<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
/ / 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 000-21523
-----------------
VIRGINIA GAS COMPANY
(Exact name of small business issuer as specified in its charter)
Delaware 87-0443823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Main Street, Abingdon, Virginia 24210, (540) 676-2380
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
/ x / Yes / / No
<PAGE>
VIRGINIA GAS COMPANY
Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 1998
Table of Contents
<TABLE>
<CAPTION>
Item Page
Number PART I - FINANCIAL INFORMATION Number
- ------ ------
<S> <C>
1 Financial Statements:
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets at September 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income (Unaudited) for the Three and Nine Months
Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Virginia Gas Storage Company
Balance Sheets at September 30, 1998 (Unaudited) and December 31, 1997 7
Statements of Income (Unaudited) for the Three and Nine Months Ended
September 30, 1998 and 1997 8
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 1998 and 1997 9
Notes to Financial Statements 10
Virginia Gas Distribution Company
Balance Sheets at September 30, 1998 (Unaudited) and December 31, 1997 11
Statements of Income (Unaudited) for the Three and Nine Months Ended
September 30, 1998 and 1997 12
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 1998 and 1997 13
Notes to Financial Statements 14
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
PART II - OTHER INFORMATION
4 Submission of Matters to a Vote of Security Holders 20
6 Exhibits and Reports on Form 8-K 20
List of Exhibits 21
Signature 22
Index to Exhibits 23
</TABLE>
2
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,966,853 $11,750,899
Accounts receivable 4,272,013 2,681,818
Notes receivable 139,749 120,898
Other current assets 653,700 305,223
---------- ----------
Total current assets 7,032,315 14,858,838
Property and equipment, net 35,698,400 22,459,289
Investment in affiliated companies 4,392,258 4,459,937
Notes receivable - affiliated companies 12,900,164 12,900,164
Other assets 791,320 1,159,272
---------- ----------
Total assets $60,814,457 $55,837,500
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 20,907 218,611
Accounts payable 1,754,077 1,092,846
Funds held for future distribution 208,451 511,099
Other current liabilities 143,502 46,111
---------- ----------
Total current liabilities 2,216,937 1,868,667
Long-term debt 24,291,956 19,728,422
Deferred income taxes 1,052,908 925,908
---------- ----------
Total liabilities 27,471,801 22,522,997
---------- ----------
Stockholders' equity:
Common stock - par value $.001, 100,000,000 (unaudited) and
10,000,000 shares authorized, 5,504,906 shares issued and
outstanding as of September 30, 1998 and December 31, 1997,
respectively 5,505 5,505
Additional paid-in capital 31,338,077 31,241,082
Retained earnings 1,999,074 2,067,916
---------- ----------
Total stockholders' equity 33,342,656 33,314,503
---------- ----------
Total liabilities and stockholders' equity $60,814,457 $55,837,500
---------- ----------
---------- ----------
</TABLE>
3
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 1,863,533 $ 2,363,528 $ 5,643,722 $ 5,864,065
Interest and other income 387,294 387,236 1,272,862 957,649
---------- ---------- ---------- ----------
2,250,827 2,750,764 6,916,584 6,821,714
---------- ---------- ---------- ----------
Expenses:
Production expenses 24,210 47,670 88,189 130,044
Purchased gas expense 68,606 764,254 383,449 830,367
Operation and maintenance expense 207,755 161,440 625,980 408,934
Cost of natural gas sold 609,876 682,174 2,157,592 2,317,177
Depreciation, depletion, and amortization 240,012 207,805 674,649 581,395
General and administrative 361,486 271,914 1,054,897 719,344
---------- ---------- ---------- ----------
1,511,945 2,135,257 4,984,756 4,987,261
---------- ---------- ---------- ----------
Other expense:
Interest 353,670 437,273 1,098,049 1,154,428
Other 27,453 41,923 106,956 109,962
---------- ---------- ---------- ----------
381,123 479,196 1,205,005 1,264,390
---------- ---------- ---------- ----------
Income before earnings of affiliated companies, income
taxes, and extraordinary loss 357,759 136,311 726,823 570,063
Equity in earnings (losses) of affiliated companies (55,056) 34,682 (67,664) 165,883
---------- ---------- ---------- ----------
Income before income taxes and extraordinary loss 302,703 170,993 659,159 735,946
