<PAGE> 1
UNITED STATE SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission file number ____________
VIRGINIA GAS COMPANY
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 87-0443823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 EAST MAIN STREET, ABINGDON, VIRGINIA 24210, (540) 676-2380
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[ x ] Yes [ ] No
<PAGE> 2
VIRGINIA GAS COMPANY
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I - FINANCIAL INFORMATION NUMBER
------ ------
<S> <C> <C>
1 Financial Statements:
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets at September 30, 1997 (Unaudited) and
December 31, 1996 3
Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September
30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Virginia Gas Storage Company
Balance Sheets at September 30, 1997 (Unaudited) and December 31, 1996 7
Statements of Income (Unaudited) for the Three and Nine Months Ended
September 30, 1997 and 1996 8
Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended
September 30, 1997 and 1996 9
Notes to Financial Statements 10
Virginia Gas Distribution Company
Balance Sheets at September 30, 1997 (Unaudited) and December 31, 1996 11
Statements of Income (Unaudited) for the Three and Nine Months Ended
September 30, 1997 and 1996 12
Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended
September 30, 1997 and 1996 13
Notes to Financial Statements 14
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
PART II - OTHER INFORMATION
4 Submission of Matters to a Vote of Security Holders 19
6 Exhibits and Reports on Form 8-K 19
List of Exhibits 20
Signature 21
</TABLE>
2
<PAGE> 3
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $14,643,256 $ 1,652,838
Accounts receivable 2,774,575 1,073,276
Notes receivable 120,891 114,556
Other current assets 324,759 134,862
----------- -----------
Total current assets 17,863,481 2,975,532
PROPERTY AND EQUIPMENT, net 19,750,901 16,343,480
INVESTMENT IN AFFILIATED COMPANIES 4,408,903 4,243,020
NOTES RECEIVABLE - AFFILIATED COMPANIES 12,927,465 9,371,062
OTHER ASSETS 1,161,587 577,309
----------- -----------
Total assets $56,112,337 $33,510,403
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ - $ 250,000
Current portion of long-term debt 283,614 1,244,490
Accounts payable 1,419,196 1,197,555
Funds held for future distribution 359,725 544,475
Other current liabilities 186,815 168,709
----------- -----------
Total current liabilities 2,249,350 3,405,229
LONG-TERM DEBT 19,800,981 12,137,729
DEFERRED INCOME TAXES 753,032 629,914
----------- -----------
Total liabilities 22,803,363 16,172,872
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock - No par, 2,000 shares authorized, zero (unaudited) and
2,000 shares issued and outstanding as of September 30, 1997 and
December 31, 1996, respectively - 1,725,000
Common stock - par value $.001, 10,000,000 shares authorized, 5,504,906
(unaudited) and 3,150,744 shares issued and outstanding as of September
30, 1997 and December 31, 1996, respectively 5,505 3,151
Additional paid-in capital 31,482,191 14,152,137
Retained earnings 1,821,278 1,457,243
----------- -----------
Total stockholders' equity 33,308,974 17,337,531
----------- -----------
Total liabilities and stockholders' equity $56,112,337 $33,510,403
=========== ===========
</TABLE>
3
<PAGE> 4
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 2,363,528 $ 450,384 $ 5,864,065 $ 995,530
Interest and other income 387,236 211,283 957,649 645,046
----------- ------------- ------------ ------------
2,750,764 661,667 6,821,714 1,640,576
----------- ------------- ------------ ------------
EXPENSES:
Production expenses 55,324 28,117 155,989 71,562
Purchased gas expense 764,254 7,704 830,367 7,704
Operation and maintenance expense 153,786 23,099 382,989 23,099
Cost of natural gas sold 682,174 - 2,317,177 -
Depreciation, depletion, and amortization 207,805 116,611 581,395 245,658
General and administrative 271,914 153,531 719,344 457,765
----------- ------------- ------------ ------------
2,135,257 329,062 4,987,261 805,788
----------- ------------- ------------ ------------
OTHER EXPENSE:
Interest 437,273 239,213 1,154,428 760,037
Other 41,923 - 109,962 -
