<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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
(NAME OF SMALL BUSINESS ISSUER 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)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
WARRANTS TO PURCHASE COMMON STOCK
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Revenues for the fiscal year ended December 31, 1996 were $2,769,718.
The aggregate market value of the voting Common Stock, par value $.001 per
share, held by nonaffiliates of the Registrant as of March 27, 1997 was
approximately $18,703,000.
As of March 27, 1997, the Registrant had outstanding 3,204,906 shares of Common
Stock, par value $.001.
<PAGE> 2
VIRGINIA GAS COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE NUMBER
<S> <C> <C>
CAPTION
PART I
1 Business 3
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 11
PART II
5 Market for Common Equity and Related Stockholder Matters 11
6 Management's Discussion and Analysis or Plan of Operations 12
7 Financial Statements 18
8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III
9 Directors and Executive Officers of the Company 39
10 Executive Compensation 41
11 Security Ownership of Certain Beneficial Owners and Management 42
12 Certain Relationships and Related Transactions 43
13 Exhibits and Reports on Form 8-K 45
Signatures 48
</TABLE>
2
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ITEM 1. BUSINESS
GENERAL
Virginia Gas Company (the "Company"), its subsidiaries and affiliates
form an integrated natural gas company engaged in natural gas storage,
gathering and distribution services; natural gas exploration, production and
well operations; pipeline operations and propane distribution. The Company
conducts its operations primarily in the southwestern counties of the
Commonwealth of Virginia.
Substantially all of the Company's revenues from the date of formation
in 1987 to 1992 were derived from exploration and production operations. In
1992, however, the Company reduced its concentration on exploration and
production activities and began diversifying into the natural gas storage,
gathering and distribution business. Expanding into these areas has resulted
in more stable and predictable revenue sources. A propane distribution
subsidiary was established in 1996, and a natural gas marketing subsidiary was
formed in 1997.
The Company's primary objectives are to continue to develop and expand
its existing storage, gathering and distribution activities and to expand its
business to include pipeline operations and propane distribution services. The
Company seeks to take advantage of deregulation of the domestic natural gas
industry by providing services previously supplied by the interstate pipeline
companies. The Company's strategy is to 1) increase storage and related
pipeline capacity to meet increasing demand for natural gas services in
southwestern Virginia and northeastern Tennessee, 2) to add value to its
natural gas production by distributing its natural gas directly to residential,
commercial and industrial users through its natural gas utility, 3) to maximize
the volume of natural gas it gathers and markets, 4) to develop and expand,
through acquisition, into propane distribution services, and 5) to increase its
natural gas reserves through selective acquisitions and drilling programs.
The Company expects consumption of natural gas to continue to grow
faster than alternative fossil fuel because of environmental pressure to use
cleaner burning fuels, the abundance of reasonably priced natural gas supply,
and the rapid progress of new natural gas technologies.
SUBSIDIARIES AND AFFILIATES
The Company has four consolidated wholly-owned subsidiaries: Virginia
Gas Exploration Company (the "Exploration Company"), Virginia Gas Pipeline
Company (the "Pipeline Company"), Virginia Gas Propane Company (the "Propane
Company") and Virginia Gas Marketing Company (the "Marketing Company").
Affiliates of the Company, Virginia Gas Distribution Company (the "Distribution
Company") and Virginia Gas Storage Company (the "Storage Company"), are each
owned 50% by the Company and 50% by one individual investor, who has no
affiliation with either the Company, or any executive officer, director or
controlling shareholder of the Company.
The Distribution Company and the Storage Company are the holders of
Certificates of Public Convenience and Necessity ("COPN") issued by the
Virginia State Corporation Commission ("SCC") that are required for such
companies to conduct their business. Some of the Storage Company's operations
are regulated by both the SCC and the Federal Energy Regulatory Commission
("FERC"). The Pipeline Company has applied for COPN's from the SCC and its
operations will likewise be regulated by both the SCC and the FERC. In
connection with the
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financing of the Distribution Company's distribution business, and the Storage
Company and Pipeline Company's storage and related pipeline businesses, the
Company participated in three tax exempt bond issues in 1994 and 1995 that
provided financing for these various projects. Funds from such financing were
allocated, as needed, to the various subsidiaries and affiliates and each such
entity has provided the Company with interest-bearing promissory notes
evidencing its obligation to repay of the funds advanced by the Company. In
February 1997, the Company completed its participation in a fourth tax exempt
bond issue, proceeds of which will provide financing for distribution, storage
and pipeline projects.
STORAGE OPERATIONS
The Company operates the only two underground natural gas storage
facilities in the Commonwealth of Virginia, the Saltville Facility and the
Early Grove Field.
The Pipeline Company has developed a high deliverability salt cavern
storage facility in Saltville, Virginia, ("Saltville Facility") for use as a
high rate, peak usage storage facility. The Saltville Facility uses 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 10,000,000 MMBtu. In June, 1996 the Pipeline Company
filed an application with the SCC for a Certificate of Public Convenience and
Necessity for the operation of the Saltville Facility. In July, 1996 the SCC
issued an order authorizing the Pipeline Company to begin service on an interim
basis using the rates set forth in the application. In November 1996, the
Pipeline Company received a limited jurisdiction certificate from the FERC
authorizing the Pipeline Company to engage in the sale, transportation
(including storage), or assignment of natural gas that is subject to FERC's
jurisdiction under the Natural Gas Act, and to charge rates for its interstate
service equal to the intrastate rates approved by the SCC. The Saltville
Facility provides 10, 60 and 90-day service and 20-day refill capacity. In
August, 1996 the Pipeline Company injected the first working gas into the
field. The Pipeline Company's customers contracted for 583,000 MMBtu of
capacity for the 1996/1997 winter heating season. Current customer commitments
total 633,000 MMBtu of capacity for the 1997/1998 winter season. Peak daily
withdrawal rates of 40,000 MMBtu were achieved in January 1997.
In December 1991, the Company, through the Storage Company, purchased
the Early Grove natural gas field located in Scott and Washington Counties in
Virginia ("Early Grove Field") for conversion to underground natural gas
storage. The Storage Company produced natural gas from the field during 1992
while conducting geological, engineering and marketing studies. In June 1993,
the Storage Company injected the first working natural gas into the field. In
December 1994 the Storage Company applied for a Certificate of Public
Convenience and Necessity from the SCC and received a final order from the SCC
in September 1995. In October 1995, the Storage Company received a limited
jurisdiction certificate from the FERC authorizing the Storage Company to
engage in the sale, transportation (including storage), or assignment of
natural gas that is subject to FERC's jurisdiction under the Natural Gas Act,
and to charge rates for its interstate service equal to the intrastate rates
approved by the SCC. The Early Grove Field has 29 storage wells and a
certificated area of 2,900 acres. The Storage Company's rates for 60-day,
90-day, 120-day and 150-day service are $1.86, $1.50, $1.33 and $.85 cents per
MMBtu stored, respectively, plus 5 cents per MMBtu injected and 5 cents per
MMBtu withdrawn.
Total contracted storage volume for the 1994/1995 contract year was
520,000 MMBtu, consisting of 60-day, 90-day and 150-day service. Volume for
the 1995/1996 contract year was 985,000 MMBtu. Contracted volume for the
1996/1997 contract year is 1,560,000 MMBtu. Contracts range from one to
fifteen years. The Storage Company is increasing the deliverability of
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the Early Grove Field 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 per day
in 1992 to over 16,000 MMBtu per day in 1997. Proposed improvements could
increase the field's working gas capacity to 2,200,000 MMBtu for the 1998/1999
contract year.
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.
GATHERING OPERATIONS
The Storage Company and the Exploration Company operate various
unregulated natural 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 natural gas
production to the ETNG, CNG and CGT interstate pipeline systems as well as to
the Distribution Company's distribution system.
For such natural gas gathering services, the Company and the Storage
Company collect certain transportation allowances from producers (owners of
natural gas). Transportation allowances vary depending upon contractual
arrangements and currently range from $.05 to $.50 per MMBtu.
DISTRIBUTION OPERATIONS
The Company, through its Affiliate, the Distribution Company, owns and
operates 17 miles of pipelines and serves approximately 200 customers in
Russell and Buchanan Counties in Virginia. In 1992, the Distribution Company
commenced providing natural gas service on an unregulated basis to a limited
number of customers. In 1993, the Distribution Company to the SCC for a
Certificate of Public Convenience and Necessity authorizing it to provide
natural gas service to the Town of Castlewood, Virginia. The Certificate was
issued by the SCC in August 1993. An application was made to the SCC in March
1994 to extend the Distribution Company's service territory to include all of
Russell County and all of Buchanan County. The SCC approved the Certificate
amendment in August 1994. The Distribution Company is classified as a Virginia
public service corporation. The Distribution Company's tariffs to its
customers are set by the SCC.
The Distribution Company has been issued a franchise from the town of
Lebanon in Russell County and is constructing a nine mile pipeline to Lebanon
from its connecting point at the ETNG interstate pipeline near Castlewood,
Virginia.
The Distribution Company has a firm transportation contract with ETNG
which will provide it with firm service for a ten-year term during the winter
months of November through March. This firm transportation contract provides
that the Distribution Company pay ETNG $.24, plus fuel expenses, per MMBtu
transported. The Distribution Company has an interruptible contract with ETNG
allowing it access to such company's natural gas trunk lines through which it
distributes natural gas to its customers. The Distribution Company's
interruptible contract with ETNG provides that the Distribution Company pay
ETNG $.2511, plus fuel expenses, per MMBtu transported.
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PIPELINE OPERATIONS
In 1996, the Corporation initiated environmental and feasibility
studies for the construction of an 80 mile intrastate natural gas pipeline
which will connect the Company's Saltville Facility to the ETNG interstate
pipeline system and transport natural gas to markets in Smyth, Wythe and
Pulaski Counties in southwestern Virginia. The total estimated cost of
construction of the pipeline, designated P-25, is $14.6 million.
The P-25 pipeline will be constructed and maintained consistent with
applicable federal, state and local laws and regulations and accepted industry
practice. The first phase of construction of the pipeline consists of 20 miles
of pipe connecting the Corporation's Saltville Facility to the ETNG interstate
pipeline system and twinning the ETNG line to the town of Marion. The Company
has contracted with the local distribution company ("LDC") which serves Smyth,
Wythe and Pulaski Counties to provide pipeline capacity in order for the LDC to
supply 20,000 MMBtu per day of service to supply the towns of Marion,
Wytheville, Dublin, Pulaski and Radford. The Company has filed for a
Certificate of Public Convenience and Necessity with the SCC. A tariff will be
set by the SCC and charged by the Pipeline Company for reserved capacity in the
pipeline. Upon completion of construction and obtaining necessary regulatory
approvals, the Corporation expects the P-25 pipeline to commence operations in
late 1997.
Substantially all of the operations conducted through the P-25
pipeline constitute common carrier pipeline activities. Such common carrier
activities are those under which transportation in the pipeline is available at
tariffs published with the SCC 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.
EXPLORATION AND PRODUCTION OPERATIONS
The Exploration Company's exploration and production operations
consist of acquiring and developing natural gas properties by taking mineral
leases from landowners, drilling and completing wells on the properties and
building natural gas gathering lines. These activities are frequently
organized on a joint venture basis with third parties, with the Exploration
Company acting as general contractor and operator of the ventures, retaining a
minority working interest in the project and some promotional consideration.
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ACREAGE. The following table sets forth the gross and net acres of
developed and undeveloped natural gas exploration and production leases held by
the Company, its subsidiaries and affiliates as of December 31, 1996.
Undeveloped acreage includes leasehold interests which may already have been
classified as containing proved undeveloped reserves.
<TABLE>
<CAPTION>
DEVELOPED (1) UNDEVELOPED
------------- -----------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
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 have only been included as developed acreage
in the presentation above.
GAS RESERVES. Company personnel have prepared an 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.
The following table sets forth natural 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
---------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
<S> <C> <C> <C>
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
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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,
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. The
Company estimates that, if all other factors (including the estimated
quantities of economically recoverable reserves) were held constant, a $.10 per
Mcf decline in gas price from that used in the reserve reports would reduce
such present value by approximately $152,000.
PRODUCTION. All of the Company's wells produce primarily natural gas.
The following table sets forth the Company's gas production and sales data
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net production:
Gas (Mcf) 161,995 160,798
Average sales price per unit:
Gas ($/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.
DRILLING ACTIVITY. The Company did not drill or complete any natural
gas wells during 1995 or 1996.
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.
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PROPANE OPERATIONS
The Corporation recently commenced distribution of propane in and
around its area of operations in southwestern Virginia. 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
Corporation plans to expand its customer base in the Counties of Buchanan,
Tazewell and Russell as demand warrants and, in part, through selective
acquisitions. The Propane Company currently serves nine customers.
COMPETITION
The Company competes in the areas of exploration, production,
transportation, marketing and distribution of natural gas with major oil
companies, other independent oil and gas concerns and individual producers and
operators. In the areas of utility services and pipeline operations, the
Company competes with major utility companies and pipeline companies. 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 then the Company likewise are
the beneficiaries of such deregulation. While the Company currently operates
the only natural gas storage facilities in Virginia, it is likely that other
distribution and marketing companies will engage in similar activities. Many
of these competitors have substantially greater financial and other resources
than the Company.
REGULATION
SCC REGULATION. The operations of the Distribution Company are wholly
intrastate and are therefore regulated by the SCC. The SCC regulates the rates
which the Distribution Company can charge to its customers. The rates are set
at levels sufficient to recover the cost of service to its customers including
an approved rate of return. The Distribution Company can apply for revised
rates based on actual costs if its costs are higher than previously anticipated
and conversely the SCC may require a reduction in rates if returns are higher
than anticipated. The Distribution Company believes the rates currently in
effect are adequate to cover the cost of service and achieve the desired rate
of return.
Some of the Storage Company's operations are regulated primarily by
the SCC and the FERC, which has jurisdiction over interstate sales of natural
gas storage. The Storage Company's rates are approved also by the SCC and are
based on the cost of service of the facility which includes an approved rate of
return. The Storage Company can apply for revised rates based on actual costs
if they are higher than previously anticipated and conversely the SCC may
require a reduction in rates if returns are higher than anticipated. The
Storage Company believes the rates currently in effect are adequate to cover
the cost of service and achieve the desired rate of return. The Storage
Company's gathering systems are exempt from regulation.
The Company's Saltville Facility will be similarly regulated by the
SCC and the FERC. The Pipeline Company will own and operate the Saltville
Facility.
The Pipeline Company's P-25 pipeline from Saltville to Radford will
also be regulated by the SCC. In January 1997 the Pipeline Company filed an
application with the SCC for a Certificate of Public Convenience and Necessity
to operate the pipeline.
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The Company's gathering and propane distribution facilities are not
subject to service or rate regulation from the SCC.
FERC REGULATION. The Company's gathering facilities are not subject
to service or rate regulation from the FERC. The FERC has issued limited
jurisdiction certificates to the Storage Company and the Pipeline Company
authorizing these companies to engage in the sale, transportation (including
storage), or assignment of natural gas that is subject to FERC's jurisdiction
under the Natural Gas Act, and to charge rates for its services equal to the
intrastate rates approved by the SCC.
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 Air Control Board. The Virginia Clean Air Act
restricts emissions from wells, pipelines and processing plants, and the
Virginia Air Control Board 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 Secretary of the 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 protections 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.
TITLE TO PROPERTIES
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.
The Storage Company's titles to properties comprising the Early Grove
Field are derived from its ownership of mineral leasehold rights and surface
easements. The Early Grove Field is served by the Storage Company which holds
a 60% interest in the Haysi gathering system and serves as operator.
The Company's title to properties comprising the Saltville Facility is
derived from a ten-year oil and gas lease from the Industrial Development
Authority of the town of Saltville, and the Counties of Washington and Smyth,
Virginia as well as from a separate Deed from the Industrial Development
Authority of the town of Saltville. The oil and gas lease and Deed provide
the Company with rights to drill for and produce oil and gas, rights to use
any facilities for natural gas storage use and rights to remove salts to
create cavities for natural gas storage. The oil and gas
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lease and Deed encompass approximately 11,000 acres of storage rights in
Washington and Smyth Counties, Virginia.
The Company's proposed pipeline, gathering systems and distribution
systems are situated on land not owned by the Company but as to which the
Company and its Subsidiaries and Affiliates have easements or licenses from the
landowners permitting the use of such land for the construction and operation
of pipeline facilities. The Company has received and intends to receive
franchises, permits and other authorizations to construct and operate pipeline,
gathering systems and distribution systems within the jurisdiction of various
cities, counties and other governmental agencies and jurisdictions, as well as
along and across waterways and rights-of-way for federal, state, county and
city highways, streets and roads.
