<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 June 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 June 30, 1998
Table of Contents
<TABLE>
<CAPTION>
Item Page
Number PART I - FINANCIAL INFORMATION Number
<S> <C> <C>
1 Financial Statements:
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets at June 30, 1998 (unaudited) and December 31,
1997 3
Consolidated Statements of Income (unaudited) for the Three and Six Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited) for the Three and Six
Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Virginia Gas Storage Company
Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 7
Statements of Income (unaudited) for the Three and Six Months Ended June 30,
1998 and 1997 8
Statements of Cash Flows (unaudited) for the Three and Six Months Ended June
30, 1998 and 1997 9
Notes to Financial Statements 10
Virginia Gas Distribution Company
Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 11
Statements of Income (unaudited) for the Three and Six Months Ended June 30,
1998 and 1997 12
Statements of Cash Flows (unaudited) for the Three and Six Months Ended June
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 19
6 Exhibits and Reports on Form 8-K 20
List of Exhibits 21
Signature 22
Financial Data Schedule 23
</TABLE>
2
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 6,131,873 $11,750,899
Accounts receivable 2,913,726 2,681,818
Notes receivable 100,749 120,898
Other current assets 325,044 305,223
------------ ------------
Total current assets 9,471,392 14,858,838
Property and equipment, net 31,869,263 22,459,289
Investment in affiliated companies 4,447,314 4,459,937
Notes receivable - affiliated companies 12,900,164 12,900,164
Other assets 518,529 1,159,272
------------ ------------
Total assets $59,206,662 $55,837,500
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 33,097 $ 218,611
Accounts payable 340,989 1,092,846
Funds held for future distribution 275,078 511,099
Other current liabilities 96,947 46,111
------------ ------------
Total current liabilities 746,111 1,868,667
Long-term debt 24,291,956 19,728,422
Deferred income taxes 925,908 925,908
------------ ------------
Total liabilities 25,963,975 22,522,997
------------ ------------
Stockholders' equity:
Common stock - par value $.001, 100,000,000 (unaudited) and
10,000,000 shares authorized and 5,504,906 outstanding as of
June 30, 1998 and December 31, 1997, respectively
5,505 5,505
Additional paid-in capital 31,337,139 31,241,082
Retained earnings 1,900,043 2,067,916
------------ ------------
Total stockholders' equity 33,242,687 33,314,503
------------ ------------
Total liabilities and stockholders' equity $59,206,662 $55,837,500
------------ ------------
------------ ------------
</TABLE>
3
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 1,552,128 $ 1,617,892 $ 3,780,189 $ 3,500,537
Interest and other income 424,749 313,593 885,567 570,413
----------- ----------- ----------- -----------
1,976,877 1,931,485 4,665,756 4,070,950
----------- ----------- ----------- -----------
Expenses:
Production expenses 49,403 64,040 117,522 100,665
Purchased gas expense 73,921 45,454 314,844 66,113
Operation and maintenance expense 164,293 128,737 364,683 229,203
Cost of natural gas sold 631,371 690,236 1,547,716 1,635,003
Depreciation, depletion, and amortization 228,578 207,394 434,637 373,590
General and administrative 370,045 232,299 693,411 447,430
----------- ----------- ----------- -----------
1,517,611 1,368,160 3,472,813 2,852,004
----------- ----------- ----------- -----------
Other expense:
Interest 316,802 399,333 744,380 717,155
Other 36,833 36,726 79,499 68,039
----------- ----------- ----------- -----------
353,635 436,059 823,879 785,194
----------- ----------- ----------- -----------
Income before earnings of affiliated companies,
income taxes, and extraordinary loss 105,631 127,266 369,064 433,752
Equity in earnings (losses) of affiliated companies (38,099) 36,762 (12,608) 131,201
----------- ----------- ----------- -----------
Income before income taxes and extraordinary loss 67,532 164,028 356,456 564,953
Provision for income taxes 25,280 35,807 98,136 137,883
----------- ----------- ----------- -----------