----------- ------------- ------------ ------------
479,196 239,213 1,264,390 760,037
----------- ------------- ------------ ------------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES AND
INCOME TAXES 136,311 93,392 570,063 74,751
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 34,682 82,015 165,883 289,957
----------- ------------- ------------ ------------
INCOME BEFORE INCOME TAXES 170,993 175,407 735,946 364,708
PROVISION FOR INCOME TAXES 33,429 38,775 171,312 21,232
----------- ------------- ------------ ------------
NET INCOME $ 137,564 $ 136,632 $ 564,634 $ 343,476
=========== ============= ============ ============
PREFERRED DIVIDENDS PAID $ - $ (65,000) $ (57,055) $ (195,000)
=========== ============= ============ ============
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 137,564 $ 71,632 $ 507,579 $ 148,476
=========== ============= ============ ============
NET INCOME PER COMMON SHARE $ 0.04 $ 0.04 $ 0.15 $ 0.13
=========== ============= ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,868,017 1,644,319 3,428,928 1,167,268
=========== ============= ============ ============
</TABLE>
4
<PAGE> 5
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 137,564 $ 136,632 $ 564,634 $ 343,476
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 207,805 116,611 581,395 245,658
Undistributed earnings of affiliated companies (34,682) (82,015) (165,883) (289,957)
Deferred income taxes 24,025 21,673 123,118 12,223
(Increase) decrease in accounts receivable (1,115,462) (129,171) (1,701,299) 263,583
(Increase) decrease in other current assets (92,070) (16,948) (189,897) 77,806
Decrease in other assets 216,987 4,617 282,028 11,055
Decrease in notes payable (1,250,000) - (250,000) (332,212)
(Decrease) increase in accounts payable (163,368) 3,972,058 221,641 3,121,300
Increase (decrease) in other current liabilities 71,700 236,380 (166,644) 343,487
----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities (1,997,501) 4,259,837 (700,907) 3,796,419
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (758,847) (5,006,704) (3,908,398) (7,588,017)
Issuance of note receivable - - (3,650,000) -
Payments received on notes receivable 27,294 33,933 87,262 96,807
----------- ----------- ----------- -----------
Net cash used in investing activities (731,553) (4,972,771) (7,471,136) (7,491,210)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (1,830,675) (128,829) (3,044,897) (2,191,110)
Proceeds from new loans - - 9,690,632 1,042,732
Redemption of preferred stock - - (2,000,000) -
Proceeds from issuance of common stock, net 17,733,020 252,000 17,607,408 4,653,318
Purchase of warrant and options - (975,000) - (975,000)
Payment of financing costs - (76,024) (331,333) (250,687)
Establishment of financing reserve fund - - (558,750) -
Dividends paid (56,085) (65,000) (200,599) (195,000)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 15,846,260 (992,853) 21,162,461 2,084,253
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 13,117,206 (1,705,787) 12,990,418 (1,610,538)
CASH AND CASH EQUIVALENTS, beginning of period 1,526,050 2,227,863 1,652,838 2,132,614
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $14,643,256 $ 522,076 $14,643,256 $ 522,076
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 566,290 $ 285,971 $ 1,517,154 $ 970,577
=========== =========== =========== ===========
Income taxes paid $ 5,500 $ 3,000 $ 16,658 $ 11,658
=========== =========== =========== ===========
</TABLE>
5
<PAGE> 6
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements as of
September 30, 1997, and for the three and nine-month periods ended September 30,
1997 and 1996, include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary to present
fairly the financial position, results of operations and cash flows of Virginia
Gas Company (the "Company"). Operating results for the three and nine months
ended September 30, 1997, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997.
The financial statements should be read in conjunction with the Notes
to Consolidated Financial Statements included in the Company's Amendment No. 1
to the Form SB-2 filed with the Securities and Exchange Commission on July 28,
1997.