EMPLOYEES
As of December 31, 1996, the Company, its subsidiaries and affiliated
companies employed 35 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.
ITEM 2. PROPERTIES
See Item 1 for a discussion of properties and locations and Note 8 of
Notes to the Consolidated Financial Statements contained in Part II, Item 7 for
a discussion of any liens or encumbrances.
ITEM 3. LEGAL PROCEEDINGS
There is no pending nor, to the knowledge of the Company, any
threatened litigation against the Company or its Subsidiaries or Affiliates
which could have a material adverse effect on their financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
APPROXIMATE NUMBER OF STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Stockholders of
Record as of December 31,
Title of Class 1996
<S> <C>
Common stock, par value $.001 875
Warrants to purchase common stock 26
</TABLE>
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The Common Stock of the Company is listed on the Nasdaq SmallCap
Market exchange under the symbol VGCO. The high and low closing sales prices,
compiled from quotations supplied by the Nasdaq Monthly Statistical Report, and
the dividends paid per share, were as follows for the fourth quarter 1996:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fourth quarter 7 3/4 6 1/2
</TABLE>
At its regularly scheduled meeting held on November 18, 1996, the
Board of Directors declared a quarterly dividend of $.01 per share, payable
January 7, 1997, to all shareholders of record on December 15, 1996.
At its regularly scheduled meeting held on January 15, 1997, the Board
of Directors declared a quarterly dividend of $.0125 per share, payable
February 15, 1997, to all shareholders of record on January 31, 1997.
The Company paid cash dividends on its Common Stock for each of the
years 1992 through 1995. There is no assurance that the Board of Directors of
the Company will authorize the Company to continue to pay cash dividends on its
Common Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 contained in Part II, Item
7.
GENERAL
The Company derives revenues from its storage, exploration, production
and gathering operations. From its 50% investments in the Storage Company and
the Distribution Company, the Company derives earnings from the storage,
gathering and distribution operations of these companies.
In its storage business, the Company receives fees for use of its
storage space in addition to injection and withdrawal fees for the use of
compression facilities, collectively referred to as storage revenues. Storage
charges to customers are in accordance with storage rates included in its
tariff filed with the Virginia State Corporation Commission.
In its exploration and production business, the Company receives
revenues from the sale of its natural gas production. The Company also
receives revenues from the operation of natural gas facilities. These revenues
include fees for marketing gas on behalf of the working interest partners and
operations fees for general operating duties related to producing wells. In
its natural gas gathering business, revenues are generated from its ownership
interest in gathering pipelines for natural gas traveling through its gathering
systems.
For those facilities built and operated on behalf of joint venture
partners, the Company manages the construction, drilling, development and
operation of the facilities and receives project management fees.
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In its storage business, the Storage Company receives fees for use of
its storage space in addition to injection and withdrawal fees for the use of
compression facilities, collectively referred to as storage revenues. Storage
charges to customers are in accordance with storage rates included in its
tariff filed with the Virginia State Corporation Commission.
In the Storage Company's unregulated natural gas gathering business,
revenues are generated from its ownership interest in gathering pipelines for
natural gas traveling through its gathering systems. The Storage Company also
provides unregulated winter gas supply services.
In its distribution operations, the Distribution Company's gross
profits are realized by the difference between the prices at which it purchases
and the prices at which it sells natural gas to its industrial, commercial and
residential customers. The prices at which the Distribution Company sell
natural gas to its customers are in accordance with the rate schedules in its
tariff filed with the Virginia State Corporation Commission. The Distribution
Company purchases natural gas under short-term contracts which reflect the
market price of natural gas.
RESULTS OF OPERATIONS FOR YEARS 1996 AND 1995
NATURAL GAS STORAGE
Storage revenues from the Saltville facility totaled $769,000 in 1996.
Initial injections of customer natural gas into the facility occurred in August
1996. Contracted storage capacity for the 1996 contract year totals 583,000
MMBtu, consisting of 10-day, 60-day and 90-day service. Of the storage
capacity leased to third parties for the 1996 contract year, 10-day service
comprised 59%, 60-day service comprised 10% and 90-day service comprised 31% of
contracted volumes.
NATURAL GAS EXPLORATION AND PRODUCTION
Exploration and production revenues for 1996 reflected natural gas
sales of $374,000 and well and pipeline operations income of $278,000. These
gas sales and operations fees accounted for 24% of total Company revenue for
1996. Natural gas sales and operations income for 1995 totaled $603,000.
Revenues for 1995 reflect $176,000 related to the Company's revision of its
method of recording certain exploration and production revenues. See Note 2 of
Notes to the Consolidated Financial Statements. Of this amount, $73,000 is
attributable to natural gas sales, $68,000 consists of operations fees with the
remaining $35,000 consisting of gathering fees.
Most of the Company's activities prior to 1992 were concentrated in
the exploration and production segment, in which the Company organizes and
manages the drilling and operation of natural gas wells in joint ventures with
other gas companies and individuals. As the Company's operations have
diversified in recent years with a concentration in developing its storage and
pipeline operations and in developing the operations of the Storage Company and
the Distribution Company, the impact of the exploration and production segment
on overall Company operations has declined. There were no wells drilled in
1996 or 1995 in these type ventures, compared to four in 1994, one in 1993,
nineteen in 1992 and twenty in 1991.
PROPANE OPERATIONS
The Company began limited distribution of propane to industrial
customers in Buchanan and Tazewell Counties, Virginia in June 1996. The
Company plans to extend its customer base in these counties in addition to
Russell County as demand warrants and, in part, through selective acquisitions.
Propane sales totaled $47,000 in 1996.
13
<PAGE> 14
PROJECT MANAGEMENT REVENUES
Project management revenues totaled $321,000 in 1996 as compared to
$757,000 in 1995. Revenues related to the operations of joint venture
facilities including operations performed for the Storage Company and
Distribution company totaled $202,000 and $275,000, respectively, in 1996 and
1995. The Company also provided management services for the Storage and
Distribution Companies during 1996 and 1995. These services performed included
financial, marketing, treasury and administrative services. Fees for these
services totaled $119,000 and $204,000 in 1996 and 1995. Management revenues
related to the development of the Saltville facility totaled $278,000 in 1995.
INTEREST INCOME
Interest income in 1996 increased $351,000 to $878,000 from $527,000
in 1995. Interest income is primarily related to the Company's participation
in tax exempt bond offerings offered by the Industrial Development Authorities
of Russell and Buchanan Counties, Virginia. A large portion of the proceeds of
these offerings have been loaned to the Distribution Company and the Storage
Company. The 1996 increase largely reflects interest on the 1995 Buchanan
County tax-exempt bond offering which closed in December 1995. As described
above, a portion of the proceeds from this offering were loaned to the
Distribution Company and the Storage Company. Notes receivable related to
these bond offerings due the Company from the Distribution Company and the
Storage Company totaled $9.5 million at December 31, 1996.
COSTS AND EXPENSES
General and administrative costs for the year ended December 31, 1996
decreased slightly from 1995 reflecting the efforts of the Company during 1996
to shift certain personnel and administrative functions from the corporate
level to the individual operating subsidiary level, including the Storage
Company and the Distribution Company.
Depreciation and amortization expense increased to $387,000 in 1996
from $305,000 in 1995, reflecting recovery of costs for capital projects
recently placed into service. The increase mainly reflects depreciation
expense related to the Saltville storage facility which began injections of
customer working gas in August 1996.
The increase in interest expense of $334,000 to $1,007,000 in 1996
primarily reflects the cost of additional debt incurred in conjunction with the
Buchanan County tax-exempt bond offering completed in December 1995. The
interest rate on the bond issue was 9%. In addition, in conjunction with the
Company's purchase of the interest of its joint venture partner in the
development of the Saltville storage facility, a promissory note for $1,725,000
was issued by the Company as partial consideration (see Note 8 of Notes to the
Consolidated Financial Statements). 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.
INCOME TAXES
As indicated in Note 2 to the Consolidated Financial Statements, the
Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires an asset-and-liability method of
accounting for income taxes. 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. The
14
<PAGE> 15
Company's provision for income taxes as a percentage of income before income
taxes and earnings of affiliated companies was 36% and 23% for the years ended
December 31, 1996 and 1995, respectively.
EQUITY INVESTMENTS
The Company has a 50% ownership interest in the Storage Company and in
the Distribution Company. The Company accounts for its investments in these
companies using the equity method. Earnings from the Company's 50% ownership
in the Storage Company and the Distribution Company increased $73,000 to
$340,000 in 1996 from $267,000 in 1995, reflecting increased combined 1996 net
income of $145,000 for these companies. Following is a discussion of the
operations of the Storage Company and the Distribution Company for 1996 and
1995.
NATURAL GAS STORAGE. Storage revenues from the Early Grove facility
totaled $2.1 million in 1996. This reflects an increase in revenues of
$900,000 over 1995 revenues of $1.2 million, or 74%. This increase is
attributable to an increase in leased storage capacity at Early Grove. The
total contracted storage capacity increased 574,500 MMBtu to 1,560,000 MMBtu
for the 1996 contract year from 985,500 MMBtu for the 1995 contract year.
Contract years vary from customer to customer and do not correspond to calendar
years.
Of the storage capacity leased to third parties for the 1996 contract
year, 60-day service comprised 11%, 90-day service comprised 48% while 150-day
service comprised the remaining 41% of total contracted volumes. For the 1995
contract year, 60-day service comprised 18% of total contracted volumes, 90-day
service comprised 57% while 150-day and interruptible service comprised the
remaining 25% of total contracted volumes.
NATURAL GAS GATHERING. Gathering revenues totaled $378,000 in 1996,
reflecting a decrease of $159,000 from 1995 gathering revenues of $537,000.
This decrease partially reflects a decrease in system throughput during 1996 of
163,320 MMBtu. In addition, $110,000 of 1995 revenue reflects the Storage
Company's revision of its method of recording certain gathering revenues. See
Note 2 of Notes to the Storage Company's Financial Statements. The revision is
also reflected in operating and maintenance expenses, where $44,000 in expenses
related to the Storage Company's gathering facilities are reflected as a result
of the revision.
In addition to storage-service and gathering revenues, during 1996 and
1995 the Storage Company has provided natural gas to certain of its storage
customers during the peak winter service periods. Revenues from winter service
sales totaled $1.1 million in 1996 compared to $888,000 in 1995. Purchased gas
expenses related to these sales totaled $974,000 and $681,000 for 1996 and
1995, respectively.
NATURAL GAS DISTRIBUTION. Distribution revenues increased to $629,000
in 1996 from $556,000 in 1995, an increase of 13%. This increase is partially
due to an increase in residential and commercial customers, reflecting 1996
expansions of distribution facilities in Russell and Buchanan Counties. The
increase also reflects an increase in the average sales price for industrial
customers to $5.30 per MMBtu in 1996, compared to $4.44 per MMBtu for these
customers in 1995.
15
<PAGE> 16
Sales volume for 1996 totaled 113,378 MMBtu, a decrease of 4,456 MMBtu
from 1995 sales volumes of 117,834 MMBtu. Volume usage by the Distribution
Company's industrial customers decreased to 94,591 MMBtu in 1996 from 103,527
MMBtu in 1995, reflecting primarily the curtailment of gas service to certain
customers with interruptible service contracts for a period of several days
during February 1996. Commercial and residential usage increased 4,480 MMBtu
to 18,787 MMBtu in 1996 from 14,307 MMBtu in 1995. The average sales price per
MMBtu increased to $5.53 in 1996 from $4.72 in 1995. Purchased gas costs
related to these sales totaled $330,000 and $234,000 in 1996 and 1995,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
During 1996, Statements of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," and No. 123, "Accounting for Stock-Based Compensation,"
became effective for and were implemented by the Company. There was no
material impact on the Company's financial position or results of operations as
a result of the implementation of these pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
The Company's working capital decreased to a $.4 million deficit at
December 31, 1996 from a $.2 million deficit at December 31, 1995. Cash
decreased to $1.7 million at December 31, 1996 compared to $2.1 million at
December 31, 1995 as cash used in operations and investing activities exceeded
cash provided by financing activities. The Company's current ratio at December
31, 1996 decreased to .87 from .94 at the end of 1995.
The combined working capital of the Storage Company and the
Distribution Company decreased to a $.6 million deficit from a $1.9 million
surplus at December 31, 1995. The combined current ratio of these companies at
December 31, 1996 decreased to .8 from 2.3 at the end of 1995.
INVESTING AND FINANCING ACTIVITIES
The Company's cash requirements in the past have been net out of cash
generated from operations and 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.
Capital investments of $11.6 million in 1996 reflect primarily the
development of the Saltville storage facility ($10.3 million) and the P-25
pipeline project ($.9 million).
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. Net proceeds realized
from the offering approximated $8 million. The common stock of the Company is
listed on the Nasdaq SmallCap Market exchange and trades with the symbol
"VGCO."
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.
16
<PAGE> 17
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.
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
these sales totaled $496,000.
The Company's material capital expenditure commitments for 1997 are
expected to include $7.8 million for the development of the P-25 intrastate
pipeline and $1.1 million for continued development of the Saltville storage
facility. The Distribution Company expects to spend $2.5 million in 1997
expanding its distribution service to the town of Lebanon. Funding for these
commitments will be obtained from a portion of the proceeds of the October 1996
initial public offering, a portion of the proceeds from the February 1997
issuance of tax-exempt bonds by the Industrial Development Authority of Russell
County, Virginia, proceeds from additional borrowings and/or a secondary
offering of the Company's common stock and operating cash flows of the Company.
17
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
VIRGINIA GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 19
Consolidated Balance Sheets as of December 31, 1996 and 1995 20
Consolidated Statements of Income for the years ended December 31, 1996 and 1995 21
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995 22
Consolidated Statements of Cash Flows for the two years ended December 31, 1996 23
Notes to Consolidated Financial Statements 24
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Company:
We have audited the accompanying consolidated balance sheets of Virginia Gas
Company and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. 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 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
19
<PAGE> 20
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,652,838 $ 2,132,614
Accounts receivable 1,073,276 892,373
Notes receivable 114,556 127,886
Other current assets 134,862 201,582
------------- -------------
Total current assets 2,975,532 3,354,455
PROPERTY AND EQUIPMENT, net 16,343,480 4,029,137
INVESTMENT IN AFFILIATED COMPANIES 4,243,020 3,903,093
NOTES RECEIVABLE - AFFILIATED COMPANIES 9,371,062 9,485,953
INVESTMENT IN JOINT VENTURE - 1,016,682
OTHER ASSETS 577,309 566,344
------------- -------------
Total assets $33,510,403 $22,355,664
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 250,000 $ 582,212
Current portion of long-term debt 1,244,490 270,678
Accounts payable 1,197,555 2,175,732
Funds held for future distribution 544,475 383,870
Other current liabilities 168,709 139,169
------------ ------------
Total current liabilities 3,405,229 3,551,661
LONG-TERM DEBT 12,137,729 12,885,761
DEFERRED INCOME TAXES 629,914 488,318
------------- -------------
Total liabilities 16,172,872 16,925,740
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock - No par, 2,000 shares authorized, issued,
and outstanding 1,725,000 1,725,000
Common stock - par value $.001, 10,000,000 shares authorized,
3,150,744 shares issued and outstanding as of December 31,
1996; no par value, 735,686 shares issued and outstanding
as of December 31, 1995 3,151 2,288,741
Additional paid-in capital 14,152,137 275,000
Retained earnings 1,457,243 1,141,183
------------- -------------
Total stockholders' equity 17,337,531 5,429,924
------------- -------------
Total liabilities and stockholders' equity $ 33,510,403 $ 22,355,664
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
20
<PAGE> 21
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
REVENUE:
Operating revenue $ 1,772,970 $ 1,493,813
Interest and other income 996,748 529,597
------------- ------------
2,769,718 2,023,410
------------- ------------
EXPENSES:
Production expenses 105,910 65,029
Purchased gas expense 28,537 -
Operation and maintenance expense 173,445 -
Depreciation, depletion, and amortization 387,116 305,216
General and administrative 645,673 708,191
------------- ------------
1,340,681 1,078,436
------------- ------------
OTHER EXPENSE:
Interest 1,006,800 673,251
Other 2,771 2,752
------------- ------------
1,009,571 676,003
------------- ------------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES AND INCOME TAXES 419,466 268,971
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 339,927 267,484
------------- ------------
INCOME BEFORE INCOME TAXES 759,393 536,455
PROVISION FOR INCOME TAXES 151,827 62,581
------------- ------------
NET INCOME $ 607,566 $ 473,874
============= ============
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 347,566 $ 428,374
============= ============
NET INCOME PER COMMON SHARE $ .21 $ .62
============= ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
21
<PAGE> 22
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED ADDITIONAL RETAINED
STOCK COMMON STOCK PAID-IN CAPITAL 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
========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
22
<PAGE> 23
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 607,566 $ 473,874
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 387,116 305,216
Undistributed earnings of affiliated companies (339,927) (267,484)
Deferred income taxes 141,596 27,693
Increase in accounts receivable (180,903) (322,611)
Decrease (increase) in other current assets 66,720 (90,136)
Decrease in other assets 20,477 78,359
(Decrease) increase in notes payable (332,212) 582,212
(Decrease) increase in accounts payable (978,177) 1,692,954
Increase (decrease) in other current liabilities 190,145 (4,119)
------------ -----------
Net cash provided by (used in) operating
activities (417,599) 2,475,958
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,803,768) (1,314,286)
Issuance of notes receivable, net - (3,721,911)
Payments received on notes receivable 128,221 16,838
Investment in joint venture - (1,016,682)
------------ -----------
Net cash used in investing activities (9,675,547) (6,036,041)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (2,731,952) (181,222)
Proceeds from new loans 1,100,000 3,750,000
Proceeds from issuance of common stock, net 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 (54,719) (382,399)
Establishment of financing reserve funds - (46,244)
Dividends paid (291,506) (257,930)
------------ -----------
Net cash provided by financing activities 9,613,370 4,598,205
------------ -----------
NET INCREASE (DECREASE) IN CASH (479,776) 1,038,122
CASH, beginning of year 2,132,614 1,094,492
------------ -----------
CASH, end of year $ 1,652,838 $ 2,132,614
============ ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 1,282,705 $ 656,833
============ ===========
Income taxes paid $ 26,158 $ 95,830
============ ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
23
<PAGE> 24
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Company (the "Company") was organized in 1987 under the laws of
the state of Delaware. The Company is an integrated natural gas company, with
its storage, distribution, transmission and exploration operations located
primarily in the southwestern counties of the Commonwealth of Virginia. All
operations of the Company are components of the natural gas industry.
