums were present and acting throughout,
and said actions appear of public record in the minute books of the Authority.
(f) Notwithstanding anything herein to the contrary, any
obligation the Authority may incur hereunder in connection with the
acquisition, improvement, construction, equipping and financing of the
Lebanon Project shall not be deemed to constitute a general obligation of the
Authority but shall be a limited obligation of the Authority payable solely
from the payments received under this Loan Agreement and the Note and the
security specifically pledged and assigned therefor, including payments
received under the Company Loan Agreements and the Company Notes.
(g) To the best of its knowledge, no litigation, inquiry
or investigation of any kind in or by any judicial or administrative court or
agency is pending or threatened against the Authority with respect to (1) the
organization and existence of the Authority, (2) its authority to execute or
deliver this Loan Agreement, the Bond Purchase Agreement, the Indenture or
the Bonds or to perform its obligations hereunder and thereunder or to assign
the Note, (3) the validity or enforceability of any of such instruments or
the transactions contemplated hereby or thereby, (4) the title of any officer
of the Authority who executed such instruments, or (5) any authority or
proceedings related to the execution and delivery of such instruments on
behalf of the Authority. No such authority or proceedings have been
repealed, revoked, rescinded or amended and all are in full force and effect.
(h) The Authority has by duly adopted resolution found
and determined that the financing of the Lebanon Project, including the
financing of interest on the Bonds attributable to construction and equipping
of the Lebanon Project for up to one year after its completion, and the loan
of the proceeds of the Bonds to the Corporation are in furtherance of the
purposes for which the Authority was organized and will serve the purposes of
the Act.
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Section 2.2. Representations by Corporation. The
Corporation makes the following representations:
(a) The Corporation is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware. The Corporation has the power to enter into this Loan Agreement,
the Bond Purchase Agreement, the Continuing Disclosure Agreement and the Note
and the transactions contemplated hereunder and thereunder and by proper
corporate action has duly authorized the execution and delivery of this Loan
Agreement, the Bond Purchase Agreement, the Continuing Disclosure Agreement
and the Note and the performance of its obligations hereunder and thereunder.
(b) The Corporation is not in default in the payment of
the principal of or interest on any of its indebtedness for borrowed money or
in default under any instrument under and subject to which any indebtedness
has been incurred, and no event has occurred and is continuing under the
provisions of any such instrument that with the lapse of time or the giving
of notice, or both, would constitute an event of default thereunder.
(c) There is no litigation at law or in equity or any
proceeding before any governmental agency involving the Corporation pending
or, to its knowledge, threatened in which any liability of any of the
Corporation is not adequately covered by insurance or for which adequate
reserves are not provided or for which any judgment or order would have a
material adverse effect upon the business or assets of the Corporation or
affect its existence or authority to do business, the acquisition,
improvement, construction, equipping or operation of the Lebanon Project, the
validity of this Loan Agreement, the Bond Purchase Agreement, the Continuing
Disclosure Agreement or the Note or the performance of its obligations
hereunder or thereunder.
(d) The execution and delivery by the Corporation of
this Loan Agreement, the Bond Purchase Agreement, the Continuing Disclosure
Agreement and the Note, the performance of its obligations hereunder and
thereunder and the consummation of the transactions herein and therein
contemplated do not and will not conflict with, or constitute a breach or
result in a violation of, the articles of incorporation or bylaws of the
Corporation, any Certificate, any agreement or other instrument to which it
is a party or by which it is bound or any constitutional or statutory
provision or order, rule, regulation, decree or ordinance of any court,
government or governmental authority having jurisdiction over the Corporation
or any of its property.
(e) A Certificate has been issued to the Distribution
Company for the operation of the distribution facilities in and near the Town
of Lebanon comprising a portion of the Lebanon Project. Pursuant to such
Certificate, the Distribution Company is obligated to furnish natural gas to
all persons who desire such service and who are within the service area of
the Distribution Company. The Lebanon Project will be available for use by a
large segment of the general public in such service area.
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Certificates have been issued or are expected to be
issued to the Pipeline Company for the operation of a portion of the pipeline
and storage facilities comprising a portion of the Lebanon Project.
The Corporation, the Companies and the other Subsidiaries
have or are expected to receive all Certificates required for the operation
and maintenance of the Lebanon Project.
(f) The Corporation has obtained all consents, approvals,
authorizations and orders of any governmental or regulatory authority that are
required to be obtained by it as a condition precedent to the issuance of the
Bonds, the execution and delivery of this Loan Agreement, the Bond Purchase
Agreement, the Continuing Disclosure Agreement and the Note and the performance
of its obligations hereunder and thereunder.
(g) The Distribution Company will own and operate the
natural gas distribution facilities that provide gas service to customers in
the service area granted in the Certificate. The Pipeline Company will own
and operate the natural gas pipeline and storage facilities in Scott,
Washington and Smyth Counties that will support the distribution facilities.
Only that portion of the pipeline and storage facilities that will support
the distribution facilities will be financed with a portion of the proceeds
of the Bonds. The Corporation will cause the Lebanon Project to be operated
as a facility for the local furnishing of gas within the meaning of Section
142(a)(8) of the Code and as an "authority facility" within the meaning of
the Act until Payment of the Bonds or until certain Events of Taxability, as
described in Section 5.7.
(h) The Corporation and the Companies were engaged in
the local furnishing of natural gas, within the meaning of Section 142(a)(8)
of the Code, on January 1, 1997. The Lebanon Project is within the area
served by the Corporation and the Companies, pursuant to the Certificates, on
January 1, 1997.
(i) The assets acquired or to be acquired with the
proceeds of the Bonds together with the other assets acquired or to be
acquired by the Corporation, the Distribution Company or the Pipeline Company
for which the Corporation has paid or for which it has available funds on
hand include all of those assets which are required to operate the Lebanon
Project.
ARTICLE III
Construction of Project; Loan of Bond Proceeds
Section 3.1. Agreement To Construct Project. The
Corporation, pursuant to the agreement set forth herein and not as an agent,
agrees to cause the acquisition, improvement, construction and equipping of
the Lebanon Project and agrees to:
(1) obtain and maintain or cause to be obtained and
maintained all Certificates, licenses, permits and consents required for the
acquisition, improvement,
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construction, equipping and operation of the Lebanon Project, and the
Authority shall have no responsibility therefor; and
(2) bring or cause to be brought any action or
proceeding against any person which the Authority might bring with respect to
the Lebanon Project as the Corporation shall deem proper.
The Corporation may enter into contracts on behalf of the Authority, provided
that (A) no such contract shall obligate the Authority to pay money other
than from the proceeds of the Bonds and (B) if the Authority is a party to
any such contract, the Corporation shall obtain the consent of the Authority
and provide for any bond required by law.
Section 3.2. Financing of Project. The Authority hereby
agrees to loan the proceeds of the Bonds to the Corporation to be passed
through the Corporation to be used ultimately for the payment of the Costs of
the Project.
Section 3.3. Repayment to Authority; Repayment to
Corporation. The Corporation shall deliver the Note to the Authority as
evidence of the Corporation's obligation to repay the loan made by the
Authority and such Note shall be assigned to the Trustee as security for the
Bonds.
Upon the issuance of the Bonds, the Corporation shall
provide the Trustee with a listing of the actual or anticipated expenditures
of the proceeds of the Bonds, broken down into categories for the assets to
be acquired or refinanced for and then owned by the Distribution Company and
the Pipeline Company. Further, upon the issuance of the Bonds, the
Distribution Company and the Pipeline Company shall each execute and deliver
to the Corporation a Company Note in a principal amount equal to its
allocable share of the face amount of the Bonds. Each Company Note, which
shall be substantially in the form set forth in Exhibit B attached hereto,
will obligate the Distribution Company or the Pipeline Company to pay to the
Corporation an amount equal to an allocable portion of the principal of and
interest on the Bonds. If, upon the last withdrawal from the Project Fund,
it is found that the assets from the original proceeds of the Bonds actually
allocated to the Distribution Company or the Pipeline Company differs from
the principal amount of that entity's Company Note by more than $50,000, each
such entity has agreed to amend its Company Note to reflect more accurately
the amount of the assets acquired or refinanced on its behalf.
The Corporation shall assign its interests in the Company
Loan Agreements and the Company Notes to the Trustee as security for the
payments due under the Note.
Section 3.4. Corporation To Provide Funds To Complete
Project. If the proceeds derived from the sale of the Bonds are not
sufficient to pay in full the Costs of the Project, the Corporation shall pay
or cause to be paid such moneys as are necessary to provide for payment in
full of such Costs. The Corporation shall not be entitled to any
reimbursement therefor from the Authority or the Trustee nor shall the
Corporation be entitled to any abatement,
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diminution or postponement of its payments hereunder or under the Note. In
no event shall the Authority be responsible or liable for the payment of any
such excess costs.
The Corporation shall not permit any changes to the plans
and specifications governing the improvement and construction of the Lebanon
Project that would increase the Costs of the Project by more than an
aggregate amount of $900,000 unless it demonstrates to the satisfaction of
the Trustee that funds are available to the Corporation to pay the increased
costs.
The proceeds of the Russell Issuer Loan and the Russell
Borrower Loan have been used by the Corporation and the Companies to finance
certain portions of the Cost of the Project. On the date that the Bonds are
issued, $100,000 of the proceeds of the Bonds will be applied to the
prepayment in full of the outstanding principal balance of the Russell Issuer
Loan. On the date that the Bonds are issued, the Corporation will pay from
its own assets (or cause the Companies to pay from their own assets) to the
holders of the Russell Issuer Loan an amount equal to the accrued and unpaid
interest on the Russell Issuer Loan to such date and will take all other
actions necessary to cause the Russell Issuer Loan to be paid in full as of
such date.
Section 3.5. Limitation of Authority's Liability.
Notwithstanding anything herein to the contrary, any obligation the Authority
may incur hereunder in connection with the undertaking of the Lebanon Project
or the payment of money shall not be deemed to constitute a general
obligation of the Authority but shall be a limited obligation payable solely
from the revenues and receipts derived by it from or in connection with the
Lebanon Project or otherwise under this Loan Agreement, including payments
received on the Note, but specifically excluding the Authority's Unassigned
Rights.
Section 3.6. Disclaimer of Warranties. THE AUTHORITY
MAKES NO REPRESENTATION OR WARRANTY THAT THE CORPORATION, THE DISTRIBUTION
COMPANY OR THE PIPELINE COMPANY WILL HAVE QUIET AND PEACEFUL POSSESSION OF
THE LEBANON PROJECT, except that the Lebanon Project is free from
encumbrances done, made or knowingly suffered by the Authority or anyone
claiming by, through or under it. The Corporation recognizes that since the
Lebanon Project is being undertaken at its request and by contractors and
suppliers approved by it in accordance with plans and specifications prepared
by engineers approved by it, THE AUTHORITY MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION
OR WORKMANSHIP OF ANY PART OF THE LEBANON PROJECT OR ITS SUITABILITY FOR THE
PURPOSES OF THE CORPORATION, THE DISTRIBUTION COMPANY OR THE PIPELINE COMPANY
OR THE EXTENT TO WHICH PROCEEDS DERIVED FROM THE SALE OF THE BONDS WILL PAY
THE COST TO BE INCURRED IN CONNECTION THEREWITH. THE AUTHORITY MAKES NO
REPRESENTATION AS TO THE FINANCIAL POSITION OR BUSINESS CONDITION OF THE
CORPORATION, THE DISTRIBUTION COMPANY OR THE PIPELINE COMPANY AND DOES NOT
REPRESENT OR WARRANT AS TO ANY OF THE STATEMENTS, MATERIALS (FINANCIAL OR
OTHERWISE), REPRESENTATIONS OR CERTIFICATIONS FURNISHED OR TO BE MADE AND
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FURNISHED BY THE CORPORATION, THE DISTRIBUTION COMPANY OR THE PIPELINE
COMPANY IN CONNECTION WITH THE SALE OF THE BONDS, OR AS TO THE CORRECTNESS,
COMPLETENESS OR ACCURACY OF SUCH STATEMENTS.
Section 3.7. Compliance with Indenture. At the request
of the Corporation, the Authority shall (a) at any time moneys held pursuant
to the Indenture are sufficient to effect redemption of the Bonds and if the
same are then redeemable under the Indenture, take all reasonable steps that
may be necessary to effect redemption thereunder, and (b) take any other
action reasonably required by the Indenture.
ARTICLE IV
Payments on the Note
Section 4.1. Amounts Payable. (a) The Corporation
shall make all payments required by the Note as and when they become due and
shall promptly pay all other amounts necessary to enable the Trustee to make
the deposits to the Bond Fund and the Reserve Fund required by Article VI of
the Indenture.
(b) The Corporation shall also pay, as and when the same
become due:
(1) To the Trustee, its reasonable fees for
services rendered and for expenses reasonably incurred by it as Trustee under
the Indenture, as Bond Registrar and paying agent on the Bonds, and as the
Dissemination Agent under the Continuing Disclosure Agreement, including the
reasonable fees and disbursements of its counsel and the reasonable fees and
expenses of any other paying agents, all as provided in the Indenture, and
all other amounts that the Corporation herein assumes or agrees to pay,
including any cost or expense necessary to cancel and discharge the Indenture
upon Payment of the Bonds.
(2) To or on behalf of the Authority, (i) all
reasonable and necessary costs and expenses of the Authority related to the
Lebanon Project or the Bonds and (ii) all other amounts which the Corporation
agrees to pay under the terms of this Agreement; provided, that the aggregate
of all such amounts paid to the Authority shall not equal or exceed an amount
which would cause the "yield" on the Note, this Loan Agreement or any other
"acquired purpose obligation" to be "materially higher" than the "yield" on
the Bonds, as such terms are used in the Code. Such fees and expenses shall
be paid directly to the Authority for its own account as and when such fees
and expenses become due and payable. When the Authority incurs expenses or
renders services after the occurrence of an Event of Default specified in
Sections 6.1(d) or 6.1(e), the expenses and the compensation for the services
are intended to constitute expenses of administration under any federal or
state bankruptcy, insolvency, arrangement, moratorium, reorganization or
other debtor relief law.
(3) Amounts described in Section 4.6.
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(4) All other amounts that the Corporation agrees
to pay under the terms of the Indenture, the Bond Purchase Agreement and this
Loan Agreement, including the amounts described in the definition of
"Determination of Taxability" in the Indenture.
Section 4.2. Payments Assigned. The Corporation
consents to the assignment made by the Indenture to the Trustee of the Note
and the Company Notes and of certain of the rights of the Authority under
this Loan Agreement and of the Corporation under the Company Loan Agreements.
The Corporation agrees to pay to the Trustee all amounts payable by the
Corporation pursuant to the Note and this Loan Agreement, except for payments
made to the Authority pursuant to Sections 4.1(b)(2), 4.5, 5.5 and 6.5. The
Corporation hereby assigns to the Trustee its rights under Company Notes and
its rights under the Company Loan Agreements, except for payments made to the
Corporation pursuant to Sections 5.2 and 6.5 thereof.
Section 4.3. Default in Payments. If the Corporation
should fail to make any payments required by the Note or this Loan Agreement
on account of principal of or interest on any Bonds when due, the Corporation
shall pay to the Trustee interest thereon until paid at the rate equal to the
rate on such Bonds, to the extent permitted by law. If the Corporation
should fail to make any other payments required by this Loan Agreement when
due, the Corporation shall pay to the Authority or the Trustee, as
applicable, interest at the rate equal to the Prime Rate plus one percent
(1%) per year.
Section 4.4. Corporation's Obligations Unconditional.
The obligation of the Corporation to make the payments on the Note and to
observe and perform all other covenants, conditions and agreements hereunder
shall be absolute and unconditional, irrespective of any rights of setoff,
recoupment or counterclaim the Corporation might otherwise have against the
Authority or the Trustee and irrespective of the failure or the delay of the
Distribution Company or the Pipeline Company to make any payment when due
under its Company Note. Subject to the prepayment of the Note as provided
therein, the Corporation shall not suspend or discontinue any payment on the
Note or hereunder or fail to observe and perform any of its other covenants,
conditions or agreements hereunder for any cause, including without
limitation, any acts or circumstances that may constitute an eviction or
constructive eviction, failure of consideration, failure of title to any part
or all of the Lebanon Project or commercial frustration of purpose, or any
damage to or destruction or condemnation of all or any part of the Lebanon
Project, or any change in the tax or other laws of the United States of
America, Commonwealth of Virginia or any political subdivision of either, or
any failure of the Authority or the Trustee to observe and perform any
covenant, condition or agreement, whether express or implied, or any duty,
liability or obligation arising out of or in connection with the Indenture or
this Loan Agreement. The Corporation may, after giving to the Authority and
the Trustee ten (10) days' notice of its intention to do so, at its own
expense and in its own name, or in the name of the Authority if procedurally
required, prosecute or defend any action or proceeding or take any other
action involving third persons that the Corporation reasonably deems
necessary to secure or protect any of its rights hereunder. In the event the
Corporation takes any such action, the Authority shall
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cooperate fully with the Corporation and shall take all necessary action to
substitute the Corporation for the Authority in such action or proceeding, if
so requested.
THE AUTHORITY, THE CORPORATION AND, BY THEIR PURCHASE OF
BONDS, THE BONDHOLDERS, EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE OBLIGATION
OF THE CORPORATION TO MAKE PAYMENTS UNDER THE NOTE IS, UNTIL ALL OF THE
SUBORDINATION DISCONTINUANCE REQUIREMENTS HAVE BEEN MET, SUBORDINATE TO THE
OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER ITS SENIOR NOTES AND ITS
SENIOR SUBORDINATED NOTES. FURTHER, THE AUTHORITY, THE CORPORATION AND, BY
THEIR PURCHASE OF BONDS, THE BONDHOLDERS, EXPRESSLY ACKNOWLEDGE AND AGREE
THAT THE OBLIGATION OF THE DISTRIBUTION COMPANY TO MAKE PAYMENTS UNDER ITS
COMPANY NOTE IS, UNTIL ALL OF THE SUBORDINATION DISCONTINUANCE REQUIREMENTS
HAVE BEEN MET, SUBORDINATE TO THE OBLIGATION OF THE DISTRIBUTION COMPANY TO
MAKE PAYMENTS UNDER ITS SENIOR COMPANY NOTES AND SENIOR SUBORDINATED COMPANY
NOTE.
BY THEIR PURCHASE OF THE BONDS, THE BONDHOLDERS EXPRESSLY
ACKNOWLEDGE AND AGREE THAT SO LONG AS NO EVENT OF DEFAULT UNDER ANY OF THE
SENIOR LOAN AGREEMENTS, SENIOR COMPANY LOAN AGREEMENTS, SENIOR SUBORDINATED
LOAN AGREEMENTS OR SENIOR SUBORDINATED COMPANY LOAN AGREEMENTS HAS OCCURRED,
THE BONDHOLDERS MAY CONTINUE TO RECEIVE AND RETAIN PAYMENTS ON THE BONDS WHEN
AND AS THE SAME BECOME DUE, BUT THAT ANY AMOUNTS RECEIVED BY SUCH HOLDERS AS
A PAYMENT ON THE BONDS SUBSEQUENT TO ANY EVENT OF DEFAULT UNDER ANY OF THE
SENIOR LOAN AGREEMENTS, SENIOR COMPANY LOAN AGREEMENTS, SENIOR SUBORDINATED
LOAN AGREEMENTS OR SENIOR SUBORDINATED COMPANY LOAN AGREEMENTS WILL BE
RETAINED AND HELD IN TRUST BY SUCH HOLDER FOR THE BENEFIT OF THE TRUSTEE FOR
THE SENIOR BONDS AND THE SENIOR SUBORDINATED BONDS.
THE BONDHOLDERS, BY THEIR PURCHASE OF THE BONDS,
EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE AUTHORITY MAKES NO REPRESENTATIONS
WHATSOEVER AS TO THE VIABILITY OF THE LEBANON PROJECT OR THE CREDITWORTHINESS
OF THE CORPORATION, THE COMPANIES OR THE BONDS OR THE ABILITY OF THE
CORPORATION OR THE COMPANIES TO PAY THE PRINCIPAL OF OR INTEREST ON THE
BONDS.
Section 4.5. Advances by Authority or Underwriter. If
the Corporation shall fail to make any payment or perform any act required of
it hereunder, the Authority or the Underwriter without prior notice or demand
on the Corporation and without waiving or releasing any obligation or
default, may (but shall be under no obligation to) make such payment or
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perform such act. All amounts so paid by the Authority or the Underwriter
and all costs, fees and expenses so incurred shall be payable by the
Corporation on demand as an additional obligation under the Note, together
with interest thereon at the Prime Rate plus one percent (1%) per year until
paid.
Section 4.6. Rebate Requirement. (a) At its sole
expense on behalf of the Authority, the Corporation shall determine and pay
to the United States the Rebate Amount as and when due in accordance with the
"rebate requirement" described in Section 148(f) of the Code. The
Corporation shall retain records of all such determinations until six (6)
years after Payment of the Bonds.
(b) Reference is made to Exhibit C hereto for additional
details of the rebate requirement. Exhibit C may be amended or substituted
without compliance with Article XII of the Indenture or Section 8.3 hereof
and without any action of the Authority upon the Corporation's delivery to
the Trustee of the proposed amendment or substitution together with an
Opinion of Bond Counsel that compliance with this Section 4.6 and Exhibit C,
as amended, will not be an Adverse Tax Action.
(c) Notwithstanding anything contained herein to the
contrary, no such payment need be made if the Corporation receives and
delivers to the Trustee an Opinion of Bond Counsel that such payment is not
required under the Code to prevent any Bonds from becoming "arbitrage bonds"
within the meaning of Section 148 of the Code.
(d) The Authority shall not be liable to the Corporation
by way of contribution, indemnification, counterclaim, set-off or otherwise
for any payment made or expense incurred by or on behalf of the Corporation
pursuant to this Section 4.6.
(e) The Authority covenants that, if so requested by the
Corporation, it shall execute any form required to be signed by an issuer of
tax-exempt bonds in connection with the payment of any rebatable arbitrage
(including Internal Revenue Service Form 8038-T). The Corporation shall
supply all information required to be stated on such form and shall prepare
such form. Except for the execution and delivery of such form upon timely
presentation by the Corporation, the Authority shall have no responsibility
for such form or the information stated thereon.
ARTICLE V
Special Covenants
Section 5.1. Insurance Requirements. The Corporation
shall maintain or cause to be maintained insurance covering such risks and in
such amounts as, in its reasonable judgment, are adequate to protect it, the
Distribution Company, the Pipeline Company, their operations and their
property, including the Lebanon Project. The insurance required to be
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maintained pursuant hereto shall be reviewed by independent insurance
consultants knowledgeable about the natural gas business at least biennially
and the Corporation agrees that it will follow or cause to be followed any
reasonable recommendations of the insurance consultants. In order to
establish compliance with this Section 5.1, the Corporation agrees that it
will deliver or cause to be delivered to the Trustee biennially, at the same
time the certificates described in Section 5.3(c) are required to be
delivered, (1) the report of an insurance consultant stating the types of
insurance policies which the Corporation, the Distribution Company or the
Pipeline Company should maintain, which in the opinion of such insurance
consultant would comply with the requirements of this Section 5.1 and
adequately provide the protection described above, and (2) reports of one or
more insurance consultants stating the insurance maintained, or caused to be
maintained, by the Corporation, the Distribution Company and the Pipeline
Company pursuant to this Section 5.1 and then in effect and stating whether,
in the opinion of such insurance consultants, the amount and manner of
providing such insurance and any reductions or eliminations of the amount of
any insurance during the period covered by such report comply with the
requirements of this Section 5.1 and adequately protect the Corporation, the
Distribution Company, the Pipeline Company, their operations and their
property, including the Lebanon Project. The Corporation shall cause the
Authority to be a named as an insured under its general liability insurance
policies referred to above, as its interest may appear.
Section 5.2. Examination of Books and Records. The
Trustee and the Underwriter shall be permitted, during normal business hours
and upon reasonable notice, to examine the books and records of the
Corporation with respect to the Corporation's financial standing or its
compliance with its obligations hereunder.
Section 5.3. Financial Statements and Other Information.
(a) As soon as practical, but in any case within 120 days after the end of
any fiscal year, the Corporation shall file with the Trustee a copy of the
audited financial statements of the Corporation and its subsidiaries as of
the end of such fiscal year, accompanied by the report of independent
certified public accountants thereon. Such audited financial statements
shall be prepared in accordance with generally accepted accounting principles
and shall include such statements as necessary for a fair presentation of
unrestricted fund financial position, results of operations and changes in
unrestricted fund balance and cash flows for, or as of the end of, such
fiscal year.
(b) If an Event of Default shall have occurred and be
continuing, the Corporation shall (1) file with the Trustee and the
Underwriter such other financial statements and information concerning its
operations and financial affairs as the Trustee or the Underwriter may from
time to time reasonably request, and (2) provide access to its facilities for
the purpose of inspection by the Trustee or the Underwriter during regular
business hours or at such other times as the Trustee or the Underwriter may
reasonably request; provided, that such obligation to file or allow
inspection shall exclude personnel records.
(c) As soon as practical, but in any case within thirty
(30) days after receipt of the audit report mentioned above, the Corporation
shall file with the Trustee and the Underwriter a certificate signed by its
chief executive officer and its chief financial officer and a report of the
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independent certified public accountant stating that nothing has come to their
attention that would lead them to believe that the Corporation is in default in
the performance of any covenant contained in this Loan Agreement (including,
without limitation, the covenants contained in Sections 5.7, 5.11, 5.12 and
5.14) or, if they are aware of any such default, specifying each such default
and what actions the Corporation has taken, is taking or proposes to take to
cure such default.
(d) The Corporation shall furnish to any Holder of
$100,000 or more in aggregate principal amount of the Bonds who requests the
same in writing, and, for informational purposes, the Underwriter, the
financial statements, certificate of no default and other information which
the Corporation has covenanted to furnish the Trustee pursuant to subsections
(a) and (c) above. Such information shall be furnished to such persons at the
times and in the manner for such information to be furnished to the Trustee.
(e) As soon as practical, but in any case within
forty-five (45) days after the end of each month, the Corporation shall
furnish to the Underwriter unaudited financial statements for such month,
including an income statement and balance sheet. Further, the Corporation
shall furnish to the Underwriter any other unaudited financial statements or
information requested by the Underwriter within thirty (30) days of any such
request.
Section 5.4. Damage, Destruction, Condemnation and Loss
of Title. (a) The Corporation shall give prompt notice to the Trustee and
the Underwriter of (1) any material damage to or destruction of any part of
the Lebanon Project, (2) a taking of all or any material part of the Lebanon
Project or any right therein under the exercise of the power of eminent
domain, (3) any loss of any material part of the Lebanon Project because of
failure of title thereto, or (4) the commencement of any proceedings or
negotiations that might result in such a taking or loss. Each such notice
shall describe generally the nature and extent of such damage, destruction,
taking, loss, proceedings or negotiations.