The consolidated financial statements for 1996 include the accounts
of three wholly-owned subsidiaries. The unaudited consolidated financial
statements for 1997 include the accounts of four wholly-owned subsidiaries. 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).
In February 1997, the Industrial Development Authority of Russell
County, Virginia issued its 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
($3,650,000) 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 supporting storage and pipeline facilities.
The bonds bear interest at 9.5 percent and will mature in February 2017. Annual
principal payments of $275,000 to $1,115,000 are due from 2002 to 2017.
In February 1997, the Company redeemed the outstanding 2,000 shares
of its Series A nonvoting preferred stock for the liquidation price of
$2,000,000 plus unpaid dividends of $35,389.
In January 1997, the Company's wholly-owned subsidiary, Virginia Gas
Marketing Company, began marketing natural gas services. These services
currently 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.
Sales of natural gas by Virginia Gas Marketing Company during the first nine
months of 1997 totaled $2,710,000 on sales volumes of 1,056,000 MMBtu.
In September 1997, the Company completed a secondary offering of its
common stock. The offering resulted in the issuance of an additional 2,300,000
common shares of the Company at $8.50 per share. Net proceeds realized from the
offering approximated $17,700,000.
6
<PAGE> 7
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 55,741 $ 148,619
Accounts receivable 1,487,283 1,233,227
Notes receivable 70,000 570,000
Other current assets 55,586 85,369
----------- -----------
Total current assets 1,668,610 2,037,215
PROPERTY AND EQUIPMENT, net 14,068,628 13,323,883
OTHER ASSETS 1,067,530 956,099
----------- -----------
Total assets $16,804,768 $16,317,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 109,551 $ 104,915
Accounts payable 1,156,594 2,193,010
Other current liabilities 284,952 108,929
----------- -----------
Total current liabilities 1,551,097 2,406,854
LONG-TERM DEBT 7,301,539 6,386,212
DEFERRED INCOME TAXES 650,872 551,686
----------- -----------
Total liabilities 9,503,508 9,344,752
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - no par value, 50,000 shares authorized, 38,200 (unaudited)
and 38,200 shares issued and outstanding as of September 30, 1997 and
December 31, 1996, respectively 5,640,000 5,640,000
Retained earnings 1,661,260 1,332,445
----------- -----------
Total stockholders' equity 7,301,260 6,972,445
----------- -----------
Total liabilities and stockholders' equity $16,804,768 $16,317,197
=========== ===========
</TABLE>
7
<PAGE> 8
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
---------- -------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 1,321,481 $ 706,166 $ 3,470,944 $ 2,658,665
Interest income 10,925 23,700 41,029 131,952
----------- ----------- ----------- -----------
1,332,406 729,866 3,511,973 2,790,617
----------- ----------- ----------- -----------
EXPENSES:
Production expenses 36,318 39,401 146,457 172,055
Purchased gas expense 542,000 - 1,052,502 664,087
Operation and maintenance expense 208,269 78,603 612,650 187,964
Depreciation, depletion, and amortization 127,531 101,621 383,863 294,081
General and administrative 155,822 172,242 548,357 450,405
----------- ----------- ----------- -----------
1,069,940 391,867 2,743,829 1,768,592
----------- ----------- ----------- -----------
OTHER EXPENSE:
Interest 104,559 79,101 269,939 156,410
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 157,907 258,898 498,205 865,615
PROVISION FOR INCOME TAXES 53,688 88,025 169,390 294,308
----------- ----------- ----------- -----------
NET INCOME $ 104,219 $ 170,873 $ 328,815 $ 571,307
=========== =========== =========== ===========
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS
STORAGE COMPANY'S EARNINGS $ 52,109 $ 85,437 $ 164,407 $ 285,654
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 9
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 104,219 $ 170,873 $ 328,815 $ 571,307
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 127,531 101,621 383,863 294,081