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.
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).
Combined financial information as of December 31, 1996 and 1995, and for the
years then ended, for investments in affiliated companies accounted for by the
equity method is as follows.
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Current assets $ 2,386,057 $ 3,634,206
Property and equipment, net 16,079,543 11,652,334
Other assets 4,917,958 5,173,286
------------ -----------
$23,383,558 $20,459,826
============ ===========
Current liabilities $ 2,941,557 $ 1,765,719
Long-term debt payable to:
Affiliated companies 11,390,406 11,025,263
Third parties 13,870 23,448
Other liabilities 551,686 339,210
Stockholders' equity 8,486,039 7,306,186
------------ -----------
$23,383,558 $20,459,826
============ ===========
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Revenues $ 5,008,509 $ 3,498,236
Income before income taxes 1,030,079 821,876
Net income 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.
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, 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.
25
<PAGE> 26
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.
OTHER ASSETS
In conjunction with 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 land owners. 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.
26
<PAGE> 27
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Trade receivables $ 451,436 $352,680
Lease operating expenses receivable 145,528 143,349
Joint-interest receivables 64,098 32,798
Due from affiliated companies 412,214 363,546
------------ ---------
$1,073,276 $892,373
============ =========
</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.
4. NOTES RECEIVABLE - AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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. 2,567,837 2,642,810
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. 1,284,833 1,300,000
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. 1,018,580 1,030,603
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. 892,457 918,515
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
------------ ------------
9,485,618 9,613,839
Less- Current portion (114,556) (127,886)
------------ ------------
$9,371,062 $9,485,953
============ ============
</TABLE>
27
<PAGE> 28
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Storage properties $11,311,486 $ -
Pipelines 2,338,410 677,925
Producing properties 2,494,370 2,183,871
Wells, pipelines, and storage properties in
progress 588,643 1,507,900
Vehicles 217,955 171,325
Propane facilities 165,756 -
Building and improvements 150,898 135,966
Office equipment 221,685 134,245
Well and pipeline equipment 32,093 31,882
------------ ------------
17,521,296 4,843,114
Less- Accumulated depreciation, depletion,
and amortization (1,177,816) (813,977)
------------ ------------
$16,343,480 $ 4,029,137
============ ============
</TABLE>
6. INVESTMENT IN JOINT VENTURE:
Prior to February 29, 1996, the Company, in conjunction with a joint venture
partner, was developing property in Saltville, Virginia, for use as a high
rate, peaking storage facility. The Saltville facility will use caverns
created in underground salt beds to store gas and is being designed to have an
initial storage capacity of 450,000 MMBtu of working gas. The Company owned 50
percent of the joint venture and received a fee as compensation for management
services provided during development of the project. The Company accounted for
its investment using the equity method. On February 29, 1996, the Company
purchased the interest of its joint venture partner and consolidated the entity
as of that date. The Company continues to develop the property. (See Note 8
for a discussion of the financing of this purchase.) Operations at the
Saltville facility commenced in August 1996.
7. OTHER ASSETS:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred financing costs $ 455,350 $ 453,858
Restricted cash and investments- reserve funds 116,809 109,612
Other 5,150 2,874
------------ ------------
$ 577,309 $ 566,344
============ ============
</TABLE>
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
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. 4,110,000 4,230,000
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. 2,717,917 2,750,000
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
$137,370 as of December 31, 1996 107,283 112,639
Note payable with interest at 9%; interest payable in semiannual
installments, maturing October 2024 100,000 -
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
December 31, 1996 85,626 -
Note 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 -
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. 395,333 400,000
Note payable to Virginia Gas Storage Company; interest payable at 8%;
balance due December 1997. 70,000 70,000
Notes payable to Virginia Gas Storage Company; interest payable at 8%;
as consideration for the issuance of common stock, due 1997. - 1,720,000
Note payable to Virginia Gas Distribution Company; interest payable at
8.5%; as consideration for the issuance of common stock, due 1997. - 70,641
Notes payable through 2001 with interest from 9% to 10.75%; secured by
assets with a book value of $78,420 as of December 31, 1996. 71,060 53,159
------------ -----------
13,382,219 13,156,439
Less- Current portion (1,244,490) (270,678)
------------ -----------
Long-term debt $12,137,729 $12,885,761
============ ===========
</TABLE>
29
<PAGE> 30
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 is 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 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. 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 is being 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.
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 (see Note 6). 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.
30
<PAGE> 31
9. 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. These
warrants were registered with the initial public offering.
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 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.
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.
31
<PAGE> 32
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.
10. 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
certain members of management upon issuance of additional shares of the
Company's common stock to ensure that these employees' portion of the Company's
outstanding 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.
32
<PAGE> 33
Changes in the options outstanding during the years ended December 31, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES 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
=========
</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.
11. 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.
12. 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.
33
<PAGE> 34
13. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Current:
Federal $ 10,231 $ 30,996
State - 3,892
---------- -----------
10,231 34,888
Deferred:
Federal 124,985 18,176
State 16,611 9,517
---------- -----------
141,596 27,693
---------- -----------
$151,827 $ 62,581
========== ===========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $104,609 $103,339
Net operating loss carryforward 86,910 -
---------- -----------
Total 191,519 103,339
---------- -----------
Deferred tax liabilities:
Capital assets 821,433 591,657
---------- -----------
Net deferred tax liabilities $629,914 $488,318
========== ===========
</TABLE>
The Company has no valuation allowances as of December 31, 1996 and there were
no changes in the valuation allowance during the years ended December 31, 1996
or 1995.
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>
1996 1995
---------- -----------
<S> <C> <C>
Tax at statutory rate of 34% $258,194 $182,395
Equity in earnings of affiliated companies (115,576) (90,945)
State income taxes, less Federal benefit 10,963 7,030
Statutory depletion in excess of cost
depletion (26,693) (19,837)
Other, net 24,939 (16,062)
---------- -----------
$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.
34
<PAGE> 35
14. 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.
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>
35
<PAGE> 36
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 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, 1994 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>
36
<PAGE> 37
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
------------- ------------
(Unaudited)
<S> <C> <C>
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
------------- ------------
(Unaudited)
<S> <C> <C>
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 1,738,986 383,549
Beginning of year 1,108,937 725,388
------------- -------------
End of year $2,847,923 $1,108,937
============= =============
</TABLE>
37
<PAGE> 38
15. 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 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. The President's bonus for 1996 was $50,000. If the President is
terminated by the Company for any reason other than for cause during 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
(378,663 shares as of December 31, 1996) 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.
16. SUBSEQUENT EVENT:
In February 1997, the Russell County Authority 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 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. Principal payments of $275,000 to
$1,115,000 are due from 2003 to 2017.
38
<PAGE> 39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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
Mark N. Witt 38 Vice President of Strategic Planning
Frank A. Merendino, Jr. 36 Vice President of Operations
John D. Jessee 36 Vice President and Chief Financial Officer
Allan R. Poole, II 50 Vice President and Director
Lydia J. Sinemus 26 Vice President
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. He also serves as
President of each of the Subsidiaries and Affiliates. From 1983 to 1986 Mr.
Edwards served as Executive Vice President and Director of Petroleum
Development Corporation. He 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.
She also serves as Vice President and Secretary of each of the Subsidiaries and
Affiliates. She is the wife of Michael L. Edwards.
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.
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.
39
<PAGE> 40
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.
ALLAN R. POOLE, II. Mr. Poole has served as Vice President of the
Company since April 1996 and as a Director since September 1996. He served as
Vice President of Penn Virginia Resources Corporation from 1989 to 1995. From
1978 to 1989 Mr. Poole was employed as regional manager of Cabot Oil & Gas
Corporation. He was employed as a senior landman by Consolidated Gas Supply
Corporation from 1971 to 1978.
LYDIA J. SINEMUS. Ms. Sinemus was elected as a Vice President of the
Company in September 1996. She has been with the Company since February 1993.
Ms. Sinemus graduated in 1992 from East Tennessee State University with a B.S.
in Geology and is currently working toward a Masters degree in Environmental
Science.
PETER C. EINSELEN. Mr. Einselen has served as a Director of the
Company since May 1996. He has served as Senior Vice President of Anderson &
Strudwick, Inc. since 1990. From 1983 to 1990, Mr. Einselen was employed by
Scott & Stringfellow, Inc., Richmond, Virginia. He has been a member of the
Board of Directors of American Industrial Loan Association since 1992.
CHARLES A. MILLS, III. Mr. Mills has served as a Director of the
Company since September 1996 and has been employed by Anderson & Strudwick,
Inc. as a Senior Vice President since 1986. He served as Chairman of the Board
of Anderson & Strudwick, Inc. from 1990 to 1992 and 1994 to the present. He
has served as a director of Humphrey Hospitality Trust, Inc. since 1994.
40
<PAGE> 41
ITEM 10. EXECUTIVE COMPENSATION
The following table presents information concerning the annual and
long-term compensation of the executive officers of the Company. This table
presents compensation for services rendered in all capacities to the Company in
1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY (1) BONUS (1) OPTIONS (2) COMPENSATION (3)
<S> <C> <C> <C> <C> <C>
Michael L. Edwards 1996 $150,000 $ 727 - $ 2,889
President/Chief 1995 $150,000 - - $ 1,524
Executive Officer 1994 $102,086 $ 20,661 - $ 3,000
Mark N. Witt 1996 $ 82,500 $ 655 19,764 $ 8,033
Vice President of 1995 $ 82,500 $ 22,297 50,240 $ 1,913
Strategic Planning 1994 $ 41,490 $ 735 14,650 $ 352
Frank A. Merendino, Jr. 1996 $ 82,500 $ 26,429 - $ 6,496
Vice President 1995 $ 82,500 $ 16,382 - $ 422
of Operations 1994 $ 75,000 $ 8,728 - $ 1,174
John D. Jessee 1996 $ 82,500 $ 25,628 - $ 7,074
Vice President 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) See below for a description of outstanding options to purchase the
Company's Common Stock.
(3) Amounts shown include Company contributions to a 401(k) Savings Plan,
vehicle allowances and directors fees.
Mark N. Witt, an officer of the Company, pursuant to an employment
agreement dated January 16, 1995 and approved by the Company's Board of
Directors on June 20, 1995, was granted an option to purchase 2% of the
Company's outstanding Common stock at an exercise price of $8.72 per share.
The option expires June 13, 1999.
EMPLOYMENT AGREEMENTS
MICHAEL L. EDWARDS. 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 will be $50,000.
41
<PAGE> 42
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.
MARK N. WITT. On January 16, 1995 the Company entered into a two-year
employment agreement with Mr. Witt which provides for an annual salary of
$82,500. Mr. Witt also received a one-time bonus of $15,000, tuition at a
management training course offered by one of the major business schools within
two years, a suitable four-wheel drive vehicle and a club membership. Mr. Witt
also received the options described above.
FRANK A. MERENDINO, JR. On November 21, 1994, the Company entered
into an employment agreement with Mr. Merendino which provides for a base
annual salary of $82,500. Mr. Merendino also received a suitable vehicle and a
club membership. The Company also covers the cost of a $1,000,000 life
insurance policy on Mr. Merendino's life. Mr. Merendino received options to
purchase shares of the Company's common stock which were exercised prior to
December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentages of shares of
common stock held by the owners of more than five percent of the Company's
issued and outstanding common stock as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF
BENEFICIAL OWNER CLASS OWNERSHIP PERCENT OF CLASS
---------------- ----- --------- ----------------
<S> <C> <C> <C>
Dr. James T. Martin Common 800,058 25.39%
Tupenny House
Tuckerstown, Bermuda
Michael L. and Karen K.
Edwards Common 378,663 12.02%
200 East Main Street
Abingdon, Virginia 24210
</TABLE>
42
<PAGE> 43
The following table sets forth the number and percentage of shares of
common stock held by each of the Company's directors and the executive officers
and all executive officers and directors as a group as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF
BENEFICIAL OWNER CLASS OWNERSHIP PERCENT OF CLASS
---------------- ----- --------- ----------------
<S> <C> <C> <C>
Michael L. and Karen K. Common 378,663 12.02%
Edwards
200 East Main Street
Abingdon, Virginia 24210
Allan R. Poole, II Common 57,000 1.81%
1032 Hanover Court
Kingsport, Tennessee 37660
Frank A. Merendino, Jr. Common 30,371 0.96%
135 Douglas Lane
Bristol, Tennessee 37620
Mark N. Witt Common 8,396 0.27%
288 Clubhouse Drive
Abingdon, Virginia 24211
John D. Jessee Common 4,200 0.13%
152 Kennedy Drive
Lebanon, Virginia 24266
Lydia J. Sinemus Common 1,000 0.03%
200 East Main Street
Abingdon, Virginia 24210
Peter C. Einselen Common 5,000 0.16%
1 King Street
St. Augustine, Florida
32084
Charles A. Mills, III Common 2,000 0.06%
3 Commercial Place, Suite
100
Norfolk Southern Tower
Norfolk, Virginia 23510
All executive officers and
directors as a group Common 486,630 15.44%
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Mills, Chairman of the Board of Anderson & Strudwick, Inc.
("A&S"), and Mr. Einselen, Senior Vice President of A&S, both serve as
directors of the Company. Mr. Mills and Mr. Einselen each receive $2,500 for
each quarterly meeting of the Board of Directors they attend.
A&S served as underwriter in the Company's initial public offering of
its common stock, completed in October 1996. In connection with the offering,
A&S received a fee of $735,840.
43
<PAGE> 44
Pursuant to the May 1996 private placement of 800,058 shares of common stock
described herein, A&S received a fee of $348,028.
As additional underwriting compensation, at the completion of the
initial public offering of the Company's stock, the Company sold to A&S, at a
purchase price of $.001 per warrant, warrants to purchase 153,300 shares of the
Company's common stock. The warrants, which may be exercised beginning August
3, 1997, expire on October 4, 2001.
A&S has also served as underwriter for four tax exempt bond issues in
the amounts of $3,000,000, $4,250,000, $3,750,000 and $9,100,000, respectively,
offered by the Industrial Development Authorities of Russell and Buchanan
Counties, Virginia, in which the Company participated. A&S receives a fee
equal to 0.125% of the outstanding principal amount of the bonds.
44
<PAGE> 45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Virginia Gas Company's Registration Statement, Registration No.
333-5362-NY).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to Virginia Gas Company's
Registration Statement, Registration No. 333-5362-NY).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
Virginia Gas Company's Registration Statement, Registration No. 333-5362-NY).
4.2 Warrant to Anderson & Strudwick, Incorporated (incorporated by reference to
Exhibit 4.2 to Virginia Gas Company's Registration Statement, Registration No.
333-5362-NY).
4.3 Shareholder "Lock-Up" Agreement (incorporated by reference to Exhibit 4.3 to
Virginia Gas Company's Registration Statement, Registration No. 333-5362-NY).