Provision for income taxes 107,338 33,429 205,474 171,312
---------- ---------- ---------- ----------
Net income before extraordinary item 195,365 137,564 453,685 564,634
Extraordinary loss on extinguishment of debt (net of tax) - - 233,307 -
---------- ---------- ---------- ----------
Net income 195,365 137,564 220,378 564,634
Preferred dividends paid - - - $ (57,055)
---------- ---------- ---------- ----------
Net income available to common stockholders $ 195,365 $ 137,564 $ 220,378 $ 507,579
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share, basic and diluted:
Net income before extraordinary item $ 0.03 $ 0.04 $ 0.08 $ 0.15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Extraordinary loss on extinguishment of debt (net of tax)
- - $ (0.04) -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common share, basic and diluted $ 0.03 $ 0.04 $ 0.04 $ 0.15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average common shares outstanding 5,504,906 3,868,017 5,504,906 3,428,928
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 220,378 $ 564,634
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 674,649 581,395
Undistributed (earnings) losses of affiliated companies 67,664 (165,883)
Deferred income taxes 127,000 123,118
Increase in accounts receivable (1,590,195) (1,701,299)
Increase in other current assets (348,478) (189,897)
Decrease in other assets 341,515 282,028
Decrease in notes payable - (250,000)
Increase in accounts payable 661,231 221,641
Decrease in other current liabilities (205,257) (166,644)
---------- ----------
Net cash used in operating activities (51,493) (700,907)
---------- ----------
Cash flows from investing activities:
Capital expenditures (13,887,510) (3,908,398)
Issuance of note receivable (18,850) (3,650,000)
Payments received on notes receivable 102,000 87,262
---------- ----------
Net cash used in investing activities (13,804,360) (7,471,136)
---------- ----------
Cash flows from financing activities:
Payment of loan principal (19,634,170) (3,044,897)
Proceeds from new loans 24,000,000 9,690,632
Repurchase of stock warrants (5,015) -
Redemption of preferred stock - (2,000,000)
Proceeds from issuance of common stock, net - 17,607,408
Payment of financing costs - (331,333)
Establishment of financing reserve fund - (558,750)
Dividends paid (289,008) (200,599)
---------- ----------
Net cash provided by financing activities 4,071,807 21,162,461
---------- ----------
Net increase (decrease) in cash and cash equivalents
(9,784,046) 12,990,418
Cash and cash equivalents, beginning of period 11,750,899 1,652,838
---------- ----------
Cash and cash equivalents, end of period $ 1,966,853 $ 14,643,256
---------- ----------
---------- ----------
Supplemental disclosure:
Interest paid $ 1,240,891 $ 1,517,154
---------- ----------
---------- ----------
Income taxes paid $ 7,075 $ 16,658
---------- ----------
---------- ----------
</TABLE>
5
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accompanying unaudited consolidated financial statements as of
September 30, 1998, and for the three and nine-month periods ended September 30,
1998 and 1997, include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary to present
fairly the financial position, results of operations and cash flows of Virginia
Gas Company (the "Company"). Operating results for the three and nine months
ended September 30, 1998, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
The financial statements should be read in conjunction with the Notes
to Consolidated Financial Statements included in the Company's Form 10-KSB filed
with the Securities and Exchange Commission on March 31, 1998.
The unaudited consolidated financial statements for 1998 and the
consolidated financial statements for 1997 include the accounts of five wholly
owned subsidiaries. The Company's investments in affiliated companies are
accounted for using the equity method. Investments carried at equity and the
percentage interest owned consist of Virginia Gas Storage Company (50 percent)
and Virginia Gas Distribution Company (50 percent).
In March 1998, the Company completed a refinancing transaction
whereby the Company issued $24 million in senior notes to John Hancock Mutual
Life Insurance Company and related entities. With the proceeds, the Company
retired or defeased $19.6 million of industrial revenue bonds. The remaining
proceeds will be used to develop the Company's pipeline and storage projects.