(b) Unless the Corporation prepays the Note in full
pursuant to Article VII, if all or material any part of the Lebanon Project
is destroyed or damaged by fire or other casualty, or if title to or the use
of all or any material part of the Lebanon Project is taken under the
exercise of the power of eminent domain or lost because of failure of title,
the Corporation shall promptly replace, repair, rebuild or restore the
property damaged, destroyed or lost so that the Lebanon Project shall be
substantially the same as before such damage, destruction or loss, with such
alterations and additions as the Corporation may determine and as will not
impair the capacity or character of the Lebanon Project for the purpose for
which it is then being used or is intended to be used. The Corporation shall
apply or cause to be applied the Net Proceeds of insurance and any
condemnation award received by it on account of such damage, destruction or
loss and so much of the funds of the Corporation, the Distribution Company
and Pipeline Company as may be necessary to payment of the cost of such
replacement, repair, rebuilding or restoration; provided, that in lieu of the
requirements of the first sentence of this Section 5.4(b) the Corporation may
apply all of such Net Proceeds to:
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(1) The acquisition and/or construction by the
Corporation, the Distribution Company or the Pipeline Company of real and/or
personal property, that (i) is suitable for its operations, (ii) is free and
clear of all liens and encumbrances of any kind except Permitted Liens, and
(iii) is available for use and occupancy by the Corporation, the
Distribution Company or the Pipeline Company without the requirement of any
payment other than as provided in the Note or this Loan Agreement; or
(2) The prorata prepayment of the Note and any
other similar obligation issued by the Corporation, the Distribution Company,
the Storage Company, the Exploration Company or the Pipeline Company
evidencing the obligation to repay any other loan made by the Authority, the
Buchanan Authority or any other industrial development authority or similar
entity to finance a portion of the Lebanon Project, in whole or in part, for
application to the prorata redemption of the Bonds, the Senior Bonds, the
Senior Subordinated Bonds and any other bonds issued on behalf of the
Corporation, the Distribution Company, the Storage Company, the Exploration
Company or the Pipeline Company to finance a portion of the Lebanon Project.
The Corporation shall not by reason of the payment of the
cost of replacement, repair, rebuilding or restoration be entitled to any
reimbursement from the Authority or the Trustee or to any abatement or
diminution of the amounts payable under the Note or this Loan Agreement. All
real and personal property acquired pursuant to this Section 5.4 shall become
part of the Lebanon Project. Prepayments of the Note shall be used to redeem
Bonds pursuant to Section 301(a) of the Indenture.
Section 5.5. Indemnification. (a) The Corporation
shall at all times protect, indemnify and save harmless the Authority, the
Trustee and the Underwriter (collectively, the "Indemnitees") from and
against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses (hereinafter referred to as "Damages"), including
without limitation (1) all amounts paid in settlement of any litigation
commenced or threatened against the Indemnitees, if such settlement is
effected with the written consent of the Corporation, (2) all expenses
reasonably incurred in the investigation of, preparation for or defense of
any litigation, proceeding or investigation of any nature whatsoever,
commenced or threatened against the Corporation, the Distribution Company,
the Pipeline Company, the Lebanon Project, or the Indemnitees, (3) any
judgments, penalties, fines, damages, assessments, indemnities or
contributions, and (4) the reasonable fees of attorneys, auditors, and
consultants; provided, that the Damages arise out of:
(A) failure by the Corporation or any of its
officers, employees or agents, to comply with the terms of this Loan
Agreement, the Bond Purchase Agreement and the Note and any agreements,
covenants, obligations, or prohibitions set forth herein or therein or
failure by the Distribution Company or the Pipeline Company to comply with
the terms of any Company Loan Agreement or Company Note;
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(B) any action, suit, claim or demand contesting or
affecting the title to the Lebanon Project;
(C) any breach of any representation or warranty
set forth in this Loan Agreement or the Bond Purchase Agreement or any
certificate delivered pursuant hereto or thereto, and any claim that any
representation or warranty of the Corporation contains or contained any
untrue or misleading statement of a material fact or omits or omitted to
state any material fact necessary to make the statements made herein or
therein not misleading in light of the circumstances under which they were
made;
(D) any action, suit, claim, proceeding or
investigation of a judicial, legislative, administrative or regulatory nature
arising from or in connection with the acquisition, improvement,
construction, equipping, ownership, operation, occupation or use of the
Lebanon Project;
(E) any suit, action, administrative proceeding,
enforcement action, or governmental or private action of any kind whatsoever
commenced against the Corporation, the Distribution Company or the Pipeline
Company, the Lebanon Project or the Indemnitees that might adversely affect
the validity, enforceability or tax-exempt status of the Bonds, this Loan
Agreement, the Bond Purchase Agreement, the Indenture, the Note, any Company
Loan Agreement or any Company Note, or the performance by the Corporation,
the Distribution Company, the Pipeline Company or any Indemnitee of any of
their respective obligations thereunder; or
(F) any releases or discharges of hazardous wastes,
constituents or pollutants, or other environmental hazards, contamination or
pollution on, in, near or under the Lebanon Project, including, without
limitation, remedial investigation and feasibility study costs, clean up
costs and other response costs under the Comprehensive Environmental Response
Compensation and Liability Act, as modified by the Superfund Amendments and
Reauthorization Act of 1986 or any other environmental legislation or
regulation, whether federal, state or local, currently in existence or which
may be enacted in the future;
provided, that such indemnity shall be effective only to the extent of any
loss that may be sustained by the Indemnitees in excess of the proceeds, net
of any expenses of collection, received by them or from any insurance carried
with respect to such loss and provided further that the benefits of this
Section 5.5 shall not inure to any person or entity other than the
Indemnitees.
(b) If any action, suit or proceeding is brought against
the Indemnitees for any loss or damage for which the Corporation is required
to provide indemnification under this Section 5.5, the Corporation, upon
request, shall at its expense resist and defend such action, suit or
proceeding, or cause the same to be resisted and defended by
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counsel designated by the Corporation and approved by the Indemnitees, which
approval shall not be unreasonably withheld or delayed; provided, that such
approval shall not be required in the case of defense by counsel designated
by any insurance company undertaking such defense pursuant to any applicable
policy of insurance. The obligations of the Corporation under this Section
5.5 shall survive any termination of this Loan Agreement, including
prepayment in full of the Note.
(c) Nothing contained herein shall require the
Corporation to indemnify the Authority or the Underwriter for any claim or
liability resulting from its gross negligence or its willful, wrongful acts
or the Trustee for any claim or liability resulting from its negligence or
its willful, wrongful acts (under the standard of care set forth in Article X
of the Indenture).
(d) All references in this Section 5.5 to the Authority,
the Trustee and the Underwriter, including references to Indemnitees, shall
include their directors, commissioners, officers, employees and agents.
Section 5.6. Maintenance and Modification of Project.
The Corporation agrees that at all times it will maintain, preserve and keep
the Lebanon Project and its other properties or cause the Lebanon Project and
its other properties to be maintained, preserved and kept in good repair,
working order and condition and that the Corporation will from time to time
make or cause to be made all repairs, replacements and renewals deemed proper
and necessary by it. In addition, the Corporation may upgrade the Lebanon
Project and its other properties or cause them to be upgraded. Further, the
Corporation may make or cause to be made substitutions, additions,
modifications and improvements to the Lebanon Project from time to time as
the Corporation, in its discretion, deems to be desirable for its use, and as
shall be permitted by the Act. The costs of such upgrades, substitutions,
additions, modifications and improvements shall be paid by the Corporation,
the Distribution Company or the Pipeline Company and be subject to the terms
of this Loan Agreement as part of the Lebanon Project. Any portion of the
Lebanon Project may be disposed of in any manner permitted by Section 5.14.
The Corporation, the Distribution Company and the
Pipeline Company have obtained or will obtain and will maintain or cause to
be maintained all consents, approvals, permits, authorizations and orders of
any governmental or regulatory authority that are required to be obtained as
a condition precedent to the acquisition, improvement, construction,
equipping and operation of the Lebanon Project, including each Certificate.
The Corporation knows of no reason why any such consents, approvals, permits,
authorizations or orders not yet received cannot be obtained on a timely
basis.
Section 5.7. Tax Exemption. (a) Unless the Corporation
shall deliver to the Trustee an Opinion of Bond Counsel to the effect that
such use, occupation or ownership will not be an Adverse Tax Action, the
Corporation shall not:
(1) take or allow to be taken any action that will
cause less than ninety-five percent (95%) of the net proceeds (with the
meaning of Section 150(a)(3) of the Code) of the Bonds to be used to acquire
property which qualifies as facility for the local furnishing of gas within
the meaning of Section 142(a)(8) of the Code or facilities functionally
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related and subordinate thereto or will cause less than ninety-five percent
(95%) of such net proceeds to be used for costs that are properly chargeable
to the capital account of the Corporation, the Distribution Company or the
Pipeline Company or would be so chargeable either with an election or but for
a proper election to deduct such amounts;
(2) take any action or approve or direct the
Trustee's taking any action or making any investment or use of the proceeds
of the Bonds (including failure to spend the same with due diligence) that
would cause the Bonds to be "arbitrage bonds" within the meaning of Section
148 of the Code;
(3) barring unforeseen circumstances, approve the
use of the proceeds of the Bonds or any other funds other than in accordance
with the "non-arbitrage" certificate with respect to such use given
immediately prior to the delivery of the Bonds;
(4) permit the Lebanon Project to be used, leased
to or occupied by the United States or an agency or instrumentality thereof
in any manner for compensation, including any entity with statutory authority
to borrow from the United States (in any case within the meaning of Section
149(b) of the Code), or in any way cause the Bonds to be "federally
guaranteed" within the meaning of Section 149(b) of the Code;
(5) permit twenty-five percent (25%) or more of the
net proceeds of the Bonds to be used to acquire (directly or indirectly) any
land (or an interest therein) or permit the proceeds of the Bonds to be used,
directly or indirectly for the acquisition of land (or an interest therein)
to be used for farming purposes, or to provide any airplane, skybox or other
private luxury box, any facility primarily used for gambling, or any store
the principal business of which is the sale of alcoholic beverages for
consumption off premises;
(6) use or allow the use any of the proceeds of the
Bonds for the acquisition of residential rental property for family units; or
(7) take or allow to be taken any other action that
would cause an Adverse Tax Action.
(b) The Corporation shall not make or allow to be made
any change in the Lebanon Project that would, at the time made, cause the
"average maturity" of the Bonds to exceed 120% of the "average reasonably
expected economic life" of the facilities being financed with the proceeds of
the Bonds, within the meaning of Section 147(b) of the Code.
(c) The Corporation shall not take or omit to take any
action the taking or omission of which will result in more than two percent
(2%) of the proceeds of the Bonds being used to finance the Costs of
Issuance. Since the Underwriter will deduct two percent (2%) of the proceeds
of the Bonds from the funds being delivered to the Trustee in partial payment
for the Underwriter's discount, the Corporation will not request the payment
of any further Costs of Issuance from the proceeds of the Bonds.
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(d) The Corporation shall not take or allow to be taken
any action that will result in the allocation of any proceeds of the Bonds to
the reimbursement of any expenditure made prior to July 30, 1995.
(e) The Corporation will not allow any portion of the
proceeds of the Bonds, directly or indirectly, to be used to acquire
investment property or to replace funds which were used, directly or
indirectly, to acquire investment property (as defined in Section 148(b)(2)
of the Code) which produces a materially higher yield over the term of the
Bonds, other than investment property acquired with --
(1) proceeds of the Bonds invested for a reasonable
temporary period of three years or less, or until such
proceeds are needed for the purpose for which the Bonds
are issued,
(2) amounts invested in a bona fide debt service
fund, withinthe meaning of Section 1.148-1(b) of the
Treasury Regulations promulgated under the Code, and
(3) amounts deposited in any reasonably required
reserve or replacement fund to the extent such amounts do
not exceed the Reserve Fund Requirement and to the extent
that at no time during any Bond Year will the aggregate
amount so invested exceed 150 percent of debt service on
the Bonds for such year.
(f) The Corporation shall not use or allow the use of
any portion of the proceeds of the Bonds (including any investment income
thereon) to acquire any property or an interest therein (other than land or
an interest in land) unless the first use of such property is pursuant to
such acquisition.
(g) The Corporation shall use its best efforts to
proceed with due diligence to acquire, improve, construct and equip the
Lebanon Project and to expend at least eighty-five percent (85%) of the
proceeds of the Bonds (including any investment income thereon) on Costs of
the Project within three (3) years from the date the Bonds are issued and to
ensure that less than fifty percent (50%) of the proceeds of the Bonds will
be invested in nonpurpose investments, as described in Section 148 of the
Code, having a substantially guaranteed yield for four (4) years or more.
(h) The Corporation will cause the information contained
in the information report (Form 8038) to be filed by the Authority with the
Internal Revenue Service upon the issuance of the Bonds to be true and
correct as of the date the Bonds are issued.
(i) The Corporation will not participate or permit the
Distribution Company or the Pipeline Company to participate in any other
issue of obligations, the interest on which
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may be excludable from gross income for federal income tax purposes, within
fifteen (15) days of the date the Bonds are issued.
(j) The Corporation will not permit the Distribution
Company or any "related person" (as defined in the Code) to the Distribution
Company to provide gas distribution services to customers in any area beyond
the boundaries of Buchanan County and Russell County. As to the gas
distribution assets to be owned and operated by the Distribution Company, the
Corporation shall request a withdrawal from the Project Fund only for those
assets that are related to the gas distribution facility serving the area in
and around the Town of Lebanon for which the Distribution Company has
received a Certificate. As to the pipeline and storage facilities to be
owned and operated by the Pipeline Company, the Corporation shall request a
withdrawal from the Project Fund only for that portion of the Pipeline
Company's pipeline and storage facilities in Russell County, Scott County,
Smyth County and Washington County that are necessary to support the
distribution facility serving the area in and around the Town of Lebanon for
which the Distribution Company has received a Certificate.
(k) The Corporation will not take or omit any action
that would cause it to be a "related person" with the Distribution Company,
as described in Section 147(a)(2) of the Code.
It is the understanding of the Authority and the Corporation that the covenants
contained herein are intended to assure compliance with the Code, including the
applicable Treasury Regulations. In the event that Treasury Regulations or
rulings are hereafter promulgated which modify or expand provisions of the Code,
as applicable to the Bonds, the Corporation will not be required to comply with
any covenant contained herein except to the extent that such modification or
expansion, in the Opinion of Bond Counsel, will cause an Adverse Tax Action. In
the event that Treasury Regulations or rulings are hereafter promulgated which
impose additional requirements which are applicable to the Bonds, the
Corporation agrees to comply with the additional requirements to the extent
necessary, in the Opinion of Bond Counsel, to preserve the exclusion from gross
income for federal income tax purposes of interest on the Bonds under Section
103 of the Code.
(l) Notwithstanding anything to the contrary in the
Indenture, this Loan Agreement or the Company Loan Agreements, if a
Determination of Taxability has occurred and if the Corporation has opted to
increase the interest rate on the Bonds and the Note in lieu of the mandatory
redemption of the Bonds (as described in Section 301(d) of the Indenture),
neither the Authority, the Corporation nor the Companies need thereafter
comply with the covenants set forth in such documents regarding Adverse Tax
Actions unless the failure to so comply would cause the interest on any
Senior Bonds or Senior Subordinated Bonds to become includable in the gross
income of the holders thereof for federal income tax purposes.
FURTHER, NOTWITHSTANDING THE FOREGOING, THE CORPORATION MAY
INTENTIONALLY VIOLATE ONE OR MORE OF THE COVENANTS SET FORTH ABOVE AND
PURPOSEFULLY CAUSE AN EVENT OF TAXABILITY TO OCCUR IF IT (1) PROVIDES ADVANCE
NOTICE TO THE
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BONDHOLDERS THAT AN EVENT OF TAXABILITY IS SCHEDULED TO OCCUR AND (2) ON OR
BEFORE THE DATE THAT THE EVENT OF TAXABILITY IS SCHEDULED TO OCCUR REDEEMS THE
BONDS IN FULL OR INCREASES THE INTEREST RATE ON THE BONDS TO FIFTEEN PERCENT
(15%) PER YEAR.
Section 5.8. Investment and Use of Trust Funds. The
Corporation's Authorized Representative shall provide to the Trustee written
instructions or oral instructions confirmed in writing for the investment, in
accordance with Article VII of the Indenture, of all funds held by the
Trustee under the Indenture.
Section 5.9. Notice of Other Defaults; Compliance with
Other Documents. The Corporation shall promptly inform the Trustee and the
Underwriter and, unless the Senior Bonds and the Senior Subordinated Bonds
have been paid or defeased in full, the Senior Underwriter, if it has become
aware of or has received any notice of any default under any agreement under
which it, the Distribution Company, the Storage Company, the Exploration
Company or the Pipeline Company is liable for any indebtedness, including
this Loan Agreement, the Senior Loan Agreements, the Senior Subordinated Loan
Agreements, the Company Loan Agreements, the Senior Company Loan Agreements
and the Senior Subordinated Company Loan Agreements.
The Corporation shall comply with the terms and
provisions of, and make all payments required under, any agreement under
which it is liable for any indebtedness, including the Senior Loan
Agreements, the Senior Notes, the Senior Subordinated Loan Agreement and the
Senior Subordinated Note.
Section 5.10. Corporate Status. Unless the prior
written consent of the Underwriter has been obtained, the Corporation agrees
that throughout the term of this Loan Agreement it will be maintain its
status as a corporation validly existing under the laws of the State of
Delaware which is authorized to transact business in the Commonwealth of
Virginia. Further, unless the prior written consent of the Underwriter has
been obtained, the Corporation agrees that throughout the term of this Loan
Agreement it will cause each of the Distribution Company and the Pipeline
Company to maintain its status as a corporation validly existing under the
laws of the Commonwealth of Virginia.
Unless the prior written consent of the Underwriter has
been obtained, the Corporation shall not merge or consolidate with, or sell
or transfer all or substantially all of its property or assets to any person,
firm or corporation, except that the Distribution Company and the Pipeline
Company may be merged into or consolidated with the Corporation or one or
more of its Subsidiaries or one another.
Section 5.11. Priority of Indebtedness; Additional
Indebtedness. There are no restrictions on the ability of the Corporation to
issue additional indebtedness secured on a parity with the Note as to the
general revenues of the Corporation.
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In addition to the Senior Bonds and the Senior
Subordinated Bonds and the documents related thereto, the Corporation, each
Company and each other subsidiary or affiliate of the Corporation may issue
additional long term indebtedness having a superior or parity claim on the
general revenues and funds of the Corporation or any of the Companies to the
claims securing the Bonds and the documents related thereto, but, as to each
entity, the outstanding principal balance of such additional indebtedness may
not exceed $500,000 at any time, and, as to all entities, the outstanding
principal balance of such additional indebtedness may not exceed $3,000,000
in the aggregate at any time.
Section 5.12. Limitations on Liens. The Corporation
shall not create or suffer to be created, or permit the existence of, any
lien upon any of its property or assets now owned or hereafter acquired by
it, other than Permitted Liens.
Section 5.13. Limitations on Payment of Dividends. If
(1) there has occurred a default in the payment of the principal of or
interest on the Senior Bonds or the Senior Subordinated Bonds or if moneys
have been transferred from the reserve fund or supplemental reserve account
for the Senior Bonds or the Senior Subordinated Bonds to the bond funds for
the Senior Bonds or the Senior Subordinated Bonds to make up any deficiency
in the bond funds for the Senior Bonds or the Senior Subordinated Bonds, as
applicable, or (2) moneys have been transferred by the Trustee from the
Reserve Fund to the Bond Fund to make up any deficiency in the Bond Fund, the
Corporation shall not make a dividend distribution (including distributions
of cash or property) to any of its shareholders unless and until it has made
such payments and made such deposits to the reserve fund or supplemental
reserve account for the Senior Bonds or the Senior Subordinated Bonds or the
Reserve Fund, as applicable, to increase the balances therein to the amounts
required.
Section 5.14. Ownership of Stocks and Project. Unless
the prior written consent of the Underwriter has been obtained, for so long
as the Note is outstanding, the Corporation shall continue to own fifty
percent (50%) of the outstanding capital stock of the Distribution Company
and at least fifty percent (50%) of the outstanding capital stock of the
Pipeline Company.
Unless the prior written consent of the Underwriter has
been obtained, the Corporation shall not sell or transfer or permit the
Distribution Company or the Pipeline Company to sell or transfer any portion
of the Lebanon Project, except (1) sales or transfers of assets in the
ordinary course of business, (2) sales or transfers of assets having an
aggregate value of less than $100,000 and (3) sales or transfers of assets to
the Corporation or one or more of its subsidiaries.
Section 5.15. Continuing Disclosure Requirements. The
Corporation hereby covenants and agrees that it will comply with and carry
out all of the provisions of the Continuing Disclosure Agreement.
Notwithstanding any other provision of this Loan Agreement, failure of the
Corporation to comply with the Continuing Disclosure Agreement
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shall not be considered an Event of Default hereunder. The remedies available
upon a default under the Continuing Disclosure Agreement are described therein.
The Authority and the Corporation have agreed that no
financial or operating data concerning the Authority is material to any
decision to purchase, hold or sell the Bonds and have agreed that the
Authority will not provide any such information. The Corporation has
undertaken all responsibilities for any continuing disclosure to Bondholders
as described in the Continuing Disclosure Agreement, and the Authority shall
have no liability to the Holders of the Bonds or any other person with
respect to such disclosure.
Section 5.16. Subordination Discontinuance Requirements.
If the Corporation has contemporaneously caused all of the Subordination
Discontinuance Requirements to be met, the Bonds will no longer be secured on
a subordinate basis to the Senior Bonds and the Senior Subordinate Bonds, but
will become secured on a parity basis with the Senior Bonds and the Senior
Subordinated Bonds. Further, if the Corporation has contemporaneously caused
all of the Subordination Discontinuance Requirements to be met on or before
February 15, 2002, the interest rate on the Bonds will not increase to the
rate described in Section 202(b) of the Indenture, but rather shall remain at
9.50% per year through Payment of the Bonds, subject to the provisions of
Section 301(d) of the Indenture.
If the Corporation has contemporaneously caused all of
the Subordination Discontinuance Requirements to be met, the Trustee will
send a notice to the Holders of the Bonds, the Senior Underwriter (if any of
the Senior Bonds or Senior Subordinated Bonds are then outstanding) and the
Underwriter informing them (1) that the Bonds are no longer subordinate in
payment to the payment of the Senior Bonds and Senior Subordinated Bonds and
(2) if before February 15, 2002, that the interest rate on the Bonds will not
increase to 12.0% on or after February 15, 2002.
ARTICLE VI
Events of Default and Remedies
Section 6.1. Event of Default Defined. Each of the
following events shall be an Event of Default under this Loan Agreement:
(a) Failure of the Corporation to make any payment on
the Note when the same becomes due and payable, whether at maturity, upon
redemption, prepayment or acceleration or otherwise pursuant to the terms
thereof or this Loan Agreement.
(b) Except as provided in Section 5.15, failure of the
Corporation to observe or perform any of its other covenants, conditions or
agreements hereunder for a period of thirty (30) days after notice in writing
(unless the Corporation and the Trustee shall agree in writing to an
extension of such time prior to its expiration), specifying such failure and
requesting that it be
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remedied, given by the Authority or the Trustee to the Corporation, or in the
case of any default which can be cured but which cannot with due diligence be
cured within such 30-day period, failure by the Corporation to proceed promptly
to prosecute the curing of the same with due diligence.
(c) Abandonment of any portion of the Lebanon Project or
the facilities financed with the proceeds of the Senior Bonds or the Senior
Subordinated Bonds by the Corporation, the Distribution Company, the Storage
Company, the Exploration Company, the Pipeline Company or any other
subsidiary or affiliate of the Corporation for a period of fifteen (15) days
or more.
(d) (1) If the Corporation, the Distribution Company,
the Storage Company, the Exploration Company or the Pipeline Company files a
petition or answer seeking reorganization or arrangement of such entity under
the federal bankruptcy laws or any other applicable law or statute, or (2)
if, pursuant to a petition in bankruptcy filed against it, any such entity is
adjudicated a bankrupt or if a court of competent jurisdiction shall enter an
order or decree appointing, without the consent of such entity, a receiver or
trustee of such entity or of the whole or substantially all of its property,
or approving a petition filed against it seeking reorganization or
arrangement of such entity under the federal bankruptcy laws or any other
applicable law or statute, and such adjudication, order or decree shall not
be vacated or set aside or stayed within ninety (90) days from the date of
the entry thereof.
(e) If there is instituted by the Corporation, the
Distribution Company, the Storage Company, the Exploration Company or the
Pipeline Company any proceedings for an order for relief, or if such entity
consents to an order for relief against it, or if such entity files a
petition or answer or consent seeking reorganization, arrangement,
adjustment, composition or relief, under the federal bankruptcy laws or any
other similar applicable federal or state law, or if such entity consents to
the filing of any such petition or to the appointment of a receiver,
liquidator, custodian, assignee, trustee or sequestrator (or other similar
official) of such entity or of any substantial part of its property, or if
such entity makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due.
(f) If any warranty, representation or other statement
by or on behalf of the Corporation, the Distribution Company or the Pipeline
Company contained in this Loan Agreement or in any other document or
instrument furnished in connection with the issuance or sale of the Bonds,
including the Company Loan Agreements, shall prove to have been false or
misleading in any material respect at the time it was made or delivered.
(g) If an Event of Default under the Indenture or any of
the Company Loan Agreements shall occur.
Section 6.2. Remedies on Default. Whenever an Event of
Default shall have happened and be continuing, the Trustee as the assignee of
the Authority shall take any action at law or in equity directed by the
Underwriter (or by the Holders of twenty-five percent (25%) or more in
aggregate principal amount of the Bonds outstanding if the Holders have
regained the
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ability to select and direct remedies upon an Event of Default) to collect the
amounts then due and thereafter to become due or to enforce observance or
performance of any covenant, condition or agreement of the Corporation under the
Note and this Loan Agreement, including declaring the entire unpaid principal of
and interest on the Note due and payable. Upon any such declaration of
acceleration, the Corporation shall immediately pay to the Trustee the entire
unpaid principal of and accrued interest on the Note and other moneys due
thereunder. Further, the Trustee, as assignee of the Company Notes shall take
any action at law or in equity directed by the Underwriter (or by the Holders of
twenty-five percent (25%) or more in aggregate principal amount of the Bonds
outstanding if the Holders have regained the ability to select and direct
remedies upon an Event of Default) to collect the amounts then due and
thereafter to become due thereunder, including declaring the entire unpaid
principal of and interest on any one or more Company Notes due and payable.