Net income before extraordinary item 42,252 128,221 258,320 427,070
Extraordinary loss on extinguishment of debt -- -- 233,307 --
----------- ----------- ----------- -----------
Net income 42,252 128,221 25,013 427,070
Preferred dividends paid -- -- -- (57,055)
----------- ----------- ----------- -----------
Net income available to common stockholders $ 42,252 $ 128,221 $ 25,013 $ 370,015
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common share, basic and diluted:
Net income before extraordinary item $ 0.01 $ 0.04 $ 0.05 $ 0.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Extraordinary loss on extinguishment
of debt (net of tax) -- -- $ (0.04) --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share $ 0.01 $ 0.04 $ 0.01 $ 0.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted-average common shares outstanding 5,504,906 3,213,816 5,504,906 3,201,350
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
4
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 42,252 $ 128,221 $ 25,013 $ 427,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 228,578 207,394 434,637 373,590
Undistributed earnings (losses) of affiliated
companies 38,099 (36,762) 12,608 (131,201)
Deferred income taxes (224,408) 22,536 -- 99,093
Decrease (increase) in accounts receivable (184,089) 403,468 (231,908) (585,837)
(Increase) in other current assets (62,225) (79,365) (86,977) (97,828)
(Increase) decrease in other assets 65,773 (23,650) 635,197 84,342
Increase in notes payable -- 1,000,000 -- 1,000,000
Increase (decrease) in accounts payable (2,619,279) 98,553 (751,857) 385,009
(Decrease) increase in other current liabilities 69,957 (298,160) (114,838) (238,344)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities (2,645,342) 1,422,235 (78,125) 1,315,894
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (4,893,655) (1,729,675) (9,839,051) (3,149,551)
Issuance of notes receivable -- -- -- (3,650,000)
Payments received on notes receivable 106,029 27,294 113,015 59,968
------------ ------------ ------------ ------------
Net cash used in investing activities (4,787,626) (1,702,381) (9,726,036) (6,739,583)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Payment of loan principal (36,599) (49,558) (19,627,208) (1,214,222)
Proceeds from new loans 194,458 563,991 24,000,000 9,690,632
Redemption of preferred stock -- -- -- (2,000,000)
Proceeds from issuance of common stock, net -- -- 5,015 (125,666)
Payment of debt issuance costs -- 89,439 -- (350,579)
Establishment of financing reserve fund -- -- -- (558,750)
Dividends paid (96,336) (48,074) (192,672) (144,514)
------------ ------------ ------------ ------------
Net cash provided by financing activities 61,523 555,798 4,185,135 5,296,901
------------ ------------ ------------ ------------
Net increase (decrease) in cash (7,371,445) 275,652 (5,619,026) (126,788)
Cash, beginning of period 13,503,318 1,250,398 11,750,899 1,652,838
------------ ------------ ------------ ------------
Cash, end of period $ 6,131,873 $ 1,526,050 $ 6,131,873 $ 1,526,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosure:
Interest paid $ 510,000 $ 580,060 $ 736,659 $ 950,864
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income taxes paid $ 2,075 $ 11,158 $ 2,075 $ 11,158
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
5
<PAGE>
Virginia Gas Company and Subsidiaries
Notes to Consolidated Financial Statements
The accompanying unaudited financial statements as of June 30, 1998,
and for the three and six month periods ended June 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 six months ended June 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 consolidated financial statements for 1997 and the unaudited
consolidated financial statements for 1998 include the accounts of four
wholly-owned subsidiaries. The Company's investments in affiliated companies are
accounted for using the equity method. Investments carried at equity and the
percentage interest owned consist of Virginia Gas Storage Company (50 percent)
and Virginia Gas Distribution Company (50 percent).
In 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 Tidewater pipeline project. 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.