Deferred income taxes 31,437 51,404 99,186 171,869
(Increase) decrease in accounts receivable (417,315) (51,330) (254,056) 76,077
(Increase) decrease in other current assets (37,238) (195,197) 29,783 (199,583)
Increase in other assets (106,776) (3,324) (143,504) (15,507)
(Decrease) increase in accounts payable (207,988) 25,016 (1,036,416) (721,222)
Increase in other current liabilities 46,412 52,119 176,023 14,721
--------- --------- ----------- -----------
Net cash (used in) provided by operating
activities (459,718) 151,182 (416,306) 191,743
--------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital retirements (expenditures), net 350,544 (888,729) (1,096,535) (2,532,552)
Payments received on notes receivable - - 500,000 1,720,000
Net cash provided by (used in) investing --------- --------- ----------- -----------
activities 350,544 (888,729) (596,535) (812,552)
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (24,953) (29,844) (80,037) (87,780)
Proceeds from new loans - - 1,000,000 500,000
--------- --------- ----------- -----------
Net cash (used in) provided by financing
activities (24,953) (29,844) 919,963 412,220
--------- --------- ----------- -----------
NET DECREASE IN CASH (134,127) (767,391) (92,878) (208,589)
CASH, beginning of period 189,868 856,288 148,619 297,486
--------- --------- ----------- -----------
CASH, end of period $ 55,741 $ 88,897 $ 55,741 $ 88,897
========= ========= =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 166,200 $ 139,101 $ 499,454 $ 467,457
========= ========= =========== ===========
Income taxes paid $ 20,000 $ 5,000 $ 67,635 $ 84,024
========= ========= =========== ===========
</TABLE>
9
<PAGE> 10
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of September 30,
1997, and for the three and nine-month periods ended September 30, 1997 and
1996, include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of Virginia Gas Storage
Company. Operating results for the three and nine months ended September 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Amendment No. 1
to the Form SB-2 filed with the Securities and Exchange Commission on July 28,
1997.
In February 1997, the Industrial Development Authority of Russell
County, Virginia issued its Natural Gas Facilities Revenue Bonds Series 1997
with principal of $9,100,000. A portion ($1,000,000) of the proceeds was loaned
to Virginia Gas Storage Company by an affiliated company which was used to
construct natural gas storage facilities. The bonds bear interest at 9.5 percent
and will mature in February 2017. Annual principal payments of $30,000 to
$123,000 are due from 2002 to 2017.
10
<PAGE> 11
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash 32,563 $ 16,166
Accounts receivable 173,016 151,752
Current portion of notes receivable 26,816 26,004
Other current assets 286,928 154,920
----------- ----------
Total current assets 519,323 348,842
PROPERTY AND EQUIPMENT, net 6,260,483 2,755,660
NOTES RECEIVABLE 3,163,826 3,413,066
DEFERRED TAX ASSET 473 1,995
OTHER ASSETS 1,237,816 546,798
----------- ----------
Total assets $11,181,921 $7,066,361
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 41,028 $ 39,240
Accounts payable 962,977 462,095
Other current liabilities 25,071 33,368
----------- ----------
Total current liabilities 1,029,076 534,703
LONG-TERM DEBT 8,636,299 5,018,064
----------- ----------
Total liabilities 9,665,375 5,552,767
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock - no par value, 100,000 shares authorized, 75,000 (unaudited) and
75,000 shares issued and outstanding as of September 30, 1997 and December
31, 1996, respectively 1,500,000 1,500,000
Retained earnings 16,546 13,594
----------- ----------
Total stockholders' equity 1,516,546 1,513,594
----------- ----------
Total liabilities and stockholders' equity $11,181,921 $7,066,361
=========== ==========
</TABLE>
11
<PAGE> 12
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 171,498 $ 141,222 $ 590,919 $ 440,314
Interest income 100,541 75,406 311,844 236,690
Other income 23,444 18,446 68,732 54,505
--------- --------- --------- ---------