Upon any such declaration of acceleration, the Distribution Company and/or the
Pipeline Company shall immediately pay to the Trustee the entire unpaid
principal of and accrued interest on its Company Note and other moneys due
thereunder. If the Trustee accelerates the payment of the Note, it shall also
accelerate the payment of the Company Notes.
If the Trustee, as the assignee of the Authority,
exercises any of its rights or remedies under this Section 6.2, it shall give
notice of such exercise to the Corporation (1) in writing in the manner
provided in Section 8.2 and (2) by telephone or telegram; provided, that
failure to give such notice by telephone or telegram shall not affect the
validity of the exercise of any right or remedy under this Section 6.2.
Except for any remedy directed by the Holders of the
Bonds, prior to exercising any remedies provided hereunder, unless the Senior
Bonds and the Senior Subordinated Bonds have been paid or defeased in full,
the Trustee shall notify the Senior Underwriter and offer the Senior
Underwriter an opportunity (which may be restricted to a short period of
time) to suggest appropriate remedies.
Section 6.3. Application of Amounts Realized in
Enforcement of Remedies. Any amounts collected pursuant to action taken
under Section 6.2 shall be applied in accordance with the provisions of the
Indenture, or, if Payment of the Bonds shall have been made, shall be applied
according to the provisions of Section 608 of the Indenture.
Section 6.4. No Remedy Exclusive. No remedy herein
conferred on or reserved to the Authority or the Trustee or the holder of the
Note is intended to be exclusive of any other remedy, and every remedy shall
be cumulative and in addition to every other remedy herein or now or
hereafter existing at law, in equity or by statute. No delay or failure to
exercise any right or power accruing upon an Event of Default shall impair
any such right or power or shall be construed to be a waiver thereof, and
any such right or power may be exercised from time to time and as often as
may be deemed expedient.
Section 6.5. Attorneys' Fees and other Expenses. Upon
an Event of Default, the Corporation shall on demand pay to or on behalf of
the Authority, the Underwriter and the
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Trustee the reasonable fees and expenses of attorneys and other reasonable
expenses incurred by any of them in the collection of payments due on the Note
or this Loan Agreement or the enforcement of performance of any other
obligations of the Corporation.
Section 6.6. No Additional Waiver Implied by One Waiver.
If any party or its assignee waives a default by any other party under any
covenant, condition or agreement herein, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any other
default hereunder.
ARTICLE VII
Prepayment of the Note
Section 7.1. Option To Prepay the Note and Terminate
Loan Agreement in Certain Events. The Corporation shall have the option to
prepay the Note in full and terminate this Loan Agreement at any time if one
of the following has occurred:
(1) Damage or destruction of the Lebanon Project by
fire or other casualty to such extent that, in the opinion of both the
Corporation's board of directors (expressed in a resolution) and an
independent architect or engineer reasonably acceptable to the Trustee, both
filed with the Trustee (A) the Lebanon Project cannot be reasonably repaired,
rebuilt or restored within a period of one year to its condition immediately
preceding such damage or destruction, or (B) the Corporation, the
Distribution Company or the Pipeline Company is prevented from carrying on
its normal operations in connection with the Lebanon Project for a period of
one year, or (C) the cost of repairs, rebuilding or restoration would exceed
125% of the Net Proceeds of insurance carried thereon.
(2) Loss of title to or use of substantially all of
the Lebanon Project as a result of the exercise of the power of eminent
domain or failure of title which, in the opinion of both the Corporation's
board of directors (expressed in a resolution) and an independent architect
or engineer reasonably acceptable to the Trustee, both filed with the
Trustee, prevents or is likely to prevent the Corporation, the Distribution
Company or the Pipeline Company from carrying on its normal operations in
connection with the Lebanon Project for a period of one year.
(3) A change in the Constitution of Virginia or of
the United States of America or a legislative or administrative action
(whether local, state or federal) or a final decree, judgment or order of any
court or administrative body (whether local, state or federal) contested by
the Corporation in good faith that causes this Loan Agreement or the Note to
become void or unenforceable or impossible of performance in accordance with
the intent and purpose of the parties as expressed therein or that causes
unreasonable burdens or excessive liabilities to be imposed on the
Corporation, the Distribution Company or the Pipeline Company in connection
with the Lebanon Project.
28
<PAGE>
To exercise such option the Corporation shall within ninety (90) days after the
event permitting its exercise file the required resolutions and opinions with
the Authority and the Trustee and specify a date not more than sixty (60) days
thereafter for making such prepayment. In such case, the Authority shall cause
the Trustee to redeem the Bonds as provided in Section 301(a) of the Indenture.
Section 7.2. Option To Prepay the Note in Whole. The
Corporation shall have the option to prepay the Note in whole, with no
penalty or premium, and terminate this Loan Agreement. In such case, the
Authority shall cause the Trustee to redeem the Bonds as provided in Sections
301(b) and/or (c) of the Indenture.
Section 7.3. Option To Prepay the Note in Part. The
Corporation shall have the option to prepay the Note in part (in $5,000
increments), with no penalty or premium. The amount so prepaid shall, so
long as all payments then due under the Note have been made, if Bonds are
then redeemable as provided in Sections 301(b) and/or (c) of the Indenture,
be used to redeem Bonds to the extent possible under such sections.
Section 7.4. Option to Prepay the Note. The Corporation
shall have the option to prepay the Note in whole upon the occurrence of a
Determination of Taxability, unless the interest rate on the Bonds is
increased, as provided in Section 301(d) of the Indenture. If the
Corporation opts to redeem the Bonds, the Authority shall cause the Trustee
to redeem the Bonds as provided in Section 301(d) of the Indenture as quickly
as possible, but in any case within 30 to 120 days after the Determination of
Taxability.
Section 7.5. Amount Required for Prepayment. To prepay
the Note in whole or in part under Sections 5.4, 7.1, 7.2, 7.3 or 7.4, the
Corporation shall pay to the Trustee, for deposit in the Bond Fund, an amount
of cash and Defeasance Obligations that will be sufficient (1) in the case of
prepayment in whole, to discharge the lien of the Indenture pursuant to
Section 801 thereof, and (2) in the case of prepayment in part, to cause any
Bonds that will be paid with the prepayment to no longer be Outstanding
because of a discharge of such Bonds as described in Section 801 of the
Indenture. Further, upon any such prepayment, the Corporation will pay all
fees and charges that may be due under the Indenture, the Bond Purchase
Agreement or this Loan Agreement. If the Corporation has prepaid the Note,
as provided above, the Corporation shall not direct the expenditure of any
funds from such prepayment in the Bond Fund for any purpose other than the
payment of principal of, premium, if any, or interest on the Bonds to be
redeemed. The Corporation shall instruct the Trustee to give the notice of
redemption required by Section 303 of the Indenture if any of the Bonds are
to be paid or redeemed other than at maturity.
ARTICLE VIII
Miscellaneous
29
<PAGE>
Section 8.1. Term of Loan Agreement. This Loan
Agreement shall be effective upon its execution and delivery and, subject to
earlier termination upon prepayment in full of the Note and other amounts
described in Article VII, shall expire on the date of the last maturity of
any Bonds, or if payment of the Note has not been made on such date, when
payment of the Note shall have been made; provided, that (a) the covenants in
Sections 5.6 and 5.7 shall continue until the final maturity date of all
Bonds or the earlier redemption date on which provision for payment for all
Bonds has been made, (b) the covenant made in Section 5.5 shall survive
Payment of the Bonds and payment of the Note and (c) the covenant in Section
4.6 shall continue for six years after Payment of the Bonds.
Section 8.2. Notices. Unless otherwise provided herein
all demands, notices, approvals, consents, requests, opinions and other
communications hereunder shall be in writing and shall be deemed to have been
given when delivered in person or mailed by first class registered or
certified mail, postage prepaid, addressed:
if to the Corporation:
200 East Main Street
Post Office Box 2407
Abingdon, Virginia 24210
(Attention: President)
Telephone (540) 676-2380; Telecopy (540) 676-2494
if to the Authority:
c/o County Administrator's Office
Russell County Courthouse
121 East Main Street
Lebanon, Virginia 24266
(Attention: Chairman)
Telephone (540) 889-8000; Telecopy (540) 889-8811
if to the Trustee:
919 East Main Street, 10th Floor
Richmond, Virginia 23219
(Attention: Corporate Trust Administration)
Telephone (804) 782-7084; Telecopy (804) 782-7855
if to the Underwriter or the Senior Underwriter:
Anderson & Strudwick Incorporated
1108 East Main Street
Richmond, Virginia 23219
(Attention: L. McCarthy Downs, III)
Telephone (804) 643-2400; Telecopy (804) 648-3404
30
<PAGE>
A duplicate copy of each demand, notice, approval, consent, request, opinion or
other communication given hereunder by either the Authority or the Corporation
to the other shall also be given to the Trustee and, for information purposes
only, the Underwriter and, until the Senior Bonds and the Senior Subordinated
Bonds are paid or defeased in full, the Senior Underwriter. The Corporation,
the Trustee, the Authority, the Underwriter or the Senior Underwriter may, by
notice given hereunder, designate any further or different addresses to which
subsequent demands, notices, approvals, consents, requests, opinions or other
communications shall be sent or persons to whose attention they shall be
directed.
Section 8.3. Amendments to Loan Agreement and Note.
Except as provided in Section 4.6(b), neither this Loan Agreement nor the
Note shall be amended, modified or supplemented, and no substitution shall be
made for the Note before Payment of the Bonds without the consent of the
Trustee and the Authority, given in accordance with and subject to Article
XII of the Indenture.
Section 8.4. Successors and Assigns. This Loan
Agreement shall be binding on, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Section 8.5. Severability. If any term or provision of
this Loan Agreement or the Note or the application thereof for any reason or
circumstances shall to any extent be held invalid or unenforceable, the
remaining provisions or the application of such term or provision to persons
and situations other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision
hereof and thereof shall be valid and enforced to the fullest extent
permitted by law.
Section 8.6. Applicable Law; Entire Understanding. This
Loan Agreement and the Note shall be governed by the applicable laws of the
Commonwealth of Virginia. This Loan Agreement and the Note express the
entire understanding and all agreements between the parties hereto.
Section 8.7. Limitation of Liability of Directors of
Authority. No covenant, agreement or obligation contained herein shall be
deemed to be a covenant, agreement or obligation of any present or future
director, officer, employee or agent of the Authority in his individual
capacity, and no such director, officer, employee or agent shall be subject
to any liability under this Loan Agreement or the Note or with respect to any
other action taken by him.
Section 8.8. Counterparts. This Loan Agreement may be
executed in several counterparts, each of which shall be an original and all
of which together shall constitute but one and the same instrument, except
that to the extent, if any, that this Loan Agreement shall constitute
personal property under the Uniform Commercial Code of Virginia, no security
interest in this Loan Agreement may be created or perfected through the
transfer or possession of any counterpart of this Loan Agreement other than
the original counterpart, which shall be the
31
<PAGE>
counterpart containing the receipt therefor executed by the Trustee following
the signatures to this Loan Agreement.
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32
<PAGE>
IN WITNESS WHEREOF, the Authority and the Corporation
have caused this Loan Agreement to be signed in their names and on their
behalf by their duly authorized officers all as of the date first above
written.
INDUSTRIAL DEVELOPMENT AUTHORITY
OF RUSSELL COUNTY
By _________________________________
Name: ___________________________
Title: (Vice) Chairman
VIRGINIA GAS COMPANY
By _________________________________
Name: Michael L. Edwards
Title: President
SEEN AND ACKNOWLEDGED:
VIRGINIA GAS DISTRIBUTION COMPANY
By ______________________________
Name: Michael L. Edwards
Title: President
VIRGINIA GAS PIPELINE COMPANY
By ______________________________
Name: Michael L. Edwards
Title: President
Exhibit A -- Specimen Note
Exhibit B -- Specimen Company Note
Exhibit C -- Arbitrage Rebate Instructions
33
<PAGE>
RECEIPT
Receipt of the foregoing original counterpart of the Loan
Agreement, dated as of February 1, 1997, between the Industrial Development
Authority of Russell County and Virginia Gas Company and the $9,100,000
Promissory Note from Virginia Gas Company to the Industrial Development
Authority of Russell County is hereby acknowledged.
CRESTAR BANK, as Trustee
By _______________________________
Name: K. M. Whitt
Title: Assistant Vice President
34
<PAGE>
Exhibit A
SPECIMEN NOTE
A-1
<PAGE>
Exhibit B
SPECIMEN COMPANY NOTE
B-1
<PAGE>
Exhibit C
REBATE INSTRUCTIONS
A. Within forty-five (45) days after (i) the initial
installment computation date (the last day of the fifth Bond Year, which is
February 15, 2002), and (ii) each fifth anniversary thereof, and (iii)
retirement of the last obligation of the Bonds, the Corporation will cause to
be computed the amount of the "rebatable arbitrage" as of each such
computation date calculated pursuant to Section 148(f) of the Code and
regulations thereunder (the "Rebate Amount") and will deliver a copy of such
computation setting forth the Rebate Amount (the "Rebate Amount
Certificate"), together with an opinion or report prepared by the expert
referred to in the following sentence, to the Trustee. The Rebate Amount
Certificate setting forth such Rebate Amount shall be prepared or approved by
(i) a person with experience in matters of accounting for federal income tax
purposes, (ii) an arbitrage rebate calculating and reporting service, or
(iii) Bond Counsel. The Corporation shall retain the records of computation
of each Rebate Amount until the date six years after the retirement of the
last obligation of the Bonds. The Trustee will be under no obligation to
verify the accuracy of or to retain copies of the Rebate Amount Certificates.
B. Not later than fifty-five (55) days after the
initial installment computation date, the Corporation shall pay or cause to
be paid to the United States ninety percent (90%) of the Rebate Amount as set
forth in the Rebate Amount Certificate prepared with respect to such
installment computation date. At least once, on or before fifty-five (55)
days after the installment computation date that is the fifth anniversary of
the initial installment computation date and on or before fifty-five (55)
days after every fifth anniversary date thereafter, until retirement of the
last obligation of the Bonds, the Corporation shall pay or cause to be paid
to the United States the amount, if any, by which ninety percent (90%) of the
Rebate Amount set forth in the most recent Rebate Amount Certificate exceeds
the aggregate of all such payments theretofore made to the United States
pursuant to these rebate instructions. On or before fifty-five (55) days
after retirement of the last obligation of the Bonds, the Corporation shall
pay or cause to be paid to the United States the amount, if any, by which
100% of the Rebate Amount set forth in the Rebate Amount Certificate with
respect to the date of the retirement of the last obligation of the Bonds
exceeds the aggregate of all payments theretofore made pursuant to these
rebate instructions. All such payments shall be made by the Corporation from
any available source.
C. The provisions hereof shall continue notwithstanding
the establishment of an escrow pursuant to Section 801 of the Indenture to
discharge the Bonds prior to such final payment.
D. Notwithstanding anything contained herein to the
contrary, no such payment will be due with respect to any installment
computation date if the Corporation receives
C-1
<PAGE>
and delivers to the Trustee an Opinion of Bond Counsel that such payment is not
required under the Code to prevent any Bonds from becoming "arbitrage bonds"
within the meaning of Section 148 of the Code.
E. Neither the Authority nor the Trustee nor the
Underwriter shall be liable to the Corporation by way of contribution,
indemnification, counterclaim, set-off or otherwise for any payment made or
expense incurred by the Corporation pursuant to these rebate instructions.
C-2
<PAGE>
VIRGINIA GAS COMPANY
PROMISSORY NOTE
$9,100,000 February 20, 1997
VIRGINIA GAS COMPANY, a Delaware corporation (the "Corporation"), for
value received, hereby promises to pay to the INDUSTRIAL DEVELOPMENT AUTHORITY
OF RUSSELL COUNTY (the "Authority"), or assigns, the principal sum of NINE
MILLION ONE HUNDRED THOUSAND DOLLARS ($9,100,000) as follows:
This Note shall mature on February 15, 2017, subject to redemption
in amounts and in the manner set forth herein and in the Indenture, as
hereinafter defined, and with interest thereon payable from the dated date of
this Note on August 15, 1997, and thereafter semiannually on each February 15
and August 15, at the rate of 9.50% per year.(1)
Payments of installments on the principal due (whether by
maturity or by mandatory sinking fund redemption) shall be due on the
fifteenth day of each month beginning on February 15, 2002, with amounts
payable in each installment and with credits toward such amounts determined
in accordance with Articles III and VI of the Indenture and Article IV of the
Loan Agreement, as hereinafter defined, but with the full amount of the
principal maturity or mandatory sinking fund redemption installment for each
year to be paid by January 15 of the preceding year, as set forth in Articles
III and VI of the Indenture. Payments of interest shall be due on the
fifteenth day of each month, beginning on March 15, 1997, with amounts
(including interest on overdue installments of interest) payable on each date
and with credits toward such amounts determined in accordance with Article VI
of the Indenture and Article IV of the Loan Agreement, but with the full
installments of interest not then paid in full accrued to each August 15 and
February 15 to be paid by each preceding July 15 and January 15,
respectively. All payments hereon shall be applied first to interest and
then to principal.
- ------------------
1 If the Corporation has not caused the Subordination Discontinuance
Requirements, as defined in the Indenture, to have been met on or before
February 15, 2002, the interest rate on this Note shall increase effective on
and after February 15, 2002 to the greater of 12.0% per year or 450 basis
points (4.5%) over the yield on the then-current 30-year U.S. Treasury Bond,
calculated as described in the Indenture. Further, if the Corporation
exercises the option described in the Indenture to adjust the interest rate
on the Bonds (as defined herein) upon a Determination of Taxability (as
defined in the Indenture), the interest rate payable per year on this Note
will be increased to the greater of (a) the interest rate then payable on
this Note or (b) fifteen percent (15%), effective on the date described in
the Indenture.
<PAGE>
Payments shall be made in lawful money of the United States of
America at the principal corporate trust office of the Trustee, as
hereinafter defined, in Richmond, Virginia, or at such other place as the
Trustee may direct in writing. The principal hereof, premium, if any, and
interest hereon shall be payable by wire or other transfer of immediately
available funds to the Trustee or by deposit of clearing house or other
next-day funds with or to the account of the Trustee at or prior to the
opening of business on the day such payments shall become due and payable (or
the next preceding business day if such date is a Saturday, Sunday or holiday
in the city in which the principal corporate trust office of the Trustee is
located).
If at any time the amount held by the Trustee in the Bond Fund
and the Reserve Fund, each as defined in the Indenture, should be sufficient
to pay at the times required the principal of, and premium, if any, and
interest on the Bonds, as hereinafter defined, then remaining unpaid and to
pay all fees and expenses of the Trustee and the paying agents accrued and to
accrue through final payment of the Bonds, the Corporation shall not be
obligated to make any further payments hereunder, except to the extent losses
may be incurred in connection with investment of moneys in such funds.
The Authority, by the execution of the Indenture and the
assignment form at the foot of this Note, is assigning this Note and the
payments thereon to Crestar Bank, as trustee (the "Trustee"), acting pursuant
to an Indenture of Trust dated as of February 1, 1997 (the "Indenture"),
between the Authority and the Trustee, as security for the Authority's
$9,100,000 Subordinated Natural Gas Facilities Revenue Bonds (Virginia Gas
Company Project), Series 1997 (the "Bonds"), all as issued pursuant to the
Indenture. Payments of principal of, premium, if any, and interest on this
Note shall be made directly to the Trustee for the account of the Authority
pursuant to such assignment and applied only to the principal of, premium, if
any, and interest on the Bonds. All obligations of the Corporation hereunder
shall terminate when all sums due and to become due pursuant to the
Indenture, this Note, the Loan Agreement and the Bonds have been paid or
provided for in full.
In addition to the payments of principal and interest
specified herein, the Corporation shall also pay such additional amounts, if
any, which, together with other moneys available therefor pursuant to the
Indenture, may be necessary to enable the Trustee to make the payments and
deposits required by Article VI of the Indenture, including, without
limitation, amounts necessary to fund and maintain the Reserve Fund, and
amounts necessary to provide for payment when due of principal of (whether at
maturity, by acceleration, call for redemption or otherwise) and premium, if
any, and interest on the Bonds.
The Corporation shall have the option and the obligation to
prepay this Note in whole or in part upon the terms and conditions and in the
manner specified in the Loan Agreement dated as of February 1, 1997 (the
"Loan Agreement") between the Authority and the Corporation.
This Note is issued to evidence the Corporation's payment
obligations in Section 4.1(a) of the Loan Agreement and is entitled to the
benefits and subject to the conditions thereof, including the provisions of
Section 4.4 thereof that the Corporation's obligations thereunder and
2
<PAGE>
hereunder shall be unconditional. All the terms, conditions and provisions
of the Loan Agreement are, by this reference thereto, incorporated herein as
a part of this Note.
Upon the occurrence of certain Events of Default, as defined
in the Loan Agreement, the principal of this Note may be declared, and the
same shall become, due in accordance with the Loan Agreement.
Upon the prepayment or the call for redemption and the
surrender of this Note for prepayment or redemption in part only, the
Corporation shall cause to be executed and delivered at the expense of the
Corporation, a new Note of like form and tenor, but in principal amount equal
to the unpaid or unredeemed portion of the principal of this Note. The
Trustee may, in lieu of surrendering this Note for a new Note, endorse on
this Note acknowledgment of such partial prepayment or redemption, which
acknowledgment shall set forth, over the signature of the Trustee, the
payment date, the principal amount prepaid or redeemed and the principal
amount remaining unpaid as provided in Exhibit A.
This Note shall be governed by and construed in accordance
with the laws of the Commonwealth of Virginia.
THE OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER THIS
NOTE IS, UNTIL ALL OF THE SUBORDINATION DISCONTINUANCE REQUIREMENTS HAVE BEEN
MET, SUBORDINATE TO THE OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER
ITS SENIOR NOTES AND ITS SENIOR SUBORDINATED NOTES (AS SUCH TERMS ARE DEFINED
IN THE INDENTURE).
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Promissory Note to be
duly executed in its name and on its behalf by its duly authorized officer
and to be dated the date first above written.
VIRGINIA GAS COMPANY
By
-----------------------------
Name: Michael L. Edwards
Title: President
4
<PAGE>
EXHIBIT A
SCHEDULE OF PREPAYMENTS AND REDEMPTIONS
Amount of Prepayment Remaining Balance
Date or Redemption of Note Signature of Holder
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5
<PAGE>
ASSIGNMENT
The Industrial Development Authority of Russell County (the
"Authority"), hereby irrevocably assigns without recourse the foregoing
Promissory Note to Crestar Bank, as trustee (the "Trustee"), acting pursuant to
an Indenture of Trust dated as of February 1, 1997 (the "Indenture"), between
the Authority and the Trustee and hereby directs Virginia Gas Company, as the
maker of the Note, to make all payments of principal, premium and interest
thereon directly to the Trustee at its principal corporate trust office in
Richmond, Virginia, or at such other place as the Trustee may direct in writing.
Such assignment is made as security for the payment of the Authority's
$9,100,000 Subordinated Natural Gas Facilities Revenue Bonds (Virginia Gas
Company Project), Series 1997, issued pursuant to the Indenture.
INDUSTRIAL DEVELOPMENT AUTHORITY
OF RUSSELL COUNTY
By _______________________________
Name: _________________________
Title: (Vice) Chairman
6
<PAGE>
LOAN AGREEMENT
between
INDUSTRIAL DEVELOPMENT AUTHORITY OF BUCHANAN COUNTY, VIRGINIA
and
VIRGINIA GAS COMPANY
Dated as of November 1, 1994
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NOTE: THIS LOAN AGREEMENT AND AN EXECUTED NOTE IN THE FORM DESCRIBED
HEREIN HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY
INTEREST IN FAVOR OF, CRESTAR BANK, AS TRUSTEE UNDER AN
INDENTURE OF TRUST DATED AS OF THE DATE HEREOF, WITH THE
INDUSTRIAL DEVELOPMENT AUTHORITY OF BUCHANAN COUNTY, VIRGINIA,
AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION
CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE
TRUSTEE AT ITS PRINCIPAL CORPORATE TRUST OFFICE IN RICHMOND,
VIRGINIA.