6
<PAGE>
Virginia Gas Storage Company
Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 104,850 $ 375,958
Accounts receivable 685,133 1,409,401
Other current assets 15,981 31,156
----------- -----------
Total current assets 805,964 1,816,515
Property and equipment, net 15,585,228 15,063,002
Other assets 847,703 1,133,920
----------- -----------
Total assets $17,238,895 $18,013,437
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 88,402 $ 109,450
Accounts payable 1,272,605 2,231,125
Other current liabilities 302,299 268,643
----------- -----------
Total current liabilities 1,663,306 2,609,218
Long-term debt 7,176,762 7,226,762
Deferred income taxes 713,441 713,441
----------- -----------
Total liabilities 9,553,509 10,549,421
----------- -----------
Stockholders' equity:
Common stock - no par value, 50,000 shares authorized and
38,200 shares issued and outstanding as of June 30, 1998 and
December 31, 1997, respectively 5,640,000 5,640,000
Retained earnings 2,045,386 1,824,016
----------- -----------
Total stockholders' equity 7,685,386 7,464,016
----------- -----------
Total liabilities and stockholders' equity $17,238,895 $18,013,437
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
Virginia Gas Storage Company
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 693,885 $ 740,711 $1,970,856 $2,149,463
Interest income 528 11,490 8,319 30,104
---------- ---------- ---------- ----------
694,413 752,201 1,979,175 2,179,567
---------- ---------- ---------- ----------
Expenses:
Production expenses 44,939 50,282 93,525 110,139
Purchased gas expense 10 1,460 431,546 510,502
Operation and maintenance expense 142,811 181,067 283,064 404,381
Depreciation, depletion, and amortization 150,398 128,137 285,982 256,332
General and administrative 92,297 199,909 162,084 392,535
---------- ---------- ---------- ----------
430,455 560,855 1,256,201 1,673,889
---------- ---------- ---------- ----------
Other expense:
Interest 147,771 88,013 305,984 165,380
Other 36,685 -- 81,580 --
---------- ---------- ---------- ----------
184,456 88,013 387,564 165,380
---------- ---------- ---------- ----------
Income before income taxes 79,502 103,333 335,410 340,298
Provision for income taxes 27,031 35,134 114,040 115,702
---------- ---------- ---------- ----------
Net income 52,471 $ 68,199 $ 221,370 $ 224,596
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Virginia Gas Company's equity in Virginia Gas
Storage Company's earnings $ 26,236 $ 34,100 $ 110,685 $ 112,298
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
Virginia Gas Storage Company
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 52,471 $ 68,199 $ 221,370 $ 224,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 150,398 128,137 285,982 256,332
Deferred income taxes -- 27,465 13,473 67,749
(Increase) decrease in accounts receivable 887,566 (38,602) 724,268 163,259
Decrease in other current assets 8,661 10,307 15,175 67,021
(Increase) decrease in other assets (133,186) (28,351) 265,134 (36,728)
Decrease in accounts payable (1,252,407) (52,143) (958,520) (828,428)
(Decrease) increase in other current liabilities 43,130 (7,304) 20,183 129,611
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (243,367) 107,708 587,065 43,412
----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (43,920) (391,260) (787,125) (1,447,079)
Payments received on notes receivable -- -- -- 500,000
----------- ----------- ----------- -----------
Net cash used in investing
activities (43,920) (391,260) (787,125) (947,079)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Payment of loan principal (2,147) (25,132) (71,048) (55,084)
Proceeds from new loans -- -- -- 1,000,000
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities (2,147) (25,132) (71,048) 944,916
----------- ----------- ----------- -----------
Net (decrease) increase in cash (289,434) (308,684) (271,108) 41,249
Cash, beginning of period 394,284 498,552 375,958 148,619
----------- ----------- ----------- -----------
Cash, end of period $ 104,850 $ 189,868 $ 104,850 $ 189,868
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosure:
Interest paid $ 127,172 $ 167,171 $ 228,734 $ 333,254
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes paid $ 19,500 $ 30,000 $ 19,500 $ 47,635
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
9
<PAGE>
Virginia Gas Storage Company
Notes to Financial Statements
The accompanying unaudited financial statements as of June 30, 1998,
and for the three and six month periods ended June 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 six months ended June 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, the 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 Tidewater pipeline
project. 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>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 307,042 $ 45,939
Accounts receivable 162,672 220,389
Current portion of notes receivable 17,686 248,062
Inventory 304,389 --
Other current assets 128,372 21,223
------------ ------------
Total current assets 920,161 535,613
Property and equipment, net 6,557,187 6,416,465