As a result of this refinancing, the Company incurred a one time after-tax
charge of approximately $233,000. This was due to the accelerated
amortization of issue costs related to the industrial revenue bonds, and
defeasement premiums, interest, and other fees related to the 1994 Russell
County bond issue.
In July 1998, the Company completed an $8.0 million line of credit
facility with Wachovia Bank, N.A. As of September 30,1998, the Company has not
drawn on the line of credit.
Reclassifications have been made to certain previously reported 1997
amounts to conform with 1998 presentation.
6
<PAGE>
Virginia Gas Storage Company
Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 94,715 $ 375,958
Accounts receivable 310,033 1,409,401
Other current assets 45,273 31,156
-------------- -------------
Total current assets 450,021 1,816,515
Property and equipment, net 15,532,581 15,063,022
Other assets 827,094 1,133,920
-------------- -------------
Total assets $16,809,696 $18,013,437
-------------- -------------
-------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 85,472 $ 109,450
Accounts payable 661,904 2,231,125
Other current liabilities 385,109 268,643
-------------- -------------
Total current liabilities 1,132,485 2,609,218
Long-term debt 7,176,762 7,226,762
Deferred income taxes 816,441 713,441
-------------- -------------
Total liabilities 9,125,688 10,549,421
Stockholders' equity:
Common stock - no par value, 50,000 shares authorized, 38,200
(unaudited) shares issued and outstanding as of September 30,
1998 and December 31, 1997, respectively 5,640,000 5,640,000
Retained earnings 2,044,008 1,824,016
-------------- -------------
Total stockholders' equity 7,684,008 7,464,016
-------------- -------------
Total liabilities and stockholders' equity $ 16,809,696 $ 18,013,437
-------------- -------------
-------------- -------------
</TABLE>
7
<PAGE>
Virginia Gas Storage Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 582,457 $ 1,321,481 $ 2,553,315 $ 3,470,944
Interest income 768 10,925 9,087 41,029
--------- ---------- ---------- ----------
583,225 1,332,406 2,562,402 3,511,973
--------- ---------- ---------- ----------
Expenses:
Production expenses 37,698 36,318 131,223 146,457
Purchased gas expense - 542,000 431,546 1,052,502
Operation and maintenance expense 107,474 208,269 390,538 612,650
Depreciation, depletion, and amortization 153,395 127,531 439,378 383,863
General and administrative 134,900 155,822 378,565 548,357
--------- ---------- ---------- ----------
433,467 1,069,940 1,771,250 2,743,829
--------- ---------- ---------- ----------
Other expense:
Interest 151,846 104,559 457,830 269,939
--------- ---------- ---------- ----------
Income (loss) before income taxes (2,088) 157,907 333,322 498,205
Provision (benefit) for income taxes (710) 53,688 113,330 169,390
--------- ---------- ---------- ----------
Net income (loss) $ (1,378) $ 104,219 $ 219,992 $ 328,815
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Virginia Gas Company's equity in Virginia Gas
Storage Company's earnings (losses) $ (689) $ 52,109 $ 109,996 $ 164,407
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
Virginia Gas Storage Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 219,992 $ 328,815
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 439,378 383,863
Deferred income taxes 103,000 99,186
(Increase) decrease in accounts receivable 1,099,368 (254,056)
(Increase) decrease in other current assets (14,117) 29,783
(Increase) decrease in other assets 271,948 (143,504)
Decrease in accounts payable (1,569,221) (1,036,416)
Increase in other current liabilities 92,488 176,023
--------- ---------
Net cash (used in) provided by operating activities 642,836 (416,306)
--------- ---------
Cash flows from investing activities:
Capital expenditures, net (874,079) (1,096,535)
Payments received on notes receivable - 500,000
--------- ---------
Net cash used in investing activities (874,079) (596,535)
Cash flows from financing activities:
Payment of loan principal (50,000) (80,037)
Proceeds from new loans - 1,000,000
--------- ---------
Net cash (used in) provided by financing activities (50,000) 919,963
--------- ---------
Net decrease in cash (281,243) (92,878)
Cash, beginning of period 375,958 148,619
--------- ---------
Cash, end of period $ 94,715 $ 55,741
--------- ---------
--------- ---------
Supplemental disclosure:
Interest paid $ 228,959 $ 499,454
--------- ---------
--------- ---------
Income taxes paid $ 48,750 $ 67,635
--------- ---------
--------- ---------
</TABLE>
9
<PAGE>
VIRGINIA GAS STORAGE COMPANY
Notes to Financial Statements
The accompanying unaudited financial statements as of September 30,
1998, and for the three and nine-month periods ended September 30, 1998 and
1997, include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of Virginia Gas Storage
Company. Operating results for the three and nine months ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Form 10-KSB filed
with the Securities and Exchange Commission on March 31, 1998.