<PAGE>
TABLE OF CONTENTS
Page
-------
ARTICLE I
Definitions and Rules of Construction
Section 1.1. Definitions............................................ 2
Section 1.2. Rules of Construction.................................. 5
ARTICLE II
Representations
Section 2.1. Representations by Authority........................... 5
Section 2.2. Representations by Corporation......................... 7
ARTICLE III
Construction of Project; Loan of Bond Proceeds
Section 3.1. Agreement To Construct Project......................... 8
Section 3.2. Financing of Project................................... 9
Section 3.3. Repayment to Authority; Repayment to
Corporation.......................................... 9
Section 3.4. Corporation To Provide Funds To Complete
Project.............................................. 10
Section 3.5. Limitation of Authority's Liability.................... 10
Section 3.6. Disclaimer of Warranties............................... 11
Section 3.7. Compliance with Indenture.............................. 11
ARTICLE IV
Payments on the Note
Section 4.1. Amounts Payable........................................ 11
Section 4.2. Payments Assigned...................................... 12
Section 4.3. Default in Payments.................................... 12
Section 4.4. Corporation's Obligations Unconditional................ 13
Section 4.5. Advances by Authority or Underwriter................... 13
Section 4.6. Rebate Requirement..................................... 13
ARTICLE V
Special Covenants
Section 5.1. Insurance Requirements................................. 14
Section 5.2. Examination of Books and Records....................... 15
Section 5.3. Financial Statements and Other Information............. 15
Section 5.4. Damage, Destruction, Condemnation and Loss
of Title............................................. 16
Section 5.5. Indemnification........................................ 18
(i)
<PAGE>
Page
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Section 5.6. Maintenance and Modification of Project................ 19
Section 5.7. Tax Exemption.......................................... 20
Section 5.8. Investment and Use of Trust Funds...................... 23
Section 5.9. Notice of Other Defaults; Compliance with
Other Documents...................................... 23
Section 5.10. Corporate Status....................................... 24
Section 5.11. Priority of Indebtedness; Additional
Indebtedness......................................... 24
Section 5.12. Limitations on Liens................................... 26
Section 5.13. Limitations on Payment of Dividends.................... 26
Section 5.14. Ownership of Stocks and Project........................ 26
Section 5.15. Prepayment of Russell Bonds............................ 26
Section 5.16. Deposit to Supplemental Reserve Account................ 27
ARTICLE VI
Events of Default and Remedies
Section 6.1. Event of Default Defined............................... 27
Section 6.2. Remedies on Default.................................... 28
Section 6.3. Application of Amounts Realized in
Enforcement of Remedies.............................. 29
Section 6.4. No Remedy Exclusive.................................... 29
Section 6.5. Attorneys' Fees and other Expenses..................... 29
Section 6.6. No Additional Waiver Implied by One Waiver............. 29
ARTICLE VII
Prepayment of the Note
Section 7.1. Option To Prepay the Note and Terminate
Loan Agreement in Certain Events..................... 29
Section 7.2. Option To Prepay the Note in Whole..................... 30
Section 7.3. Option To Prepay the Note in Part...................... 31
Section 7.4. Obligation To Prepay the Note.......................... 31
Section 7.5. Amount Required for Prepayment......................... 31
ARTICLE VIII
Miscellaneous
Section 8.1. Term of Loan Agreement................................. 31
Section 8.2. Notices................................................ 32
Section 8.3. Amendments to Loan Agreement and Note.................. 33
Section 8.4. Successors and Assigns................................. 33
Section 8.5. Severability........................................... 33
Section 8.6. Applicable Law; Entire Understanding................... 33
Section 8.7. Limitation of Liability of Directors of
Authority............................................ 33
Section 8.8. Counterparts........................................... 33
(ii)
<PAGE>
Page
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Testimonium ....................................................... 34
Signatures ....................................................... 34
Receipt ....................................................... 35
Exhibit A - Specimen Note
Exhibit B - Specimen Company Promissory Note
Exhibit C - Arbitrage Rebate Instructions
(iii)
<PAGE>
THIS LOAN AGREEMENT, dated as of November 1, 1994, between the
INDUSTRIAL DEVELOPMENT AUTHORITY OF BUCHANAN COUNTY, VIRGINIA, a political
subdivision of the Commonwealth of Virginia (the "Authority"), and VIRGINIA
GAS COMPANY, a Delaware corporation (the "Corporation"),
W I T N E S S E T H:
WHEREAS, the Authority is a political subdivision of the Commonwealth of
Virginia created pursuant to the Industrial Development and Revenue Bond Act,
Chapter 33, Title 15.1 of the Code of Virginia of 1950, as amended (the
"Act"), and is empowered by the Act, among other things, to issue its bonds
and to loan the proceeds from the sale and issuance of such bonds to be
applied to pay the costs of acquiring, improving, constructing and equipping
industrial and commercial facilities;
WHEREAS, at the request of the Corporation, the Distribution Company,
the Storage Company and the Exploration Company, as hereinafter defined, the
Authority has determined to issue its Natural Gas Facilities Revenue Bonds
(Virginia Gas Company Project) Series 1994, in the aggregate principal amount
of $4,250,000 (the "Bonds") for the purpose of providing funds, together with
other available funds to (i) acquire, improve, construct and equip a natural
gas distribution facility and supporting assets (the "Project") to serve
natural gas customers in and near the Town of Grundy in Buchanan County,
Virginia, and (ii) pay certain costs of issuance of the Bonds; all upon the
terms and conditions set forth hereinafter and in the Indenture of Trust
dated as of the date hereof (the "Indenture") between the Authority and
Crestar Bank, as Trustee (the "Trustee"); and
WHEREAS, although the Corporation will be primarily liable to make the
payments due on the Note, as hereinafter described, the Corporation will not
own any portion of the Project. The natural gas distribution facilities
comprising a portion of the Project will be owned and operated by Virginia
Gas Distribution Company, a Virginia corporation (the "Distribution
Company"), the natural gas gathering and storage facilities comprising a
portion of the Project will be owned and operated by Virginia Gas Storage
Company, a Virginia corporation (the "Storage Company"), and the natural gas
production facilities comprising a portion of the Project will be owned and
operated by Virginia Gas Exploration Company, a Virginia corporation (the
"Exploration Company");
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto covenant and agree as
follows:
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ARTICLE I
Definitions and Rules of Construction
Section 1.1. Definitions. Except as set forth below or unless the
context otherwise requires, all undefined capitalized terms shall have the
meanings assigned them in the Indenture. Words and terms defined in the
preamble hereto shall have the meaning set forth therein. The following
words and terms shall have the following meanings unless the context
otherwise requires:
"Adverse Tax Action" shall mean any action or omission to take action
reasonably within the control of the actor, the result of which is to subject
interest on the Bonds to inclusion in gross income for federal income tax
purposes; provided, that no Adverse Tax Action shall be deemed to have
occurred if the interest on any Bond becomes taxable to the Holder thereof
who is a "substantial user" of the Project or a "related person" within the
meaning of Section 147(a) of the Code.
"Bond Purchase Agreement" shall mean the Bond Purchase Agreement dated
November 7, 1994 among the Authority, the Corporation and the Underwriter,
pursuant to which the Bonds are sold to the Underwriter, including all
amendments or supplements thereto.
"Certificate" shall mean the Certificate of Public Convenience and
Necessity issued to the Distribution Company by the Virginia State
Corporation Commission relating to the operation of the natural gas
distribution facilities comprising a portion of the Project.
"Company" or "Companies," depending on the context in which such
words are used, shall mean each of or all of the Distribution Company,
the Storage Company and the Exploration Company.
"Company Promissory Note" shall mean each Promissory Note issued by the
Distribution Company, the Storage Company or the Exploration Company to the
Corporation evidencing its obligation to repay the Corporation for property
and assets acquired or refinanced for that entity from the proceeds of the
Bonds.
"Event of Default" shall mean with respect to this Loan
Agreement each of those events set forth in Section 6.1 of this Loan
Agreement.
"Loan Agreement" shall mean this Loan Agreement, including all
amendments and supplements hereto.
"Net Proceeds" shall mean the gross proceeds from any insurance recovery
or condemnation award remaining after payment
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of attorneys' fees, fees and expenses of the Trustee and all other expenses
incurred in the collection of such gross proceeds.
"Note" shall mean the Corporation's Promissory Note in the original
principal amount of $4,250,000, dated the date of the Bonds, in the form of
Exhibit A attached hereto, issued hereunder and delivered to the Authority to
evidence certain of the obligations of the Corporation hereunder, and all
amendments, supplements or substitutions thereto or therefor.
"Payment of the Bonds" shall mean payment in full of the principal of,
premium, if any, and interest on all Bonds and all fees necessary to provide
for the discharge of the Indenture or provision for such payment to discharge
the Indenture as provided therein.
"Parity Debt" shall have the meaning set forth in Section 5.11.
"Permitted Liens" shall mean as of any particular time, (a) liens for ad
valorem taxes and special assessments not then delinquent; (b) utility,
access and other easements and rights-of-way, mineral rights, restrictions
and exceptions, which, in the opinion of an architect, engineer or surveyor
will not interfere with or impair the operation of the Project or other
assets owned by the Corporation, the Distribution Company, the Storage
Company or the Exploration Company; (c) such minor defects, irregularities,
encumbrances, easements, right-of-way and licenses as normally exist with
respect to the subject property and as do not interfere with or impair the
operation of the Project or other assets owned by the Corporation, the
Distribution Company, the Storage Company or the Exploration Company for its
intended use; (d) liens arising by reason of good faith deposits in
connection with leases of real estate, bids or contracts (other than
contracts for the payment of money), deposits to secure public or statutory
obligations, liens to secure, or in lieu of, surety, stay or appeal bonds,
and deposits as security for the payment of taxes or assessments or other
similar charges; (e) any judgment lien against the Corporation, the
Distribution Company, the Storage Company or the Exploration Company so long
as such judgment is being contested in good faith and execution thereon is
stayed, or provision for payment of the judgment has been made in accordance
with applicable law or by the deposit with the applicable court, the Trustee
or with a commercial bank or trust company of cash, security or other
property acceptable to the Trustee; (f) any liens of mechanics, materialmen,
laborers, suppliers or vendors for work or services performed or materials
furnished in connection with any property that are not due and payable or
that are not delinquent, the amount or validity of which are being contested
in good faith and execution thereon is stayed or that have been due for less
than ninety (90) days; (g) any lien existing on the date of
authentication and delivery of the Bonds; provided, that no such lien may be
increased, extended, renewed or modified to apply to any property not subject
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to such lien on such date or to secure indebtedness not outstanding on such
date, unless such lien as increased, extended, renewed or modified otherwise
qualifies as a Permitted Lien hereunder; (h) purchase money liens on
property securing indebtedness that was assumed in connection with the
acquisition of such property; provided, that no such lien may be increased,
extended, renewed or modified with respect to such indebtedness unless such
lien as increased, extended, renewed or modified otherwise qualifies as a
Permitted Lien hereunder; and (i) any lien on the property of the Corporation
granted in favor of or securing indebtedness to any of its wholly-owned
subsidiaries, and vice versa.
"Prime Rate" shall mean the rate per year announced from time to time by
Crestar Bank as its prime rate, with any change in the Prime Rate being
effective as of the date such announced prime rate is changed. The Prime
Rate is not necessarily the best or lowest rate of interest offered by such
bank.
"Project" shall mean the acquisition, improvement, construction and
equipping of a natural gas distribution facility to serve the general public
in and near the Town of Grundy in Buchanan County, including certain natural
gas gathering and production facilities and storage facilities that directly
support the distribution facilities. The gathering and production facilities
are located primarily in Buchanan County and Dickenson County and the storage
facilities are located primarily in Buchanan County, Scott County and
Washington County.
"Rebate Amount" shall have the meaning set forth in Exhibit C, as it may
be amended from time to time.
"Rebate Amount Certificate" shall have the meaning set forth in Exhibit
C, as it may be amended from time to time.
"Russell Company Loan Agreements" shall mean the two Company Loan
Agreements dated as of January 1, 1994, one between the Corporation and the
Distribution Company and the other between the Corporation and the Storage
Company, as amended or supplemented.
"Russell Company Promissory Notes" shall have the meaning set forth in
Section 3.3.
"Russell IDA" shall have the meaning set forth in Section 3.3.
"Russell Indenture" shall mean the Indenture of Trust dated as of
January 1, 1994 between the Russell IDA and the Russell Trustee pursuant to
which the Russell Bonds were issued, as amended or supplemented.
"Russell Loan Agreement" shall have the meaning set forth in Section
3.3.
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"Russell Note" shall have the meaning set forth in Section 3.3.
"Subsidiaries" shall mean any corporations for which fifty percent (50%)
of more of the capital stock is owned by the Corporation.
Section 1.2. Rules of Construction. The following rules shall apply to
the construction of this Loan Agreement unless the context otherwise requires:
(a) Singular words shall connote the plural number as well as the
singular and vice versa. Any references herein to the masculine gender
include the feminine and neuter genders, and vice versa.
(b) Words importing the redemption or calling for redemption of Bonds
shall not be deemed to refer to or connote the payment of Bonds at their
stated maturity.
(c) All references herein to particular articles or sections are
references to articles or sections of this Loan Agreement unless otherwise
indicated. The words "hereof," "herein," "hereto," "hereby," and "hereunder"
refer to the entire Loan Agreement.
(d) The headings and table of contents herein are solely for convenience
of reference and shall not constitute a part of this Loan Agreement nor shall
they affect its meaning, construction or effect.
ARTICLE II
Representations
Section 2.1. Representations by Authority. The Authority makes the
following representations:
(a) The Authority is an industrial development authority duly
established under the Act, and is a political subdivision of the Commonwealth
of Virginia having those corporate powers enumerated under the Act, has the
power to enter into this Loan Agreement, the Bond Purchase Agreement and the
Indenture and the transactions contemplated hereby and thereby and to perform
its obligations hereunder and thereunder. The Project constitutes and will
constitute an "authority facility" within the meaning of the Act.
(b) By proper corporate action the Authority has duly authorized the
execution and delivery of this Loan Agreement, the Bond Purchase Agreement,
the Indenture and the Bonds, the
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performance of its obligations hereunder and thereunder and the issuance of
the Bonds and, simultaneously with the execution and delivery of this Loan
Agreement, has duly executed and delivered the Bond Purchase Agreement and
the Indenture and issued and sold the Bonds.
(c) The execution and delivery of, and the performance of the
obligations and agreements of the Authority set forth in, this Loan
Agreement, the Bond Purchase Agreement, the Indenture and the Bonds are
within the power and authority of the Authority and have been duly authorized
by the Authority and will not contravene any provision of any judgment, order
or decree to which the Authority is subject or contravene or constitute a
default under any contract, agreement or other instrument to which the
Authority is a party.
(d) The Authority is not in violation of the Act or, to its knowledge,
any existing law, rule or regulation applicable to it which would affect its
existence or the matters referred to in the preceding subsections (b) and (c).
(e) All actions of the Authority with respect to the issuance of the
Bonds occurred at meetings held after notice given in accordance with the
Authority's procedures and applicable law, which were open to the public and
at which quorums were present and acting throughout, and said actions appear
of public record in the minute books of the Authority.
(f) Notwithstanding anything herein to the contrary, any obligation the
Authority may incur hereunder in connection with the acquisition,
improvement, construction, equipping and financing of the Project shall not
be deemed to constitute a general obligation of the Authority but shall be a
limited obligation of the Authority payable solely from the payments received
under this Loan Agreement and the Note and the security specifically pledged
and assigned therefor, including payments received under the Company Loan
Agreements and the Company Promissory Notes.
(g) To the best of its knowledge, no litigation, inquiry or
investigation of any kind in or by any judicial or administrative court or
agency is pending or threatened against the Authority with respect to (1) the
organization and existence of the Authority, (2) its authority to execute or
deliver this Loan Agreement, the Bond Purchase Agreement, the Indenture or
the Bonds or to perform its obligations hereunder and thereunder or to assign
the Note, (3) the validity or enforceability of any of such instruments or
the transactions contemplated hereby or thereby, (4) the title of any officer
of the Authority who executed such instruments, or (5) any authority or
proceedings related to the execution and delivery of such instruments on
behalf of the Authority. No such authority or proceedings have been
repealed, revoked, rescinded or amended and all are in full force and effect.
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(h) The Authority has by duly adopted resolution found and determined
that the financing of the Project, including the financing of interest on the
Bonds attributable to construction and equipping of the Project for up to one
year after its completion, and the loan of the proceeds of the Bonds to the
Corporation are in furtherance of the purposes for which the Authority was
organized and will serve the purposes of the Act.
Section 2.2. Representations by Corporation. The Corporation makes the
following representations:
(a) The Corporation is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Corporation
has the power to enter into this Loan Agreement, the Bond Purchase Agreement
and the Note and the transactions contemplated hereunder and thereunder and
by proper corporate action has duly authorized the execution and delivery of
this Loan Agreement, the Bond Purchase Agreement and the Note and the
performance of its obligations hereunder and thereunder.
(b) The Corporation is not in default in the payment of the principal of
or interest on any of its indebtedness for borrowed money or in default under
any instrument under and subject to which any indebtedness has been incurred,
and no event has occurred and is continuing under the provisions of any such
instrument that with the lapse of time or the giving of notice, or both,
would constitute an event of default thereunder.
(c) There is no litigation at law or in equity or any proceeding before
any governmental agency involving the Corporation pending or, to its
knowledge, threatened in which any liability of any of the Corporation is not
adequately covered by insurance or for which adequate reserves are not
provided or for which any judgment or order would have a material adverse
effect upon the business or assets of the Corporation or affect its existence
or authority to do business, the acquisition, improvement, construction,
equipping or operation of the Project, the validity of this Loan Agreement,
the Bond Purchase Agreement or the Note or the performance of its obligations
hereunder or thereunder.
(d) The execution and delivery by the Corporation of this Loan
Agreement, the Bond Purchase Agreement and the Note, the performance of its
obligations hereunder and thereunder and the consummation of the transactions
herein and therein contemplated do not and will not conflict with, or
constitute a breach or result in a violation of, the articles of
incorporation or bylaws of the Corporation, the Certificate, any agreement or
other instrument to which it is a party or by which it is bound or any
constitutional or statutory provision or order, rule, regulation, decree or
ordinance of any court, government or governmental authority having
jurisdiction over the Corporation or any of its property.
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(e) The Certificate has been issued to the Distribution Company.
Pursuant to the Certificate, the Distribution Company is obligated to furnish
natural gas to all persons who desire such service and who are within the
service area of the Distribution Company. The Project will be available for
use by a large segment of the general public in such service area.
(f) The Corporation has obtained all consents, approvals, authorizations
and orders of any governmental or regulatory authority that are required to
be obtained by it as a condition precedent to the issuance of the Bonds, the
execution and delivery of this Loan Agreement, the Bond Purchase Agreement
and the Note and the performance of its obligations hereunder and thereunder.
(g) The Distribution Company will own and operate the natural gas
distribution facilities that provide gas service to customers in the service
area granted in the Certificate. The Storage Company will own and operate
the natural gas gathering and storage facilities in Scott, Washington,
Buchanan and Dickenson Counties that will support the distribution
facilities. The Exploration Company will own and operate the natural gas
production facilities in Buchanan and Dickenson Counties that will support
the distribution facilities. Only that portion of the gathering, storage and
production facilities that will support the distribution facilities will be
financed with a portion of the proceeds of the Bonds. The Corporation will
cause the Project to be operated as a facility for the local furnishing of
gas within the meaning of Section 142(a)(8) of the Code and as an "authority
facility" within the meaning of the Act until Payment of the Bonds.
(h) The assets acquired or to be acquired with the proceeds of the
Bonds together with the other assets acquired or to be acquired by the
Corporation, the Distribution Company, the Storage Company or the Exploration
Company for which the Corporation has paid or for which it has available
funds on hand include all of those assets which are required to operate the
Project.
ARTICLE III
Construction of Project; Loan of Bond Proceeds
Section 3.1. Agreement To Construct Project. The Corporation, pursuant
to the agreement set forth herein and not as an agent, agrees to cause the
acquisition, improvement, construction and equipping of the Project and
agrees to:
(1) obtain and maintain or cause to be obtained and maintained all
licenses, permits and consents required for the acquisition, improvement,
construction, equipping and operation of
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the Project, and the Authority shall have no responsibility therefor; and
(2) bring or cause to be brought any action or proceeding against
any person which the Authority might bring with respect to the Project as the
Corporation shall deem proper.
The Corporation may enter into contracts on behalf of the Authority,
provided that (A) no such contract shall obligate the Authority to pay money
other than from the proceeds of the Bonds and (B) if the Authority is a party
to any such contract, the Corporation shall obtain the consent of the
Authority and provide for any bond required by law.
Section 3.2. Financing of Project. The Authority hereby agrees to loan
the proceeds of the Bonds to the Corporation to be passed through the
Corporation to be used ultimately for the payment of the Costs of the Project.
Section 3.3. Repayment to Authority; Repayment to Corporation. The
Corporation shall deliver the Note to the Authority as evidence of the
Corporation's obligation to repay the loan made by the Authority and such
Note shall be assigned to the Trustee as security for the Bonds.
Upon the issuance of the Bonds, the Corporation shall provide the
Trustee with a listing of the actual or anticipated expenditures of the
proceeds of the Bonds, broken down into categories for the assets to be
acquired or refinanced for and then owned by the Distribution Company, the
Storage Company and the Exploration Company. Further, upon the issuance of
the Bonds, the Distribution Company, the Storage Company and the Exploration
Company shall each execute and deliver to the Corporation a Company
Promissory Note in a principal amount equal to its allocable share of the
face amount of the Bonds. Each Company Promissory Note, which shall be
substantially in the form set forth in Exhibit B attached hereto, will
obligate the Distribution Company, the Storage Company or the Exploration
Company to pay to the Corporation an amount equal to an allocable portion of
the principal of, premium, if any, and interest on the Bonds. If, upon the
last withdrawal from the Project Fund, it is found that the assets from the
original proceeds of the Bonds actually allocated to the Distribution
Company, the Storage Company or the Exploration Company differs from the
principal amount of that entity's Company Promissory Note by more than
$50,000, each such entity has agreed to amend its Company Promissory Note to
reflect more accurately the amount of the assets acquired or refinanced on
its behalf.
The Corporation shall assign its interests in the Company Loan
Agreements and the Company Promissory Notes to the Trustee as security for
the payments due under the Note.
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THE AUTHORITY, THE CORPORATION AND, BY THEIR PURCHASE OF BONDS, THE
BONDHOLDERS, EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE OBLIGATION OF THE
CORPORATION TO MAKE PAYMENTS UNDER THE NOTE IS ON A PARITY WITH THE
OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER ITS $3,000,000
PROMISSORY NOTE DATED JANUARY 6, 1994 (THE "RUSSELL NOTE") AND ISSUED TO THE
INDUSTRIAL DEVELOPMENT AUTHORITY OF RUSSELL COUNTY (THE "RUSSELL IDA").
FURTHER, THE AUTHORITY, THE CORPORATION AND, BY THEIR PURCHASE OF BONDS, THE
BONDHOLDERS, EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE OBLIGATIONS OF THE
DISTRIBUTION COMPANY AND THE STORAGE COMPANY TO MAKE PAYMENTS UNDER THEIR
COMPANY PROMISSORY NOTES ARE ON A PARITY WITH THE OBLIGATIONS OF THE
DISTRIBUTION COMPANY AND THE STORAGE COMPANY TO MAKE PAYMENTS, RESPECTIVELY,
UNDER THE $1,300,000 COMPANY PROMISSORY NOTE DATED JANUARY 6, 1994 AND ISSUED
TO THE CORPORATION AND THE $1,330,000 COMPANY PROMISSORY NOTE DATED JANUARY
6, 1994 AND ISSUED TO THE CORPORATION (TOGETHER, THE "RUSSELL COMPANY
PROMISSORY NOTES").
Section 3.4. Corporation To Provide Funds To Complete Project. If the
proceeds derived from the sale of the Bonds are not sufficient to pay in full
the Costs of the Project, the Corporation shall pay or cause to be paid such
moneys as are necessary to provide for payment in full of such Costs. The
Corporation shall not be entitled to any reimbursement therefor from the
Authority or the Trustee nor shall the Corporation be entitled to any
abatement, diminution or postponement of its payments hereunder or under the
Note. In no event shall the Authority be responsible or liable for the
payment of any such excess costs.
The Corporation shall not permit any changes to the plans and
specifications governing the improvement and construction of the Project that
would increase the Costs of the Project by more than an aggregate amount of
$300,000 unless it demonstrates to the satisfaction of the Trustee that funds
are available to the Corporation to pay the increased costs.
Section 3.5. Limitation of Authority's Liability. Notwithstanding
anything herein to the contrary, any obligation the Authority may incur
hereunder in connection with the undertaking of the Project or the payment of
money shall not be deemed to constitute a general obligation of the Authority
but shall be a limited obligation payable solely from the revenues and
receipts derived by it from or in connection with the Project or otherwise
under this Loan Agreement, including payments received on the Note, but
specifically excluding the Authority's Unassigned Rights.
Section 3.6. Disclaimer of Warranties. THE AUTHORITY MAKES NO
REPRESENTATION OR WARRANTY THAT THE CORPORATION, THE
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DISTRIBUTION COMPANY, THE STORAGE COMPANY OR THE EXPLORATION COMPANY WILL
HAVE QUIET AND PEACEFUL POSSESSION OF THE PROJECT, except that the Project is
free from encumbrances done, made or knowingly suffered by the Authority or
anyone claiming by, through or under it. The Corporation recognizes that
since the Project is being undertaken at its request and by contractors and
suppliers approved by it in accordance with plans and specifications prepared
by engineers approved by it, THE AUTHORITY MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION
OR WORKMANSHIP OF ANY PART OF THE PROJECT OR ITS SUITABILITY FOR THE PURPOSES
OF THE CORPORATION, THE DISTRIBUTION COMPANY, THE STORAGE COMPANY OR THE
EXPLORATION COMPANY OR THE EXTENT TO WHICH PROCEEDS DERIVED FROM THE SALE OF
THE BONDS WILL PAY THE COST TO BE INCURRED IN CONNECTION THEREWITH. THE
AUTHORITY MAKES NO REPRESENTATION AS TO THE FINANCIAL POSITION OR BUSINESS
CONDITION OF THE CORPORATION, THE DISTRIBUTION COMPANY, THE STORAGE COMPANY
OR THE EXPLORATION COMPANY AND DOES NOT REPRESENT OR WARRANT AS TO ANY OF THE
STATEMENTS, MATERIALS (FINANCIAL OR OTHERWISE), REPRESENTATIONS OR
CERTIFICATIONS FURNISHED OR TO BE MADE AND FURNISHED BY THE CORPORATION, THE
DISTRIBUTION COMPANY, THE STORAGE COMPANY OR THE EXPLORATION COMPANY IN
CONNECTION WITH THE SALE OF THE BONDS, OR AS TO THE CORRECTNESS, COMPLETENESS
OR ACCURACY OF SUCH STATEMENTS.
Section 3.7. Compliance with Indenture. At the request of the
Corporation, the Authority shall (a) at any time moneys held pursuant to the
Indenture are sufficient to effect redemption of the Bonds and if the same
are then redeemable under the Indenture, take all steps that may be necessary
to effect redemption thereunder, and (b) take any other action required by
the Indenture.
ARTICLE IV
Payments on the Note
Section 4.1. Amounts Payable. (a) The Corporation shall make all
payments required by the Note as and when they become due and shall promptly
pay all other amounts necessary to enable the Trustee to make the deposits to
the Bond Fund and the Reserve Fund required by Article VI of the Indenture.
(b) The Corporation shall also pay, as and when the same become due:
(1) To the Trustee, its reasonable fees for services rendered and
for expenses reasonably incurred by it as Trustee under the Indenture and as
Bond Registrar and paying agent on the Bonds, including the reasonable fees
and disbursements of its counsel and the reasonable fees and expenses of any
other paying agents, all as provided in the Indenture, and all other
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amounts that the Corporation herein assumes or agrees to pay, including any
cost or expense necessary to cancel and discharge the Indenture upon Payment
of the Bonds.
(2) To or on behalf of the Authority, (i) all reasonable and
necessary costs and expenses of the Authority related to the Project or the
Bonds and (ii) all other amounts which the Corporation agrees to pay under
the terms of this Agreement; provided, that the aggregate of all such amounts
paid to the Authority shall not equal or exceed an amount which would cause
the "yield" on the Note, this Loan Agreement or any other "acquired purpose
obligation" to be "materially higher" than the "yield" on the Bonds, as such
terms are used in the Code. Such fees and expenses shall be paid directly to
the Authority for its own account as and when such fees and expenses become
due and payable. When the Authority incurs expenses or renders services after
the occurrence of an Event of Default specified in Sections 6.1(d) or 6.1(e),
the expenses and the compensation for the services are intended to constitute
expenses of administration under any federal or state bankruptcy, insolvency,
arrangement, moratorium, reorganization or other debtor relief law.
(3) Amounts described in Section 4.6.
(4) All other amounts that the Corporation agrees to pay under the
terms of this Loan Agreement.