295,483 235,074 971,495 731,509
--------- --------- --------- ---------
EXPENSES:
Purchased gas expense 105,313 77,078 344,309 223,651
Operation and maintenance expense 43,656 15,036 82,042 37,401
Depreciation, depletion, and amortization 53,053 21,217 103,804 59,254
General and administrative 31,321 32,668 104,669 115,108
--------- --------- --------- ---------
233,343 145,999 634,824 435,414
--------- --------- --------- ---------
OTHER EXPENSE:
Interest 108,249 93,263 309,204 263,388
Other 6,700 6,180 22,993 19,667
--------- --------- --------- ---------
114,949 99,443 332,197 283,055
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (52,809) (10,368) 4,474 13,040
PROVISION (BENEFIT) FOR INCOME TAXES (17,955) (3,525) 1,522 4,433
--------- --------- --------- ---------
NET INCOME (LOSS) $ (34,854) $ (6,843) $ 2,952 $ 8,607
========= ========= ========= =========
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS
DISTRIBUTION COMPANY'S EARNINGS $ (17,427) $ (3,422) $ 1,476 $ 4,303
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (34,854) $ (6,843) $ 2,952 $ 8,607
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 53,053 21,217 103,804 59,254
Deferred income taxes (17,955) (3,128) 1,522 3,934
Decrease (increase) in accounts receivable 220,701 (120) (21,264) (24,800)
Decrease in affiliated company receivable - - - 1,562,500
(Increase) decrease in other current assets (138,145) (6,470) (132,008) 15,309
Increase in other assets (141,720) (1,733) (155,966) (10,381)
(Decrease) increase in accounts payable (600,033) 46,721 500,882 (122,477)
(Decrease) increase in other current liabilities (4,260) 1,147 (8,297) (64,498)
---------- --------- ----------- -----------
Net cash (used in) provided by operating
activities (663,213) 50,791 291,625 1,427,448
---------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (525,333) (63,574) (3,595,785) (244,427)
Loans made to affiliated companies - - (1,000,000) (1,500,000)
Payments received on notes receivable 1,196,054 7,150 1,248,428 91,148
---------- --------- ----------- -----------
Net cash provided by (used in) investing
activities
670,721 (56,424) (3,347,357) (1,653,279)
---------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (9,474) (10,909) (29,977) (31,301)
Proceeds from new loans - - 3,650,000 -
Payment of financing costs - - (219,394) -
Establishment of financing reserve fund - - (328,500) -
---------- --------- ----------- -----------
Net cash (used in) provided by financing
activities (9,474) (10,909) 3,072,129 (31,301)
---------- --------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (1,966) (16,542) 16,397 (257,132)
CASH, beginning of period 34,529 66,097 16,166 306,687
---------- --------- ----------- -----------
CASH, end of period $ 32,563 $ 49,555 $ 32,563 $ 49,555
========== ========= =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 200,555 $ 108,263 $ 550,551 $ 424,827
========== ========= =========== ===========
Income taxes paid $ - $ - $ - $ -
========== ========= =========== ===========
</TABLE>
13
<PAGE> 14
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of September 30,
1997, and for the three and nine-month periods ended September 30, 1997 and
1996, include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of Virginia Gas
Distribution Company. Operating results for the three and nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Amendment No. 1
to the Form SB-2 filed with the Securities and Exchange Commission on July 28,
1997.
In February 1997, the Industrial Development Authority of Russell
County, Virginia issued its Natural Gas Facilities Revenue Bonds Series 1997
with principal of $9,100,000. A portion ($3,650,000) of the proceeds was
allocated to Virginia Gas Distribution Company by Virginia Gas Company which
will be used to construct a natural gas distribution facility in and around the
town of Lebanon, Virginia. A portion ($1,000,000) of these allocated proceeds
was loaned by Virginia Gas Distribution Company to an affiliated company. The
bonds bear interest at 9.5 percent and will mature in February 2017. Annual
principal payments of $110,000 to $447,000 are due from 2002 to 2017.