In March 1998, Virginia Gas Storage Company's parent, Virginia Gas
Company (the "Parent"), completed a refinancing transaction whereby the
Parent issued $24 million in senior notes to John Hancock Mutual Life
Insurance Company and related entities. With the proceeds, the Company
retired or defeased $19.6 million of industrial revenue bonds, most of which
had been previously allocated to Virginia Gas Storage Company and three other
affiliated companies. The remaining proceeds will be used to develop the
Parent's pipeline and storage projects. As a result of this refinancing, the
Virginia Gas Storage Company has recorded a regulatory asset of approximately
$725,000. This asset is made up of issue costs related to the industrial
revenue bonds, and defeasement premiums, interest, and other fees related to
the 1994 Russell County bond issue. The regulatory asset will be amortized
over 14 years, the life of the John Hancock note.
10
<PAGE>
Virginia Gas Distribution Company
Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 93,935 $ 45,939
Accounts receivable 87,084 220,389
Current portion of notes receivable 17,686 21,223
Other current assets 531,920 248,062
------------- -------------
Total current assets 730,625 535,613
Property and equipment, net 6,730,219 6,416,465
Notes receivable 2,898,121 2,948,121
Deferred tax asset 30,215 31,736
Other assets 783,173 1,204,387
------------- -------------
Total assets $ 11,172,353 $ 11,136,322
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 34,455 $ 41,347
Accounts payable 1,374,880 980,560
Other current liabilities 35,792 31,840
------------- -------------
Total current liabilities 1,445,127 1,053,747
Long-term debt 8,626,717 8,626,717
------------- -------------
Total liabilities 10,071,844 9,680,464
------------- -------------
Stockholders' equity:
Common stock - no par value, 100,000 shares authorized, 75,000
(unaudited) shares issued and outstanding as of September 30, 1,500,000 1,500,000
1998 and December 31, 1997, respectively
Retained earnings (399,491) (44,142)
------------- -------------
Total stockholders' equity 1,100,509 1,455,858
------------- -------------
Total liabilities and stockholders' equity $ 11,172,353 $ 11,136,322
------------- -------------
------------- -------------
</TABLE>
11
<PAGE>
Virginia Gas Distribution Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 165,118 $ 171,498 $ 636,277 $ 590,919
Interest income 62,028 100,541 205,606 311,844
Other income 23,843 23,444 67,025 68,732
----------- ----------- ----------- -----------
250,989 295,483 908,908 971,495
----------- ----------- ----------- -----------
Expenses:
Purchased gas expense 91,555 105,313 414,695 344,309
Operation and maintenance expense 25,208 43,656 111,752 82,042
Depreciation, depletion, and amortization 56,387 53,053 167,270 103,804
General and administrative 33,736 31,321 109,178 104,669
----------- ----------- ----------- -----------
206,886 233,343 802,895 634,824
----------- ----------- ----------- -----------
Other expense:
Interest 185,165 108,249 593,414 309,204
Other 23,688 6,700 50,961 22,993
----------- ----------- ----------- -----------
208,853 114,949 644,375 332,197
----------- ----------- ----------- -----------
Income (loss) before income taxes (164,750) (52,809) (538,362) 4,474
Provision (benefit) for income taxes (56,015) (17,955) (183,042) 1,522
----------- ----------- ----------- -----------
Net income (loss) $ (108,735) $ (34,854) $ (355,320) $ 2,952
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Virginia Gas Company's equity in Virginia Gas
Distribution Company's earnings (losses) $ (54,368) $ (17,427) $ (177,660) $ 1,476
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
12
<PAGE>
Virginia Gas Distribution Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (355,320) $ 2,952
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 167,270 103,804
Deferred income taxes 1,521 1,522
Decrease (increase) in accounts receivable 133,305 (21,264)