Section 4.2. Payments Assigned. The Corporation consents to the
assignment made by the Indenture to the Trustee of the Note and the Company
Promissory Notes and of certain of the rights of the Authority under this
Loan Agreement and of the Corporation under the Company Loan Agreements. The
Corporation agrees to pay to the Trustee all amounts payable by the
Corporation pursuant to the Note and this Loan Agreement, except for payments
made to the Authority pursuant to Sections 4.1(b)(2), 4.5, 5.5 and 6.5. The
Corporation hereby assigns to the Trustee its rights under Company Promissory
Notes and its rights under the Company Loan Agreements, except for payments
made to the Corporation pursuant to Sections 5.2 and 6.5 thereof.
Section 4.3. Default in Payments. If the Corporation should fail to
make any payments required by the Note or this Loan Agreement on account of
principal of or interest on any Bonds when due, the Corporation shall pay to
the Trustee interest thereon until paid at the rate equal to the rate on such
Bonds, to the extent permitted by law. If the Corporation should fail to make
any other payments required by this Loan Agreement when due, the Corporation
shall pay to the Authority or the Trustee, as applicable, interest at the
rate equal to the Prime Rate plus one percent (1%) per year.
Section 4.4. Corporation's Obligations Unconditional. The obligation
of the Corporation to make the payments on the Note
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and to observe and perform all other covenants, conditions and agreements
hereunder shall be absolute and unconditional, irrespective of any rights of
setoff, recoupment or counterclaim the Corporation might otherwise have
against the Authority or the Trustee and irrespective of the failure or the
delay of the Distribution Company, the Storage Company or the Exploration
Company to make any payment when due under its Company Promissory Note.
Subject to the prepayment of the Note as provided therein, the Corporation
shall not suspend or discontinue any payment on the Note or hereunder or fail
to observe and perform any of its other covenants, conditions or agreements
hereunder for any cause, including without limitation, any acts or
circumstances that may constitute an eviction or constructive eviction,
failure of consideration, failure of title to any part or all of the Project
or commercial frustration of purpose, or any damage to or destruction or
condemnation of all or any part of the Project, or any change in the tax or
other laws of the United States of America, Commonwealth of Virginia or any
political subdivision of either, or any failure of the Authority or the
Trustee to observe and perform any covenant, condition or agreement, whether
express or implied, or any duty, liability or obligation arising out of or in
connection with the Indenture or this Loan Agreement. The Corporation may,
after giving to the Authority and the Trustee ten (10) days' notice of its
intention to do so, at its own expense and in its own name, or in the name of
the Authority if procedurally required, prosecute or defend any action or
proceeding or take any other action involving third persons that the
Corporation reasonably deems necessary to secure or protect any of its rights
hereunder. In the event the Corporation takes any such action, the Authority
shall cooperate fully with the Corporation and shall take all necessary
action to substitute the Corporation for the Authority in such action or
proceeding, if so requested.
Section 4.5. Advances by Authority or Underwriter. If the Corporation
shall fail to make any payment or perform any act required of it hereunder,
the Authority or the Underwriter without prior notice or demand on the
Corporation and without waiving or releasing any obligation or default, may
(but shall be under no obligation to) make such payment or perform such act.
All amounts so paid by the Authority or the Underwriter and all costs, fees
and expenses so incurred shall be payable by the Corporation on demand as an
additional obligation under the Note, together with interest thereon at the
Prime Rate plus one percent (1%) per year until paid.
Section 4.6. Rebate Requirement. (a) At its sole expense on behalf of
the Authority, the Corporation shall determine and pay to the United States
the Rebate Amount as and when due in accordance with the "rebate requirement"
described in Section 148(f) of the Code. The Corporation shall retain
records of all such determinations until six (6) years after Payment of the
Bonds.
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(b) Reference is made to Exhibit C hereto for additional details of the
rebate requirement. Exhibit C may be amended or substituted without
compliance with Article XII of the Indenture or Section 8.3 hereof and
without any action of the Authority upon the Corporation's delivery to the
Trustee of the proposed amendment or substitution together with an Opinion of
Bond Counsel that compliance with this Section 4.6 and Exhibit C, as amended,
will not be an Adverse Tax Action.
(c) Notwithstanding anything contained herein to the contrary, no such
payment need be made if the Corporation receives and delivers to the Trustee
an Opinion of Bond Counsel that such payment is not required under the Code
to prevent any Bonds from becoming "arbitrage bonds" within the meaning of
Section 148 of the Code.
(d) The Authority shall not be liable to the Corporation by way of
contribution, indemnification, counterclaim, set-off or otherwise for any
payment made or expense incurred by or on behalf of the Corporation pursuant
to this Section 4.6.
(e) The Authority covenants that, if so requested by the Corporation,
it shall execute any form required to be signed by an issuer of tax-exempt
bonds in connection with the payment of any rebatable arbitrage (including
Internal Revenue Service Form 8038-T). The Corporation shall supply all
information required to be stated on such form and shall prepare such form.
Except for the execution and delivery of such form upon timely presentation
by the Corporation, the Authority shall have no responsibility for such form
or the information stated thereon.
ARTICLE V
Special Covenants
Section 5.1. Insurance Requirements. The Corporation shall maintain or
cause to be maintained insurance covering such risks and in such amounts as,
in its reasonable judgment, are adequate to protect it, the Distribution
Company, the Storage Company, the Exploration Company, their operations and
their property, including the Project. The insurance required to be
maintained pursuant hereto shall be reviewed by independent insurance
consultants knowledgable about the natural gas business at least biennially
and the Corporation agrees that it will follow or cause to be followed any
reasonable recommendations of the insurance consultants. In order to
establish compliance with this Section 5.1, the Corporation agrees that it
will deliver or cause to be delivered to the Trustee biennially, at the same
time the certificates described in Section 5.3(c) are required to be
delivered, (1) the report of an insurance consultant stating the types of
insurance policies which the Corporation, the Distribution Company, the
Storage Company or the Exploration Company should maintain, which in the
opinion of such insurance
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consultant would comply with the requirements of this Section 5.1 and
adequately provide the protection described above, and (2) reports of one or
more insurance consultants stating the insurance maintained, or caused to be
maintained, by the Corporation, the Distribution Company, the Storage Company
and the Exploration Company pursuant to this Section 5.1 and then in effect
and stating whether, in the opinion of such insurance consultants, the amount
and manner of providing such insurance and any reductions or eliminations of
the amount of any insurance during the period covered by such report comply
with the requirements of this Section 5.1 and adequately protect the
Corporation, the Distribution Company, the Storage Company, the Exploration
Company, their operations and their property, including the Project.
Section 5.2. Examination of Books and Records. The Trustee and the
Underwriter shall be permitted, during normal business hours and upon
reasonable notice, to examine the books and records of the Corporation with
respect to the Corporation's financial standing or its compliance with its
obligations hereunder.
Section 5.3. Financial Statements and Other Information. (a) As soon
as practical, but in any case within 120 days after the end of any fiscal
year, the Corporation shall file with the Trustee a copy of the audited
consolidated financial statements of the Corporation and its subsidiaries as
of the end of such fiscal year, accompanied by the report of independent
certified public accountants thereon. Such audited financial statements
shall be prepared in accordance with generally accepted accounting principles
and shall include such statements as necessary for a fair presentation of
unrestricted fund financial position, results of operations and changes in
unrestricted fund balance and cash flows for, or as of the end of, such
fiscal year.
(b) If an Event of Default shall have occurred and be continuing, the
Corporation shall (1) file with the Trustee such other financial statements
and information concerning its operations and financial affairs as the
Trustee may from time to time reasonably request, and (2) provide access to
its facilities for the purpose of inspection by the Trustee during regular
business hours or at such other times as the Trustee may reasonably request;
provided, that such obligation to file or allow inspection shall exclude
personnel records.
(c) As soon as practical, but in any case within thirty (30) days after
receipt of the audit report mentioned above, the Corporation shall file with
the Trustee a certificate signed by its chief executive officer and its chief
financial officer and a report of the independent certified public accountant
stating that nothing has come to their attention that would lead them to
believe that the Corporation is in default in the performance of any covenant
contained in this Loan Agreement (including, without
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limitation, the covenants contained in Sections 5.7, 5.11, 5.12 and 5.14) or,
if they are aware of any such default, specifying each such default and what
actions the Corporation has taken, is taking or proposes to take to cure such
default.
(d) The Corporation shall furnish to any Holder of $100,000 or more in
aggregate principal amount of the Bonds who requests the same in writing,
and, for informational purposes, the Underwriter, the financial statements,
certificate of no default and other information which the Corporation has
covenanted to furnish the Trustee pursuant to subsections (a) and (c) above.
Such information shall be furnished to such persons at the times and in the
manner for such information to be furnished to the Trustee.
THE AUTHORITY AND THE CORPORATION AGREE TO COMPLY WITH ANY APPLICABLE
RULES AND REGULATIONS OF THE MUNICIPAL SECURITIES RULEMAKING BOARD AND THE
SECURITIES AND EXCHANGE COMMISSION REGARDING THE DISSEMINATION OF INFORMATION
AFTER THE ISSUANCE OF THE BONDS. THE CORPORATION WILL CAUSE TO BE DELIVERED
TO THE APPROPRIATE ENTITY ANY INFORMATION REQUIRED TO BE DISSEMINATED. IF
SUCH INFORMATION MUST BE DISSEMINATED THROUGH THE TRUSTEE, THE CORPORATION
WILL DELIVER SUCH INFORMATION TO THE TRUSTEE AND PAY TO THE TRUSTEE ITS
REASONABLE FEES AND EXPENSES OF COLLECTING AND DISSEMINATING SUCH
INFORMATION. NEITHER THE AUTHORITY NOR THE TRUSTEE WILL HAVE ANY
RESPONSIBILITY FOR COLLECTING OR FOR VERIFYING THE ACCURACY OF SUCH
INFORMATION.
(e) As soon as practical, but in any case within forty-five (45) days
after the end of each fiscal quarter, the Corporation shall furnish to the
Underwriter unaudited consolidated financial statements for such fiscal
quarter, including an income statement and balance sheet. Further, the
Corporation shall furnish to the Underwriter any other unaudited financial
statements or information requested by the Underwriter within thirty (30)
days of any such request.
Section 5.4. Damage, Destruction, Condemnation and Loss of Title. (a)
The Corporation shall give prompt notice to the Trustee and the Underwriter
of (1) any material damage to or destruction of any part of the Project, (2)
a taking of all or any part of the Project or any right therein under the
exercise of the power of eminent domain, (3) any loss of any part of the
Project because of failure of title thereto, or (4) the commencement of any
proceedings or negotiations that might result in such a taking or loss. Each
such notice shall describe generally the nature and extent of such damage,
destruction, taking, loss, proceedings or negotiations.
(b) Unless the Corporation prepays the Note in full pursuant to Article
VII, if all or any part of the Project is
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destroyed or damaged by fire or other casualty, or if title to or the use of
all or any part of the Project is taken under the exercise of the power of
eminent domain or lost because of failure of title, the Corporation shall
promptly replace, repair, rebuild or restore the property damaged, destroyed
or lost so that the Project shall be substantially the same as before such
damage, destruction or loss, with such alterations and additions as the
Corporation may determine and as will not impair the capacity or character of
the Project for the purpose for which it is then being used or is intended to
be used. The Corporation shall apply or cause to be applied the Net Proceeds
of insurance and any condemnation award received by it on account of such
damage, destruction or loss and so much of the funds of the Corporation, the
Distribution Company, the Storage Company and Exploration Company as may be
necessary to payment of the cost of such replacement, repair, rebuilding or
restoration; provided, that in lieu of the requirements of the first sentence
of this Section 5.4(b) the Corporation may apply all of such Net Proceeds to:
(1) The acquisition and/or construction by the Corporation, the
Distribution Company, the Storage Company or the Exploration Company of real
and/or personal property, that (i) is suitable for its operations, (ii) is
free and clear of all liens and encumbrances of any kind except Permitted
Liens, and (iii) is available for use and occupancy by the Corporation, the
Distribution Company, the Storage Company or the Exploration Company without
the requirement of any payment other than as provided in the Note or this
Loan Agreement; or
(2) The prorata prepayment of the Note and any other similar
obligation issued by the Corporation, the Distribution Company, the Storage
Company or the Exploration Company evidencing the obligation to repay any
other loan made by the Authority or any other industrial development
authority or similar entity to finance a portion of the Project, in whole or
in part, for application to the prorata redemption of the Bonds and any other
bonds issued on behalf of the Corporation, the Distribution Company, the
Storage Company or the Exploration Company to finance a portion of the
Project.
The Corporation shall not by reason of the payment of the cost of
replacement, repair, rebuilding or restoration be entitled to any
reimbursement from the Authority or the Trustee or to any abatement or
diminution of the amounts payable under the Note or this Loan Agreement. All
real and personal property acquired pursuant to this Section 5.4 shall become
part of the Project. Prepayments of the Note shall be used to redeem Bonds
pursuant to Section 301(a) of the Indenture. As described in that Section
301(a), the Corporation may select the maturities of the Bonds to be
redeemed.
Section 5.5. Indemnification. (a) The Corporation shall at all times
protect, indemnify and save harmless the Authority, the Trustee and the
Underwriter (collectively, the
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"Indemnitees") from and against all liabilities, obligations, claims,
damages, penalties, causes of action, costs and expenses (hereinafter
referred to as "Damages"), including without limitation (1) all amounts paid
in settlement of any litigation commenced or threatened against the
Indemnitees, if such settlement is effected with the written consent of the
Corporation, (2) all expenses reasonably incurred in the investigation of,
preparation for or defense of any litigation, proceeding or investigation of
any nature whatsoever, commenced or threatened against the Corporation, the
Distribution Company, the Storage Company, the Exploration Company, the
Project, or the Indemnitees, (3) any judgments, penalties, fines, damages,
assessments, indemnities or contributions, and (4) the reasonable fees of
attorneys, auditors, and consultants; provided, that the Damages arise out of:
(A) failure by the Corporation or any of its officers, employees or
agents, to comply with the terms of this Loan Agreement, the Bond Purchase
Agreement and the Note and any agreements, covenants, obligations, or
prohibitions set forth herein or therein or failure by the Distribution
Company, the Storage Company or the Exploration Company to comply with the
terms of any Company Loan Agreement or Company Promissory Note;
(B) any action, suit, claim or demand contesting or affecting the
title to the Project;
(C) any breach of any representation or warranty set forth
in this Loan Agreement or the Bond Purchase Agreement or any
certificate delivered pursuant hereto or thereto, and any claim that
any representation or warranty of the Corporation contains or contained
any untrue or misleading statement of a material fact or omits or
omitted to state any material fact necessary to make the statements
made herein or therein not misleading in light of the circumstances
under which they were made;
(D) any action, suit, claim, proceeding or investigation of
a judicial, legislative, administrative or regulatory nature arising
from or in connection with the acquisition, improvement, construction,
equipping, ownership, operation, occupation or use of the Project;
(E) any suit, action, administrative proceeding, enforcement
action, or governmental or private action of any kind whatsoever
commenced against the Corporation, the Distribution Company, the
Storage Company or the Exploration Company, the Project or the
Indemnitees that might adversely affect the validity, enforceability or
tax-exempt status of the Bonds, this Loan Agreement, the Bond Purchase
Agreement, the Indenture, the Note, any Company Loan Agreement or any
Company Promissory Note, or the performance by the Corporation, the
Distribution Company, the Storage Company, the Exploration Company or
any Indemnitee of any of their respective obligations thereunder; or
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(F) any releases or discharges of hazardous wastes,
constituents or pollutants, or other environmental hazards,
contamination or pollution on, in, near or under the Project,
including, without limitation, remedial investigation and feasibility
study costs, clean up costs and other response costs under the
Comprehensive Environmental Response Compensation and Liability Act, as
modified by the Superfund Amendments and Reauthorization Act of 1986 or
any other environmental legislation or regulation, whether federal,
state or local, currently in existence or which may be enacted in the
future,
provided that such indemnity shall be effective only to the extent of
any loss that may be sustained by the Indemnitees in excess of the
proceeds, net of any expenses of collection, received by them or from
any insurance carried with respect to such loss and provided further
that the benefits of this Section 5.5 shall not inure to any person or
entity other than the Indemnitees.
(b) If any action, suit or proceeding is brought against the
Indemnitees for any loss or damage for which the Corporation is
required to provide indemnification under this Section 5.5, the
Corporation, upon request, shall at its expense resist and defend such
action, suit or proceeding, or cause the same to be resisted and
defended by counsel designated by the Corporation and approved by the
Indemnitees, which approval shall not be unreasonably withheld or
delayed, provided that such approval shall not be required in the case
of defense by counsel designated by any insurance company undertaking
such defense pursuant to any applicable policy of insurance. The
obligations of the Corporation under this Section 5.5 shall survive any
termination of this Loan Agreement, including prepayment in full of the
Note.
(c) Nothing contained herein shall require the Corporation
to indemnify the Authority or the Underwriter for any claim or
liability resulting from its gross negligence or its willful, wrongful
acts or the Trustee for any claim or liability resulting from its
negligence or its willful, wrongful acts (under the standard of care
set forth in Article X of the Indenture).
(d) All references in this Section 5.5 to the Authority, the
Trustee and the Underwriter, including references to Indemnitees, shall
include their directors, commissioners, officers, employees and agents.
Section 5.6. Maintenance and Modification of Project. The
Corporation agrees that at all times it will maintain, preserve and
keep the Project and its other properties or cause the Project and its
other properties to be maintained, preserved and kept in good repair,
working order and condition and that the Corporation will from time to
time make or cause to be made all repairs, replacements and renewals
deemed proper and necessary by it. In addition, the Corporation may
upgrade the Project and its
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other properties or cause them to be upgraded. Further, the Corporation may
make or cause to be made substitutions, additions, modifications and
improvements to the Project from time to time as the Corporation, in its
discretion, deems to be desirable for its use, and as shall be permitted by
the Act. The costs of such upgrades, substitutions, additions, modifications
and improvements shall be paid by the Corporation, the Distribution Company,
the Storage Company or the Exploration Company and be subject to the terms of
this Loan Agreement as part of the Project. Any portion of the Project may
be disposed of in any manner permitted by Section 5.14.
The Corporation and the Distribution Company have obtained or
will obtain and will maintain or cause to be maintained all consents,
approvals, permits, authorizations and orders of any governmental or
regulatory authority that are required to be obtained as a condition
precedent to the acquisition, improvement, construction, equipping and
operation of the Project, including the Certificate. The Corporation
knows of no reason why any such consents, approvals, permits,
authorizations or orders not yet received cannot be obtained on a
timely basis.
Section 5.7. Tax Exemption. (a) Unless the Corporation shall
deliver to the Trustee an Opinion of Bond Counsel to the effect that
such use, occupation or ownership will not be an Adverse Tax Action,
the Corporation shall not:
(1) take or allow to be taken any action that will cause
less than ninety-five percent (95%) of the net proceeds (with the
meaning of Section 150(a)(3) of the Code) of the Bonds to be used to
acquire property which qualifies as facility for the local furnishing
of gas within the meaning of Section 142(a)(8) of the Code or
facilities functionally related and subordinate thereto or will cause
less than ninety-five percent (95%) of such net proceeds to be used for
costs that are properly chargeable to the capital account of the
Corporation, the Distribution Company, the Storage Company or the
Exploration Company or would be so chargeable either with an election
or but for a proper election to deduct such amounts;
(2) take any action or approve or direct the Trustee's
taking any action or making any investment or use of the proceeds of
the Bonds (including failure to spend the same with due diligence) that
would cause the Bonds to be "arbitrage bonds" within the meaning of
Section 148 of the Code;
(3) barring unforeseen circumstances, approve the use of the
proceeds of the Bonds or any other funds other than in accordance with the
"non-arbitrage" certificate with respect to such use given immediately prior
to the delivery of the Bonds;
(4) permit the Project to be used, leased to or occupied by
the United States or an agency or instrumentality
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thereof in any manner for compensation, including any entity with statutory
authority to borrow from the United States (in any case within the meaning of
Section 149(b) of the Code), or in any way cause the Bonds to be "federally
guaranteed" within the meaning of Section 149(b) of the Code;
(5) permit twenty-five percent (25%) or more of the net
proceeds of the Bonds to be used to acquire (directly or indirectly)
any land (or an interest therein) or permit the proceeds of the Bonds
to be used, directly or indirectly for the acquisition of land (or an
interest therein) to be used for farming purposes, or to provide any
airplane, skybox or other private luxury box, any facility primarily
used for gambling, or any store the principal business of which is the
sale of alcoholic beverages for consumption off premises;
(6) use or allow the use any of the proceeds of the Bonds
for the acquisition of residential rental property for family units; or
(7) take or allow to be taken any other action that would
cause an Adverse Tax Action.
(b) The Corporation shall not make or allow to be made any
change in the Project that would, at the time made, cause the "average
maturity" of the Bonds to exceed 120% of the "average reasonably
expected economic life" of the facilities being financed with the
proceeds of the Bonds, within the meaning of Section 147(b) of the
Code.
(c) The Corporation shall not take or omit to take any
action the taking or omission of which will result in more than two
percent (2%) of the proceeds of the Bonds being used to finance the
Costs of Issuance.
(d) The Corporation shall not take or allow to be taken any
action that will result in the allocation of any proceeds of the Bonds
to the reimbursement of any expenditure made prior to June 7, 1993.
(e) The Corporation will not allow any portion of the
proceeds of the Bonds, directly or indirectly, to be used to acquire
investment property or to replace funds which were used, directly or
indirectly, to acquire investment property (as defined in Section
148(b)(2) of the Code) which produces a materially higher yield over
the term of the Bonds, other than investment property acquired with --
(1) proceeds of the Bonds invested for a reasonable
temporary period of three years or less, or until such proceeds
are needed for the purpose for which the Bonds are issued,
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(2) amounts invested in a bona fide debt service fund,
within the meaning of Section 1.148-1(b) of the Treasury
Regulations promulgated under the Code, and
(3) amounts deposited in any reasonably required reserve or
replacement fund to the extent such amounts do not exceed the
Reserve Fund Requirement and to the extent that at no time
during any Bond Year will the aggregate amount so invested
exceed 150 percent of debt service on the Bonds for such year.
(f) The Corporation shall not use or allow the use of any
portion of the proceeds of the Bonds (including any investment income
thereon) to acquire any property or an interest therein (other than
land or an interest in land) unless the first use of such property is
pursuant to such acquisition.
(g) The Corporation shall use its best efforts to proceed
with due diligence to acquire, improve, construct and equip the Project
and to expend at least eighty-five percent (85%) of the proceeds of the
Bonds (including any investment income thereon) on Costs of the Project
within three (3) years from the date the Bonds are issued and to ensure
that less than fifty percent (50%) of the proceeds of the Bonds will be
invested in nonpurpose investments, as described in Section 148 of the
Code, having a substantially guaranteed yield for four (4) years or
more.
(h) The Corporation will cause the information contained in
the information report (Form 8038) to be filed by the Authority with
the Internal Revenue Service upon the issuance of the Bonds to be true
and correct as of the date the Bonds are issued.
(i) The Corporation will not participate or permit the
Distribution Company, the Storage Company or the Exploration Company to
participate in any other issue of obligations, the interest on which
may be excludable from gross income for federal income tax purposes,
within fifteen (15) days of the date the Bonds are issued.
(j) The Corporation will not permit the Distribution Company or
any "related person" (as defined in the Code) to the Distribution
Company to provide gas distribution services to customers in any area
beyond the boundaries of Buchanan County and Russell County. As to the
gas distribution assets to be owned and operated by the Distribution
Company, the Corporation shall request a withdrawal from the Project
Fund only for those assets that are related to the gas distribution
facility serving the area in and around the Town of Grundy for which
the Distribution Company has received the Certificate. As to the
gathering and storage facilities to be owned and operated by the
Storage Company, the Corporation shall request a withdrawal from the
Project Fund only for that portion of the Storage Company's
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gathering and storage facilities in Buchanan County, Scott County, Washington
County and Dickenson County that are necessary to support the distribution
facility serving the area for which the Distribution Company has received the
Certificate. Further, as to the production facilities to be owned and
operated by the Exploration Company, the Corporation shall request a
withdrawal from the Project Fund only for that portion of the Exploration
Company's production facilities in Buchanan County and Dickenson County that
are necessary to support the distribution facility serving the area for which
the Distribution Company has received the Certificate.
(k) The Corporation will not take or omit any action that would
cause it to be a "related person" with the Distribution Company, as
described in Section 147(a)(2) of the Code.
It is the understanding of the Authority and the Corporation that the
covenants contained herein are intended to assure compliance with the
Code, including the applicable Treasury Regulations. In the event that
Treasury Regulations or rulings are hereafter promulgated which modify
or expand provisions of the Code, as applicable to the Bonds, the
Corporation will not be required to comply with any covenant contained
herein except to the extent that such modification or expansion, in the
Opinion of Bond Counsel, will cause an Adverse Tax Action. In the
event that Treasury Regulations or rulings are hereafter promulgated
which impose additional requirements which are applicable to the Bonds,
the Corporation agrees to comply with the additional requirements to
the extent necessary, in the Opinion of Bond Counsel, to preserve the
exclusion from gross income for federal income tax purposes of interest
on the Bonds under Section 103 of the Code.
Section 5.8. Investment and Use of Trust Funds. The
Corporation's Authorized Representative shall provide to the Trustee
written instructions or oral instructions confirmed in writing for the
investment, in accordance with Article VII of the Indenture, of all
funds held by the Trustee under the Indenture.
Section 5.9. Notice of Other Defaults; Compliance with Other
Documents. The Corporation shall promptly inform the Trustee and,
unless the Russell Bonds have been paid or defeased in full, the
Russell Underwriter if it has become aware of or has received any
notice of any default under any agreement under which it, the
Distribution Company, the Storage Company or the Exploration Company is
liable for any indebtedness, including this Loan Agreement, the Russell
Loan Agreement, the Company Loan Agreements and the Russell Company
Loan Agreements.
The Corporation shall comply with the terms and provisions of,
and make all payments required under, any agreement under which it is
liable for any indebtedness, including the Russell Loan Agreement and
the Russell Note.
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Section 5.10. Corporate Status. The Corporation agrees that
throughout the term of this Loan Agreement it will be maintain its
status as a corporation validly existing under the laws of the State of
Delaware which is authorized to transact business in the Commonwealth
of Virginia. Further, the Corporation agrees that throughout the term
of this Loan Agreement it will cause each of the Distribution Company,
the Storage Company and the Exploration Company to maintain its status
as a corporation validly existing under the laws of the Commonwealth of
Virginia.