Notes receivable 2,898,121 2,948,121
Deferred tax asset 157,242 31,736
Other assets 785,897 1,204,387
------------ ------------
Total assets $ 11,318,608 $ 11,136,322
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 34,456 $ 41,347
Accounts payable 1,418,223 980,560
Other current liabilities 29,969 31,840
------------ ------------
Total current liabilities 1,482,648 1,053,747
Long-term debt 8,626,716 8,626,717
------------ ------------
Total liabilities 10,109,364 9,680,464
------------ ------------
Stockholders' equity:
Common stock - no par value, 100,000 shares authorized, 75,000
shares issued and outstanding as of June 30, 1998 and
December 31, 1997 1,500,000 1,500,000
Retained earnings (deficit) (290,756) (44,142)
------------ ------------
Total stockholders' equity 1,209,244 1,455,858
------------ ------------
Total liabilities and stockholders' equity $ 11,318,608 $ 11,136,322
------------ ------------
------------ ------------
</TABLE>
11
<PAGE>
Virginia Gas Distribution Company
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 190,066 $ 199,337 $ 471,159 $ 419,421
Interest income 70,557 114,881 143,579 211,303
Other income 23,839 23,444 43,182 45,288
--------- --------- --------- ---------
284,462 337,662 657,920 676,012
--------- --------- --------- ---------
Expenses:
Purchased gas expense 127,990 118,466 323,140 238,996
Operation and maintenance expense 45,053 19,431 86,547 38,386
Depreciation, depletion, and amortization 54,112 27,602 110,883 50,751
General and administrative 33,654 42,244 75,441 73,348
--------- --------- --------- ---------
260,809 207,743 596,011 401,481
--------- --------- --------- ---------
Other expense:
Interest 214,650 114,177 408,249 200,955
Other 3,954 7,675 27,272 16,293
--------- --------- --------- ---------
218,604 121,852 435,521 217,248
--------- --------- --------- ---------
Income (loss) before income taxes (194,951) 8,067 (373,612) 57,283
Provision (benefit) for income taxes (66,283) 2,743 (127,027) 19,477
--------- --------- --------- ---------
Net income (loss) $(128,668) $ 5,324 $(246,585) $ 37,806
--------- --------- --------- ---------
--------- --------- --------- ---------
Virginia Gas Company's equity in Virginia Gas
Distribution Company's earnings (loss) $ (64,334) $ 2,662 $(123,293) $ 18,903
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
12
<PAGE>
Virginia Gas Distribution Company
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (128,668) $ 5,324 $ (246,585) $ 37,806
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 54,112 27,602 110,883 50,751
Deferred income taxes -- 2,743 1,521 19,477
Decrease (increase) in accounts receivable 770,477 266,414 57,717 (241,965)
Decrease (increase) in other current assets (334,788) (46,745) (411,538) 6,137
Increase in other assets (81,397) (9,523) 414,988 (14,246)
Increase in accounts payable 277,393 1,015,374 437,663 1,100,915
Decrease in other current liabilities (141,306) (20,424) (128,897) (4,037)
----------- ----------- ----------- -----------
Net cash provided by operating
activities 415,823 1,240,765 235,752 954,838
----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (187,988) (2,487,213) (248,133) (3,070,452)
Loans made to affiliated companies -- -- -- (1,000,000)
Payments received on notes receivable -- 10,217 280,376 52,374
----------- ----------- ----------- -----------
Net cash (used in) provided by investing
activities (187,988) (2,476,996) 32,243 (4,018,078)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Payment of loan principal -- (9,565) (6,892) (20,503)
Proceeds from new loans -- -- -- 3,650,000
Payment of financing costs -- (143,892) -- (219,394)
Establishment of financing reserve fund -- -- -- (328,500)
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities -- (153,457) (6,892) 3,081,603
----------- ----------- ----------- -----------
Net (decrease) increase in cash 227,835 (1,389,688) 261,103 18,363
Cash, beginning of period 79,207 1,424,217 45,939 16,166
----------- ----------- ----------- -----------
Cash, end of period $ 307,042 $ 34,529 $ 307,042 $ 34,529
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosure:
Interest paid $ 298,954 $ 212,833 $ 428,020 $ 349,996
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes paid $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
13
<PAGE>
Virginia Gas Distribution Company
Notes to Financial Statements
The accompanying unaudited financial statements as of June 30, 1998,
and for the three and six month periods ended June 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 six months ended June 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, the 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 companies. With the proceeds, the Parent 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 Tidewater pipeline
project. 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 Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with items 6 and
7 of the Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, and the Notes to Consolidated Financial Statements set forth in this
report.