Increase in other current assets (280,321) (132,008)
Decrease (increase) in other assets 413,087 (155,966)
Increase in accounts payable 394,320 500,882
Decrease in other current liabilities (2,939) (8,297)
-------- ---------
Net cash provided by operating activities 470,923 291,625
-------- ---------
Cash flows from investing activities:
Capital expenditures (472,927) (3,595,785)
Issuance of notes receivable - (1,000,000)
Payments received on notes receivable 50,000 1,248,428
-------- ---------
Net cash used in investing activities (422,927) (3,347,357)
-------- ---------
Cash flows from financing activities:
Payment of loan principal - (29,977)
Proceeds from new loans - 3,650,000
Payment of financing costs - (219,394)
Establishment of financing reserve fund - (328,500)
-------- ---------
Net cash provided by financing activities - 3,072,129
-------- ---------
Net increase in cash 47,996 16,397
Cash, beginning of period 45,939 16,166
-------- ---------
Cash, end of period $ 93,935 $ 32,563
-------- ---------
-------- ---------
Supplemental disclosure:
Interest paid $ 428,044 $ 550,551
-------- ---------
-------- ---------
</TABLE>
13
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
Notes to Financial Statements
The accompanying unaudited financial statements as of September 30,
1998, and for the three and nine-month periods ended September 30, 1998 and
1997, include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of Virginia Gas
Distribution Company. Operating results for the three and nine months ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Form 10-KSB filed
with the Securities and Exchange Commission on March 31, 1998.
In March 1998, Virginia Gas Distribution Company's parent, Virginia
Gas Company (the "Parent"), completed a refinancing transaction whereby the
Parent issued $24 million in senior notes to John Hancock Mutual Life
Insurance Company and related entities. With the proceeds, the Company
retired or defeased $19.6 million of industrial revenue bonds, most of which
had been previously allocated to Virginia Gas Distribution Company and three
other affiliated companies. The remaining proceeds will be used to develop
the Parent's pipeline and storage projects. As a result of this refinancing,
the Virginia Gas Distribution Company has recorded a regulatory asset of
approximately $679,000. This asset is made up of issue costs related to the
industrial revenue bonds, and defeasement premiums, interest, and other fees
related to the 1994 Russell County bond issue. The regulatory asset will be
amortized over 14 years, the life of the John Hancock note.
14
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Item 2. Management's Discussions and Analysis of Financial Condition
And Results of Operations
The following discussion should be read in conjunction with Items 6 and
7 of the Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, and the Notes to Consolidated Financial Statements set forth in this
report.
Results of Operations
Overview. During the three and nine-month periods ended September 30,
1998, Virginia Gas Company (the "Company") recorded net income of $195,000 and
$220,000 respectively, compared to $138,000 and $508,000 for the same periods in
1997. The Company experienced net income growth of 41% during the three month
period when compared to the prior year. Basic and diluted income per common
share available to common stockholders for the corresponding periods was $0.03
and $0.04, respectively, in 1998 compared to $0.04 and $0.15, respectively, in
1997. Before the extraordinary item recorded during the first quarter of 1998,
the Company earned $454,000 for the nine-month period ending September 30, 1998,
which represents basic and diluted earnings per common share of $0.08. The
number of weighted-average shares used in calculating income per common share
for the three and nine months ended September 30, 1998 was 5,504,906 compared
with 3,868,017 and 3,428,928 for the corresponding periods in 1997.
