<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 March 31, 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 March 31, 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 March 31, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Income (Unaudited)
for the Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements Unaudited) 6
Virginia Gas Storage Company
Balance Sheets at March 31, 1998 (Unaudited) and
December 31, 1997 7
Statements of Income (Unaudited) for the Three Months
Ended March 31, 1998 and 1997 8
Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 1998 and 1997 9
Notes to Financial Statements (Unaudited) 10
Virginia Gas Distribution Company
Balance Sheets at March 31, 1998 (Unaudited) and
December 31, 1997 11
Statements of Income (Unaudited) for the Three Months
Ended March 31, 1998 and 1997 12
Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 1998 and 1997 13
Notes to Financial Statements (Unaudited) 14
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 18
List of Exhibits 19
Signature 20
Index to Exhibits 21
</TABLE>
2
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,503,318 $ 11,750,899
Accounts receivable 2,729,637 2,681,818
Notes receivable 100,748 120,898
Other current assets 350,126 305,223
------------ ------------
Total current assets 16,683,829 14,858,838
Property and equipment, net 27,201,261 22,459,289
Investment in affiliated companies 4,485,413 4,459,937
Notes receivable - affiliated companies 12,900,164 12,900,164
Other assets 587,227 1,159,272
------------ ------------
Total assets $ 61,857,894 $ 55,837,500
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 69,684 $ 218,611
Accounts payable 2,960,268 1,092,846
Funds held for future distribution 278,249 511,099
Other current liabilities 94,166 46,111
------------ ------------
Total current liabilities 3,402,367 1,868,667
Long-term debt 24,097,498 19,728,422
Deferred income taxes 1,150,315 925,908
------------ ------------
Total liabilities 28,650,180 22,522,997
------------ ------------
Stockholders' equity:
Common stock - par value $.001, 10,000,000
shares authorized, 5,504,906 shares issued
and outstanding as of March 31, 1998 and
December 31, 1997 5,505 5,505
Additional paid-in capital 31,248,068 31,241,082
Retained earnings 1,954,141 2,067,916
------------ ------------
Total stockholders' equity 33,207,714 33,314,503
------------ ------------
Total liabilities and stockholders' $ 61,857,894 $ 55,837,500
------------ ------------
------------ ------------
</TABLE>
3
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Operating revenue $2,228,061 $ 1,882,645
Interest and other income 460,818 256,820
----------- -----------
2,688,879 2,139,465
----------- -----------
Expenses:
Production expenses 37,813 36,625
Purchased propane gas expense 240,923 20,659
Cost of natural gas sold 916,345 944,767
Operation and maintenance expense 230,697 100,466
Depreciation, depletion, and amortization 206,059 166,196
General and administrative 323,366 215,131
----------- -----------
1,955,203 1,483,844
----------- -----------
Other expense:
Interest 427,578 317,822
Other 42,666 31,313
----------- -----------
470,244 349,135
Income before earnings of affiliated companies,
income taxes, and extraordinary loss 263,432 306,486
Equity in earnings of affiliated companies 25,491 94,439
----------- -----------
Income before income taxes and extraordinary
loss 288,923 400,925
Provision for income taxes 72,856 102,076
----------- -----------
Net income before extraordinary item 216,067 298,849
Extraordinary loss on extinguishment of debt
(net of tax) (233,305) -
----------- -----------
Net income (loss) (17,238) 298,849
Preferred dividends paid - (57,055)
----------- -----------
Net income (loss) available to common
stockholders $ (17,238) $ 241,794
----------- -----------
----------- -----------
Earnings (loss) per common share, basic and
diluted:
Net income before extraordinary item $ 0.04 $ 0.08
----------- -----------
----------- -----------
Extraordinary loss on extinguishment
of debt (net of tax) $ (0.04) $ -
----------- -----------
----------- -----------
Net income (loss) $ 0.00 $ 0.08
----------- -----------
----------- -----------
Weighted-average common shares outstanding 5,504,906 3,188,659
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (17,238) $ 298,849
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion, and amortization 206,059 166,196
Undistributed earnings of affiliated companies (25,491) (94,439)
Deferred income taxes 224,407 76,557
Increase in accounts receivable (47,819) (989,305)
Increase in other current assets (24,753) (18,463)
Decrease in other assets 572,045 107,937
Increase in accounts payable 1,867,422 286,456
Increase (decrease) in other current liabilities (333,722) 59,817
----------- -----------