The Corporation shall not merge or consolidate with, or sell or
transfer all or substantially all of its property or assets to any
person, firm or corporation, except that the Distribution Company, the
Storage Company and the Exploration Company may be merged into or
consolidated with the Corporation or one another.
Section 5.11. Priority of Indebtedness; Additional
Indebtedness. Language similar to the language contained in this
Section 5.11 shall appear in each Company Loan Agreement.
The Corporation, each Company and each other subsidiary or
affiliate of the Corporation may issue additional long-term
indebtedness having a superior or parity claim on the general revenues
and funds of the Corporation or any of the Companies, but, as to each
entity, the outstanding principal balance of such indebtedness may not
exceed $500,000 at any time.
The Corporation, any of the Companies and any other subsidiaries
or affiliates of the Corporation may issue obligations that are secured
on a parity with the Note and the Company Promissory Notes as to the
general revenues and funds of the Corporation and any of the Companies
("Parity Debt"), respectively, only if the following conditions have
been met:
(1) The combined long-term debt of the Corporation, the
Companies and any other subsidiaries or affiliates of the Corporation
has a debt service coverage (taking into account the issuance of the
Parity Debt) equal to at least 3.0 times the combined debt service for
both (A) the latest prior fiscal year for which the Corporation has
audited financial statements and (B) the next two fiscal years, as
forecasted by a feasibility consultant such as Allen & Hoshall, Inc. or
its successor; provided, that this provision does not apply to
obligations issued to refund the Russell Bonds;
(2) No additional long-term Parity Debt may be incurred by the
Corporation, the Companies or any other subsidiary or affiliate of the
Corporation unless the shareholder's equity of the Corporation and its
subsidiaries and affiliates is equal to at least 33.33 percent of the
total outstanding long-term indebtedness of the Corporation and its
subsidiaries and
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affiliates (taking into account the issuance of the Parity Debt); provided,
that this provision does not apply to obligations issued to refund the
Russell Bonds;
(3) No payments due under this Loan Agreement, the Note, the
Company Loan Agreements, the Company Promissory Notes or any amendments
or supplements thereto are then delinquent;
(4) There are at such time no Events of Default, as defined
in this Loan Agreement and in the Company Loan Agreements, then
existing which have not been cured or waived under the terms of this
Loan Agreement, the Company Loan Agreements, the Indenture or any
amendments or supplements thereto; and
(5) The issuance of such Parity Debt will not cause any
Outstanding Bonds or the Russell Bonds to lose their tax-exempt status
under the Code.
There are no restrictions on the ability of the Corporation, any
of the Companies or any other subsidiary or affiliate of the
Corporation to issue indebtedness that is secured by a pledge of some
or all of the general revenues and funds of the Corporation and any of
the Companies that is secondary and subordinate to the pledge securing
the Note and the Company Promissory Notes. The Corporation, any of the
Companies and any other subsidiary or affiliate of the Corporation
shall provide to the Trustee evidence that the holder of any future
subordinated debt has acknowledged and agreed that its debt is
subordinate to the obligations of the Corporation and the Companies
under this Loan Agreement and the Note, the Company Loan Agreements and
the Company Promissory Notes, if applicable, the Russell Loan Agreement
and the Russell Note, and, if applicable, the Russell Company Loan
Agreements and the Russell Company Promissory Notes. In the documents
for all such future subordinated debt in a principal amount of more
than $250,000, the Corporation, any of the Companies and any other
subsidiary or affiliate of the Corporation shall ensure that the
documents provide that so long as no Event of Default under the Loan
Agreement or the Company Loan Agreements has occurred, the holder of
such debt may continue to receive and retain payments on the
subordinated debt when and as the same become due but that any amounts
received by such holder as a payment on the subordinated debt
subsequent to any Event of Default under this Loan Agreement or the
Company Loan Agreements will be retained and held in trust by such
holder for the benefit of the Trustee.
There are no restrictions on the ability of the Corporation, any
of the Companies or any other subsidiary or affiliate of the
Corporation to issue short-term indebtedness or trade payables or
liabilities that are secured by a pledge of some or all of the general
revenues and funds of the Corporation and any of the Companies on a
parity with the general revenues and funds serving the Note and the
Company Promissory Notes.
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The Corporation shall not assume, guarantee, endorse or
otherwise become liable for the obligations of any person, firm or
corporation (except the Companies and any other subsidiaries or
affiliates of the Corporation) except by endorsement for purposes of
discount or collection of notes or other instruments received from
customers in the ordinary course of business.
Section 5.12. Limitations on Liens. The Corporation shall not
create or suffer to be created, or permit the existence of, any lien
upon any of its property or assets now owned or hereafter acquired by
it, other than Permitted Liens.
Section 5.13. Limitations on Payment of Dividends. If (1)
moneys have been transferred from the reserve fund or supplemental
reserve account for the Russell Bonds to the bond fund for the Russell
Bonds to make up any deficiency in such bond fund or (2) moneys have
been transferred by the Trustee from the Reserve Fund to the Bond Fund
to make up any deficiency in the Bond Fund, the Corporation shall not
make a dividend distribution (including distributions of cash or
property) to any of its shareholders unless and until it has made
deposits to the reserve fund or supplemental reserve account for the
Russell Bonds or the Reserve Fund, as applicable, to increase the
balance therein to the amounts required.
Section 5.14. Ownership of Stocks and Project. For so long
as the Note is outstanding, the Corporation shall continue to own fifty
percent (50%) of the outstanding capital stock of the Distribution
Company and at least fifty percent (50%) of the outstanding capital
stock of the Storage Company and the Exploration Company.
The Corporation shall not permit the Distribution Company, the
Storage Company or the Exploration Company to sell or transfer any
portion of the Project, except (1) sales or transfers of assets in the
ordinary course of business, (2) sales or transfers of assets having an
aggregate value of less than $100,000 and (3) sales or transfers of
assets to the Corporation or one or more of its subsidiaries.
Section 5.15. Prepayment of Russell Bonds. The Corporation
hereby covenants and agrees that on January 15, 2000 it will either:
(1) prepay or redeem the Russell Bonds in full; or
(2) deposit $15,000 with the Russell Trustee on that date and
on the fifteenth day of each month thereafter until the Russell Bonds
are prepaid in full. The Corporation shall direct the Russell Trustee
to apply such amounts to the prorata prepayment of each series of the
Russell Bonds in inverse order of maturity.
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Section 5.16. Deposit to Supplemental Reserve Account. The
Corporation hereby covenants and agrees that within ten (10) days of
the issuance of the Bonds that it will deposit $425,000 with the
Russell Trustee. The Corporation will direct the Russell Trustee to
hold such amount in a supplemental reserve account for the Russell
Bonds. If the Bonds are Outstanding on the date that the Russell Bonds
are paid, redeemed or defeased in full, the Corporation shall direct
the Russell Trustee to deliver certain amounts in such supplemental
reserve account to the Trustee for deposit into the Reserve Fund, all
as described in Section 603(a) of the Indenture.
ARTICLE VI
Events of Default and Remedies
Section 6.1. Event of Default Defined. Each of the following
events shall be an Event of Default under this Loan Agreement:
(a) Failure of the Corporation to make any payment on the
Note when the same becomes due and payable, whether at maturity, upon
redemption, prepayment or acceleration or otherwise pursuant to the
terms thereof or this Loan Agreement.
(b) Failure of the Corporation to observe or perform any of
its other covenants, conditions or agreements hereunder for a period of
thirty (30) days after notice in writing (unless the Corporation and
the Trustee shall agree in writing to an extension of such time prior
to its expiration), specifying such failure and requesting that it be
remedied, given by the Authority or the Trustee to the Corporation, or
in the case of any default which can be cured but which cannot with due
diligence be cured within such 30-day period, failure by the
Corporation to proceed promptly to prosecute the curing of the same
with due diligence.
(c) Abandonment of any portion of the Project by the
Corporation, the Distribution Company, the Storage Company or the
Exploration Company for a period of fifteen (15) days or more.
(d) (1) If the Corporation, the Distribution Company, the
Storage Company or the Exploration Company files a petition or answer
seeking reorganization or arrangement of such entity under the federal
bankruptcy laws or any other applicable law or statute, or (2) if,
pursuant to a petition in bankruptcy filed against it, any such entity
is adjudicated a bankrupt or if a court of competent jurisdiction shall
enter an order or decree appointing, without the consent of such
entity, a receiver or trustee of such entity or of the whole or
substantially all of its property, or approving a petition filed
against it seeking reorganization or arrangement of such entity under
the federal bankruptcy laws or any other applicable law or statute, and
such
27
<PAGE>
adjudication, order or decree shall not be vacated or set aside or stayed
within ninety (90) days from the date of the entry thereof.
(e) If there is instituted by the Corporation, the
Distribution Company, the Storage Company or the Exploration Company
any proceedings for an order for relief, or if such entity consents to
an order for relief against it, or if such entity files a petition or
answer or consent seeking reorganization, arrangement, adjustment,
composition or relief, under the federal bankruptcy laws or any other
similar applicable federal or state law, or if such entity consents to
the filing of any such petition or to the appointment of a receiver,
liquidator, custodian, assignee, trustee or sequestrator (or other
similar official) of such entity or of any substantial part of its
property, or if such entity makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally
as they become due.
(f) If any warranty, representation or other statement by or on
behalf of the Corporation, the Distribution Company, the Storage
Company or the Exploration Company contained in this Loan Agreement or
in any other document or instrument furnished in connection with the
issuance or sale of the Bonds, including the Company Loan Agreements,
shall prove to have been false or misleading in any material respect at
the time it was made or delivered.
(g) If an Event of Default under the Indenture or any of the
Company Loan Agreements shall occur.
Section 6.2. Remedies on Default. Whenever an Event of Default
shall have happened and be continuing, the Trustee as the assignee of
the Authority may take any action at law or in equity necessary or
desirable to collect the amounts then due and thereafter to become due
or to enforce observance or performance of any covenant, condition or
agreement of the Corporation under the Note and this Loan Agreement,
including declaring the entire unpaid principal of and interest on the
Note due and payable. Upon any such declaration of acceleration, the
Corporation shall immediately pay to the Trustee the entire unpaid
principal of and accrued interest on the Note and other moneys due
thereunder. Further, the Trustee, as assignee of the Company
Promissory Notes may take any action at law or in equity necessary or
desirable to collect the amounts then due and thereafter to become due
thereunder, including declaring the entire unpaid principal of and
interest on any one or more Company Promissory Notes due and payable.
Upon any such declaration of acceleration, the Distribution Company,
the Storage Company and/or the Exploration Company shall immediately
pay to the Trustee the entire unpaid principal of and accrued interest
on its Company Promissory Note and other moneys due thereunder. If the
Trustee accelerates the payment of the Note, it shall also accelerate
the payment of the Company Promissory Notes.
28
<PAGE>
If the Trustee, as the assignee of the Authority, exercises any
of its rights or remedies under this Section 6.2, it shall give notice
of such exercise to the Corporation (1) in writing in the manner
provided in Section 8.2 and (2) by telephone or telegram; provided,
that failure to give such notice by telephone or telegram shall not
affect the validity of the exercise of any right or remedy under this
Section 6.2.
Except for any remedy directed by the Holders of the Bonds,
prior to exercising any remedies provided hereunder, unless the Russell
Bonds have been paid or defeased in full, the Trustee shall notify the
Russell Underwriter and offer the Russell Underwriter an opportunity
(which may be restricted to a short period of time) to suggest
appropriate remedies.
Section 6.3. Application of Amounts Realized in Enforcement of
Remedies. Any amounts collected pursuant to action taken under Section
6.2 shall be applied in accordance with the provisions of the
Indenture, or, if Payment of the Bonds shall have been made, shall be
applied according to the provisions of Section 608 of the Indenture.
Section 6.4. No Remedy Exclusive. No remedy herein conferred
on or reserved to the Authority or the Trustee or the holder of the
Note is intended to be exclusive of any other remedy, and every remedy
shall be cumulative and in addition to every other remedy herein or now
or hereafter existing at law, in equity or by statute. No delay or
failure to exercise any right or power accruing upon an Event of
Default shall impair any such right or power or shall be construed to
be a waiver thereof, and any such right or power may be exercised from
time to time and as often as may be deemed expedient.
Section 6.5. Attorneys' Fees and other Expenses. Upon an Event
of Default, the Corporation shall on demand pay to or on behalf of the
Authority and the Trustee the reasonable fees and expenses of attorneys
and other reasonable expenses incurred by either of them in the
collection of payments due on the Note or this Loan Agreement or the
enforcement of performance of any other obligations of the Corporation.
Section 6.6. No Additional Waiver Implied by One Waiver. If
any party or its assignee waives a default by any other party under any
covenant, condition or agreement herein, such waiver shall be limited
to the particular breach so waived and shall not be deemed to waive any
other default hereunder.
ARTICLE VII
Prepayment of the Note
29
<PAGE>
Section 7.1. Option To Prepay the Note and Terminate Loan
Agreement in Certain Events. The Corporation shall have the option to
prepay the Note in full and terminate this Loan Agreement at any time
if one of the following has occurred:
(1) Damage or destruction of the Project by fire or other
casualty to such extent that, in the opinion of both the Corporation's
board of directors (expressed in a resolution) and an independent
architect or engineer reasonably acceptable to the Trustee, both filed
with the Trustee (A) the Project cannot be reasonably repaired, rebuilt
or restored within a period of one year to its condition immediately
preceding such damage or destruction, or (B) the Corporation, the
Distribution Company, the Storage Company or the Exploration Company is
prevented from carrying on its normal operations in connection with the
Project for a period of one year, or (C) the cost of repairs,
rebuilding or restoration would exceed 125% of the Net Proceeds of
insurance carried thereon.
(2) Loss of title to or use of substantially all of the
Project as a result of the exercise of the power of eminent domain or
failure of title which, in the opinion of both the Corporation's board
of directors (expressed in a resolution) and an independent architect
or engineer reasonably acceptable to the Trustee, both filed with the
Trustee, prevents or is likely to prevent the Corporation, the
Distribution Company, the Storage Company or the Exploration Company
from carrying on its normal operations in connection with the Project
for a period of one year.
(3) A change in the Constitution of Virginia or of the
United States of America or a legislative or administrative action
(whether local, state or federal) or a final decree, judgment or order
of any court or administrative body (whether local, state or federal)
contested by the Corporation in good faith that causes this Loan
Agreement or the Note to become void or unenforceable or impossible of
performance in accordance with the intent and purpose of the parties as
expressed therein or that causes unreasonable burdens or excessive
liabilities to be imposed on the Corporation, the Distribution Company,
the Storage Company or the Exploration Company in connection with the
Project.
To exercise such option the Corporation shall within ninety (90) days
after the event permitting its exercise file the required resolutions
and opinions with the Authority and the Trustee and specify a date not
more than sixty (60) days thereafter for making such prepayment. In
such case, the Authority shall cause the Trustee to redeem the Bonds as
provided in Section 301(a) of the Indenture.
Section 7.2. Option To Prepay the Note in Whole. The
Corporation shall have the option to prepay the Note in whole, with any
applicable premium, and terminate this Loan Agreement before Payment of
the Bonds. In such case, the Authority shall
30
<PAGE>
(i) cause the Trustee to redeem the Bonds as provided in Sections 301(b)
and/or (c) of the Indenture if Bonds are then redeemable as provided in
Sections 301(b) and/or (c) of the Indenture, or (ii) if the Bonds are not
then so redeemable, cause the amount so prepaid to be transferred to and held
in the Bond Fund to be applied to the redemption of the Bonds on the next
date or dates that the Bonds are so redeemable. The Corporation shall direct
the Trustee to invest such moneys in the Bond Fund only at a "yield" not in
excess of the "yield" on the Bonds, as described in Section 148 of the Code,
unless there shall be delivered to the Trustee an Opinion of Bond Counsel
that other investments will not cause an Adverse Tax Action.
Section 7.3. Option To Prepay the Note in Part. The
Corporation shall have the option to prepay the Note in part, with any
applicable premium. The amount so prepaid shall, so long as all
payments then due under the Note have been made (a) if Bonds are then
redeemable as provided in Sections 301(b) and/or (c) of the Indenture,
be used to redeem Bonds to the extent possible under such sections, or
(b) if Bonds are not then so redeemable, be transferred to and held in
the Bond Fund to be applied to the redemption of the Bonds on the next
date or dates that the Bonds are so redeemable. The Corporation shall
direct the Trustee to invest such moneys in the Bond Fund only at a
"yield" not in excess of the "yield" on the Bonds, as described in
Section 148 of the Code, unless there shall be delivered to the Trustee
an Opinion of Bond Counsel that other investments will not cause an
Adverse Tax Action.
Section 7.4. Obligation to Prepay the Note. The Corporation
shall have the obligation to prepay the Note in whole upon the
occurrence of a Determination of Taxability. In such case, the
Authority shall cause the Trustee to redeem the Bonds as provided in
Section 301(d) of the Indenture within 120 days after the Determination
of Taxability.
Section 7.5. Amount Required for Prepayment. To prepay the
Note in whole or in part under Sections 5.4, 7.1, 7.2, 7.3 or 7.4, the
Corporation shall pay to the Trustee, for deposit in the Bond Fund, an
amount of cash and Defeasance Obligations that will be sufficient (1)
in the case of prepayment in whole, to discharge the lien of the
Indenture pursuant to Section 801 thereof, and (2) in the case of
prepayment in part, to cause any Bonds that will be paid with the
prepayment to no longer be Outstanding because of a discharge of such
Bonds as described in Section 801 of the Indenture. If the Corporation
has prepaid the Note, as provided above, the Corporation shall not
direct the expenditure of any funds from such prepayment in the Bond
Fund for any purpose other than the payment of principal of, premium,
if any, or interest on the Bonds to be redeemed. The Corporation shall
instruct the Trustee to give the notice of redemption required by
Section 303 of the Indenture if any of the Bonds are to be paid or
redeemed other than at maturity.
31
<PAGE>
ARTICLE VIII
Miscellaneous
Section 8.1. Term of Loan Agreement. This Loan Agreement
shall be effective upon its execution and delivery and, subject to
earlier termination upon prepayment in full of the Note and other
amounts described in Article VII, shall expire on the date of the last
maturity of any Bonds, or if payment of the Note has not been made on
such date, when payment of the Note shall have been made; provided,
that (a) the covenants in Sections 5.6 and 5.7 shall continue until the
final maturity date of all Bonds or the earlier redemption date on
which provision for payment for all Bonds has been made, (b) the
covenant made in Section 5.5 shall survive Payment of the Bonds and
payment of the Note and (c) the covenant in Section 4.6 shall continue
for six years after Payment of the Bonds.
Section 8.2. Notices. Unless otherwise provided herein all
demands, notices, approvals, consents, requests, opinions and other
communications hereunder shall be in writing and shall be deemed to
have been given when delivered in person or mailed by first class
registered or certified mail, postage prepaid, addressed:
if to the Corporation:
120 South Court Street
Post Office Box 2407
Abingdon, Virginia 24210
(Attention: President)
Telephone (703) 676-2380; Telecopy (703) 676-0151
if to the Authority:
c/o County Administrator's Office
Buchanan County Courthouse
Post Office Drawer 950
Grundy, Virginia 24614
(Attention: Chairman)
Telephone (703) 935-6501; Telecopy (703) 935-4479
if to the Trustee:
919 East Main Street, 10th Floor
Richmond, Virginia 23219
(Attention: Corporate Trust Administration)
Telephone (804) 782-7084; Telecopy (804) 782-7855
if to the Underwriter or the Russell Underwriter:
Anderson & Strudwick Incorporated
1108 East Main Street
Richmond, Virginia 23219
(Attention: L. McCarthy Downs, III)
Telephone (804) 643-2400; Telecopy (804) 343-3308
32
<PAGE>
A duplicate copy of each demand, notice, approval, consent, request,
opinion or other communication given hereunder by either the Authority
or the Corporation to the other shall also be given to the Trustee and,
for information purposes only, the Underwriter and, until the Russell
Bonds are paid or defeased in full, the Russell Underwriter. The
Corporation, the Trustee, the Authority, the Underwriter or the
Russell Underwriter may, by notice given hereunder, designate any
further or different addresses to which subsequent demands, notices,
approvals, consents, requests, opinions or other communications shall
be sent or persons to whose attention they shall be directed.
Section 8.3. Amendments to Loan Agreement and Note. Except as
provided in Section 4.6(b), neither this Loan Agreement nor the Note
shall be amended, modified or supplemented, and no substitution shall
be made for the Note before Payment of the Bonds without the consent of
the Trustee and the Authority, given in accordance with and subject to
Article XII of the Indenture.
Section 8.4. Successors and Assigns. This Loan Agreement shall
be binding on, inure to the benefit of and be enforceable by the
parties and their respective successors and assigns.
Section 8.5. Severability. If any term or provision of this
Loan Agreement or the Note or the application thereof for any reason or
circumstances shall to any extent be held invalid or unenforceable, the
remaining provisions or the application of such term or provision to
persons and situations other than those as to which it is held invalid
or unenforceable, shall not be affected thereby, and each term and
provision hereof and thereof shall be valid and enforced to the fullest
extent permitted by law.
Section 8.6. Applicable Law; Entire Understanding. This Loan
Agreement and the Note shall be governed by the applicable laws of the
Commonwealth of Virginia. This Loan Agreement and the Note express the
entire understanding and all agreements between the parties hereto.
Section 8.7. Limitation of Liability of Directors of Authority.
No covenant, agreement or obligation contained herein shall be deemed
to be a covenant, agreement or obligation of any present or future
director, officer, employee or agent of the Authority in his individual
capacity so long as he acts in good faith, and no such director,
officer, employee or agent shall be subject to any liability under this
Loan Agreement or the Note or with respect to any other action taken by
him provided that he does not act in bad faith.
Section 8.8. Counterparts. This Loan Agreement may be executed
in several counterparts, each of which shall be an original and all of
which together shall constitute but one and
33
<PAGE>
the same instrument, except that to the extent, if any, that this Loan
Agreement shall constitute personal property under the Uniform Commercial
Code of Virginia, no security interest in this Loan Agreement may be created
or perfected through the transfer or possession of any counterpart of this
Loan Agreement other than the original counterpart, which shall be the
counterpart containing the receipt therefor executed by the Trustee following
the signatures to this Loan Agreement.
34
<PAGE>
IN WITNESS WHEREOF, the Authority and the Corporation have
caused this Loan Agreement to be signed in their names and on their
behalf by their duly authorized officers all as of the date first above
written.
INDUSTRIAL DEVELOPMENT AUTHORITY OF
BUCHANAN COUNTY, VIRGINIA
By _________________________________
Name: Joe Gary Street
Title: Chairman
VIRGINIA GAS COMPANY
By _________________________________
Name: Mark N. Witt
Title: Vice President
SEEN AND ACKNOWLEDGED:
VIRGINIA GAS DISTRIBUTION COMPANY
By ______________________________
Name: Mark N. Witt
Title: Vice President
VIRGINIA GAS STORAGE COMPANY
By ______________________________
Name: Mark N. Witt
Title: Vice President
VIRGINIA GAS EXPLORATION COMPANY
By ______________________________
Name: Mark N. Witt
Title: Vice President
Exhibit A -- Specimen Note
Exhibit B -- Specimen Company Promissory Note
35
<PAGE>
Exhibit C -- Arbitrage Rebate Instructions
36
<PAGE>
RECEIPT
Receipt of the foregoing original counterpart of the Loan
Agreement, dated as of November 1, 1994, between the Industrial
Development Authority of Buchanan County, Virginia and Virginia Gas
Company and the $4,250,000 Promissory Note from Virginia Gas Company to
the Industrial Development Authority of Buchanan County, Virginia is
hereby acknowledged.
CRESTAR BANK, as Trustee
By _______________________________
Name: ________________________
Title: ________________________
37
<PAGE>
Exhibit A
SPECIMEN NOTE
1
<PAGE>
Exhibit B
SPECIMEN COMPANY PROMISSORY NOTE
1
<PAGE>
Exhibit C
REBATE INSTRUCTIONS
A. Within forty-five (45) days after (i) the initial installment
computation date (the last day of the fifth Bond Year, which is
November 15, 1999), and (ii) each fifth anniversary thereof, and (iii)
retirement of the last obligation of the Bonds, the Corporation will
cause to be computed the amount of the "rebatable arbitrage" as of each
such computation date calculated pursuant to Section 148(f) of the Code
and regulations thereunder (the "Rebate Amount") and will deliver a
copy of such computation setting forth the Rebate Amount (the "Rebate
Amount Certificate"), together with an opinion or report prepared by
the expert referred to in the following sentence, to the Trustee. The
Rebate Amount Certificate setting forth such Rebate Amount shall be
prepared or approved by (i) a person with experience in matters of
accounting for federal income tax purposes, (ii) an arbitrage rebate
calculating and reporting service, or (iii) Bond Counsel. The
Corporation shall retain the records of computation of each Rebate
Amount until the date six years after the retirement of the last
obligation of the Bonds. The Trustee will be under no obligation to
verify the accuracy of or to retain copies of the Rebate Amount
Certificates.
B. Not later than fifty-five (55) days after the initial
installment computation date, the Corporation shall pay or cause to be
paid to the United States ninety percent (90%) of the Rebate Amount as
set forth in the Rebate Amount Certificate prepared with respect to
such installment computation date. At least once, on or before
fifty-five (55) days after the installment computation date that is the
fifth anniversary of the initial installment computation date and on or
before fifty-five (55) days after every fifth anniversary date
thereafter, until retirement of the last obligation of the Bonds, the
Corporation shall pay or cause to be paid to the United States the
amount, if any, by which ninety percent (90%) of the Rebate Amount set
forth in the most recent Rebate Amount Certificate exceeds the
aggregate of all such payments theretofore made to the United States
pursuant to these rebate instructions. On or before fifty-five (55)
days after retirement of the last obligation of the Bonds, the
Corporation shall pay or cause to be paid to the United States the
amount, if any, by which 100% of the Rebate Amount set forth in the
Rebate Amount Certificate with respect to the date of the retirement of
the last obligation of the Bonds exceeds the aggregate of all payments
theretofore made pursuant to these rebate instructions. All such
payments shall be made by the Corporation from any available source.
C. The provisions hereof shall continue notwithstanding the
establishment of an escrow pursuant to Section
1
<PAGE>
801 of the Indenture to discharge the Bonds prior to such final payment.
D. Notwithstanding anything contained herein to the contrary, no
such payment will be due with respect to any installment computation
date if the Corporation receives and delivers to the Trustee an Opinion
of Bond Counsel that such payment is not required under the Code to
prevent any Bonds from becoming "arbitrage bonds" within the meaning of
Section 148 of the Code.
E. Neither the Authority nor the Trustee nor the Underwriter
shall be liable to the Corporation by way of contribution,
indemnification, counterclaim, set-off or otherwise for any payment
made or expense incurred by the Corporation pursuant to these rebate
instructions.