Revenues. Total revenues declined 18% to $2.3 million for the three
months ended September 30, 1998, compared to $2.8 million for the same period in
1997. Natural gas sales totaled $663,000 for the third quarter of 1998 compared
to $1.5 million for the third quarter of 1998. The decrease reflects a one-time
sale of 200,000 MMBtu to a customer of the Company totaling $570,000, which
occurred during the three-month period ending September 30, 1997. Total natural
gas sales volume during the third quarter of 1998 was 346,000 MMBtu compared to
567,000 MMBtu during the same period in 1997. The Company's average natural gas
sales price declined during the period to $1.91/MMBtu from $2.57/MMBtu, which
accounted for a portion of the lower revenue. Pipeline revenues derived from the
Company's newly constructed portions of its Tidewater pipeline were $171,000 for
the quarter. Storage revenues at the Company's Saltville storage facility
increased 12% to $700,000 during the three months ended in 1998 compared to
$626,000 reflecting increased contract volume of 240,000 MMBtu. Propane gas
sales increased 6% to $165,000 during the third quarter of 1998 from $155,000
for the three months ended September 30, 1997. Exploration and production
revenues, reflecting the Company's well tending and gathering line revenue
declined slightly to $86,000 from $87,000 in 1997. Management revenues increased
during the third quarter of 1998 to $79,000 from $42,000 in 1997. Interest and
other income totaled $387,000 for the third quarter of 1998 and 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Revenue 3rd Qtr 3rd Qtr Percentage
1998 1997 Change
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Sales $ 663,000 $ 1,454,000 (54)%
-------------------------------------------------------------------------------------
Storage Revenues 700,000 626,000 12
-------------------------------------------------------------------------------------
Pipeline Revenues 171,000 - 100
-------------------------------------------------------------------------------------
Propane Gas Sales 165,000 155,000 6
-------------------------------------------------------------------------------------
Explor. & Prod. Revenues 86,000 87,000 ( 1)
-------------------------------------------------------------------------------------
Management Revenues 79,000 42,000 88
-------------------------------------------------------------------------------------
Interest and Other 387,000 387,000 -
-------------------------------------------------------------------------------------
Total $ 2,251,000 $ 2,751,000
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Item 2. Continued
Total revenues increased to $6.9 million for the nine months ended
September 30, 1998, compared to $6.8 million for the same period in 1997.
Natural gas sales declined $945,000 to $2,335,000 in 1998 from $3,280,000 during
the same period in 1997 due primarily to the $570,000 one-time sale of gas that
occurred in the third quarter of 1997. Sales volumes are consistent after
excluding the 200,000 MMBtu one-time sale at 1,040,815 MMBtu and 1,256,144 MMBtu
for the nine months ended September 30, 1998 and 1997, respectively. Average
sales prices have declined to $2.24/ MMBtu in 1998 compared to $2.57/MMBtu in
1997. Propane Gas Sales have increased approximately 200% to $818,000 during the
nine-month period compared to $273,000 during the comparable period in 1997.
Pipeline revenues for the nine-month period ending September 30, 1998 were
$171,000. The Company completed a 35-mile portion of its Tidewater pipeline
during 1998 and began collecting revenues for contracted demand.
Costs and Expenses. Total operating costs and expenses totaled $1.5
million for the three months ended September 30, 1998, compared to $2.1 million
for the same period in 1997. Total operating costs and expenses were $5.0
million for the nine months ended September 30, 1998 and 1997. Purchased gas
expenses decreased to $69,000 and $383,000 for the three and nine-month periods
ended September 30, 1998, respectively, from $764,000 and $830,000 for the
corresponding periods in 1997. These decreases reflect the one-time sale of gas
to a storage customer during the three-month period in 1997.
Operations and maintenance expenses totaled $208,000 and $626,000 for
the three and nine-month periods ended September 30, 1998 compared to $161,000
and $409,000 for the same periods in 1997, primarily reflecting operating costs
related to the growth of the propane distribution operations.
Cost of natural gas sold, related to the Company's marketing of natural
gas, totaled $610,000 and $2.2 million for the three and nine-month periods
ended September 30, 1998, compared to $682,000 and $2.3 million for the
corresponding 1997 periods. Sales volume decreased to 320,000 MMBtu and 1.0
million MMBtu for the three and nine months ending in 1998 compared to 367,000
MMBtu and 1.1 million MMBtu for the corresponding period in 1997.