Results of Operations
Overview. During the three and six month periods ended June 30, 1998,
Virginia Gas Company (the "Company") recorded net income of $42,000 and $25,000,
respectively, compared to $128,000 and $427,000 for the same periods in 1997.
Basic and diluted net income per common share available to common stockholders
for the corresponding periods was $0.01 and $0.01, respectively, in 1998
compared to $0.04 and $0.12, respectively, in 1997. The number of
weighted-average shares used in calculating income per common share was
5,504,906 for the three and six months ended June 30, 1998, compared with
3,213,816 and 3,201,350 for the corresponding periods in 1997.
Revenues. Total revenues increased $46,000 to $1,977,000 for the three
months ended June 30, 1998, compared to $1,931,000 for the same period in 1997.
Propane gas sales increased $62,000 to $147,000 from $85,000 for the three month
period reflecting an increased customer base. In April 1997, the Company
purchased a portion of Blue Grass Oils propane territory, which included
approximately 1,300 customers. Through June 30 1998, the Company expanded the
operations by adding three field offices and is now serving 2,300 customers.
Revenues from the Company's Saltville natural gas storage facility decreased
slightly to $592,000 from $602,000. The Company significantly enhanced its
storage mix by focusing on 10-day "peaking" service contracts which yield more
revenues. This reduced the units of gas stored under contract from 767,000 Dths
to 417,000 Dths. The Company's pipeline and well operations revenue decreased
slightly from $93,000 during the same period in 1997 to $86,000. Natural gas
sales decreased $78,000 from $758,000 to $680,000 reflecting decreased volumes.
The Company sold 309,000 Dths during its second quarter of 1998 compared to
342,000 Dths during the same period in 1997. The Company's interest income
increased $100,000 from $313,000 to $413,000 in 1998 reflecting increased
liquidity from the Company's secondary stock offering in September 1997 and its
private debt placement in March 1998.
Total revenues increased 18% to $4.7 million for the six months ended
June 30, 1998, compared to $4.0 million for the same period in 1997. Propane gas
sales increased $534,000 to $652,000 from $118,000. Gas sales and well operation
revenues totaled $1.9 million for the first six months of 1998 compared to $2.0
million for the same period in 1997. Gas sales increased from 689,000 Dths to
695,000 Dths, however the average selling price decreased 9% from $2.65 per Dth
to $2.41 per Dth. Natural gas storage revenues decreased $27,000 from $1,228,000
during the six month period ended 1997 to $1,201,000 in 1998. Interest income
increased $282,000 to $846,000 from $564,000 during the same period in 1997
reflecting increased liquidity as discussed in the previous paragraph.
15
<PAGE>
Item 2. Continued
Costs and Expenses. Total operating costs and expenses totaled $1.5
million for the three months ended June 30, 1998, compared to $1.4 million for
the same period in 1997. Margins for sales of natural gas and propane gas
remained consistent. Natural gas cost of sales was $631,000 during the second
quarter of 1998 compared to $690,000 for 1997 and propane cost of sales was
$74,000 compared to $45,000. Production expense declined from $64,000 to $49,000
reflecting the maturation of the Company's exploration and production operation.
Operations and maintenance costs increased during the three month period to
$164,000 from $129,000 during the same period in 1997. This increase is
primarily due to the growth in the Company's propane operations.
Depreciation and amortization was $229,000 during the second quarter of
1998 compared to $207,000 for the same period in 1997. The propane operations
greatly expanded during the past year and placed additional assets into service
causing the majority of this increase.
General and administrative costs increased $138,000 from $232,000 in
1997 to $370,000 during the second quarter of 1998. The large increase in
general and administrative costs is the result of two factors: expansion of the
Company's propane operations and pipeline construction. The propane operation
requires an elevated level of general and administrative costs to serve its
expanding volume of customers. Additionally, the Company is currently
constructing the initial phases of the proposed 482-mile Tidewater Intrastate
Pipeline Project. In support of the current and upcoming construction the
Company has added 22 employees and significantly enhanced its infrastructure
during the past year.