14
<PAGE> 15
VIRGINIA GAS COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with items 6
and 7 of the Company's Annual Report on Form 10-KSB for the year ended December
31, 1996, and the Notes to Consolidated Financial Statements set forth in this
report.
RESULTS OF OPERATIONS
OVERVIEW. During the three and nine-month periods ended September 30,
1997, Virginia Gas Company (the "Company") recorded net income of $138,000 and
$565,000, respectively, compared to $137,000 and $343,000 for the same periods
in 1996. The net income per common share available to common stockholders for
the corresponding periods was $0.04 and $0.15, respectively, in 1997 compared to
$0.04 and $0.13, respectively, in 1996. The number of weighted-average shares
used in calculating income per common share was 3,868,017 and 3,428,928 for the
three and nine months ended September 30, 1997, respectively, compared with
1,644,319 and 1,167,268 for the corresponding periods in 1996.
REVENUES. Total revenues increased 316% to $2.8 million for the three
months ended September 30, 1997, compared to $662,000 for the same period in
1996. Natural gas sales and well operation revenues totaled $1.5 million for the
third quarter of 1997 compared to $156,000 for the third quarter of 1996. The
increase primarily reflects the formation of the Company's marketing operations
during the first quarter of 1997. The increase also reflects sales of natural
gas totaling $570,000 to a natural gas storage customer of the Company. Other
natural gas sales during the third quarter of 1997 totaled $884,000 on sales
volumes of 367,000 MMBtu. Exploration and production revenues, reflecting the
Company's revenue interest in these sales of natural gas from company-operated
wells, consisted of natural gas sales of $82,000 and well operation revenues of
$67,000 during the third quarter of 1997 compared to $89,000 and $67,000,
respectively, for the same period in 1996. Propane gas sales totaled $155,000
for the three months ended September 30, 1997, compared to $11,000 for the third
quarter of 1996.
Total revenues increased 316% to $6.8 million for the nine months
ended September 30, 1997, compared to $1.6 million for the same period in 1996.
Natural gas sales and well operation revenues totaled $3.5 million for the first
nine months of 1997 compared to $454,000 for the same period in 1996. Sales of
natural gas during the first nine months of 1997 totaled $3.3 million on sales
volumes of 1,256,000 MMBtu. Exploration and production revenues consisted of
natural gas sales of $271,000 and well operation revenues of $198,000,
respectively, for the first nine months of 1997 compared to $247,000 and
$207,000, respectively, for the same period in 1996. Propane sales totaled
$273,000 for the nine months ended September 30, 1997, compared to $11,000 for
the same period in 1996.
Natural gas storage revenues totaled $626,000 and $1.9 million,
respectively, for the three and nine-month periods ended September 30, 1997,
compared to $190,000 for the same periods in 1996. Initial injections of
customer gas into the Company's storage facility located in Saltville, Virginia
began in August 1996.
15
<PAGE> 16
ITEM 2. CONTINUED
Management revenues, interest and other income totaled $429,000 for
the third quarter of 1997, compared to $280,000 for the same period in 1996, an
increase of 53%. The majority of the increase reflects an increase in interest
income of $147,000. These revenues totaled $1.1 million for the nine months
ended September 30, 1997, compared with $910,000 for the same period in 1996, an
increase of 26%. The majority of the increase reflects an increase in interest
income of $278,000, offset by a decrease in management revenues and other income
of $44,000.
COSTS AND EXPENSES. Total operating costs and expenses totaled $2.2
million for the three months ended September 30, 1997, compared to $329,000 for
the same period in 1996. Total operating costs and expenses increased $4.3
million to $5.1 million for the nine months ended September 30, 1997 compared to
$806,000 for the same period in 1996. Production and purchased gas expenses
increased to $820,000 and $986,000 for the three and nine-month periods ended
September 30, 1997, respectively, from $36,000 and $79,000 for the corresponding
periods in 1996. Theses increases reflect increased production expenses,
increased purchased gas expense attributed to the expanding propane distribution
operations and purchased gas expense related to the sale of natural gas to a
storage customer of the Company.