Depreciation, depletion and amortization increased 15% to $240,000 in
the third quarter of 1998 from $208,000 for the third quarter of 1997. This
increase totaled 16% to $675,000 for the nine months ended September 30, 1998
from $582,000 for the same period in 1997. These increases are due to additions
in the Company's pipeline operations and propane operations that were put in
service during 1998.
General and administrative costs were $361,000 and $1.1 million for the
three and nine-month periods ended September 30, 1998, respectively, compared to
$272,000 and $719,000 for the corresponding periods in 1997. These increases
reflect the growth in the Company's propane operations and growth in
infrastructure during construction of the Tidewater Pipeline Project.
Interest Expense. Interest expense decreased 19% to $354,000 during
the third quarter of 1998 from $437,000 for the same period in 1997. Interest
expense was $1.1 million during the first nine months of 1998 and $1.2
million in the comparable 1997 period. These decreases are the result of
higher capitalized interest during increased construction activity. The
Company capitalizes interest on expenditures for significant projects while
activities are in progress to bring the assets to their intended use.
Capitalized interest for the three and nine-month periods ended
16
<PAGE>
Item 2. Continued
September 30, 1998 totaled $164,000 and $415,000, respectively. Capitalized
interest for the comparable 1997 periods totaled $80,000 and $225,000,
respectively.
Equity in Earnings of Affiliates. The Company has a 50% ownership
interest in two affiliated companies which provide natural gas storage,
gathering and distribution services: Virginia Gas Storage Company (the "Storage
Affiliate") and Virginia Gas Distribution Company (the "Distribution
Affiliate"). The Company accounts for its investments in these companies using
the equity method. For the three months ended September 30, 1998, the Company's
equity in earnings of these affiliates decreased to a loss of $55,000 from a
gain of $35,000 for the comparable period in 1997. The Company's equity in
earnings of affiliates decreased to a loss of $68,000 for the first nine months
of 1998 from a gain of $166,000 for the same period in 1997. These decreases
reflect higher interest and depreciation due to significant additions that were
added in 1997.
Income Taxes. Using the asset-and-liability method, deferred income
taxes reflect the temporary differences between assets and liabilities
recognized for financial reporting purposes and amounts recognized for income
tax purposes. The Company's provision for income taxes as a percentage of income
before its equity in earnings of affiliates (the Company's equity in earnings of
affiliates is reflected on a post-income tax basis) was 30% and 28% for the
three and nine-month periods ended September 30, 1998, respectively, compared
with 25% and 30%, respectively, for the same periods in 1997.
Equity Investments
Virginia Gas Storage Company. Storage revenues from the Early Grove
facility for the three months ended September 30, 1998, were $535,000 compared
to $622,000 for the same period in 1997. Storage revenues for the nine months
ended September 30, 1998, were $1.8 million compared to $1.9 million for the
comparable 1997 period. These decreases reflect the reduction of gas stored
under contract. At the end of September 1998, the Storage Affiliate had
1,670,000 MMBtu of stored gas under contract compared to 1,835,000 MMBtu in
1997. Gathering revenues totaled $39,000 and $169,000 for the three and
nine-month periods ended September 30, 1998, respectively, compared to $74,000
and $223,000 for the comparable periods in 1997. The nine-month decrease
reflects a reduction in natural gas throughput due partially to production
decline. Additionally, the Company experienced decreased peak winter service
volumes sold as a result of the milder seasonal temperatures during the first
quarter of 1998 as compared to the corresponding period in 1997. Revenues from
natural gas sales totaled $576,000 for nine-month period ended September 30,
1998, compared to $570,000 and $1.2 million for the three and nine months ended
September 30, 1997. Purchased gas expenses related to these sales totaled
$432,000 for the nine-month period in 1998 and $542,000 and $1.1 million for the
three and nine months ended September 30, 1997, respectively. The large decline
in gas sales is explained by the large one-time sale of gas to the Storage
Affiliate's parent, which in-turn was sold to a customer of the parent.