9.1 Shareholders' Agreement and Voting Trust (incorporated by reference to Exhibit 9.1
to Virginia Gas Company's Registration Statement, 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 Registration Statement, 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
Registration Statement, 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
Registration Statement, Registration No. 333-5362-NY).
10.4 Employment Agreement between Virginia Gas Company and Frank A. Merendino, Jr.
(incorporated by reference to Exhibit 10.4 to Virginia Gas Company's Registration
Statement, Registration No. 333-5362-NY).
10.5 Employment Agreement between Virginia Gas Company and Mark N. Witt (incorporated
by reference to Exhibit 10.5 to Virginia Gas Company's Registration Statement,
Registration No. 333-5362-NY).
10.6 Employment Agreement between Virginia Gas Company and Michael L. Edwards
(incorporated by reference to Exhibit 10.6 to Virginia Gas Company's Registration
Statement, 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 Registration
Statement, Registration No. 333-5362-NY).
10.8 Firm Gas Storage Agreement between Virginia Gas Storage Company and Roanoke Gas
Company (incorporated by reference to Exhibit 10.8 to Virginia Gas Company's
Registration Statement, Registration No. 333-5362-NY).
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
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 Registration Statement, 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 Registration Statement,
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
Registration Statement, 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 Registration Statement, 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 Registration Statement, 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 Registration
Statement, 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 Registration Statement, 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
Registration Statement, Registration No. 333-5362-NY).
* 10.17 Amendment to Transfer Agreement between Virginia Gas Company and Tenneco Energy
Marketing Company, successor-in-interest to Tenneco Energy Resources Corporation
10.18 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 Registration Statement, Registration No. 333-5362-NY).
10.19 United Cities Contract (incorporated by reference to Exhibit 10.18 to Virginia Gas
Company's Registration Statement, Registration No. 333-5362-NY).
10.20 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 Registration Statement, Registration No. 333-5362-NY).
10.21 Warrant to Shareholders (incorporated by reference to Exhibit 10.20 to Virginia
Gas Company's Registration Statement, Registration No. 333-5362-NY).
* 10.22 Firm Storage Service Agreement between Virginia Gas Storage Company and Sevier
County Utility District
* 10.23 Firm Storage Service Agreement between Virginia Gas Storage Company and Natural
Gas Utility District of Hawkins County
* 10.24 Firm Storage Service Agreement between Virginia Gas Pipeline Company and Citizens
Gas Utility District
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
* 10.25 Firm Gas Storage Agreement between Virginia Gas Pipeline Company and Knoxville
Utilities Board
* 21.1 Subsidiaries and Affiliates of Virginia Gas Company
* 27.1 Financial Data Schedule
* 99.1 Financial Statements of Virginia Gas Storage Company
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
* 99.2 Financial Statements of Virginia Gas Distribution Company
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
</TABLE>
- ------------
* Filed herewith
(b) Reports on Form 8-K
None.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 1997.
VIRGINIA GAS COMPANY
(Registrant)
By /s/ MICHAEL L. EDWARDS
-------------------------------
Michael L. Edwards
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1997.
<TABLE>
<S> <C> <C>
/s/ JOHN D. JESSEE Vice President and Chief Financial Officer
- --------------------------
John D. Jessee
/s/ JAMES R. EDMONDSON Corporate Controller (Principal Accounting Officer)
- --------------------------
James R. Edmondson
/s/ ALLAN R. POOLE, II Vice President and Director
- --------------------------
Allan R. Poole, II
/s/ KAREN K. EDWARDS Corporate Secretary and Director
- --------------------------
Karen K. Edwards
</TABLE>
48
<PAGE> 1
EXHIBIT 10.17
AMENDMENT TO TRANSFER AGREEMENT
THIS AMENDMENT is entered into as of the 16th day of December, 1996,
by and between VIRGINIA GAS COMPANY ("VGC"), a Delaware corporation, and TENNECO
ENERGY MARKETING COMPANY ("TEMC"), a Kentucky corporation and successor-in-
interest to TENNECO ENERGY RESOURCES CORPORATION "TERC"), a Delaware
corporation.
WITNESSETH
WHEREAS, VGC and TERC entered into a certain Transfer Agreement as of
February 29, 1996, pertaining to a certain natural gas storage facility in or
near Saltville, Virginia;
WHEREAS, VGC made and delivered a certain Promissory Note dated
February 29, 1996, payable to the order of TERC in the principal sum of ONE
MILLION SEVEN HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($1,725,000), together with
interest on the unpaid principal as provided therein, pursuant to the terms and
conditions of the Transfer Agreement;
WHEREAS, Section 1.2 of the Transfer Agreement sets forth the
schedule of payments from VGC to TERC, including payments of principal and
interest due under the Promissory Note;
WHEREAS, pursuant to Section 1.2(b)(iv) of the Transfer Agreement, VGC
has elected to pay the remaining principal and interest under the Promissory
Note in installments, rather than in a single payment on December 10, 1996,
with the obligation to pay such installments to be secured by letter of credit
or other form of security acceptable to TERC;
WHEREAS, the parties hereto have agreed to amend the schedule of
payments of remaining principal and interest under the Promissory Note, and
have agreed on an acceptable form of security therefor;
WHEREAS, on October 31, 1996, TERC was merged into CHANNEL INDUSTRIES
GAS COMPANY ("Channel"), a Delaware corporation, thereby causing Channel to
succeed to the interest of TERC under the Transfer Agreement and the Promissory
Note;
WHEREAS, Channel has assigned its interest under the Transfer
Agreement and the Promissory Note to its subsidiary, TEMC;
NOW, THEREFORE, VGC and TEMC hereby agree to amend the Transfer
Agreement by deleting Sections 1.2(b)(iii) and 1.2(b)(iv) in their entirety;
and substituting in lieu thereof the following provisions:
"(iii) $390,000 on or before December 24, 1996
(iv) $243,750 on March 15, 1997;
(v) $243,750 on June 15, 1997;
<PAGE> 2
(vi) $243,750 on September 15, 1997; and
(vii) $243,750 on December 15, 1997.
On or before December 31, 1996, VGC shall provide to TEMC a letter of credit in
form and substance acceptable to TEMC from an issuer acceptable to TEMC,
securing VGC's payment obligations hereunder in the amount of EIGHT HUNDRED
FIFTY THOUSAND DOLLARS ($850,000). After making each of the payments provided
for in (iv), (v), and (vi) above, VGC shall have the option of replacing the
letter of credit then applicable hereto with different letters of credit in the
amounts of $637,500, $425,000, and $212,500, respectively."
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective authorized representatives as
of the day and year first written above.
VIRGINIA GAS COMPANY TENNECO ENERGY MARKETING COMPANY
By: /s/ M.L. EDWARDS By: /s/ WAYNE B. ALLRED
------------------------- -------------------------------
Name: M.L. EDWARDS Name: WAYNE B. ALLRED
----------------------- ----------------------------
Title: President Title: Vice President & Treasurer
---------------------- -------------------------------
<PAGE> 1
EXHIBIT 10.22
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 1 day of July, 1996, by
and between VIRGINIA GAS STORAGE COMPANY, a Virginia corporation, hereinafter
referred to as "VGSC," and SEVIER COUNTY UTILITY DISTRICT, a_______________,
hereinafter referred to as "SCUD."
WITNESSETH
WHEREAS, VGSC 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, SCUD 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, SCUD 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, SCUD has the right to maintain an aggregate
storage quantity of up to 60,000 dth (the "Maximum Storage Quantity," or "MSQ").
VGSC'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. In the event SCUD
cannot inject 60,000 dth prior to October 26, 1996, the MSQ and the MDWQ shall
be proportionately reduced to reflect the actual amounts of gas injected.
1.2 VGSC shall redeliver a thermally equivalent quantity of gas to
SCUD 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
1
<PAGE> 2
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 SCUD's Storage Gas Balance. SCUD may withdraw
during the Withdrawal Period any quantity up to the MDWQ.
ARTICLE 11
CONDITIONS OF SERVICE
2.1 SCUD shall pay VGSC $0.05 per each dth injected and $0.05 per each
dth withdrawn. Subject to the provisions of Section 2.3, SCUD will pay VGSC an
annual storage charge ("Annual Storage Charge") which shall be the product of
$1.86 multiplied by the Maximum Storage Quantity, which fee shall be payable in
twelve (12) equal monthly installments.
2.2 VGSC shall reimburse SCUD for any injected gas that cannot be
withdrawn for delivery to SCUD 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 SCUD'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
------------- -------------
Storage Charge = Contract MSQ X Contract MDWQ X $1.86 X 60,000
SCUD's election to use the storage service at levels below the MSQ and MDWQ
shall not be considered deficiencies in performance.
2.4 SCUD 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
SCUD 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
2
<PAGE> 3
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:
Virginia Gas Storage Company
P.O. Box 2407
120 South Court Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (703) 676-2380, extension 17
Facsimile Machine Number: (703) 676-0151
Sevier County Utility District
P.O. Box 4398
Sevierville, TN 37864-4398
Attention: Phil McMahan
Telephone Number: (423) 453-3272
Facsimile Machine Number: (423) 428-5055
ARTICLE IV
BILLING AND PAYMENT
4.1 On or before the fifteenth (15th) day of each calendar month,
VGSC shall submit to SCUD an invoice for services performed during the
preceding month.
4.2 SCUD shall pay the amounts invoiced by the twenty-fifth (25th) day
of each month in which said invoice is received by SCUD or within ten (10) days
of SCUD's receipt of VGSC's invoice.
4.3 Should SCUD fail to pay all of the amount of any invoice as herein
provided when such amount is due, SCUD 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 SCUD's account until such amount is
paid; provided, however, that if SCUD, in good faith, disputes
3
<PAGE> 4
the amount of any such invoice or part thereof and pays to VGSC such amounts as
SCUD 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 judgement 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.
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 VGSC retains a landlord's lien
against the personal property of SCUD 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, 2006 (the "Termination Date") and
shall continue and remain in force and effect for successive terms of one (1)
year each hereafter unless and until cancelled 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
4
<PAGE> 5
6.1 SCUD 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 SCUD 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 SCUD 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
judgements (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 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,
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 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 SCUD (by fax, phone
5
<PAGE> 6
or other means) and SCUD 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 SCUD 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 2.1 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.
ARTICLE VIII
OPERATIONAL FLOW ORDERS
8.1 SCUD 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 for VGSC's operations; (c)
to alleviate operational problems arising from overdeliveries or
underdeliveries by SCUD in violation of this Agreement; and (d) to prevent
damage to a storage field.
8.2 Upon the issuance of an OFO, SCUD 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 SCUD 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.
6
<PAGE> 7
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 SCUD 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.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above by the parties' duly authorized officers.
Attest: SEVIER COUNTY UTILITY DISTRICT
/s/ ROSALIE MCNEILLY By: /s/ PHIL Y. McCAHAN
- ---------------------------- ----------------------------------
Its: General Manager
---------------------------------
Attest: VIRGINIA GAS STORAGE COMPANY
/S/ JOHN D. JESSE By: /s/ M.L. EDWARDS
- ---------------------------- ----------------------------------
Its: President
---------------------------------
7
<PAGE> 8
EXHIBIT A
to that certain Gas Storage Agreement dated July 1, 1996 by and
between
SEVIER COUNTY UTILITY DISTRICT
and
VIRGINIA GAS STORAGE COMPANY
Delivery Points:
1. Early Grove receipt/delivery point, Washington County, VA. For
injections: ETNG Meter Number 759147; for withdrawals: ETNG Meter
Number 759009.
2. Saltville receipt/delivery point, Smyth County, Virginia. For
injections, ETNG Meter Number 759766; for withdrawals, ETNG Meter
Number 759777.
3. Dickenson #2 receipt point, Dickenson County, Virginia for
withdrawals only, ETNG Meter Number 759321.
Maximum Daily Injection Quantity, in dth:
333 when SCUD's Storage Gas Balance is less than one half the MSQ.
272 when SCUD's Storage Gas Balance is more than one half the MSQ.
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:
1,000
Withdrawal Period runs from December 1 through February 28 of each year.
Withdrawals may be made from November 1 to November 30, and from March 1
through April 30 of each year on a best efforts, interruptible basis.
8
<PAGE> 1
EXHIBIT 10.23
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 9 day of September,
1996, by and between VIRGINIA GAS STORAGE COMPANY, a Virginia corporation,
hereinafter referred to as "VGSC," and NATURAL GAS UTILITY DISTRICT OF HAWKINS
COUNTY, a public utility district of the State of Tennessee, hereinafter
referred to as "Hawkins."
WITNESSETH
WHEREAS, VGSC 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 VGSC'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 180,000 dth (the "Maximum Storage Quantity," or
"MSQ"). VGSC'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 redeliver a thermally equivalent quantity of gas to
Hawkins 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
<PAGE> 2
be made without adverse effect upon withdrawals of other Customers or to VGSC'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.
ARTICLE II
CONDITIONS OF SERVICE
2.1 Hawkins shall pay VGSC $0.05 per each dth injected and $0.05 per
each dth withdrawn. Subject to the provisions of Section 2.3, Hawkins 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 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, 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
---------- -------------
Storage Charge = Contract MSQ X Contract MDWQ X $1.50 X 180,000
Hawkins's 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 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 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 VGSC shall be performed by East Tennessee Natural
Gas Company.
<PAGE> 3
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:
Virginia Gas Storage Company
P.O. Box 2407
120 South Court Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (703) 676-2380, extension 17
Facsimile Machine Number: (703) 676-0151
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, VGSC
shall submit to Hawkins an invoice for services performed during the preceeding
month.
4.2 Hawkins shall pay the amounts invoiced by the twenty-fifth (25th)
day of each month in which said invoice IS received by Hawkins or within ten
(10) days of Hawkins' receipt of VGSC'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 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
<PAGE> 4
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 VGSC such amounts as Hawkins 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 judgement 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.
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 VGSC 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 April 30, 2006 (the "Termination Date") and
shall continue and remain in force and effect for successive terms of one (1)
year each hereafter unless and until cancelled 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.
<PAGE> 5
ARTICLE VI
INDEMNITY
6.1 Hawkins 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 Hawkins 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 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
judgements (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 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,
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
<PAGE> 6
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 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 VGSC, or
VGSC 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 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 2.1 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.
ARTICLE VIII
OPERATIONAL FLOW ORDERS
8.1 Hawkins 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 for VGSC'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
<PAGE> 7
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 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 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.
10.5 Hawkins may convert any amount of capacity up to its MSQ to a
different class of service offered by VGSC anytime after April 1, 1997, subject
to capacity availability.
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
VIVIAN SHORTRIDGE By: /s/ TOMMY W. YOUNG
- -------------------- -------------------------------------
Its: General Manager
------------------------------------
Attest: VIRGINIA GAS STORAGE COMPANY
/S/ F.A. MERENDINO By: /s/ M.L. EDWARDS
- -------------------- -------------------------------------
Its: President
------------------------------------
<PAGE> 8
EXHIBIT A
to that certain Gas Storage Agreement dated September 9, 1996 by and
between
NATURAL GAS UTILITY DISTRICT OF HAWKINS COUNTY
and
VIRGINIA GAS STORAGE COMPANY
Delivery Points:
1. Early Grove receipt/delivery point, Washington County, VA. For
injections: ETNG Meter Number 759147; for withdrawals: ETNG Meter
Number 759009.
2. Saltville receipt/delivery point, Smyth County, Virginia. For
injections, ETNG Meter Number 759766; for withdrawals, ETNG Meter
Number 759777.
3. Dickenson #2 receipt point, Dickenson County, Virginia for
withdrawals only, ETNG Meter Number 759321.
Maximum Daily Injection Quantity, in dth:
990 when Hawkins' Storage Gas Balance is less than one half the MSQ.
810 when Hawkins' Storage Gas Balance is more than one half the MSQ.
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. Injections may also be made at a
higher injection rate than above on a best efforts interruptible basis with the
prior consent of VGSC.
Maximum Daily Withdrawal Quantity ("MDWQ"), in dth:
2,000 when Hawkins' Storage Gas Balance is less than or equal to 100
percent of the MSQ, but greater than 25 percent of the MSQ.
1,500 when Hawkins' Storage Gas Balance is less than or equal to 25
percent of the MSQ, but greater than 10 percent of the MSQ.
1,260 when Hawkins' Storage Gas Balance is less than or equal to 10% of
the MSQ.
Withdrawal Period runs from November 1 through March 31 of each year. If VGSC
can physically deliver an MDWQ of 2,000 Dth/day without harm to storage
facilities or without endangering other customers' FSS service, it will deliver
2,000 Dth/day to Hawkins without regard to the above limitations.