Interest expense decreased during the current quarter to $317,000 from
$399,000 in 1997. Although the Company had additional borrowings outstanding
during 1998, those borrowings were at substantially lower rates. Additionally,
the Company was in a construction phase during the second quarter which
increased the amount of capitalized interest.
Total operating costs and expenses were $3.5 million for the six months
ended June 30, 1998, compared to $2.9 million for the same period in 1997.
Operating costs specifically related to the expansion of the Company's propane
operations accounted for the majority of noted increases. Propane cost of sales
and operations and maintenance expenses increased $360,000 for the 1998
six-month period corresponding to the aforementioned revenue growth. Operating
costs relating to the Company's pipeline operations increased slightly, but were
off-set by decreases in the marketing operations. The operating costs applicable
to the Company's exploration and production operations remained relatively
static for the six-month period ending June 30, 1998 compared to the
corresponding period in 1997.
Depreciation and amortization was $435,000 for the six months ended
June 30, 1998 compared to $374,000 for the same period in 1997. This increase,
as noted earlier, is primarily due to the expansion of the Company's propane
operations.
General and administrative costs were $693,000 for the six months ended
June 30, 1998, an increase of $246,000 from the $447,000 for the same period in
1997. As noted earlier, the Company's propane and pipeline operations have
expanded extensively and combine to account for essentially all of this
increase.
16
<PAGE>
Item 2. Continued
Interest expense totaled $744,000 for the six months ended June 30,
1998, compared to $717,000 for the same period in 1997. This increase of $27,000
is the result of a larger increase in gross interest expense due to additional
borrowing off-set by increased capitalized interest related to construction
projects.
Equity in Earnings of Affiliates. The Company has a 50% ownership
interest in two affiliated companies which provide natural gas storage,
gathering and distribution services. The Company accounts for its investments
in these companies using the equity method. For the second quarter 1998, the
Company's equity in earnings of these affiliates decreased to a loss of
$38,000 from income of $36,000 for the second quarter 1997. The Company's
storage operations showed a slight decrease between the periods while the
distribution operations had significant decreases. The decrease in the
Company's distribution affiliate's net income was primarily due to increases
in interest and depreciation related to the construction of a 13-mile
distribution pipeline in Russell County, Virginia completed in June 1997, and
which is not yet at full capacity. The largest customer using this pipeline,
Reynolds Wheels International, has indicated that it will double its usage in
November 1998. Secondarily, the decrease in the distribution operations is
explained by margin decline. The contracts for most of the largest customers
of the distribution operations are linked to fuel oil indices. These indices
dictate the fluctuations in revenues and do not coincide with natural gas
prices. The Company has renegotiated with one of the large customers to
mitigate this variance and expects to do the same for other customers.
The affiliated earnings for the six month period ended June 30, 1998
decreased to a $13,000 loss from income of $131,000 for the same period in 1997.
The income applicable to the storage operations remained static while the
distribution earnings decreased due to those facts previously mentioned.
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 tax-effected extraordinary items and equity earnings was 24% and 28% for
the second quarter 1998 and 1997, respectively. This same percentage was 27% and
32% for the six months ended June 30, 1998 and 1997, respectively.
Equity Investments
Natural Gas Storage. Storage revenues from the Early Grove facility for
the three months ended June 30, 1998, were $632,000 compared to $610,000 for the
same period in 1997. Storage revenues for the six months ended June 30, 1998,
were $1,246,000 compared to $1,265,000 for the comparable 1997 period. These
increases reflect variations in the mix of contract storage at the Early Grove
facility.
Natural Gas Distribution. Distribution revenues for the three months
ended June 30, 1998, were $190,000 compared to $199,000 for the same period
in 1997. Distribution revenues for the first six months of 1998 were
$471,000, an increase of $52,000 over revenues of $419,000 for the same
period in 1997. The Company's distribution operations realized greater unit
sales, but at a lower market price than that of the second quarter 1997. For
the six month period the unit price also declined, but the Company realized a
31% increase in unit sales which led to an increase in revenues. As mentioned
earlier the purchased gas expense for these sales did not fluctuate according
to sales due to negotiated contracts and thus the Company recognized greater
purchased gas expense in both reporting periods.