Operations and maintenance expenses totaled $154,000 and $383,000 for
the three and nine-month periods ended September 30, 1997 compared to $23,000
for the same periods in 1996, primarily reflecting operating costs related to
the Saltville storage facility in addition to the propane distribution
operations.
Cost of natural gas sold, related to the Company's marketing of
natural gas, totaled $682,000 and $2.3 million for the three and nine-month
periods ended September 30, 1997 compared to zero for the corresponding 1996
periods, reflecting the initiation of marketing operations and the corresponding
costs.
General and administrative costs were $272,000 and $719,000 for the
three and nine-month periods ended September 30, 1997, respectively, compared to
$153,000 and $458,000 for the corresponding periods in 1996. These increases
reflect the growth in Company operations and the accompanying growth in
personnel and facilities.
Depreciation, depletion and amortization increased 78% to $208,000 in
the third quarter of 1997 from $117,000 for the third quarter of 1996. This
increase totaled 137% to $581,000 for the nine months ended September 30, 1997
from $246,000 for the same period in 1996. These increases reflect the recovery
of costs for capital projects recently placed into service, primarily the
Company's Saltville storage facility.
INTEREST EXPENSE. Interest expense increased 83% to $437,000 during
the third quarter of 1997 from $239,000 for the same period in 1996. Interest
expense increased 52% to $1.2 million during the first nine months of 1997 from
$760,000 in the comparable 1996 period. These increases are due primarily to
additional tax-exempt bond financing in addition to short-term borrowings. 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 three and nine-month periods ended September 30,
1997 totaled $80,000 and $250,000, respectively. Capitalized interest for the
comparable 1996 periods totaled $70,000 and $232,000, respectively.
16
<PAGE> 17
ITEM 2. CONTINUED
EQUITY IN EARNINGS OF AFFILIATES. The Company has a 50% ownership
interest in two affiliated companies which provide natural gas storage,
gathering and distribution services. The Company accounts for its investments in
these companies using the equity method. For the three months ended September
30, 1997, the Company's equity in earnings of these affiliates decreased 58% to
$35,000 from $82,000 for the comparable period in 1996. The Company's equity in
earnings of affiliates decreased 43% to $166,000 for the first nine months of
1997 from $290,000 for the same period in 1996. These decreases reflect
increased operations expenses related to natural gas storage operations in
addition to higher interest costs.
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 25% and 30% for the
three and nine-month periods ended September 30, 1997, respectively, compared
with 41% and 28%, respectively, for the same periods in 1996.
EQUITY INVESTMENTS
NATURAL GAS STORAGE. Storage revenues from the Early Grove facility
for the three months ended September 30, 1997, were $622,000 compared to
$561,000 for the same period in 1996. Storage revenues for the nine months ended
September 30, 1997, were $1,887,000 compared to $1,438,000 for the comparable
1996 period. These increases reflect increased storage capacity at the Early
Grove facility.
NATURAL GAS GATHERING. Gathering revenues totaled $77,000 and
$237,000 for the three and nine-month periods ended September 30, 1997,
respectively, compared to $73,000 and $280,000 for the comparable periods in
1996. The nine-month decrease reflects a decrease in natural gas throughput due
partially to production decline and to decreased peak winter service volumes
sold as a result of the milder seasonal temperatures experienced during the
first quarter of 1997 as compared to the corresponding period in 1996. Revenues
from natural gas sales totaled $570,000 and $1,183,000 for the three and
nine-month periods ended September 30, 1997, compared to $781,000 for the nine
months ended September 30, 1996. Purchased gas expenses related to these sales
totaled $1,053,000 and $664,000 for the nine months ended September 30, 1997 and
1996, respectively.