<PAGE> 1
EXHIBIT 10.24
FIRM STORAGE SERVICE AGREEMENT
THIS AGREEMENT, made and entered into as of this 7 day of November, 1996,
by and between VIRGINIA GAS PIPELINE COMPANY, a Virginia corporation,
hereinafter referred to as "VGPC," and CITIZENS GAS UTILITY DISTRICT, a public
utility district of the State of Tennessee, hereinafter referred to as
"Citizens."
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, Citizens 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, Citizens 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, Citizens has the right to maintain an aggregate
storage quantity of up to 3,000 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 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
Citizens 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 Citizens' Storage Gas Balance.
Citizens may withdraw during the Withdrawal Period any quantity up to the MDWQ.
<PAGE> 2
ARTICLE II
CONDITIONS OF SERVICE
2.1 Citizens shall pay VGPC $0.05 per each dth injected and $0.05 per
each dth withdrawn. Subject to the provisions of Section 2.3, Citizens 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 Citizens for any injected gas that cannot be
withdrawn for delivery to Citizens 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 Citizens' 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
---------- -----------
Storage Charge = Contract MSQ X Contract MDWQ X $5.64 X 3,000
Citizens's election to use the storage service at levels below the MSQ and MDWQ
shall not be considered deficiencies in performance.
2.4 Citizens 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 Citizens 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> 3
Virginia Gas Pipeline Company
P.O. Box 2407
120 South Court Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (540) 676-2380, extension 17
Facsimile Machine Number: (540) 676-0151
Citizens Gas Utility District
P.O. Box 320
Helenwood, TN 37755
Attention: Mark Boatner
Telephone Number: (423) 569-2170
Facsimile Machine Number: (423) 569-5303
ARTICLE IV
BILLING AND PAYMENT
4.1 On or before the fifteenth (15th) day of each calendar month, VGPC
shall submit to Citizens an invoice for services performed during the preceding
month.
4.2 Citizens shall pay the amounts invoiced by the twenty-fifth (25th)
day of each month in which said invoice is received by Citizens or within ten
(10) days of Citizens' receipt of VGPC's invoice.
4.3 Should Citizens fail to pay all of the amount of any invoice as
herein provided when such amount is due, Citizens 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 Citizens' account until such amount is
paid; provided, however, that if Citizens, in good faith, disputes the amount
of any such invoice or part thereof and pays to VGPC such amounts as Citizens
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 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
<PAGE> 4
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 Citizens 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, 2006 (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 Citizens 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 Citizens 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 Citizens 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.
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.
<PAGE> 5
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 Citizens (by fax, phone or other means) and Citizens 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 Citizens 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.
ARTICLE VIII
OPERATIONAL FLOW ORDERS
8.1 Citizens 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 Citizens in violation of this Agreement; and (d) to
prevent damage to a storage field.
8.2 Upon the issuance of an OFO, Citizens must take the actions set
forth in the OFO, which may include, but are not limited to, reducing its
withdrawals from storage.
<PAGE> 6
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 Citizens 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 Citizens 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.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above by the parties' duly authorized officers.
Attest: CITIZEN GAS UTILITY DISTRICT
By: /s/ FREDDY BISHOP
----------------------------
Its: General Manager
---------------------------
Attest: VIRGINIA GAS PIPELINE COMPANY
By: /s/ M.L. EDWARDS
----------------------------
Its: President
---------------------------
<PAGE> 7
EXHIBIT A
to that certain Gas Storage Agreement dated November 7, 1996 by and between
CITIZENS GAS UTILITY DISTRICT
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:
100 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 VGPC.
Maximum Daily Withdrawal Quantity, in dth:
300 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> 1
EXHIBIT 10.25
[KUB LOGO]
July 26, 1996
Mr. Michael Edwards
Virginia Gas Storage Company
120 South Court Street
Abingdon, Virginia 24210
Dear Mr. Edwards:
Please find enclosed one fully executed original of the Firm Gas Storage
Agreement between Knoxville Utilities Board and Virginia Gas Pipeline Company
dated July 10, 1996.
Sincerely,
/s/ JAMIE RALEY
Jamie Raley
Energy Supply Analyst
<PAGE> 2
FIRM GAS STORAGE AGREEMENT
BY AND BETWEEN
KNOXVILLE UTILITIES BOARD
AND
VIRGINIA GAS PIPELINE COMPANY
Dated: July 10, 1996
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ARTICLE HEADING PAGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II Precedent Events and Regulatory Approvals . . . . . . . . . . . . . . . . . . 3
III Quantity of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
IV Nominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
V Delivery Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VI Conditions of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VII Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
VIII Billing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
IX Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
X Title, Indemnity, and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 12
XI Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
XII Operational Flow Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
XIII Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
XIV Regulatory Bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
XV Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
XVI Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE> 4
GAS STORAGE AGREEMENT
THIS GAS STORAGE AGREEMENT, made and entered into as of this 10 day of
July, 1996, by and between VIRGINIA GAS PIPELINE COMPANY, a Virginia
Corporation, hereinafter referred to as "VGPC," and KNOXVILLE UTILITIES BOARD,
an agency of the City of Knoxville, Tennessee, hereinafter referred to as
"KUB."
WITNESSETH THAT:
WHEREAS, VGPC has undertaken to provide a firm storage service from its
Saltville, Virginia property and desires to provide that service to KUB;
WHEREAS, KUB has requested storage service from said property on a FIRM
basis, in order to facilitate its service to its customers, who are primarily
residential and small commercial gas consumers for whom security of supply is
of the highest priority; and
WHEREAS, VGPC and KUB desire to enter into an agreement providing for
such gas storage service on a firm basis, upon the terms and conditions set
forth herein;
NOW, THEREFORE, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Unless expressly stated otherwise, the following terms as used in this
Agreement shall mean:
1.1 The term "Btu" shall mean British Thermal Unit(s) which shall
mean that amount of heat energy required to raise the temperature of one
avoirdupois pound of water from fifty-nine degrees Fahrenheit (59 degree F) to
sixty-degrees Fahrenheit (60 degree F) at standard atmospheric pressure, as
determined on a dry basis. All prices and charges paid hereunder shall be
computed on a "dry" Btu basis.
1.2 The term "calendar year" shall mean a twelve month period from
January 1 through December 31.
1.3 The term "Contract Year" shall mean the period from November 1 of
a calendar year through October 31 of the following calendar year.
<PAGE> 5
1.4 The term "day" shall mean the period of time beginning at 8:00
a.m., Central Time Zone, on a calendar day and ending at 8:00 a.m., Central
Time Zone, on the following calendar day, or such other definition of "day", as
may change from time to time, set forth in the tariff of East Tennessee Natural
Gas Company ("East Tennessee") on file with the Federal Energy Regulatory
Commission ("FERC") or any successor agency ("East Tennessee Tariff").
1.5 The term "gas" shall include casinghead gas, natural gas from gas
wells, coal bed methane gas, and residue gas resulting from processing
casinghead gas and gas well gas.
1.6 The term "MMBtu" shall mean one million (1,000,000) Btus, and may
be used interchangeably with the terms "Dekatherm" or "Dth".
1.7 The term "month" shall mean the period of time beginning at 8:00
a.m., Central Time Zone, on the first calendar day of each calendar month and
ending at 8:00 a.m., Central Time Zone, on the first day of the following
calendar month, or such other definition of "month", as may change from time to
time, set forth in the East Tennessee Tariff.
1.8 The term "Partial Contract Year" shall mean the period of less
than one year from the Effective Date, if it does not fall on November 1 of a
calendar year, through October 31 of the same or the following calendar year,
as applicable.
1.9 Unless otherwise specified in this Agreement, the term "Party"
shall refer only to KUB or VGPC, and the term "Parties" shall refer to KUB and
VGPC.
1.10 The terms "Storage Inventory" and "KUB's Storage Inventory" shall
mean the volumes of gas being stored by VGPC for the account of KUB at any
particular time pursuant to the provisions of this Agreement, and shall equal
the cumulative volumes of gas that KUB has caused to be delivered to VGPC for
injection into storage, less the cumulative volumes of gas withdrawn from
storage and redelivered by VGPC for ultimate redelivery to KUB (or deemed to be
withdrawn pursuant to Section 6.2.2 hereof), as adjusted upward or downward for
any net volumes VGPC may from time to time allow KUB to exchange with other
customers of VGPC storing gas at Saltville.
1.11 The term "year" shall mean a period of twelve (12) consecutive
months.
- 2 -
<PAGE> 6
ARTICLE II
PRECEDENT EVENTS AND REGULATORY APPROVALS
2.1 Precedent Events - The commencement of the firm storage service
described herein, and all related payments therefor, are predicated upon VGPC
obtaining any necessary Federal Energy Regulatory Commission ("FERC")
authorizations to provide such storage service. VGPC covenants and agrees that
it will promptly take, at its sole expense, such actions as are reasonably
necessary to obtain such authorizations, including making any filings necessary
with the State Corporation Commission of Virginia and FERC, and promptly notify
KUB as of the date all such authorizations are in place. KUB covenants and
agrees that it will not oppose any such filing made by VGPC, provided, however,
that KUB retains all its rights to take any position it deems appropriate on
any VGPC filing subsequent to the initial authorizations hereunder. If (a)
VGPC cannot obtain all necessary authorizations by October 31, 1997, or (b) any
necessary authorization is issued in a manner that is materially adverse to
either Party (including, but not limited to, in a manner that would require a
material change in the rates or terms and conditions of this Agreement), then
either Party may, within sixty (60) days of October 31, 1997 or such issuance,
whichever is applicable, provide the other with thirty (30) days prior written
notice of its intent to terminate this Agreement, and, following such notice,
this Agreement will be of no further force and effect, unless all necessary
authorizations are issued in a form satisfactory to both Parties during said
thirty-day notice period. Upon termination pursuant to this section, should KUB
have any gas already in or remaining in storage, VGPC agrees to purchase KUB's
Storage Inventory for an amount calculated pursuant to Section 2.3 below. VGPC
will make such payment(s) to KUB within ten (10) days of receipt by VGPC of
KUB's invoice detailing the amounts due KUB.
2.2 Effective Date - The "Effective Date" of this Agreement shall be
the first day of the first month following receipt by KUB of notification from
VGPC pursuant to Section 2.1 above that VGPC has received all necessary
authorizations to provide the firm storage service contemplated hereunder.
2.3 Valuation of KUB's Storage Inventory - Upon the termination of
this Agreement pursuant to Section 2.1 above or another provision of this
Agreement, if KUB has any gas remaining in storage pursuant to this Agreement,
KUB's Storage Inventory shall be valued at an amount equal to the volume of
KUB's Storage Inventory, as adjusted upwards for transportation fuel on
Tennessee Gas Pipeline Company ("Tennessee") and East Tennessee, times the sum
of the then current month's Inside FERC Gas Market Report-Tennessee Zone 1
index price per MMBtu plus applicable interruptible transportation charges on
Tennessee and East Tennessee.
- 3 -
<PAGE> 7
2.4 Effect of Virginia Gas Tariff
(a) If, at any time subsequent to the execution of this Agreement,
tariff sheets filed by VGPC are approved by the Virginia State Corporation
Commission and/or FERC and become effective ("VGPC's Gas Tariff"), this
Agreement shall be deemed to be a Firm Storage Service Agreement executed under
VGPC's Rate Schedule FSS or other applicable rate schedule, to the extent
necessary to effectuate the terms and provisions of this Agreement; provided,
however, that it is understood and agreed that, to the extent any provision of
this Agreement conflicts with such Tariff, this Agreement shall be controlling
and shall take precedence over such Tariff. By executing this Agreement, the
Parties further agree that KUB shall be deemed to have satisfied any applicable
requirement(s) in VGPC's Gas Tariff for making a request for service and/or for
demonstrating its creditworthiness.
(b) If, notwithstanding Section 2.4(a) above, any court or regulatory
authority shall hold that VGPC's Gas Tariff takes precedence over this
Agreement or has the effect of altering the rights and obligations of the
Parties as set forth in this Agreement, and KUB believes in good faith that
such alteration or compliance with such Tariff would have a material adverse
effect on KUB, then KUB may in its sole discretion terminate this Agreement
upon ten (10) days prior written notice to VGPC, and, following such notice,
this Agreement will be of no further force and effect, provided, however, that
VGPC may, during such notice period, attempt to revise its Tariff to remove
KUB's objection, and KUB may, in its sole discretion, opt to proceed with the
termination, to delay it, or to rescind it. Upon termination pursuant to this
section, VGPC agrees to purchase KUB's Storage Inventory for an amount
calculated pursuant to Section 2.3 above. VGPC will make such payment to KUB
within ten (10) days of receipt by VGPC of KUB's invoice detailing the amounts
due KUB.
ARTICLE III
QUANTITY OF SERVICE
3.1 Elements of Service
3.1.1 VGPC's Obligations - Subject to the terms and conditions
of this Agreement, and following commencement of service hereunder, VGPC shall
receive for injection on a firm basis into VGPC's Saltville storage facility
("Saltville") for KUB's account a quantity of gas up to KUB's Maximum Daily
Injection Quantity ("MDIQ"), on any day; receive and hold in storage a total
quantity of gas up to KUB's Maximum Storage Quantity ("MSQ"); and on demand
withdraw from KUB's Storage Inventory on a firm basis and deliver to KUB on a
firm basis a quantity of gas up to KUB's Maximum Daily Withdrawal Quantity
("MDWQ"), on any day until KUB's Storage Inventory is depleted and reduced to
zero MMBtu.
- 4 -
<PAGE> 8
3.1.2 KUB's Reservations - KUB shall not at any time be under
any obligation to make any level of injections or withdrawals or to maintain
any level of Storage Inventory, and KUB shall have the sole discretion as to
what levels, if any, of injections, withdrawals, or Storage Inventory to make
or maintain, within the limits of its MDIQ, MDWQ, and MSQ, respectively.
3.2 Injections - KUB's MDIQ for each day shall be 2000 MMBtu per day
in the Contract Year or Partial Contract Year ending October 31, 1997, and 4500
MMBtu per day in each Contract Year thereafter. VGPC, at its sole discretion,
may allow KUB to make injections in excess of 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.
3.3 Withdrawals - KUB's MDWQ for each day shall be 4000 MMBtu per day
in the Contract Year or Partial Contract Year ending October 31, 1997, and 9000
MMBtu per day in each Contract Year thereafter. VGPC, at its sole discretion,
may allow KUB to make withdrawals in excess of 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 the amount of such
wit withdrawals will not exceed KUB's Storage Inventory.
3.4 Storage Capacity - KUB's MSQ shall be 40,000 MMBtu during the
Contract Year or Partial Contract Year ending October 31, 1997, and 90,000
MMBtu in each Contract Year thereafter.
ARTICLE IV
NOMINATIONS
4.1 Monthly Nomination - On or before two business days prior to East
Tennessee's nomination deadline for the next month, KUB will provide VGPC with
a nomination specifying the quantities of gas to be injected and/or withdrawn
under this Agreement for each day during the next month ("Daily Nominated
Quantity"). Such nomination may be in an amount from zero to the MDIQ and/or
MDWQ, as applicable. If KUB makes no nomination, its nomination will be deemed
to be zero.
4.2 Daily and Intraday Adjustments - Upon at least two (2) hours
advance notice to VGPC prior to East Tennessee's nomination deadline for the
next day, or, in the case of intraday adjustments, prior to the effective time
of the adjustment, KUB may adjust its Daily Nominated Quantity upward or
downward to any amount from zero to the MDIQ and/or MDWQ, as applicable.
4.3 Manner of Submitting Nominations - KUB may provide the
nominations or adjustments thereto set forth above in this section either
orally (including by
- 5 -
<PAGE> 9
telephone) or in writing (including by facsimile), but an oral nomination must
be followed by written confirmation within twenty-four (24) hours.
4.4 Appointment of Agent - At any time during the Term of this
Agreement, KUB may appoint an agent to exercise its rights under this
Agreement, including but not limited to making nominations pursuant to this
Article IV, and/or assign its rights under this Agreement to such agent so that
such agent may manage KUB's storage.
ARTICLE V
DELIVERY POINTS
5.1 Delivery Points - The Primary Delivery Point for all gas injected
and withdrawn hereunder shall be the interconnect between the Saltville storage
field and the East Tennessee system located in Smyth County, Virginia. VGPC
will take whatever steps may be necessary, at its own expense, to assure that
this point is a qualified receipt point on East Tennessee for purposes of
making intraday nominations. Upon reasonable notice to KUB and with its
consent, and subject to the availability of transportation to KUB, as
determined by KUB, and provided that VGPC shall bear any incremental expense,
VGPC may deliver gas under this Agreement at any other qualified receipt point
on the East Tennessee system ("Secondary Delivery Points"), provided that such
deliveries shall have the same firm priority status as deliveries to the
Primary Delivery Point. The Primary and Secondary Delivery Points shall be
referred to collectively herein as the Delivery Points.