17
<PAGE>
Item 2. Continued
Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company's working capital was $8.7 million
compared to $13.0 million at December 31, 1997. The decrease in working capital
is explained by construction expenditures incurred during the second quarter for
the Company's 72-mile pipeline expansion project. The Company's current ratio at
June 30, 1998, was 11.5, compared to 8.0 at December 31, 1997. The combined
working capital of the Company's affiliates, Virginia Gas Storage Company and
Virginia Gas Distribution Company, remained consistent at a deficit of $1.3
million for both June 30, 1998 and December 31, 1997. The combined current ratio
of these companies was 0.57 at June 30, 1998.
18
<PAGE>
Virginia Gas Company and Subsidiaries
Part II. Other Information
For the Three Months Ended June 30, 1997
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held June 10,
1998. The meeting involved the election of directors,
amendments to the Company's Certificate of Incorporation and
Bylaws, and the appointment of auditors of the Company for the
1998 fiscal year. An aggregate of 5,152,562 voting shares of
the Company was represented in person or by proxy at the
Meeting.
Proposal 1. The shareholders approved the nomination of
Glenn B. Rogers and Karen K. Edwards to
serve the Company as directors for a
three-year term. Directors of the Company
who are continuing their term are Michael L.
Edwards, Everette G. Allen, Jr. and G. Lee
Crenshaw, II.
Proposal 2. The shareholders ratified an amendment to
the Company's Certificate of Incorporation
that (a) increased the number of authorized
shares of common and preferred stock from
10,000,000 to 101,000,000, (b) deleted
provisions describing rights associated with
the preferred stock and vest the Board of
Directors with the authority to determine
rights associated with the preferred stock,
and (c) deleted provisions requiring the
vote of the holders of 75% of the issued and
outstanding voting shares to (i) amend the
Company's Certificate of Incorporation or
the bylaws; (ii) approve a merger,
reorganization or recapitalization of the
Company; or (iii) sell all or substantially
all of the assets of the Company.
Proposal 3. The shareholders approved an amendment to
the Company's Bylaws that (a) deleted
provisions requiring the vote of the holders
of 75% of the issued and outstanding voting
shares to (i) amend the Company's
Certificate of Incorporation or make,
repeal, alter, amend or rescind the Bylaws;
(ii) approve a merger, reorganization or
recapitalization of the Company; or (iii)
sell all or substantially all of the assets
of the Company, and (b) permitted holders of
not less than a majority of the total voting
power of all shares of stock of the Company
entitled to vote in the election of
directors to amend the Bylaws.
Proposal 4. The shareholders ratified the appointment
of Arthur Andersen LLP, independent public
accountants, as auditors of the Company for
the 1998 fiscal year.
19
<PAGE>
Item 4. Continued
The results of the voting for each proposal were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C> <C> <C>
Proposal 1. Rogers 5,127,301 - 25,261
Edwards 5,100,069 - 52,493
Proposal 2. 4,752,870 218,121 31,754
Proposal 3. 4,821,495 150,921 30,329
Proposal 4. 5,141,972 5,325 5,265
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See list of Exhibits on page 20 hereof.
(b) The Company filed the following Current Reports on
Form 8-K during the quarter ended June 30, 1998:
Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 15, 1998.
20
<PAGE>
Virginia Gas Company and Subsidiaries
List of Exhibits
27 Financial Data Schedule for the Six Months Ended June 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
<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> MAR-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,131,873
<SECURITIES> 0
<RECEIVABLES> 3,014,475
<ALLOWANCES> 0
<INVENTORY> 224,762
<CURRENT-ASSETS> 9,471,391
<PP&E> 34,253,488
<DEPRECIATION> 2,384,225
<TOTAL-ASSETS> 59,206,662
<CURRENT-LIABILITIES> 746,111
<BONDS> 0
0
0
<COMMON> 5,505
<OTHER-SE> 33,237,182
<TOTAL-LIABILITY-AND-EQUITY> 59,206,662
<SALES> 1,552,128
<TOTAL-REVENUES> 1,976,877
<CGS> 918,988
<TOTAL-COSTS> 1,517,611
<OTHER-EXPENSES> 36,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316,802
<INCOME-PRETAX> 67,532
<INCOME-TAX> 25,280
<INCOME-CONTINUING> 42,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,252
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