2
<PAGE>
VIRGINIA GAS COMPANY
$4,250,000 November 15, 1994
VIRGINIA GAS COMPANY, a Delaware corporation (the "Corporation"),
for value received, hereby promises to pay to the INDUSTRIAL DEVELOPMENT
AUTHORITY OF BUCHANAN COUNTY, VIRGINIA (the "Authority"), or assigns, the
principal sum of FOUR MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($4,250,000)
as follows:
Installments of principal shall be payable by November 15 each year
in amounts and in the manner set forth herein and with interest thereon
payable from the dated date of this Note on May 15, 1995, and thereafter
semiannually on each November 15 and May 15, at the rates and in the manner
set forth below on each installment of principal set forth below not
previously paid in full:
<TABLE>
<CAPTION>
Year Amount Rate
-------- ------------- ------------
<S> <C> <C> <C>
1996 $ 120,000 6.00%
1997 100,000 6.25
1998 105,000 6.50
1999 95,000 6.75
2000 30,000 7.00
2001 105,000 7.25
2002 115,000 7.50
2003 125,000 7.75
2017 3,455,000 9.00
</TABLE>
Payments of installments on the principal due as set forth above shall be due
on the fifteenth day of each month beginning on November 15, 1995, with
amounts payable in each installment and with credits toward such amounts
determined in accordance with Article VI of the Indenture and Article IV of
the Loan Agreement, each as hereinafter defined, but with the full amount of
the principal installment due for each year as set forth above to be paid by
October 15 of the year set forth above. Payments of interest shall be due on
the fifteenth day of each month, beginning on December 15, 1994, with amounts
(including interest on overdue installments of interest) payable on each date
and with credits toward such amounts determined in accordance with Article VI
of the Indenture and Article IV of the Loan Agreement, but with the full
installments of interest not then paid in full accrued to each May 15 and
November 15 to be paid by each preceding April 15 and October 15,
respectively. All payments hereon shall be applied first to interest and then
to principal.
Payments shall be made in lawful money of the United States of
America at the principal corporate trust office of the Trustee, as
hereinafter defined, in Richmond, Virginia, or at such other place as the
Trustee may direct in writing. The principal hereof, premium, if any, and
interest hereon shall be payable by wire or other transfer of immediately
available funds to the
<PAGE>
Trustee or by deposit of clearing house or other next-day funds with or to
the account of the Trustee at or prior to the opening of business on the day
such payments shall become due and payable (or the next preceding business
day if such date is a Saturday, Sunday or holiday in the city in which the
principal corporate trust office of the Trustee is located).
If at any time the amount held by the Trustee in the Bond Fund and
the Reserve Fund, each as defined in the Indenture, should be sufficient to
pay at the times required the principal of, and premium, if any, and interest
on the Bonds, as hereinafter defined, then remaining unpaid and to pay all
fees and expenses of the Trustee and the paying agents accrued and to accrue
through final payment of the Bonds, the Corporation shall not be obligated to
make any further payments hereunder, except to the extent losses may be
incurred in connection with investment of moneys in such funds.
The Authority, by the execution of the Indenture and the assignment
form at the foot of this Note, is assigning this Note and the payments
thereon to Crestar Bank, as trustee (the "Trustee"), acting pursuant to an
Indenture of Trust dated as of November 1, 1994 (the "Indenture"), between
the Authority and the Trustee, as security for the Authority's $4,250,000
Natural Gas Facilities Revenue Bonds (Virginia Gas Company Project), Series
1994 (the "Bonds"), all as issued pursuant to the Indenture. Payments of
principal of, premium, if any, and interest on this Note shall be made
directly to the Trustee for the account of the Authority pursuant to such
assignment and applied only to the principal of, premium, if any, and
interest on the Bonds. All obligations of the Corporation hereunder shall
terminate when all sums due and to become due pursuant to the Indenture, this
Note, the Loan Agreement and the Bonds have been paid or provided for in full.
In addition to the payments of principal and interest specified
herein, the Corporation shall also pay such additional amounts, if any,
which, together with other moneys available therefor pursuant to the
Indenture, may be necessary to enable the Trustee to make the payments and
deposits required by Article VI of the Indenture, including, without
limitation, amounts necessary to fund and maintain the Reserve Fund upon the
Initial Deposit to the Reserve Fund (as defined in the Indenture) and amounts
necessary to provide for payment when due of principal of (whether at
maturity, by acceleration, call for redemption or otherwise) and premium, if
any, and interest on the Bonds.
The Corporation shall have the option and the obligation to prepay
this Note in whole or in part upon the terms and conditions and in the manner
specified in the Loan Agreement dated as of November 1, 1994 (the "Loan
Agreement") between the Authority and the Corporation.
This Note is issued to evidence the Corporation's payment
obligations in Section 4.1(a) of the Loan Agreement and is
-2-
<PAGE>
entitled to the benefits and subject to the conditions thereof, including the
provisions of Section 4.4 thereof that the Corporation's obligations
thereunder and hereunder shall be unconditional. All the terms, conditions
and provisions of the Loan Agreement are, by this reference thereto,
incorporated herein as a part of this Note.
Upon the occurrence of certain Events of Default, as defined in the
Loan Agreement, the principal of this Note may be declared, and the same
shall become, due in accordance with the Loan Agreement.
Upon the prepayment or the call for redemption and the surrender of
this Note for prepayment or redemption in part only, the Corporation shall
cause to be executed and delivered at the expense of the Corporation, a new
Note of like form and tenor, but in principal amount equal to the unpaid or
unredeemed portion of the principal of this Note. The Trustee may, in lieu
of surrendering this Note for a new Note, endorse on this Note acknowledgment
of such partial prepayment or redemption, which acknowledgment shall set
forth, over the signature of the Trustee, the payment date, the principal
amount prepaid or redeemed and the principal amount remaining unpaid as
provided in Exhibit A.
This Note shall be governed by and construed in accordance with the
laws of the Commonwealth of Virginia.
THE OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER THIS NOTE
IS ON A PARITY WITH THE OBLIGATION OF THE CORPORATION TO MAKE PAYMENTS UNDER
ITS $3,000,000 PROMISSORY NOTE DATED JANUARY 6, 1994 AND ISSUED TO THE
INDUSTRIAL DEVELOPMENT AUTHORITY OF RUSSELL COUNTY.
IN WITNESS WHEREOF, the Corporation has caused this Promissory Note
to be duly executed in its name and on its behalf by its duly authorized
officer and to be dated the date first above written.
VIRGINIA GAS COMPANY
By -----------------------------
Name: Mark N. Witt
Title: Vice President
-3-
<PAGE>
EXHIBIT A
SCHEDULE OF PREPAYMENTS AND REDEMPTIONS
Amount of Prepayment Remaining Balance
Signature of Date or Redemption of Note
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<PAGE>
ASSIGNMENT
The Industrial Development Authority of Buchanan County, Virginia
(the "Authority"), hereby irrevocably assigns without recourse the foregoing
Promissory Note to Crestar Bank, as trustee (the "Trustee"), acting pursuant
to an Indenture of Trust dated as of November 1, 1994 (the "Indenture"),
between the Authority and the Trustee and hereby directs Virginia Gas
Company, as the maker of the Note, to make all payments of principal, premium
and interest thereon directly to the Trustee at its principal corporate trust
office in Richmond, Virginia, or at such other place as the Trustee may
direct in writing. Such assignment is made as security for the payment of the
Authority's $4,250,000 Natural Gas Facilities Revenue Bonds (Virginia Gas
Company Project), Series 1994, issued pursuant to the Indenture.
INDUSTRIAL DEVELOPMENT AUTHORITY
OF BUCHANAN COUNTY, VIRGINIA
By ------------------------------
Name: Joe Gary Street
Title: Chairman
<PAGE>
Exhibit 5.1
July 28, 1997
Board of Directors
Virginia Gas Company
120 South Court Street
Abingdon, Virginia 24210
Dear Sirs and Madam:
We have acted as counsel to Virginia Gas Company (the "Company") in
connection with the Company's Registration Statement on Form SB-2 (Commission
File No. 333- ) (the "Registration Statement"), filed herewith,
relating to the registration under the Securities Act of 1933, as amended, of
the offering and sale of up to 2,300,000 (the "Shares") of the Company's
Common Stock, par value $.001 per share ("Common Stock"). The Shares will be
offered by Ferris, Baker Watts, Incorporated.
As the basis for the opinion hereinafter expressed, we have examined
such statutes, regulations, corporate records and documents, certificates of
corporate and public officials, and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination we
have assumed the authenticity of all documents submitted to us as copies.
Based on the foregoing and on such legal considerations as we deem
relevant for purposes of this opinion, we are of the opinion that the Shares
will, when sold, have been duly and validly authorized by all necessary
corporate action by the Company and, assuming the due execution and delivery of
the certificates for the Shares against payment therefor, the Shares will be
validly issued, fully-paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
BRIGHT & BARNES
A Professional Corporation
<PAGE>
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 19 day of March, 1997,
by and between VIRGINIA GAS STORAGE COMPANY, a Virginia corporation,
hereinafter referred to as "VGSC," and Roanoke Gas Company, a Virginia
corporation, hereinafter referred to as "RGC".
WITNESSETH
WHEREAS, VGSC has undertaken to provide a firm storage service under the
Utility Services Act of Virginia, in accordance with its Gas Tariff filed
with the State Corporation Commission of Virginia ("SCC"), and under part 284
of the Regulations of the Federal Energy Regulatory Commission ("FERC"); and
WHEREAS, RGC has requested storage service on a firm basis pursuant to
Rate Schedule FSS in compliance with Section 3 of VGSC's SCC Gas Tariff; and
WHEREAS, RGC agrees to arrange for transportation of quantities of gas
in order to deliver and receive gas to and from storage.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
QUANTITY OF SERVICE
1.1 Subject to the terms and provisions of this Agreement and the SCC
Gas Tariff applicable thereto, RGC has the right to maintain an aggregate
quantity of up to 180,000 dth (the "Maximum Storage Quantity," or "MSQ").
VGCS's obligation to accept gas at the Delivery Points specified on Exhibit A
hereto for injection into storage on any day is limited to the Maximum Daily
Injection Quantity ("MDIQ") specified on Exhibit A hereto. VGSC, at its sole
discretion, may allow injections at rates above the MDIQ on a best efforts,
interruptible basis if such injections can be made without adverse effect
upon injections of other Customers or to VGSC's operations.
1.2 VGSC shall deliver a thermally equivalent quantity of gas to RGC
at the Delivery Points described on Exhibit A hereto. VGSC's obligation to
withdraw gas from storage on any day is limited to the available Maximum
Daily Withdrawal Quantity ("MDWQ") specified on Exhibit A hereto. VGSC, at
its sole discretion, may allow withdrawals at rates higher than the MDWQ on a
best efforts, interruptible basis if such withdrawals can be made without
adverse effect upon withdrawals of other Customers or to VGSC's operations
and such gas is available from RGC's Storage Gas Balance. RGC may withdraw
during the Withdrawal Period any quantity up to the MDWQ.
<PAGE>
ARTICLE II
CONDITIONS OF SERVICE
2.1 RGC shall pay VGSC $0.05 per each dth injected and $0.05 per each
dth withdrawn. Subject to the provisions of Section 2.3, RGC will pay VGSC
an annual storage charge ("Annual Storage Charge") which shall be the product
of $1.50 multiplied by the Maximum Storage Quantity, which fee shall be
payable in twelve (12) equal monthly installments.
2.2 VGSC shall reimburse RGC for any injected gas that cannot be
withdrawn for delivery to RGC at Inside FERC index for deliveries into
Tennessee Gas, Zone 1, plus interruptible transportation on Tennessee Gas and
East Tennessee. Any gas not withdrawn at RGC's option shall be carried over
to the following year's storage balance.
2.3 On May 1, 1997 and each May 1 thereafter, VGSC shall pro-rate the
Annual Storage Charge for the year retroactively and prospectively to reflect
any deficiencies in performance in the prior Withdrawal Period as follows:
Adjusted Annual Actual MSQ Actual MDWQ
= ---------- X ----------- X $1.50 X 180,000
Storage Charge Contract MSQ Contract MDWQ
RGC's election to use the storage service at levels below the MSQ and MDWQ
shall not be considered deficiencies in performance.
2.4 RGC shall insure that the gas delivered to VGSC at the Delivery
Points for injection meets the minimum quality specifications of East
Tennessee Natural Gas Company's FERC Tariff. VGSC shall insure that gas
delivered to RGC at the Delivery Points meets the minimum quality
specifications of East Tennessee Natural Gas Company's FERC Tariff.
2.5 The measurement of quantities for billing purposes, in MMBtu,
delivered to or received from VGSC shall be performed by East Tennessee
Natural Gas Company.
ARTICLE III
NOTICES
3.1 Notices hereunder shall be given to the respective party at the
applicable address, telephone number or facsimile machine number stated
below, or such other addresses, telephone numbers or facsimile numbers as the
parties shall respectively hereafter designate in writing from time to time:
<PAGE>
Virginia Gas Pipeline Company
P.O. Box 2407
200 East Main Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (540) 676-2380, extension 17
Facsimile Machine Number: (540) 676-2494
Roanoke Gas Company
519 Kimball Avenue, N.E.
Roanoke, VA 24030
Attention: Mike Gagnet
Telephone Number: (540) 983-3800
Facsimile Machine Number: (540) 983-3957
ARTICLE IV
BILLING AND PAYMENT
4.1 On or before the fifteenth (15th) day of each calendar month,
VGSC shall submit to RGC an invoice for services performed during the
preceding month.
4.2 RGC shall pay the amounts invoiced by the twenty-fifth (25th)
day of each month in which said invoice is received by RGC or within ten (10)
days of RGC's receipt of VGSC's invoice.
4.3 Should RGC fail to pay all of the amount of any invoice as herein
provided when such amount is due, RGC shall pay a charge for late payment
which shall be included by VGSC on the next regular monthly invoice rendered
hereunder. Such charge for late payment shall accrue interest at an annual
rate equivalent to the then current Chase Manhattan Bank prime interest rate
plus two percent (2%), but not to exceed the maximum rate permitted by law.
If such failure to pay continues for thirty (30) days after payment is due,
VGSC, in addition to any other remedy it may have, may suspend further
injections and/or withdrawals of gas for RGC's account until such amount is
paid; provided, however, that if RGC, in good faith, disputes the amount of
any such invoice or part thereof and pays to VGSC such amounts as RGC
concedes to be correct, and, at any time thereafter within thirty (30) days
of a demand made by VGSC, furnishes a good and sufficient surety bond in an
amount and with sureties satisfactory to VGSC conditioned upon the payment of
any amounts ultimately found due upon such invoices after a final
determination, which may be reached either by agreement or judgment of the
courts, as the case may be, then VGSC shall not be entitled to suspend
further injections and/or withdrawals of gas unless and until default be made
in the conditions on such bond or there is a subsequent default under the
conditions of this agreement.
<PAGE>
4.4 In the event any overcharge and undercharge in any form
whatsoever shall be found within twenty-four (24) months from the date a
billing discrepancy occurs, the appropriate party shall refund the amount of
overcharge or pay the amount of undercharge within thirty (30) days after
the final determination of the amount overcharged or undercharged has been
made. Any overcharge or undercharge found after such twenty-four (24) months
shall be deemed waived by both parties.
4.5 Both parties hereto shall have the right, at any and all
reasonable times, to examine the books and records of the other party to the
extent necessary to verify the accuracy of any statement, charge, computation
or demand made under or pursuant to this Agreement.
4.6 It is expressly understood that VGSC retains a landlord's lien
against the personal property of RGC's stored hereunder for the recovery of
any and all amounts which may become due and payable under this Agreement.
ARTICLE V
TERM
5.1 Subject to the provisions hereof, this Agreement shall become
effective as of the date first written above and shall be in full force and
effect for a primary term through April 30, 2007 (the "Termination Date") and
shall continue and remain in force and effect for successive terms of one (1)
year each hereafter unless and until canceled by either party giving 180 days
written notice to the other party prior to the end of the primary term and
any yearly extension thereof.
ARTICLE VI
INDEMNITY
6.1 RGC shall be deemed to have the exclusive control and possession
of the Gas until delivered to VGSC at the Delivery Points and after the Gas
is redelivered to RGC at the Delivery Points pursuant to Sections 1.1 and 1.2
hereof. VGSC shall be deemed to have the exclusive control and possession of
the Gas after it has been delivered to VGSC at the Delivery Points, until
such time as the Gas is redelivered to RGC at the Delivery Points pursuant to
Sections 1.1 and 1.2 hereof.
6.2 The party in control of the Gas will defend, indemnify and hold
the other harmless from and against any and all claims, causes of action or
judgments (including attorney's fees and expenses) in any way arising with
respect to the Gas while in that party's control, and the other shall not be
liable for any part thereof.
<PAGE>
ARTICLE VII
FORCE MAJEURE
7.1 Subject to the provisions of this Article VII, no party shall be
liable to the other party for the failure to perform in conformity with this
Agreement to the extent such failure results from an event of Force Majeure
which is beyond the reasonable control of the party affected thereby, which
wholly or partially prevents the supply, transportation, sale, delivery,
injection, storage, withdrawal or redelivery of Gas.
7.2 Events of Force Majeure shall include, by way of illustration,
but not limitation those enumerated in Section 16.2, Original Sheets No. 58
and No. 59 of the Terms and Conditions of VGSC's SCC Gas Tariff.
7.3 Immediately upon becoming aware of the occurrence of an event of
Force Majeure, the party affected shall give notice thereof to the other
party, describing such event and stating the specific obligations, the
performance of which are, or are expected to be, delayed or prevented, and
(either in the original or in supplemental notices) stating the estimated
period during which performance may be suspended or reduced, including, to
the extent known or ascertainable, the estimated extent of such reduction of
performance. Such notice of an event of Force Majeure is to be first given
by telephone communication, and then shall be confirmed in writing within
five (5) days, given particulars available to the reporting party, and being
supplemented if necessary within twenty (20) days to give full particulars.
Notwithstanding any other provision in this Agreement, the parties mutually
agree that should some cause or event, beyond the control of VGSC, make it
appear to VGSC that a storage area is losing pressure and may no longer be
viable for storage, it may immediately notify RGC (by fax, phone or other
means) and RGC shall immediately start accepting the stored gas in order to
drain the storage area and cut down on the potential loss to VGSC,or VGSC may
otherwise dispose of such gas and pay RGC for the value thereof plus the
value of any gas otherwise lost. Thereafter this Agreement shall be
considered of no further force and effect unless VGSC can reasonably
revitalize and stabilize such storage area to hold gas pressure in which
event VGSC shall give the thirty (30) day notice as provided in Section 3.1
and the Agreement shall thereafter continue in full force and effect.
7.4 The party relying upon an event of Force Majeure shall act
prudently and use all reasonable efforts to eliminate the effects of Force
Majeure as soon as reasonably practicable, provided that the settlement of
strikes and lockouts shall be entirely within the discretion of the party
affected.
7.5 No suspension or reduction of performance by reason of an event
of Force Majeure shall invalidate this Agreement, and upon removal of the
Force Majeure, performance shall resume in this Agreement as soon as
practicable.
<PAGE>
ARTICLE VIII
OPERATIONAL FLOW ORDERS
8.1 RGC may be subject to certain operational flow orders ("OFO's")
issued by VGSC: (a) to alleviate conditions that threaten the integrity of
VGSC's system; (b) to maintain pressures necessary to VGSC's operations; (c)
to alleviate operational problems arising from overdeliveries or
underdeliveries by RGC in violation of this Agreement; and (d) to prevent
damage to a storage field.
8.2 Upon the issuance of an OFO, RGC must take the actions set forth
in the OFO, which may include, but are not limited to, reducing its
withdrawals from storage.
ARTICLE IX
SUCCESSORS AND ASSIGNS
9.1 This Agreement shall be binding upon and inure to the benefit of
the successors, assigns and legal representatives of the parties hereto.
Either party may freely assign this Agreement to a company with which it is
affiliated or which it controls, is controlled by, or is under common control
with, or any party succeeding to substantially all the interests of RGC or
VGSC. All other assignments shall be subject to the prior written consent of
the party not assigning, such approval not to be unreasonably withheld.
Either party hereto shall have the right to pledge or mortgage its respective
rights hereunder for security of its indebtedness without the prior written
consent of the other party.
ARTICLE X
MISCELLANEOUS
10.1 This Agreement constitutes the entire Agreement between the
parties and no waiver by VGSC or RGC of any default of either party under
this Agreement shall operate as a waiver of any subsequent default whether of
a like or different character.
10.2 The laws of the Commonwealth of Virginia shall govern the
validity, construction, interpretation, and effect of this Agreement.
10.3 No modification of or supplement to the terms and provisions
hereof shall be or become effective except by execution of a supplementary
written agreement between the parties.
10.4 Exhibit A attached to this Agreement constitutes a part of this
Agreement and is incorporated herein.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first written above by the parties' duly authorized officers.
Attest: ROANOKE GAS COMPANY
ILLEGIBLE By: J.B. Williamson
------------------------------------------
Its: Vice President
------------------------------------------
Attest: VIRGINIA GAS STORAGE COMPANY
ILLEGIBLE By: M. Edwards
------------------------------------------
Its: President
------------------------------------------
<PAGE>
EXHIBIT A
to that certain Gas Storage Agreement dated March 19, 1997 by and between
ROANOKE GAS COMPANY
and
VIRGINIA GAS STORAGE COMPANY
Delivery Points:
1. Saltville receipt/delivery point, Smyth County, Virginia. For
injections: ETNG Meter Number 759766; for withdrawals:
ETNG Meter Number 759777.
2. Early Grove receipt/delivery point, Washington County, VA. For
injections: ETNG Meter Number 759147; for withdrawals
ETNG Meter Number 759009.
3. Dickenson #2 receipt point, Dickenson County, Virginia for
withdrawals only, ETNG Meter Number 759321.
Maximum Daily Injection Quantity, in dth:
- ----------------------------------------
1,200 Dth
Injection Period runs from on or about April 5 of each year to on or about
October 26 of each year (the "Summer Period"). Injections may be made from
October 27 to April 4 of each year (the "Winter Period") on a best efforts,
interruptible basis with the consent of VGSC.
Maximum Daily Withdrawal Quantity, in dth:
- -----------------------------------------
857 Dth from Early Grove delivery point ETNG Meter Number 759009
1,143 Dth from Early Grove, Saltville or Dickenson #2 delivery point
ETNG Meter Number 759009
ETNG Meter Number 759777
ETNG Meter Number 759321
Withdrawal Period runs from November 15 through April 15 of each year.
Withdrawals may be made from November 1 to November 15, and from April 16
through April 30 of each year on a best efforts, interruptible basis.
<PAGE>
[letterhead]
16 January 1996
Mr. James E. Smith
Powell-Clinch Utility District
P.O. Box 428
Lake City, TN 37769
RE: Additional Volumes -- Storage Service Agreement dated 7 July 1995
Dear Jim:
Virginia Gas Storage Company ("VGSC") is willing to increase Powell-Clinch
Utility District's ("P - C's") Maximum Storage Quantities (MSQ's) by 300,000
MMBtu per year beginning in the 1996 Contract Year under the same rates
described in Article 2.1 of the 7 July 1995 Firm Storage Service Agreement
(the "Agreement") as you requested. You have indicated that Powell-Clinch
desires in addition to exercise the Options for 75,000 MMBtu per year from
the 1998 through the 2002 Contract Years as described in Article 6.1 of the
Agreement. This will result in the following:
<TABLE>
Maximum Monthly
Daily Storage
Contract MSQ Withdrawals Charge
Year (MMBtu) (MMBtu/Day) Payment
-------- ------- ----------- -----------
<S> <C> <C> <C>
1996.................525,000 4,375 $ 37,187.50
1997.................600,000 5,000 42,500.00
1998.................675,000 5,625 47,812.50
1999.................750,000 6,250 53,125.00
2000.................825,000 6,875 58,437.50
2001.................900,000 7,500 63,750.00
2002 through
2009.................975,000 8,125 69,062.50
</TABLE>
The Delivery Point for injections is ETNG Meter Number 759147. For
withdrawals, VGSC can redeliver stored volumes to P - C at ETNG Meter Number
759009, Dickenson #2, or the Saltville/ETNG interconnect.
<PAGE>
Mr. James E. Smith
16 January 1996
Page Two
Maximum Daily Injection Quantities will be proportionately increased to
reflect the abovementioned additional volumes using the methodology outlined
in Article 1.5 of the Agreement.
If the foregoing accurately reflects your understanding of the revisions to
the Agreement that our two companies wish to make at this time, please so
indicate by signing below and returning one copy for our records.
If I can be of any further assistance to you in this matter, please do not
hesitate to call me.
Sincerely,
VIRGINIA GAS STORAGE COMPANY
/s/ M.L. Edwards
- ---------------------
Michael L. Edwards
President
AGREED TO and ACCEPTED
This 25th day of January, 1996.
POWELL-CLINCH UTILITY DISTRICT
By: /s/ James E. Smith
------------------------
James E. Smith
Its: General Manager
<PAGE>
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 25th day of February,
1997, by and between VIRGINIA GAS PIPELINE COMPANY, a Virginia corporation,
hereinafter referred to as "VGPC," and Natural Gas Utility District of
Hawkins County, a public utility district of the State of Tennessee,
hereinafter referred to as "Hawkins."
WITNESSETH
WHEREAS, VGPC has undertaken to provide a firm storage service under the
Utility Facilities Act of Virginia, in accordance with its Gas Tariff filed
with the State Corporation Commission of Virginia ("SCC"), and under part 284
of the Regulations of the Federal Energy Regulatory Commission ("FERC"); and
WHEREAS, Hawkins has requested storage service on a firm basis pursuant
to Rate Schedule FSS in compliance with Section 3 of VGPC's SCC Gas Tariff;
and
WHEREAS, Hawkins agrees to arrange for transportation of quantities of
gas in order to deliver and receive gas to and from storage.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
QUANTITY OF SERVICE
1.1 Subject to the terms and provisions of this Agreement and the SCC
Gas Tariff applicable thereto, Hawkins has the right to maintain an aggregate
storage quantity of up to 5,000 dth (the "Maximum Storage Quantity," or
"MSQ"). VGPC's obligation to accept gas at the Delivery Points specified on
Exhibit A hereto for injection into storage on any day is limited to the
Maximum Daily Injection Quantity ("MDIQ") specified on Exhibit A hereto.
VGPC, at its sole discretion, may allow injection at rates above the MDIQ on
a best efforts, interruptible basis if such injections can be made without
adverse effect upon injections of other Customers or to VGPC's operations.