ARTICLE VI
CONDITIONS OF SERVICE
6.1 Storage Charges - KUB will pay VGPC $0.05 per each MMBtu injected
to and $0.05 per each MMBtu withdrawn from Saltville by or for KUB. KUB will
also pay VGPC an annual storage charge ("Annual Storage Charge") which shall be
the product of the lesser of $5.64 and the maximum applicable rate under VGPC's
Gas Tariff, multiplied by the MSQ applicable to the Contract Year, which fee
shall be payable in twelve (12) equal monthly installments beginning in
November, 1996, or, if the Effective Date is later than November 1, 1996, on a
pro-rated basis beginning on the Effective Date such that the total Annual
Storage Charge for such Partial Contract Year shall be the product of the
lesser of $5.64 and the maximum applicable rate under VGPC's Gas Tariff,
multiplied by the MSQ applicable to such Contract Year times a ratio the
numerator of which shall be the number of months in such Partial Contract Year
and the denominator of which shall be 12. KUB may also begin to make injections
into Saltville prior to the Effective Date and at any time from and after
November 1, 1996, up to its MDIQ. KUB will pay VGPC $0.05 per each MMBtu thus
injected, and VGSC will store such gas volumes in full compliance
- 6 -
<PAGE> 10
with all applicable provisions of this Agreement. KUB will not be liable to
VGPC for any annual storage charge for any such period prior to the Effective
Date.
6.2 Failure to Perform
6.2.1 Injection - If VGPC fails to accept for injection on a
firm basis KUB's adjusted nominations up to the MDIQ on any day, for reasons
other than an event of Force Majeure, then VGPC shall reimburse or credit to
KUB the product of the volumes VGPC failed to inject times the then-effective
rate being charged by Tennessee for interruptible storage, including but not
limited to any charges for injections, withdrawals, and fuel and losses. In
addition, if VGPC has not cured the failure(s) to inject such that KUB does not
have an opportunity to inject on a timely basis its desired volumes, and, as a
result of the failure to inject, KUB's Storage Inventory is subsequently
depleted, then VGPC shall also reimburse or credit to KUB for the volumes VGPC
failed to inject the sum of (i) any reasonable incremental expenses incurred by
KUB in transporting substitute supplies to the interconnect between KUB's
facilities and the pipeline facilities of East Tennessee, (ii) the
differential, if positive, between the cost of the substitute supplies KUB
purchases as a result of the depletion and the value of the gas VGPC failed to
inject (as calculated pursuant to Section 2.3 of this Agreement), (iii) any
reasonable incidental expenses incurred in purchasing substitute supplies, (iv)
any penalties, including but not limited to those imposed by pipelines,
incurred by KUB as a result of VGPC's failure, and (v) a pro rata credit of the
Annual Storage Charge equal to $5.64 times the volumes VGPC failed to inject
divided by 365.
6.2.2 Withdrawal - If VGPC fails to withdraw and deliver to KUB
on a firm basis its adjusted nominations up to the MDWQ on any day, for reasons
other than an event of Force Majeure, then VGPC shall reimburse or credit to
KUB the sum of (i) the value of the gas VGPC failed to withdraw, as calculated
pursuant to Section 2.3 of this Agreement (and KUB's Storage Inventory shall be
reduced by such volumes as if they had been withdrawn), (ii) any reasonable
incremental expenses incurred by KUB in transporting substitute supplies to the
interconnect between KUB's facilities and the pipeline facilities of East
Tennessee, (iii) the differential, if positive, between the cost of the
substitute supplies KUB purchases as a result of the failure and the value of
the gas VGPC failed to withdraw (as calculated pursuant to Section 2.3 of this
Agreement), (iv) any reasonable incidental expenses incurred by KUB in
purchasing substitute supplies, (v) any penalties, including but not limited to
those imposed by pipelines, incurred by KUB as a result of VGPC's failure to
withdraw, and (vi) a pro rate credit of the Annual Storage Charge equal to
$5.64 times the volumes VGPC failed to withdraw divided by 365.
6.2.3 Termination - If VGPC's failure to perform under Sections
6.2.1 or 6.2.2 above on any day exceeds 25 percent of its obligation under the
applicable section (such that its performance falls short of 75 percent of its
obligation), then, in
- 7 -
<PAGE> 11
addition to the remedies prescribed in those sections, such day shall be
counted as a "Failure to Perform Day." If the total number of Failure to
Perform Days exceeds three (3) days in any Contract Year, then KUB shall have
the right, upon 15 days prior written notice, to terminate this Agreement.
6.2.4 Curtailment - If for any reason, including a Force
Majeure event, VGPC is unable to satisfy all of its obligations under this
Agreement, then VGPC agrees to provide to KUB at least a pro rata share (a) of
the total amount VGPC is able to inject into Saltville, based on the ratio of
KUB's firm injection rights to the total firm injection rights into Saltville;
(b) of the total amount VGPC is able to withdraw from Saltville, based on
the ratio of KUB's firm withdrawal rights to the total firm withdrawal rights
out of Saltville; and (c) of the total firm storage capacity available, based
on the ratio of KUB's firm right to storage capacity in Saltville to the total
firm rights to storage capacity in Saltville. At KUB's request, VGPC shall
provide KUB with information necessary to verify that KUB's injections,
withdrawals, and capacity were curtailed in accordance with this Section.
Compliance with this subsection shall not excuse VGPC from any of its other
obligations under this Section 6.2.
6.3 Quality and Pressure
(a) KUB shall insure that gas delivered to VGPC meets the
minimum quality specifications of the East Tennessee Tariff, as they may be
changed from time to time, and such gas shall be deemed to satisfy any
applicable quality specifications in VGPC's Tariff.
(b) VGPC shall insure that gas delivered to KUB at the
Delivery Points meets the minimum quality specifications of the East Tennessee
Tariff, as they may be changed from time to time, and is at a pressure
sufficient to effect delivery into East Tennessee's facilities at such points
against the pressure prevailing therein from time to time.
(c) If (i) the gas delivered to KUB at the Delivery Points
fails to meet the standards concerning quality or pressure set forth in Section
6.3(b) above, and (ii) East Tennessee fails to receive and transport the gas,
then VGPC shall be deemed to have failed to deliver the quantities nominated by
KUB, and shall be subject to the remedies set forth in Section 6.2.2 above.
VGPC shall indemnify and hold KUB harmless for any and all suits, actions,
damages, losses and expenses reasonably incurred by KUB as a result of any
quality deficiency in gas delivered or attempted to be delivered hereunder.
6.4 Measurement - The measurement of quantities for billing purposes,
in MMBtu, delivered to or received from VGPC shall be performed by East
Tennessee.
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ARTICLE VII
NOTICES
7.1 Notices - Notices hereunder shall be directed in writing or, if
initially made by telephone, promptly confirmed in writing, 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:
Virginia Gas Pipeline Company
P.O. Box 2407
120 South Court Street
Abingdon, Virginia 24210
Attention: Michael L. Edwards
Telephone Number: (540) 676-2380
Facsimile Machine Number: (540) 676-0151
Knoxville Utilities Board
514 Bernard Avenue
Knoxville, Tennessee 37921-6206
Attention: Michael L. Bolin
Telephone Number: (423) 594-8170
Facsimile Machine Number: (423) 525-2809
ARTICLE VIII
BILLING AND PAYMENT
8.1 Billing - On or before the fifteenth (15th) day of each calendar
month, VGPC shall submit to KUB an invoice for services performed during the
preceding month.
8.2 Payment - KUB shall pay the amounts invoiced within the later of
the twenty-fifth (25th) day of each month in which said invoice is received by
KUB or ten (10) days of KUB's receipt of VGPC's invoice, unless such date falls
on a Saturday, Sunday, or holiday, in which case KUB shall pay the amounts
invoiced on the next business day. All payments by VGPC to KUB shall be
payable within ten days of receipt by VGPC of KUB's invoice detailing the
method used for calculating the amounts due KUB.
8.3 Late Payment - Should either Party fail to pay all of the amount
of any invoice as herein provided when such amount is due, the non-paying Party
shall pay a charge for late payment which shall be included 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,
N.A. prime
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<PAGE> 13
interest rate plus two percent (2%), but not to exceed the maximum rate
permitted by law, from the date when such payment was due until it is paid,
together with any court costs, reasonable attorneys' fees, and all other
reasonable costs of collection which the Party due payment may incur in
enforcing the terms of this Agreement.
8.4 Remedies and Good Faith Disputes - 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 KUB's account until such amount is paid; provided, however, that if
KUB, in good faith, disputes the amount of any such invoice or part thereof and
pays to VGPC such amounts as KUB concedes to be correct, and, at any time
thereafter within thirty (30) days of a demand made by VGPC, pays the disputed
amount to an independent third party escrow agent with provision for release of
any amounts ultimately found due upon such invoices after a final
determination, which may be reached either by agreement or arbitration, 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 conditions on
such escrow account or there is a subsequent default under the terms of this
Agreement. If the Parties are unable to resolve the dispute within sixty (60)
days of the due date of the invoice, then the matter will be submitted to
arbitration in accordance with Article XV.
8.5 Discrepancies - 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.
8.6 Books and Records - Both Parties hereto shall have the right, at
any and all reasonable times, to examine the books and records of the other
Party, the confidentiality of which they agree to maintain, to the extent
necessary to verify the accuracy of any statement, charge, computation or
demand made under or pursuant to this Agreement or any curtailment under
Section 6.2.4 hereof.
8.7 Source of Payment of Obligations of KUB - Although the
performance of KUB under this Agreement is not excused by a lack of such
revenue, any and all obligations of KUB under this Agreement may be satisfied
solely from the revenues of KUB's Division of Gas.
8.8 Winding-Up Arrangements - Upon the expiration of this Agreement
at the expiration of its term or any extension thereof pursuant to Section 9.1
below, any monies due and owing shall be paid pursuant to the terms hereof, and
KUB shall have the right to withdraw its Storage Inventory within 30 days,
notwithstanding its
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<PAGE> 14
MDWQ. Upon the termination of this Agreement pursuant to any other provision
hereof, any monies due and owing shall be paid pursuant to the terms hereof,
and VGPC shall purchase KUB's Storage Inventory for an amount calculated
pursuant to Section 2.3 above. VGPC will make such payment to KUB within ten
(10) days of receipt of KUB's invoice detailing the amounts due KUB. The
Parties' rights and obligations under this Agreement shall remain in effect
solely for the purpose of complying with this section until the obligations
under this section, including withdrawal by KUB, payment by VGPC, or any
combination thereof, have been fulfilled.
8.9 Credit Standards for KUB - Upon request, KUB will provide to VGPC
copies of KUB's annual financial reports. Pursuant to Section 2.4(a) of this
Agreement, KUB shall be deemed to have satisfied any applicable requirement(s)
in VGPC's Gas Tariff for demonstrating its creditworthiness for service
hereunder. In the event of a default by KUB which continues uncured for thirty
(30) days after written notice to KUB, VGPC shall have the right to make a
written request to KUB for demonstration of its continued creditworthiness and
for KUB to provide VGPC with such security for the performance of KUB's
obligations under this Agreement as is reasonably satisfactory to VGPC (such
security for an amount not to exceed two times the average amount of all
monthly invoices delivered to KUB under this Agreement prior to the date of
VGPC's written request for security).
ARTICLE IX
TERM
9.1 Term - Subject to the provisions hereof, including but not
limited to the satisfaction of the conditions precedent set forth in Article II
above, this Agreement shall be in full force and effect for a primary term from
the date first written above through April 30, 2000 (the "Termination Date"),
and shall continue and remain in full force and effect for successive terms of
one (1) year each thereafter unless and until cancelled by KUB upon one year's
written notice to the other Party prior to the end of the primary term or any
yearly extension thereof, provided that any such cancellation shall take effect
at the end of a Contract Year.
9.2 Right of First Refusal - KUB shall have a right of first refusal
on an amount of storage services up to the quantities set forth in Article III
hereof (including injections, withdrawals, and storage capacity) for a period
of five years after the expiration of the primary term (the "Option Period").
If at any time during the Option Period VGPC wishes to terminate this Agreement
because it has received a bona fide offer from a third party to use said amount
of capacity, VGPC shall give KUB written notice of such offer (an "Option
Notice") and shall make such storage capacity available to KUB on the same
terms and at the same price per MMBtu which is set forth in such bona fide
offer which VGPC is willing to accept. If KUB fails to accept such offer
within a thirty day period (the "Option Exercise Period")
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<PAGE> 15
after receiving the Option Notice, VGPC shall be free to terminate this
Agreement and to make such storage capacity available to the third party.
ARTICLE X
TITLE, INDEMNITY, AND TAXES
10.1 Title - KUB shall at all times hold title to the gas stored
hereunder, and VGPC shall at no time acquire title or any claim to ownership of
such gas. VGPC hereby covenants and agrees that it will not assert any claim
of ownership or otherwise attempt to encumber KUB's gas held in storage. VGPC
hereby further covenants and agrees that it will execute, sign, and deliver at
KUB's request any receipts, instruments, documents, and certifications
confirming KUB's Storage Inventory and purporting to demonstrate that KUB holds
title to the gas in storage, under the Uniform Commercial Code, other state
law, or otherwise, that KUB may reasonably determine are necessary to give
notice to third parties of KUB's exclusive ownership rights to the gas which is
stored hereunder.
10.2 Control - As between the Parties hereto, KUB shall be deemed to
have the exclusive control and possession of the gas until delivered to VGPC at
the Primary Delivery Point and after the gas is redelivered to KUB at a
Delivery Point pursuant to Sections 3.2 and 3.3 hereof. VGPC shall be deemed
to have the exclusive control and possession of the gas after it has been
delivered to VGPC at the Primary Delivery Point, until such time as the gas is
redelivered to KUB at a Delivery Point pursuant to Sections 3.2 and 3.3 hereof.
VGPC shall bear all risk of loss of any volumes of KUB's gas, for any reason
whatsoever, while it is in VGPC's control and possession, including while it is
stored at Saltville.
10.3 Indemnity - The Party in control of the gas will defend,
indemnify and hold the other harmless from and against any and all damage,
injury, losses, claims, causes of action, or judgments (including reasonable
attorneys' fees and expenses), including but not limited to adverse claims to
title or ownership, 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.
10.4 Taxes - VGPC shall be responsible for all taxes, fees, or charges
which are levied by a governmental or regulatory body on the ownership or
operation of the Saltville storage facility. KUB shall be responsible for all
taxes, fees, or charges which are levied by a governmental or regulatory body
on the ownership of its gas stored hereunder.
10.5 Security - VGPC shall provide KUB with copies of its financial
statements on an annual basis. If at any time VGPC (a) admits that it is
unable to pay its debts as they become due, (b) applies for or agrees to the
appointment of a receiver or trustee in liquidation of it or its properties,
(c) makes a general
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<PAGE> 16
assignment for the benefit of creditors, (d) files a voluntary petition in
bankruptcy or a petition seeking reorganization or an arrangement with
creditors under any bankruptcy law, (e) is a party against whom a petition
under any bankruptcy law is filed and such party admits the material
allegations in such petition filed against it, or (f) is adjudicated as
bankrupt under a bankruptcy law, then KUB shall have the right to make a
written request to VGPC to provide KUB with such security for the performance
of VGPC's obligations under this Agreement as is reasonably satisfactory to
KUB, and VGPC shall provide KUB with such security within thirty (30) days
after receipt of KUB's request. If VGPC fails to do so, then KUB may, at its
option, terminate this Agreement upon ten days' prior written notice to VGPC,
or pursue its other remedies at law and equity for VGPC's breach of this
provision, or both. If KUB reasonably believes that any of the events
enumerated in subsections (a)-(f) above is threatened or imminent, KUB shall
further have the right to request relevant financial information from VGPC in
order to evaluate its financial condition, and VGPC shall promptly supply such
information. Upon review of such information, if KUB continues to reasonably
believe that one or more of the events in subsections (a)-(f) is threatened or
imminent, then KUB shall have the rights to request security, terminate this
Agreement, and pursue other remedies specified above.
10.6 Books and Records - VGPC will at all times maintain its books and
records to accurately reflect the volumes of gas held in storage under this
Agreement for KUB, and KUB shall have the right, at any and all reasonable
times, to examine VGPC's books and records to the extent necessary to verify
the accuracy of VGPC's record of KUB's Storage Inventory.
ARTICLE XI
FORCE MAJEURE
11.1 Suspension of Obligations - Subject to the provisions of this
Article XI, 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 delivery,
injection, storage, withdrawal or redelivery of gas, except that it is
expressly understood by KUB and VGPC that the occurrence of an event of Force
Majeure will not excuse VGPC under any circumstances from its obligations under
Article X hereof, or under Section 3.3 hereof for a period in excess of one
month.