NATURAL GAS DISTRIBUTION. Distribution revenues for the three months
ended September 30, 1997, were $171,000, an increase of $30,000 over revenues of
$141,000 for the same period in 1996. Distribution revenues for the first nine
months of 1997 were $591,000, an increase of $151,000 over revenues of $440,000
for the same period in 1996. These increases primarily reflect increased usage
during the 1997 periods by industrial customers. Purchased gas costs related to
these sales totaled $105,000 and $344,000 for the three and nine-month periods
ended September 30, 1997, respectively, compared to $77,000 and $224,000 for the
same periods in 1996.
17
<PAGE> 18
ITEM 2. CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's working capital reflected a
$15.6 million surplus, compared to the $430,000 deficit at December 31, 1996.
The Company's current ratio at September 30, 1997, was 7.94, an increase from
the ratio of 0.87 at December 31, 1996. The combined working capital of the
Company's affiliates, Virginia Gas Storage Company and Virginia Gas Distribution
Company, increased to a $392,000 deficit at September 30, 1997, from the
$556,000 deficit at December 31, 1996. The combined current ratio of these
companies was 0.85 at September 30, 1997. Cash increased to $14,643,000 at
September 30, 1997 from $1,653,000 at December 31, 1996 as net cash provided by
financing activities exceeded net cash used in operating and investing
activities.
In September 1997, the Company completed a secondary offering of its
common stock. The offering resulted in the issuance of an additional 2,300,000
common shares of the Company at $8.50 per share. Net proceeds realized from the
offering approximated $17,700,000.
18
<PAGE> 19
VIRGINIA GAS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held July 8, 1997. The meeting involved the election of
directors and the appointment of auditors of the Company for the 1997 fiscal year. An aggregate of
2,222,430 voting shares of the Company was represented in person or by proxy at the Meeting.
Proposal 1. The shareholders approved the nomination of Peter C. Einselen and Charles A.
Mills, III to serve the Company as directors for a three-year term. Directors of
the Company who are continuing their term are Michael L. Edwards, Karen K.
Edwards and Allan R. Poole, II.
Proposal 2. The shareholders ratified the appointment of Arthur Andersen LLP, independent
public accountants, as auditors of the Company for the 1997 fiscal year.
The results of the voting for each proposal were as follows:
FOR AGAINST ABSTAIN
Proposal 1. Einselen 2,221,030 - 1,400
Mills 2,214,930 - 7,500
Proposal 2. 2,212,630 3,000 6,800
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See list of Exhibits on page 20 hereof.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the three months ended
September 30, 1997.
</TABLE>
19
<PAGE> 20
VIRGINIA GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
27 Financial Data Schedule for the Nine Months Ended September 30, 1997
20
<PAGE> 21
VIRGINIA GAS COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRGINIA GAS COMPANY
(Registrant)
By /s/ John D. Jessee
----------------------------------
John D. Jessee, Vice President and
Chief Financial Officer
21
<PAGE> 22
VIRGINIA GAS COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description
27 Financial Data Schedule
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF VIRGINIA GAS COMPANY AND SUBSIDIARIES AS
OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,643,256
<SECURITIES> 0
<RECEIVABLES> 2,895,466
<ALLOWANCES> 0
<INVENTORY> 127,862
<CURRENT-ASSETS> 17,863,481
<PP&E> 21,486,335
<DEPRECIATION> (1,735,434)
<TOTAL-ASSETS> 56,112,337
<CURRENT-LIABILITIES> 2,249,350
<BONDS> 19,800,981
0
0
<COMMON> 5,505
<OTHER-SE> 33,303,469
<TOTAL-LIABILITY-AND-EQUITY> 56,112,337
<SALES> 5,864,065
<TOTAL-REVENUES> 6,821,714
<CGS> 4,267,917
<TOTAL-COSTS> 4,987,261
<OTHER-EXPENSES> 109,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,154,428
<INCOME-PRETAX> 735,946
<INCOME-TAX> 171,312
<INCOME-CONTINUING> 564,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 564,634
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