1.2 VGPC shall redeliver a thermally equivalent quantity of gas to
Hawkins at the Delivery Points described on Exhibit A hereto. VGPC's
obligation to withdraw gas from storage on any day is limited to the
available Maximum Daily Withdrawal Quantity ("MDWQ") specified on Exhibit A
hereto. VGPC, at its sole discretion, may allow withdrawals at rates higher
than the MDWQ on a best efforts, interruptible basis if such withdrawals can
be made without adverse effect upon withdrawals of other Customers or to
VGPC's operations and such gas is available from Hawkins' Storage Gas
Balance. Hawkins may withdraw during the Withdrawal Period any quantity up
to the MDWQ.
<PAGE>
ARTICLE II
CONDITIONS OF SERVICE
2.1 Hawkins shall pay VGPC $0.05 per each dth injected and $0.05 per
each dth withdrawn. Subject to the provisions of Section 2.3, Hawkins will
pay VGPC an annual storage charge ("Annual Storage Charge") which shall be
the product of $5.64 multiplied by the Maximum Storage Quantity, which fee
shall be payable in twelve (12) equal monthly installments.
2.2 VGPC shall reimburse Hawkins for any injected gas that cannot be
withdrawn for delivery to Hawkins at Inside FERC index for deliveries into
Tennessee Gas, Zone 1, plus interruptible transportation on Tennessee Gas and
East Tennessee. Any gas not withdrawn at Hawkins' option shall be carried
over to the following year's storage balance.
2.3 On May 1, 1997 and each May 1 thereafter, VGPC shall pro-rate the
Annual Storage Charge for the year retroactively and prospectively to reflect
any deficiencies in performance in the prior Withdrawal Period as follows:
Adjusted Annual Actual MSQ Actual MDWQ
= ------------ X ------------- X $5.64 X 5,000
Storage Charge Contract MSQ Contract MDWQ
Hawkins' election to use the storage service at levels below the MSQ and MDWQ
shall not be considered deficiencies in performance.
2.4 Hawkins shall insure that the gas delivered to VGPC at the Delivery
Points for injection meets the minimum quality specifications of East
Tennessee Natural Gas Company's FERC Tariff. VGPC shall insure that gas
delivered to Hawkins at the Delivery Points meets the minimum quality
specifications of East Tennessee Natural Gas Company's FERC Tariff.
2.5 The measurement of quantities for billing purposes, in MMBtu,
delivered to or received from VGPC shall be performed by East Tennessee
Natural Gas Company.
ARTICLE III
NOTICES
3.1 Notices hereunder shall be given to the respective party at the
applicable address, telephone number or facsimile machine number stated
below, or such other addresses, telephone numbers or facsimile numbers as the
parties shall respectively hereafter designate in writing from time to time:
<PAGE>
Virginia Gas Pipeline Company
P.O. Box 2407
200 East Main Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (540) 676-2380, extension 17
Facsimile Machine Number: (540) 676-2494
Natural Gas Utility District of Hawkins County
202 Park Boulevard
Rogersville, TN 37857
Attention: Tommy W. Young
Telephone Number: (423) 272-8402
Facsimile Machine Number: (423) 272-4645
ARTICLE IV
BILLING AND PAYMENT
4.1 On or before the fifteenth (15th) day of each calendar month, VGPC
shall submit to Hawkins an invoice for services performed during the
preceding month.
4.2 Hawkins shall pay the amounts invoiced by the twenty-fifth (25) day
of each month in which said invoice is received by Hawkins or within ten (10)
days of Hawkins' receipt of VGPC's invoice.
4.3 Should Hawkins fail to pay all of the amount of any invoice as
herein provided when such amount is due, Hawkins shall pay a charge for late
payment which shall be included by VGPC on the next regular monthly invoice
rendered hereunder. Such charge for late payment shall accrue interest at an
annual rate equivalent to the then current Chase Manhattan Bank prime interest
rate plus two percent (2%), but not to exceed the maximum rate permitted by
law. If such failure to pay continues for thirty (30) days after payment is
due, VGPC, in addition to any other remedy it may have, may suspend further
injections and/or withdrawals of gas for Hawkins' account until such amount
is paid; provided, however, that if Hawkins, in good faith, disputes the
amount of any such invoice or part thereof and pays to VGPC such amounts as
Hawkins concedes to be correct, and, at any time thereafter within thirty
(30) days of a demand made by VGPC, furnishes a good and sufficient surety
bond in an amount and with sureties satisfactory to VGPC conditioned upon the
payment of any amounts ultimately found due upon such invoices after a final
determination, which may be reached either by agreement or judgment of the
courts, as the case may be, then VGPC shall not be entitled to suspend
further injections and/or withdrawals of gas unless and until default be made
in the
<PAGE>
conditions on such bond or there is a subsequent default under the conditions
of this agreement.
4.4 In the event any overcharge or undercharge in any form whatsoever
shall be found within twenty four (24) months from the date a billing
discrepancy occurs, the appropriate party shall refund the amount of
overcharge or pay the amount of undercharge within thirty (30) days after the
final determination of the amount overcharged or undercharged has been made.
Any overcharge or undercharge found after such twenty four (24) months shall
be deemed waived by both parties.
4.5 Both parties hereto shall have the right, at any and all reasonable
times, to examine the books and records of the other party to the extent
necessary to verify the accuracy of any statement, charge, computation or
demand made under or pursuant to this Agreement.
4.6 It is expressly understood that VGPC retains a landlord's lien
against the personal property of Hawkins' stored hereunder for the recovery
of any and all amounts which may become due and payable under this agreement.
ARTICLE V
TERM
5.1 Subject to the provisions hereof, this Agreement shall become
effective as of the date first written above and shall be in full force and
effect for a primary term through March 1, 2007 (the "Termination Date") and
shall continue and remain in force and effect for successive terms of one (1)
year each hereafter unless and until canceled by either party giving 180 days
written notice to the other party prior to the end of the primary term and
any yearly extension thereof.
ARTICLE VI
INDEMNITY
6.1 Hawkins shall be deemed to have the exclusive control and possession
of the Gas until delivered to VGPC at the Delivery Points and after the Gas
is redelivered to Hawkins at the Delivery Points pursuant to Sections 1.1 and
1.2 hereof. VGPC shall be deemed to have the exclusive control and possession
of the Gas after it has been delivered to VGPC at the Delivery Points, until
such time as the Gas is redelivered to Hawkins at the Delivery Points pursuant
to Sections 1.1 and 1.2 hereof.
6.2 The party in control of the Gas will defend, indemnify and hold the
other harmless from and against any and all claims, causes of action or
judgment (including attorney's fees and expenses) in any way arising with
respect to the Gas while in that party's control, and the other shall not be
liable for any part thereof.
<PAGE>
ARTICLE VII
FORCE MAJEURE
7.1 Subject to the provisions of this Article VII, no party shall be
liable to the other party for the failure to perform in conformity with this
Agreement to the extent such failure results from an event of Force Majeure
which is beyond the reasonable control of the party affected thereby, which
wholly or partially prevents the supply, transportation, sale, delivery,
injection, storage, withdrawal or redelivery of Gas.
7.2 Events of Force Majeure shall include, by way of illustration, but
not limitation those enumerated in Section 16.2, Original Sheets No. 56 and
No. 57 of the Terms and Conditions of VGPC's SCC Gas Tariff.
7.3 Immediately upon becoming aware of the occurrence of an event of
Force Majeure, the party affected shall give notice thereof to the other
party, describing such event and stating the specific obligations, the
performance of which are, or are expected to be, delayed or prevented, and
(either in the original or in supplemental notices) stating the estimated
period during which performance may be suspended or reduced, including, to
the extent known or ascertainable, the estimated extent of such reduction of
performance. Such notice of an event of Force Majeure is to be first given
by telephone communication, and then shall be confirmed in writing within
five (5) days, giving particulars available to the reporting party, and being
supplemented if necessary within twenty (20) days to give full particulars.
Not withstanding any other provision in this Agreement, the parties mutually
agree that should some cause or event, beyond the control of VGPC, make it
appear to VGPC that a storage area is losing pressure and may no longer be
viable for storage, it may immediately notify Hawkins (by fax, phone or other
means) and Hawkins shall immediately start accepting the stored gas in order
to drain the storage area and cut down on the potential loss to VGPC, or VGPC
may otherwise dispose of such gas and pay Hawkins for the value thereof plus
the value of any gas otherwise lost. Thereafter this Agreement shall be
considered of no further force and effect unless VGPC can reasonably
revitalize and stabilize such storage area to hold gas pressure in which
event VGPC shall give the thirty (30) day notice as provided in Section 3.1
and the Agreement shall thereafter continue in full force and effect.
7.4 The party relying upon an event of Force Majeure shall act prudently
and use all reasonable efforts to eliminate the effects of Force Majeure as
soon as reasonably practicable, provided that the settlement of strikes and
lockouts shall be entirely within the discretion of the party affected.
7.5 No suspension or reduction of performance by reason of an event of
Force Majeure shall invalidate this Agreement, and upon removal of the Force
Majeure, performance shall resume in this Agreement as soon as practicable.
<PAGE>
ARTICLE VIII
OPERATIONAL FLOW ORDERS
8.1 Hawkins may be subject to certain operational flow orders ("OFO's")
issued by VGPC: (a) to alleviate conditions that threaten the integrity of
VGPC's system; (b) to maintain pressures necessary for VGPC's operations; (c)
to alleviate operational problems arising from overdeliveries or
underdeliveries by Hawkins in violation of this Agreement; and (d) to prevent
damage to a storage field.
8.2 Upon the issuance of an OFO, Hawkins must take the actions set forth
in the OFO, which may include, but are not limited to, reducing its
withdrawals from storage.
ARTICLE IX
SUCCESSORS AND ASSIGNS
9.1 This Agreement shall be binding upon and inure to the benefit of the
successors, assigns and legal representatives of the parties hereto. Either
party may freely assign this Agreement to a company with which it is
affiliated or which it controls, is controlled by, or is under common control
with, or any party succeeding to substantially all the interests of Hawkins
or VGPC. All other assignments shall be subject to the prior written consent
of the party not assigning, such approval not to be unreasonably withheld.
Either party hereto shall have the right to pledge or mortgage its respective
rights hereunder for security of its indebtedness without the prior written
consent of the other party.
ARTICLE X
MISCELLANEOUS
10.1 This Agreement constitutes the entire Agreement between the parties
and no waiver by VGPC or Hawkins of any default of either party under this
Agreement shall operate as a waiver of any subsequent default whether of a
like or different character.
10.2 The Laws of the Commonwealth of Virginia shall govern the validity,
construction, interpretation, and effect of this Agreement.
10.3 No modification of a supplement to the terms and provisions hereof
shall be or become effective except by execution of a supplementary written
agreement between the parties.
<PAGE>
10.4 Exhibit A attached to this Agreement constitutes a part of this
Agreement and is incorporated herein.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above by the parties' duly authorized officers.
Attest: NATURAL GAS UTILITY DISTRICT
OF HAWKINS COUNTY
[ILLEGIBLE]
By: Tommy W. Young
--------------------
Its: General Manager
-------------------
Attest: VIRGINIA GAS PIPELINE COMPANY
By: M. L. Edwards
--------------------
[ILLEGIBLE]
Its: President
-------------------
<PAGE>
EXHIBIT A
to that certain Gas Storage Agreement dated February 25, 1997 by and between
NATURAL GAS UTILITY DISTRICT OF HAWKINS COUNTY
and
VIRGINIA GAS PIPELINE COMPANY
Delivery Points:
1. Saltville receipt/delivery point, Smyth County, Virginia. For
injections: ETNG Meter Number 759766; for withdrawals: ETNG Meter
Number 759777.
2. Early Grove receipt/delivery point, Washington County, VA. For
injections: ETNG Meter Number 759147; for withdrawals: ETNG
Meter Number 759009.
3. Dickenson #2 receipt point, Dickenson County, Virginia for
withdrawals only, ETNG Meter Number 759321.
Maximum Daily Injection Quantity, in dth:
250 Dth
Injection Period runs from on or about April 5 of each year to on or about
October 26 of each year (the "Summer Period"). Injections may be made from
October 27 to April 4 of each year (the "Winter Period") on a best efforts,
interruptible basis with the prior consent of VGPC.
Maximum Daily Withdrawal Quantity, in dth:
500 Dth
Withdrawal Period runs from November 15 through March 15 of each year.
Withdrawals may be made from November 1 to November 15, and from March 15
through March 31 of each year on a best efforts, interruptible basis.
<PAGE>
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 30th day of June, 1997,
by and between VIRGINIA GAS PIPELINE COMPANY, a Virginia corporation,
hereinafter referred to as "VGPC," and ALCOA, a Pennsylvania corporation,
hereinafter referred to as "ALCOA."
WITNESSETH
WHEREAS, VGPC has undertaken to provide a firm storage service under the
Utility Facilities Act of Virginia, in accordance with its Gas Tariff filed
with the State Corporation Commission of Virginia ("SCC"), and under part 284
of the Regulations of the Federal Energy Regulatory Commission ("FERC"); and
WHEREAS, ALCOA has requested storage service on a firm basis pursuant to
Rate Schedule FSS in compliance with Section 3 of VGPC's SCC Gas Tariff; and
WHEREAS, ALCOA agrees to arrange for transportation of quantities of gas
in order to deliver and receive gas to and from storage.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
QUANTITY OF SERVICE
1.1 Subject to the terms and provisions of this Agreement and the SCC Gas
Tariff applicable thereto, ALCOA has the right to maintain an aggregate
storage quantity of up to 17,400 dth ("Maximum Storage Quantity," or "MSQ").
VGPC's obligation to accept gas at the Delivery Points specified on Exhibit A
hereto for injection into storage on any day is limited to the Maximum Daily
Injection Quantity ("MDIQ") specified on Exhibit A hereto. VGPC, at its sole
discretion, may allow injections at rates above the MDIQ on a best efforts,
interruptible basis if such injections can be made without adverse effect
upon injections of other Customers or to VGPC's operations.
1.2 VGPC shall redeliver a thermally equivalent quantity of gas to ALCOA
at the Delivery Points described on Exhibit A hereto. VGPC's obligation to
withdraw gas from storage on any day is limited to the available Maximum Daily
Withdrawal Quantity ("MDWQ") specified on Exhibit A hereto. VGPC, at its sole
discretion, may allow withdrawals at rates higher than the MDWQ on a best
efforts, interruptible basis if such withdrawals can be made without adverse
effect upon withdrawals of other Customers or to VGPC's operations and such
gas is available from ALCOA's Storage Gas Balance. ALCOA may withdraw during
any day at any quantity up to the MDWQ.
<PAGE>
ARTICLE II
CONDITIONS OF SERVICE
2.1 ALCOA shall pay VGPC $0.05 per each dth injected and $0.05 per each
dth withdrawn.
2.2 Subject to the provisions of Section 2.4, ALCOA will pay VGPC an
annual storage charge ("Annual Storage Charge") which shall be the product of
$5.64 multiplied by the Maximum Storage Quantity, which fee shall be payable
in twelve (12) equal monthly installments, ("Monthly Storage Charge")
2.3 VGPC shall reimburse ALCOA for any injected gas that cannot be
withdrawn for delivery to ALCOA at ALCOA's cost of replacing such gas,
including pipeline penalties associated with the replacement. Any gas not
withdrawn at ALCOA's option during any day or year shall be carried over to
the following day's or year's storage balance.
2.4 VGPC shall pro-rate the Monthly Storage Charge for the billing month
retroactively and prospectively to reflect any deficiencies in performance
during the month.:
Adjusted Annual
Storage Charge = the lesser of (Actual MSQ/Contract MSQ x Monthly Storage
Charge or (Actual MDWQ/Contract MDWQ) x Monthly
Storage Charge or (Actual MDIQ/Contract MDIQ) x Monthly
Storage Charge
ALCOA's election to use the storage service at levels below the MSQ and MDWQ
shall not be considered deficiencies in performance.
2.5 ALCOA shall insure that the gas delivered to VGPC at the Delivery
Points for injection meets the minimum quality specifications of East
Tennessee Natural Gas Company's FERC Tariff. VGPC shall insure that gas
delivered to ALCOA at the Delivery Points meets the minimum quality
specifications of East Tennessee Natural Gas Company's FERC Tariff.
2.6 The measurement of quantities for billing purposes, in MMBtu,
delivered to or received from VGPC shall be performed by East Tennessee
Natural Gas Company.
ARTICLE III
NOTICES
3.1 Notices hereunder shall be given to the respective party at the
applicable address, telephone number or facsimile machine number stated
below, or such other addresses, telephone numbers or facsimile numbers as the
parties shall respectively hereafter designate in writing from time to time:
<PAGE>
For VGPC:
Virginia Gas Pipeline Company
PO Box 2407
200 East Main Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (540) 676-2380, extension 17
Facsimile Machine Number: (540) 676-2494
For ALCOA:
<TABLE>
<S> <C>
ALCOA STRATEGIC ENERGY LIMITED
1656-E ALCOA Building Two Gateway Center
425 Sixth Avenue 9th Floor
Pittsburgh, PA 15219 Pittsburgh, PA 15222
Attention: Terry Lee Attention: David Boger
Telephone Number: (412) 553-3502 Telephone Number: (412) 394-6525
Facsimile Machine Number: (412) 553-3027 Facsimile Machine Number: (412) 394-6574
</TABLE>
ARTICLE IV
BILLING AND PAYMENT
4.1 On or before the fifteenth (15th) day of each calendar month, VGPC
shall submit to ALCOA an invoice for services performed during the preceding
month.
4.2 ALCOA shall pay the amounts invoiced by the twenty-fifth (25th) day
of each month in which said invoice is received by ALCOA or within ten (10)
days of ALCOA's receipt of VGPC's invoice.
4.3 Should ALCOA fail to pay the entire amount of any invoice as herein
provided when such amount is due, ALCOA shall pay a charge for late payment
which shall be included by VGPC on the next regular monthly invoice rendered
hereunder. Such charge for late payment shall accrue interest at an annual
rate equivalent to the then current Chase Manhattan Bank prime interest rate
plus two percent (2%), but not to exceed the maximum rate permitted by law.
If such failure to pay continues for thirty (30) days after payment is due,
VGPC, in addition to any other remedy it may have, may suspend further
injections and/or withdrawals of gas for ALCOA's account until such amount is
paid; provided, however, that if ALCOA, in good faith, disputes the amount of
any such invoice or part thereof and pays to VGPC such amounts as ALCOA
concedes to be correct, then ALCOA may withhold payment without risk of
suspension to determine the final amounts due to VGPC conditioned upon the
payment of any amounts ultimately found due upon such invoices within fifteen
(15) days after a final determination, which may be reached either by
agreement or judgment of the courts, as the case may be, then
<PAGE>
VGPC shall not be entitled to suspend further injections and/or withdrawals
of gas unless and there is a subsequent default under the conditions of this
agreement.
4.4 In the event any overcharge or undercharge in any form whatsoever
shall be found within twenty four (24) months from the date a billing
discrepancy occurs, the appropriate party shall refund the amount of
overcharge or pay the amount of undercharge within thirty (30) days after the
final determination of the amount overcharged or undercharged has been made.
Any overcharge or undercharge found after such twenty-four (24) months shall
be deemed waived by both parties. Refunds of overcharges shall be paid with
interest at the rate set forth in Section 4.3.
4.5 Both parties hereto shall have the right, at any and all reasonable
times, to examine the books and records of the other party to the extent
necessary to verify the accuracy of any statement, charge, computation or
demand made under or pursuant to this Agreement.
4.6 It is expressly understood that VGPC retains a landlord's lien
against the personal property of ALCOA's stored hereunder for the recovery of
any and all amounts which may become due and payable under this agreement
provided that no such lien may be asserted absent an unexcused failure to
make payments within 5 days after a notice of late payment has been given to
ALCOA and absent good faith concerns about ALCOA's creditworthiness.
ARTICLE V
TERM
5.1 Subject to the provisions hereof, this Agreement shall become
effective as of the date first written above and shall be in full force and
effect for a primary term through April 1, 2002 (the "Termination Date") and
shall continue and remain in force and effect for successive terms of one (1)
year each hereafter unless and until canceled by either party giving 180 days
written notice to the other party prior to the end of the primary term and
any yearly extension thereof.
ARTICLE VI
OPTIONS
6.1 On a best efforts basis, ALCOA shall have the option to increase its
MSQ under the same terms, conditions and rates as described above. This
option must be exercised no later than May 1 of the Contract Year.
6.2 If the abovementioned option is exercised, all of the previously
mentioned quantities shall be proportionally increased.
<PAGE>
ARTICLE VII
INDEMNITY
7.1 ALCOA shall be deemed to have the exclusive control and possession of
the Gas until delivered to VGPC at the Delivery Points and after the Gas is
redelivered to ALCOA at the Delivery Points pursuant to Sections 1.1 and 1.2
hereof. VGPC shall be deemed to have the exclusive control and possession of
the Gas after it has been delivered to VGPC at the Delivery Points, until
such time as the Gas is redelivered to ALCOA at the Delivery Points pursuant
to Sections 1.1 and 1.2 hereof.
7.2 The party in control of the Gas will defend, indemnify and hold the
other harmless from and against any and all claims, causes of action or
judgments (including attorney's fees and expenses) in any way arising with
respect to the Gas while in that party's control, and the other shall not be
liable for any part thereof.
ARTICLE VIII
FORCE MAJEURE
8.1 Subject to the provisions of this Article VII, no party shall be
liable to the other party for the failure to perform in conformity with this
Agreement to the extent such failure results from an event of Force Majeure
which is beyond the reasonable control of the party affected thereby, which
wholly or partially prevents the supply, transportation, sale, delivery,
injection, storage, withdrawal or redelivery of Gas.
8.2 Events of Force Majeure shall include, by way of illustration, but
not limitation those enumerated in Section 16.2, Original Sheets No. 56 and
No. 57 of the Terms and Conditions of VGPC's SCC Gas Tariff.
8.3 Immediately upon becoming aware of the occurrence of any event of
Force Majeure, the party affected shall give notice thereof to the other
party, describing such event and stating the specific obligations, the
performance of which are, or are expected to be, delayed or prevented, and
(either in the original or in supplemental notices) stating the estimated
period during which performance may be suspended or reduced, including, to
the extent known or ascertainable, the estimated extent of such reduction of
performance. Such notice of an event of Force Majeure is to be first given by
telephone communication, and then shall be confirmed in writing within five
(5) days, giving particulars available to the reporting party, and being
supplemented if necessary within twenty (20) days to give full particulars.
Not withstanding any other provision in this Agreement, the parties mutually
agree that should some cause or event, beyond the control of VGPC, make it
reasonably appear to VGPC in its best engineering effort that a storage area
is losing pressure and may no longer be viable for storage, it may
immediately notify ALCOA (by fax, phone or other means) and ALCOA shall
immediately start accepting the stored gas in order to drain the storage area
and cut down on the potential loss to VGPC, or
<PAGE>
VGPC may otherwise dispose of such gas and pay ALCOA for the fair market
value thereof plus the value of any gas otherwise lost. Thereafter this
Agreement shall be considered of no further force and effect unless VGPC can
reasonably revitalize and stabilize such storage area to hold gas pressure in
which event VGPC shall give the thirty (30) day notice as provided in Section
3.1 and the Agreement shall thereafter continue in full force and effect.
8.4 The party relying upon an event of Force Majeure shall act prudently
and use all reasonable efforts to eliminate the effects of Force Majeure as
soon as reasonably practicable, provided that the settlement of strikes and
lockouts shall be entirely within the discretion of the party affected.
8.5 No suspension or reduction of performance by reason of an event of
Force Majeure shall invalidate this Agreement, and upon removal of the Force
Majeure, performance shall resume in this Agreement as soon as practicable.
ARTICLE IX
OPERATIONAL FLOW ORDERS
9.1 ALCOA may be subject to certain operational flow orders ("OFO's")
issued by VGPC: (a) to alleviate conditions that threaten the integrity of
VGPC's system; (b) to maintain pressures necessary for VGPC's operations; (c)
to alleviate operational problems arising from overdeliveries or
underdeliveries by ALCOA in violation of this Agreement; and (d) to prevent
damage to a storage field.
9.2 Upon the issuance of an OFO, VGPC shall notify ALCOA through notice
by telephone, confirmed by fax two (2) hours prior to the start of the OFO.
9.3 Upon the issuance of an OFO, ALCOA must take the actions set forth in
the OFO, which may include, but are not limited to, reducing its withdrawals
from storage.
ARTICLE X
SUCCESSORS AND ASSIGNS
10.1 This Agreement shall be binding upon and inure to the benefit of the
successors, assigns and legal representatives of the parties hereto. Either
party may freely assign this Agreement to a company with which it is
affiliated or which it controls, is controlled by, or is under common control
with, or any party succeeding to substantially all the interests of ALCOA or
VGPC provided that the successor entity is no less creditworthy than the
assignor and is committed to, and capable of, performing its obligation under
this Agreement. All other assignments shall be subject to the prior written
consent of the party not assigning, such approval not to be unreasonably
withheld. Either party hereto shall have the right to pledge or mortgage its
respective rights hereunder for security of its indebtedness without the
written consent of the other party.
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 This Agreement constitutes the entire Agreement between the parties
and no waiver by VGPC or ALCOA of any default of either party under this
Agreement shall operate as a waiver of any subsequent default whether of a
like or different character.
11.2 The laws of the Commonwealth of Virginia shall govern the validity,
construction, interpretation, and effect of this Agreement.
11.3 No modification of or supplement to the terms and provisions hereof
shall be or become effective except by execution of a supplementary written
agreement between the parties.
11.4 Exhibit A attached to this Agreement constitutes a part of this
Agreement and is incorporated herein.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above by the parties' duly authorized officers.
Attest: ALCOA
By: /s/ illegible
--------------------
ILLEGIBLE
Its: Vice President
-------------------
Attest: VIRGINIA GAS PIPELINE COMPANY
By: /s/ M. L. Edwards
--------------------
ILLEGIBLE
Its: President
-------------------
<PAGE>
EXHIBIT A
to that certain Gas Storage Agreement dated June 30, 1997 by and between
ALCOA
and
VIRGINIA GAS PIPELINE COMPANY
Delivery Points:
1. Saltville receipt/delivery point, Smyth County, Virginia.
For injections: ETNG Meter Number 759766; for withdrawals:
ETNG Meter Number 759777.
2. Early Grove receipt/delivery point, Washington County, Virginia.
For injections: ETNG Meter Number 759147; for withdrawals:
ETNG Meter Number 759009.
3. Dickenson #2 receipt point, Dickenson County, Virginia.
For withdrawals only, ETNG Meter Number 759321.
Maximum Daily Injection Quantity, in dth:
870 Dth
Maximum Daily Withdrawal Quantity, in dth:
1,740 Dth