Virginia Gas Distribution Company. Distribution revenues for the
three months ended September 30, 1998, were $165,000, a decrease of $6,000
from revenues of $171,000 for the same period in 1997. Distribution revenues
for the first nine months of 1998 were $636,000, an increase of $45,000 over
revenues of $591,000 for the same period in 1997. The decrease during the
three-months ending September 30, 1998 is due to lower average prices that
have resulted from indexed-priced contracts. The average price for the 1998
period was $4.10 per MMBtu on volume of
17
<PAGE>
Item 2. Continued
40,000 MMBtu compared to $4.81 per MMBtu on volume of 36,000 MMBtu during the
same three-month period in 1997. The decreases in the indexes have been caused
by lower oil prices. A similar trend exists for the nine-month period, however,
volume growth has increased revenues. Average prices for the nine-months ending
September 30, 1998 were $4.52 per MMBtu on volumes of 141,000 MMBtu compared to
$5.20 per MMBtu on volumes of 114,000 MMBtu.
Financial Condition, Liquidity and Capital Resources
At September 30, 1998, the Company's working capital was $4.8 million,
compared to $13.0 million at December 31, 1997. The Company's current ratio
at September 30, 1998, was 3.17, a decrease from the ratio of 7.95 at
December 31, 1997. The decline in working capital is the result of
expenditures related to the construction of the Company's storage and
pipeline projects. The combined working capital of the Company's affiliates,
Virginia Gas Storage Company and Virginia Gas Distribution Company, increased
to a $1.4 million deficit at September 30, 1998, from the $1.3 million
deficit at December 31, 1997. The combined current ratio of these companies
was 0.30 at September 30, 1998 compared to 0.64 at December 31, 1997. Net
cash used in operations improved to $51,000 in the nine months ending
September 30, 1998 from $701,000 in the same period of 1997. The Company's
net cash decreased $9.8 million during the nine months ending September
30,1998 compared to an increase of $13.0 million in the same period of 1997,
reflecting construction expenditures during 1998.
Regulatory Matters
The Virginia State Corporation Commission (the "Commission") regulates the
Company's Saltville storage facility and its pipeline operations, the Storage
Affiliate, and the Distribution Affiliate. The Affiliates are involved in
discussions with the Staff of the Commission regarding the Commission's
policy on capitalized interest. Although Management believes its position on
this issue to be justifiable, those discussions could result in a portion of
capitalized interest being written-off by the affiliates. Neither the timing
of the resolution of this issue nor the potential effect on the Company are
currently estimable.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999 and
may not be applied retroactively. Management has not quantified the impacts
of adoption but believe that this Statement will have no material impact to
the financial statements.
18
<PAGE>
Item 2. Continued
Year 2000 Issue
The Company uses vendor-supported software exclusively. After
discussions with vendors, the Company believes that the year 2000 issue has been
appropriately addressed and does not expect the year 2000 issue to have a
material adverse impact on the financial position, results of operations, or
cash flows in future periods.
19
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Part II. Other Information
For the Nine Months Ended September 30, 1998
Item 4. Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of security holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See list of Exhibits on page 20 hereof.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the three months
ended September 30, 1998.
20
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
List of Exhibits
27 Financial Data Schedule for the Nine Months Ended September 30, 1998
21
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRGINIA GAS COMPANY
(Registrant)
By /s/ Michael L. Edwards
-----------------------------------------------
Michael L. Edwards, President, Chief Executive
Officer and Chairman of the Board of Directors
22
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------
<S> <C>
27 Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VIRGINIA GAS
COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,966,853
<SECURITIES> 0
<RECEIVABLES> 4,272,013
<ALLOWANCES> 0
<INVENTORY> 208,086
<CURRENT-ASSETS> 7,032,315
<PP&E> 38,301,931
<DEPRECIATION> 2,603,531
<TOTAL-ASSETS> 60,814,457
<CURRENT-LIABILITIES> 2,126,937
<BONDS> 24,291,956
0
0
<COMMON> 5,505
<OTHER-SE> 33,337,151
<TOTAL-LIABILITY-AND-EQUITY> 60,814,457
<SALES> 1,863,533
<TOTAL-REVENUES> 2,250,827
<CGS> 910,447
<TOTAL-COSTS> 1,511,945
<OTHER-EXPENSES> 27,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 353,670
<INCOME-PRETAX> 302,703
<INCOME-TAX> 107,338
<INCOME-CONTINUING> 195,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195,365
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