11.2 Definition of Force Majeure - Events of Force Majeure shall
include, by way of illustration, but not limitation: acts of God, strikes,
lockouts or other industrial disturbances, acts of public enemy, wars,
insurrections, floods, and the operation of Governmental Authority (other than
at the request of the Party claiming inability to perform), earthquakes and
fires, and breakage of VGPC's pipelines by third parties, it being understood
and agreed by the Parties hereto that the failure
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<PAGE> 17
to hold the MSQ, the inability of VGPC to withdraw the MDWQ from or inject the
MDIQ into Saltville, and the failure or breakage of any of VGPC's equipment,
machinery, or pipelines other than by third parties shall not constitute Force
Majeure.
11.3 Notice - 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, in whole
or in part, 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.
11.4 Failure of Storage Facility - Notwithstanding any other provision
in this Agreement, the Parties mutually agree that should some cause or event,
beyond the control of VGPC, cause VGPC to reasonably conclude that the
Saltville storage facility is losing pressure and may no longer be viable for
storage, it may immediately notify KUB (by facsimile, telephone or other means)
and KUB shall immediately begin to accept redelivery of the stored gas, as soon
as practicable, and to the maximum extent practicable, in order to drain the
storage area and mitigate the potential loss to VGPC. VGPC may otherwise
dispose of any volumes not thus withdrawn. VGPC will pay KUB for each MMBtu of
its Storage Inventory not thus withdrawn, including any gas that is lost or
unaccounted for, at a price calculated pursuant to Section 2.3 of this
Agreement. VGPC will make such payment to KUB within ten (10) days of receipt
by VGPC of KUB's invoice detailing the amount due KUB. 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 KUB thirty (30) days prior written notice, after
which the Agreement shall continue in full force and effect.
11.5 Cure - 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.
11.6 Termination - 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 pursuant to this Agreement as
soon as practicable, provided that, if a Force Majeure event continues for a
period of thirty (30) consecutive days, then the Party which did not claim such
Force Majeure may
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<PAGE> 18
at any time thereafter terminate this Agreement upon thirty (30) days prior
written notice, if the Force Majeure event has not been corrected prior to the
expiration of such notice period.
ARTICLE XII
OPERATIONAL FLOW ORDERS
12.1 Operational Flow Orders - It is understood by the Parties that,
to the extent it has the authority to do so under its applicable state and/or
federal authorizations, VGPC may from time to time implement operating
procedures, sometimes known as operational flow orders ("OFO's"), in order: (a)
to alleviate conditions that threaten the integrity of VGPC's system; (b) to
maintain pressures necessary for VGPC's operations; and (c) to prevent damage
to the Saltville storage field. Although such an OFO shall not relieve VGPC of
any of its obligations hereunder, KUB shall use reasonable efforts to cooperate
with any such OFOs, including adjusting its injections or withdrawals.
ARTICLE XIII
SUCCESSORS AND ASSIGNS
13.1 Assignment - All provisions of this Agreement shall extend to and
be binding on the successors and assigns of the Parties hereto insofar as
applicable to the rights and obligations succeeded to or assigned, but no
succession or assignment shall relieve the assigning or succeeded to Party of
its obligations without the written consent of the other Party, which consent
shall not be unreasonably withheld. Nothing in this section prevents either
Party from pledging or mortgaging all or any part of.such Party's property as
security, nor from participating in any program to release capacity or transfer
storage gas in place that may be permitted by VGPC.
ARTICLE XIV
REGULATORY BODIES
14.1 Laws and Regulations - Subject to Section 2.4 above, this
Agreement shall be subject to all valid applicable governmental laws and
orders, regulatory authorizations, directives, rules and regulations of any
governmental body or official having jurisdiction over the Parties, their
facilities, the gas or this Agreement or any provision thereof, but nothing
contained herein shall be construed as a waiver of any right to question or
contest any such law, order, rule or regulation in any forum having
jurisdiction.
14.2 Reliance on Law - The Parties are entitled to act in accordance
with a law until such law is amended, reversed or otherwise disposed in a final
nonappealable order.
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<PAGE> 19
14.3 Cooperation - The Parties shall cooperate to ensure compliance
with all governmental regulation, including obtaining and maintaining all
necessary regulatory authorizations or any reasonable exchange or provision of
information needed for filing or reporting requirements.
14.4 Changes in Law or Regulation - Subject to Section 2.4 above, if
any federal or state statute or regulation or order by a court of law or
regulatory authority directly or indirectly (a) prohibits performance under
this Agreement or (b) makes such performance illegal or impossible, then the
Parties will use all reasonable efforts to revise the Agreement prospectively
in a manner mutually acceptable so that (a) performance under the Agreement is
no longer prohibited, illegal, or impossible, and (b) the Agreement is revised
in a manner that preserves, to the maximum extent possible, the respective
positions of the Parties. Each Party will provide reasonable and prompt notice
to the other Party as to any proposed law, regulations or any regulatory
proceedings or actions that could affect the rights and obligations of the
Parties. If the Parties are unable to revise the Agreement in accordance with
the above, then the Party whose performance has been affected shall have the
right, at its sole discretion, to terminate this Agreement upon 30 days prior
written notice to the other Party.
ARTICLE XV
ARBITRATION
15.1 Submission of Dispute for Arbitration - Any controversy
pertaining to matters expressly made subject to arbitration under this
Agreement shall be determined by a board of arbitration, consisting of three
members, upon notice of submission given by either Party, which notice shall
also name one (1) arbitrator. The Party receiving such notice, shall, by notice
to the other Party within ten (10) business days thereafter, name the second
arbitrator, or failing to do so, the Party giving notice of submission shall
name the second arbitrator. The two (2) arbitrators so appointed shall name a
third arbitrator.
15.2 Qualification of Arbitrators - The arbitrators shall not be
employed by or affiliated with either Party and shall be qualified by
education, experience and training in the natural gas industry to decide upon
the particular question in dispute.
15.3 Arbitration Proceedings - The arbitrators so appointed, after
giving the Parties due notice of the date of a hearing and reasonable
opportunity to be heard, shall promptly hear the controversy in a location
mutually agreeable to the Parties or selected by the arbitrators, and shall
thereafter render their decision determining said controversy no later than
ninety (90) days after such board has been appointed. Any decision requires
the support of a majority of the arbitrators. After the presentation of
evidence has been concluded, each Party shall submit to the
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arbitrators a final offer of its proposed resolution of the dispute. The
arbitrators shall approve the final offer of one Party, without modification,
and reject that of the other.
15.4 Arbitrator's Decision - The decision of the arbitrators shall be
rendered in writing and supported by written reasons. The decision of the
arbitrators shall be final and binding upon the Parties and will be complied
with by the Parties. It shall be made effective as of the date the dispute
arose, unless to do so is impracticable, in which case it shall be made
effective as of the date the dispute arose to the maximum extent practicable.
Each Party shall bear the expenses of its chosen arbitrator, and the expenses
of the third arbitrator shall be borne equally by the Parties. Each Party
shall bear the compensation and expenses of its legal counsel, witnesses and
employees.
ARTICLE XVI
MISCELLANEOUS
16.1 Choice of Law - The laws of the Commonwealth of Virginia shall
govern the validity, construction, interpretation, and effect of this
Agreement, without regard to choice of law doctrine that refers to the laws of
another jurisdiction.
16.2 No Incidental, Consequential or Punitive Damages - Except as
expressly provided in this Agreement, the Parties hereto waive any and all
rights, claims, or causes of action arising under this Agreement for
incidental, consequential or punitive damages. Subject to Sections 6.2 and 10.5
of this Agreement, any damages resulting from a breach of this Agreement by
either Party shall be limited to actual damages incurred by the Party claiming
damages.
16.3 Third Party Beneficiaries - Neither KUB nor VGPC intends for the
provisions of this Agreement to benefit any third party. Subject to the
Guaranty Agreement of even date herewith between KUB and Virginia Gas Company,
no third party shall have any right to enforce the terms of this Agreement
against KUB or VGPC.
16.4 Waiver of Default - No waiver by KUB or VGPC of any default of
the other under this Agreement shall operate as a waiver of any future default,
whether of a like or different character.
16.5 Interpretation - In interpretation and construction of this
Agreement, no presumption shall be made against any Party on grounds such Party
drafted the Agreement or any provision thereof.
16.6 Headings - The Table of Contents and the headings of any article,
section or subsection of this Agreement are for purposes of convenience only
and shall not be interpreted as having meaning or effect.
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<PAGE> 21
16.7 Entire Agreement - The terms and conditions contained herein
constitute the full and complete agreement between the Parties and any change
to be made must be submitted in writing and agreed to by both Parties.
16.8 Attorneys' Fees - In the event any litigation is commenced by
either Party to enforce this Agreement, the prevailing Party shall be entitled
to collect from the losing Party the reasonable cost and expense of such
litigation, including reasonable attorneys' fees.
16.9 Severability - Except as otherwise stated herein, any article or
section declared or rendered unlawful by a court of law or regulatory authority
with jurisdiction over the Parties or deemed unlawful because of a statutory
change will not otherwise affect the lawful obligations that arise under this
Agreement.
16.10 Enforceability - Each Party represents that it has all necessary
power and authority to enter into and perform its obligations under this
Agreement and that this Agreement constitutes a legal, valid and binding
obligation of that Party enforceable against it in accordance with its terms,
except as such enforceability may be affected by any bankruptcy law or the
application of principles of equity.
IN WITNESS WHEREOF, this Agreement has been executed in duplicate as of
the date first written above by the Parties' duly authorized officers.
KNOXVILLE UTILITIES BOARD
Attest:
/S/ MIKE BOLIN By: /s/ JAMES F. CARMON
- ------------------------- -------------------------------------------
Its: Senior Vice President Gas Operations
------------------------------------------
VIRGINIA GAS PIPELINE COMPANY
Attest:
/S/ JOHN D. JESSE By: /s/ M.L. EDWARDS
- ------------------------- -------------------------------------------
Its: President
-------------------------------------------
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<PAGE> 22
GUARANTY AGREEMENT
This Guaranty Agreement made and entered into as of July 10, 1996 (the
"Guaranty"), by and between Virginia Gas Company, a Delaware corporation
("Guarantor"), and Knoxville Utilities Board, an agency of the City of
Knoxville, Tennessee ("Purchaser").
WITNESSETH:
WHEREAS, Virginia Gas Pipeline Company ("VGPC"), a Virginia corporation
and a subsidiary of the Guarantor, and the Purchaser desire to enter into a
Firm Gas Storage Agreement dated July 10, 1996 (the "Gas Storage Agreement")
pursuant to which VGPC has agreed to provide firm storage service to the
Purchaser in the quantities and subject to the terms and conditions set forth
therein; and
WHEREAS, the Guarantor has determined that VGPC's commitments pursuant
to the Gas Storage Agreement are beneficial to Guarantor and Guarantor desires
to guarantee such obligations;
NOW, THEREFORE; in consideration of the premises, the receipt and
sufficiency of which is hereby acknowledged, and in order to induce the
Purchaser to enter into the Gas Storage Agreement, Guarantor does hereby agree
as follows:
1. Guarantor hereby unconditionally guarantees to the Purchaser the
full and timely performance by VGPC of its financial obligations under the Gas
Storage Agreement. Performance by Guarantor of its obligations hereunder shall
be made in full irrespective of (but without prejudice to the rights otherwise
of Guarantor with respect to) any claim, set-off or other right that Guarantor
may have at any time against the Purchaser, VGPC, or any other person or
entity, whether in connection herewith or with any unrelated transaction.
2. This Guaranty is a primary obligation of Guarantor and shall be
construed as an unconditional, absolute and continuing guaranty, irrespective
of the validity or enforceability of the Gas Storage Agreement, the absence of
any action to enforce the same, the recovery of any judgment against VGPC or
any action to enforce the same or any other circumstances which might otherwise
constitute a legal or equitable discharge or defense of a guarantor. This
Guaranty shall remain in full force and effect until all obligations of VGPC
under the Gas Storage Agreement have been performed. Guarantor represents that
it has all necessary power and authority
<PAGE> 23
to enter into and perform its obligations under this Guaranty and that this
Guaranty constitutes a legal, valid and binding obligation of Guarantor.
3. The Purchaser shall have the full right, in its sole discretion
and without any notice to or consent from Guarantor, from time to time and at
any time, without affecting, impairing or discharging, in whole or in part, the
liability of Guarantor hereunder, to deal with VGPC in any manner whatsoever
with respect to the obligations guaranteed hereunder, including but not limited
to: (i) extending, in whole or in part, the time of performance or payment of
any obligation owing by VGPC under the Gas Storage Agreement or otherwise
guaranteed hereunder; (ii) agreeing with VGPC to make any change, amendment or
modification whatsoever of any term or condition of the Gas Storage Agreement,
including, but not limited to, the amounts payable thereunder; and (iii)
settling, compromising, releasing, surrendering, modifying, or impairing, and
enforcing, exercising or failing or refusing to enforce or exercise, any
claims, rights or remedies of any kind or nature against VGPC. Guarantor
hereby consents to, ratifies, and affirms any such extension, change,
amendment, renewal, release, surrender, exchange, modification, impairment,
settlement or compromise, and all such actions shall be binding upon Guarantor.
4. Guarantor hereby waives diligence, presentment, demand for
payment, protest or notice with respect to the Gas Storage Agreement and all
demands whatsoever, and notice of acceptance hereof, and covenants that this
Guaranty will not be discharged except by complete and final payment of all
financial obligations of VGPC contained in the Gas Storage Agreement and by
Guarantor contained in this Guaranty. Guarantor hereby waives any legal or
equitable defenses arising out of the insolvency, bankruptcy or similar legal
disability of VGPC.
5. This Guaranty constitutes the entire agreement, and supersedes
all prior written agreements and understandings, and all oral agreements,
between the parties with respect to the subject matter hereof and may be
executed simultaneously in several counterparts, each of which shall be deemed
an original, and all of which together shall constitute one and the same
instrument.
6. The invalidity or unenforceability of any one or more phrases,
sentences, clauses or Sections in this Guaranty shall not affect the validity
or enforceability of the remaining portions of this Guaranty or any part
thereof.
7. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAW OF THE COMMONWEALTH OF VIRGINIA WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS. The Guarantor, by its execution hereof, hereby submits to
the non-exclusive jurisdiction of the courts of the Commonwealth of Virginia
and of the United States of America sitting in Virginia in connection with any
action or proceeding relating to this Guaranty and hereby consents to service
of process or other summons in any such action or
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proceeding brought by the Purchaser against it in any such court by means of
registered mail to the last known address of the Guarantor. Nothing herein,
however, shall prevent service of process by any other means permitted by law
or the bringing of any such action or proceeding in any other jurisdiction.
8. This Guaranty shall remain in full force and effect or shall be
reinstated (as the case may be) if at any time any payment by VGPC, in whole or
in part, is rescinded or must otherwise be returned by the Purchaser upon the
insolvency, bankruptcy or reorganization of VGPC or otherwise, all as though
that payment had not been made.
9. So long as any amount payable by VGPC under the Gas Storage
Agreement is overdue and unpaid, the Guarantor shall not (i) exercise any right
of subrogation or indemnity, or similar right or remedy, against VGPC or any of
its assets or property in respect of any amount paid by the Guarantor under
this Guaranty or (ii) file a proof of claim in competition with the Purchaser
for any amount owing to the Guarantor by VGPC on any account whatsoever in the
event of the bankruptcy, insolvency or liquidation of VGPC.
10. The rights and remedies set forth in the Gas Storage Agreement
and this Guaranty are in addition to and not exclusive of any rights and
remedies available to the Purchaser by law in respect of this Guaranty. If any
amount payable by the Guarantor under this Guaranty is not paid when due, the
Purchaser may, without notice or demand of any kind, set off and apply such
amount against any indebtedness of the Purchaser to the Guarantor then due and
payable (including without limitation principal, interest, indemnity or
reimbursement for losses) whether under any loan or credit agreement, note,
interest rate or currency exchange agreement, or otherwise, and such set off
and application shall satisfy the obligations hereunder of the Guarantor to the
Purchaser to the extent such amount is so set off and applied. The Purchaser
shall be entitled to apply any amount received by it from any source, including
the Guarantor, in respect of VGPC's obligations under the Gas Storage Agreement
to the discharge of those obligations in such order as the Purchaser may from
time to time elect in its sole discretion.
11. The Guarantor shall pay or reimburse the Purchaser on demand for
all reasonable costs and expenses (including fees and expenses of counsel)
incurred in connection with the enforcement of the Purchaser's rights under
this Guaranty.
12. All amendments, waivers and modifications of or to any provision
of this Guaranty and any consent to departure by the Guarantor from the terms
hereof shall be in writing and signed and delivered by the Purchaser and, in
the case of any such amendment or modification, by the Guarantor, and shall not
otherwise be effective. Any such waiver or consent shall be effective only in
the specific instance and for the purpose for which it is given.
- 3 -
<PAGE> 25
13. This Guaranty shall be binding on the Guarantor and its
successors and assigns. However, the Guarantor shall not transfer any of its
obligations hereunder without the prior written consent of the Purchaser, and
any purported transfer without that consent shall be void. This Guaranty shall
inure to the benefit of the Purchaser and its successors and assigns.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed
in its name and behalf.
VIRGINIA GAS COMPANY
By: /s/ M.L. EDWARDS
----------------------------------
Name:
Title:
Accepted as of July 10, 1996 by
KNOXVILLE UTILITIES BOARD
By: /s/ JAMES F. CARMON
---------------------------------------------
Name:
Title: Senior Vice President Gas Operations
- 4 -
<PAGE> 1
EXHIBIT 21.1
VIRGINIA GAS COMPANY AND SUBSIDIARIES
SUBSIDIARIES AND AFFILIATES OF THE REGISTRANT
SUBSIDIARIES:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
Virginia Gas Exploration Company Virginia
Virginia Gas Pipeline Company Virginia
Virginia Gas Propane Company Virginia
Virginia Gas Marketing Company Virginia
</TABLE>
AFFILIATES:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
Virginia Gas Storage Company Virginia
Virginia Gas Distribution Company Virginia
</TABLE>
<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 YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,652,838
<SECURITIES> 0
<RECEIVABLES> 1,187,832
<ALLOWANCES> 0
<INVENTORY> 16,337
<CURRENT-ASSETS> 2,975,532
<PP&E> 17,521,296
<DEPRECIATION> (1,177,816)
<TOTAL-ASSETS> 33,510,403
<CURRENT-LIABILITIES> 3,405,229
<BONDS> 12,137,729
0
1,725,000
<COMMON> 3,151
<OTHER-SE> 15,609,380
<TOTAL-LIABILITY-AND-EQUITY> 33,510,403
<SALES> 1,772,970
<TOTAL-REVENUES> 2,769,718
<CGS> 695,008
<TOTAL-COSTS> 1,340,681
<OTHER-EXPENSES> 2,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,006,800
<INCOME-PRETAX> 759,393
<INCOME-TAX> 151,827
<INCOME-CONTINUING> 607,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607,566
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Storage Company:
We have audited the accompanying balance sheets of Virginia Gas Storage Company
as of December 31, 1996 and 1995, and the related statements of income, changes
in stockholders' equity, and cash flows for the years then ended. 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 1995, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
<PAGE> 2
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 148,619 $ 297,486
Accounts receivable 1,233,227 929,087
Notes receivable 570,000 70,000
Other current assets 85,369 63,016
------------- --------------
Total current assets 2,037,215 1,359,589
PROPERTY AND EQUIPMENT, net 13,323,883 9,499,382
NOTES RECEIVABLE - 1,720,000
OTHER ASSETS 956,099 933,788
------------- --------------
Total assets $16,317,197 $13,512,759
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 104,915 $ 116,633
Accounts payable 2,193,010 1,100,419
Other current liabilities 108,929 167,619
------------- --------------
Total current liabilities 2,406,854 1,384,671
LONG-TERM DEBT 6,386,212 5,992,171
DEFERRED INCOME TAXES 551,686 339,210
------------- --------------
Total liabilities 9,344,752 7,716,052
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock - no par value, 50,000 shares authorized, 38,200
shares issued and outstanding 5,640,000 5,640,000
Retained earnings 1,332,445 656,707
Note receivable from shareholder - (500,000)
------------- --------------
Total stockholders' equity 6,972,445 5,796,707
------------- --------------
Total liabilities and stockholders' equity $16,317,197 $13,512,759
============= ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 3
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
REVENUE:
Operating revenue $3,831,224 $2,696,594
Interest and other income 154,220 82,454
----------- -------------
3,985,444 2,779,048
----------- -------------
EXPENSES:
Production expenses 222,808 277,167
Purchased gas expense 974,277 680,857
Operation and maintenance expense 374,579 294,249
Depreciation, depletion, and amortization 416,699 308,039
General and administrative 700,296 356,979
----------- -------------
2,688,659 1,917,291
----------- -------------
OTHER EXPENSE:
Interest 272,941 115,010
----------- -------------
INCOME BEFORE INCOME TAXES 1,023,844 746,747
PROVISION FOR INCOME TAXES 348,106 261,364
----------- -------------
NET INCOME $ 675,738 $ 485,383
=========== =============
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS STORAGE COMPANY'S
EARNINGS $ 337,869 $ 242,692
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<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
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 675,738 $ 485,383
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 416,699 308,039
Deferred income taxes 212,476 139,214
Increase in accounts receivable (304,140) (194,420)
Increase in other current assets (22,353) (50,441)
Increase in other assets (37,981) (31,946)
Increase in accounts payable 1,092,591 64,109
Decrease in other current liabilities (58,690) (27,763)
----------- -----------
Net cash provided by operating activities 1,974,340 692,175
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,225,530) (2,870,185)
Payments received on affiliated company notes receivable 1,720,000 100,000
----------- -----------
Net cash used in investing activities (2,505,530) (2,770,185)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (117,677) (23,006)
Proceeds from new loans 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 382,323 1,701,717
----------- -----------
NET DECREASE IN CASH (148,867) (376,293)
CASH, beginning of year 297,486 673,779
----------- -----------
CASH, end of year $ 148,619 $ 297,486
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 606,505 $ 450,501
=========== ===========
Income taxes paid $ 159,024 $ 123,349
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Storage Company (the "Company") was organized in 1992 under the
laws of the Commonwealth 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.
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.
<PAGE> 7
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.
OTHER ASSETS
In conjunction with 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>
1996 1995
----------- ---------
<S> <C> <C>
Trade receivables $ 618,275 $ 500,531
Receivables from affiliated companies 469,656 202,524
Pipeline operating expenses 54,944 58,919
Joint-interest receivables 90,249 91,530
Other 103 75,583
----------- ---------
$1,233,227 $ 929,087
=========== =========
</TABLE>
4. NOTES RECEIVABLE:
<TABLE>
<CAPTION>
1996 1995
-------------- -----------
<S> <C> <C>
Notes receivable from Virginia Gas Company; interest receivable at
8%; principal received as consideration for the issuance of
common shares, due 1997. $ - $ 1,720,000
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 -
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
Note receivable from Virginia Gas Exploration Company; interest
receivable at 8%; principal balance due 1997. 70,000 70,000
-------------- -----------
570,000 1,790,000
Less- Current portion (570,000) (70,000)
-------------- -----------
$ - $ 1,720,000
============== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
Storage properties $12,095,480 $ 7,903,561
Pipelines 2,026,091 2,022,786
Vehicles 133,742 129,311
Office equipment 63,335 24,298
Wells and pipelines in progress 68,832 81,994
----------- -------------
14,387,480 10,161,950
Less- Accumulated depreciation, depletion,
and amortization (1,063,597) (662,568)
----------- -------------
$13,323,883 $ 9,499,382
=========== ============-
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Restricted cash and investments - reserve funds $ 582,233 $ 547,394
Deferred debt issuance costs 365,707 380,874
Other 8,159 5,520
----------- ----------
$ 956,099 $ 933,788
=========== ==========
</TABLE>
7. ACCOUNTS PAYABLE:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Trade payables $1,827,867 $ 683,747
Payable to affiliated companies 365,143 416,672
----------- ----------
$2,193,010 $1,100,419
=========== ==========
</TABLE>
8. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Amounts due affiliated companies $46,255 $ 95,548
Funds held for future distribution 8,120 31,444
Income taxes payable 17,569 39,024
Other 36,985 1,603
----------- ----------
$108,929 $167,619
=========== ==========
</TABLE>
<PAGE> 9
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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. $ 2,567,837 $2,642,810
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. 1,018,579 1,030,603
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. 1,000,000 500,000
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. 568,557 585,157
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. 470,798 476,356
Notes payable through 1999 with interest from 8.0% to 12.75%;
secured by assets with a book value of $21,567 as of December 31,
1996. 22,659 31,181
------------ -----------
6,491,127 6,108,804
Less- Current portion (104,915) (116,633)
------------ -----------
Long-term debt $ 6,386,212 $5,992,171
============ ============
</TABLE>
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 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.
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.
<PAGE> 10
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.
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>
12. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Current:
Federal $135,630 $108,482
State - 13,668
---------- ---------
135,630 122,150
---------- ---------
Deferred:
Federal 212,476 139,214
State - -
---------- ---------
212,476 139,214
---------- ---------
$348,106 $261,364
========== =========
</TABLE>
<PAGE> 11
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 4,656 $ 62,388
---------- ---------
Deferred tax liabilities:
Capital assets 556,342 401,598
---------- ---------
Net deferred tax liabilities $551,686 $339,210
========== =========
</TABLE>
The Company has no valuation allowances as of December 31, 1996 and 1995, and
there were no changes in the valuation allowance during the years then ended.
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>
1996 1995
---------- ---------
<S> <C> <C>
Tax at statutory rate of 34% $348,106 $253,894
State income taxes, less Federal benefit - 10,961
Other, net - (3,491)
---------- ---------
$348,106 $261,364
========== =========
</TABLE>
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. Other transactions with
affiliated companies includes purchases of natural gas, natural gas storage and
technical services provided for and by affiliated companies.
14. SUBSEQUENT EVENT:
In February 1997, the Russell County Authority 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 the Company by an affiliated company
which will be used to construct natural gas storage facilities. The bonds bear
interest at 9.5 percent and will mature in February 2017. Principal payments
of $30,200 to $123,000 are due from 2003 to 2017.
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Distribution Company:
We have audited the accompanying balance sheets of Virginia Gas Distribution
Company as of December 31, 1996 and 1995, and the related statements of income,
changes in stockholders' equity, and cash flows for the years then ended.
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 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
<PAGE> 2
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 16,166 $ 306,687
Accounts receivable 151,752 203,826
Receivable from affiliate - 1,562,500
Other current assets 154,920 151,700
Notes receivable 26,004 49,904
------------- -------------
Total current assets 348,842 2,274,617
PROPERTY AND EQUIPMENT, net 2,755,660 2,152,952
NOTES RECEIVABLE - AFFILIATED COMPANIES 3,413,066 1,987,366
DEFERRED TAX ASSET 1,995 4,115
OTHER ASSETS 546,798 528,017
------------- -------------
Total assets $ 7,066,361 $ 6,947,067
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 39,240 $ 42,987
Accounts payable 462,095 234,348
Other current liabilities 33,368 103,713
------------- -------------
Total current liabilities 534,703 381,048
LONG-TERM DEBT 5,018,064 5,056,540
------------- -------------
Total liabilities 5,552,767 5,437,588
============= =============
STOCKHOLDERS' EQUITY:
Common stock - no par value, 100,000 shares authorized,
75,000 shares issued and outstanding 1,500,000 1,500,000
Retained earnings 13,594 9,479
------------- -------------
Total stockholders' equity 1,513,594 1,509,479
------------- -------------
Total liabilities and stockholders' equity $ 7,066,361 $ 6,947,067
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 3
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUE:
Operating revenue $ 629,280 $ 556,052
Interest income 320,836 129,249
Other income 72,949 33,887
------------ ------------
1,023,065 719,188
------------ ------------
EXPENSES:
Purchased gas expense 330,332 234,297
Operation and maintenance expense 55,032 50,563
Depreciation, depletion, and amortization 78,013 76,162
General and administrative 191,619 125,982
------------ ------------
654,996 487,004
------------ ------------
OTHER EXPENSE:
Interest 358,158 147,915
Other 3,676 9,140
------------ ------------
361,834 157,055
INCOME BEFORE INCOME TAXES 6,235 75,129
PROVISION FOR INCOME TAXES 2,120 25,544
------------ ------------
NET INCOME $ 4,115 $ 49,585
============ ============
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS DISTRIBUTION $ 2,058 $ 24,792
COMPANY'S EARNINGS ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON 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
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,115 $ 49,585
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 78,013 76,162
Deferred income taxes 2,120 22,197
Decrease (increase) in accounts receivable 52,074 (108,776)
Decrease (increase) in receivable from affiliate 1,562,500 (1,562,500)
Increase in other current assets (3,220) (81,914)
Increase in other assets (25,239) (6,973)
Increase in accounts payable 227,747 68,609
(Decrease) increase in other current liabilities (70,345) 82,471
----------- -----------
Net cash provided by (used in) operating
activities 1,827,765 (1,461,139)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (674,263) (412,178)
Loans made to affiliated companies (1,500,000) (500,000)
Payments received on notes receivable 98,200 20,741
----------- -----------
Net cash used in investing activities (2,076,063) (891,437)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (42,223) (4,644)
Proceeds from new loans - 2,881,314
Payment of financing costs - (66,368)
Establishment of financing reserve funds - (259,129)
----------- -----------
Net cash provided by (used in) financing
activities (42,223) 2,551,173
----------- -----------
NET INCREASE (DECREASE) IN CASH (290,521) 198,597
CASH, beginning of year 306,687 108,090
----------- -----------
CASH, end of year $ 16,166 $ 306,687
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 533,085 $ 97,181
=========== ===========
Income taxes paid $ - $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Distribution Company (the "Company") was organized during 1992
under the laws of the Commonwealth 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 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.
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.
<PAGE> 7
OTHER ASSETS
In conjunction with 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. RECEIVABLE FROM AFFILIATE:
As of December 31, 1995, the Company had not received from Virginia Gas Company
all of its allocated proceeds related to debt incurred in conjunction with the
December 1995 issuance of Buchanan County, Virginia, Revenue Bonds (see Note
7). The funds were received in January 1996. Upon receipt, the Company loaned
$1,000,000 of these proceeds to Virginia Gas Pipeline Company and $500,000 to
Virginia Gas Storage Company (see Note 4).
4. NOTES RECEIVABLE - AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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. $ 568,557 $ 585,157
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. 1,000,000 500,000
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. 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. 470,798 476,356
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. 395,333 400,000
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
Note receivable from Virginia Gas Company; interest receivable at
8.5%; receivable in monthly installments of principal and
interest with the balance due in 1997. - 70,641
Other 4,382 5,116
------------ ------------
3,439,070 2,037,270
Less- Current portion (26,004) (49,904)
------------ ------------
$3,413,066 $ 1,987,366
============ ============
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Pipelines $ 2,343,856 $ 1,812,249
Project and construction in progress 555,232 316,320
Other property and equipment 104,386 200,642
3,003,474 2,329,211
----------- -----------
Less- Accumulated depreciation and
amortization (247,814) (176,259)
----------- -----------
$ 2,755,660 $ 2,152,952
=========== ===========
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Restricted cash and investments - reserve funds $ 396,285 $ 374,711
Deferred debt issuance costs 147,191 153,206
Other 3,322 100
----------- -----------
$ 546,798 $ 528,017
=========== ===========
</TABLE>
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
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. 1,284,833 1,300,000
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. 892,457 918,515
Note payable through 1997 with interest, secured by an asset with a
book value of $1,610. 800 1,798
------------ -----------
5,057,304 5,099,527
Less- Current portion (39,240) (42,987)
------------ -----------
Long-term debt $ 5,018,064 $ 5,056,540
============ ===========
</TABLE>
<PAGE> 9
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, 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 ($1,300,000)
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>
8. 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.
9. INCOME TAXES:
The components of the provision for income taxes as of December 31, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $ - $ 3,347
State - -
--------- --------
- 3,347
--------- --------
Deferred:
Federal 2,120 22,197
State - -
--------- --------
2,120 22,197
--------- --------
$ 2,120 $ 25,544
========= ========
</TABLE>
<PAGE> 10
The significant components of deferred tax assets and liabilities as of
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 128,657 $ 99,763
--------- ---------
Deferred tax liabilities:
Capital assets 126,662 95,648
--------- ---------
Net deferred tax assets $ 1,995 $ 4,115
========= =========
</TABLE>
The Company has no valuation allowances as of December 31, 1996 and 1995, and
there were no changes in the valuation allowance during the years ended
December 31, 1996 or 1995.
The Company's actual provision for income tax as of December 31, 1996 and 1995,
approximates the tax provision at the statutory Federal income tax rate.
10. 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. Other transactions with
affiliated companies include purchases of natural gas, natural gas storage and
technical services provided for and by affiliated companies.
11. SUBSEQUENT EVENT:
In February 1997, the Russell County Authority 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 the Company by VGC which will be
used to construct a natural gas distribution facility in and around the town of
Lebanon. The bonds bear interest at 9.5 percent and will mature in February
2017. Principal payments of $110,300 to $447,200 are due from 2003 to 2017.