Net cash provided by (used in) operating activities 2,420,910 (106,395)
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,946,246) (1,393,235)
Issuance of notes receivable - (3,650,000)
Payments received on notes receivable - 32,674
----------- -----------
Net cash used in investing activities (4,946,246) (5,010,561)
----------- -----------
Cash flows from financing activities:
Payment of loan principal (19,630,924) (1,164,664)
Proceeds from new loans 24,000,000 9,100,000
Redemption of preferred stock - (2,000,000)
Payment of issuance costs - (125,612)
Proceeds from exercised warrants 5,015 -
Payment of debt issuance costs - (440,018)
Establishment of financing reserve fund - (558,750)
Dividends paid (96,336) (96,440)
----------- -----------
Net cash provided by financing activities 4,277,755 4,714,516
----------- -----------
Net increase (decrease) in cash 1,752,419 (402,440)
Cash, beginning of period 11,750,899 1,652,838
----------- -----------
Cash, end of period $13,503,318 $ 1,250,398
----------- -----------
----------- -----------
Supplemental disclosure:
Interest paid $ 226,659 $ 370,804
----------- -----------
----------- -----------
</TABLE>
5
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited consolidated financial statements as of March
31, 1998, and for the three months ended March 31, 1998, have been prepared
in accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Virginia Gas Company (the "Company") annual report on
Form 10-KSB for the year ended December 31, 1997. 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 the Company have been included. Operating
results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ending December
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 a $24 million note to John Hancock. 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
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 394,284 $ 375,958
Accounts receivable 1,572,699 1,409,401
Notes receivable -- --
Other current assets 24,641 31,156
----------- ------------
Total current assets 1,991,624 1,816,515
Property and equipment, net 15,674,449 15,063,002
Other assets 731,774 1,133,920
----------- ------------
Total assets $18,397,847 $18,013,437
----------- ------------
----------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 90,549 $ 109,450
Accounts payable 2,525,012 2,231,125
Other current liabilities 259,168 268,643
----------- ------------
Total current liabilities 2,874,729 2,609,218
Long-term debt 7,176,762 7,226,762
Deferred income taxes 713,441 713,441
----------- ------------
Total liabilities 10,764,932 10,549,421
----------- ------------
Stockholders' equity:
Common stock - no par value, 50,000 shares authorized,
38,200 shares issued and outstanding as of March 31, 1998
and December 31, 1997 5,640,000 5,640,000
Retained earnings 1,992,915 1,824,016
----------- ------------
Total stockholders' equity 7,632,915 7,464,016
----------- ------------
Total liabilities and stockholders' equity $18,397,847 $18,013,437
----------- ------------
----------- ------------
</TABLE>
7
<PAGE>
Virginia Gas Storage Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Revenue:
Operating revenue $1,276,971 $1,408,752
Interest income 7,791 18,614
----------- ------------
1,284,762 1,427,366
----------- ------------
Expenses:
Production expenses 48,586 59,857
Purchased gas expense 436,278 509,042
Operation and maintenance expense 135,510 223,314
Depreciation, depletion, and amortization 135,584 128,195
General and administrative 69,788 155,825
----------- ------------
825,746 1,076,233
----------- ------------
Other expense:
Interest 158,213 77,367
Other 44,895 36,801
----------- ------------
203,108 114,168
----------- ------------
Income before income taxes 255,908 236,965
Provision for income taxes 87,009 80,568
----------- ------------
Net income $ 168,899 $ 156,397
----------- ------------
----------- ------------
Virginia Gas Company's equity in Virginia Gas
Storage Company's earnings $ 84,450 $ 78,198
----------- ------------
----------- ------------
</TABLE>
8
<PAGE>
Virginia Gas Storage Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 168,899 $ 156,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization 135,584 128,195
Deferred income taxes -- 80,891
Decrease (increase) in accounts receivable (163,298) 201,861
Decrease in other current assets 6,515 56,714
Decrease (increase) in other assets 398,320 (8,377)
(Decrease) increase in accounts payable 293,887 (776,285)
(Decrease)Increase in other current liabilities (28,376) 96,308
----------- ------------
Net cash (used in) provided by operating
activities 811,531 (64,296)
----------- ------------
Cash flows from investing activities:
Capital expenditures (743,205) (1,055,819)
Payments received on notes receivable -- 500,000
----------- ------------
Net cash used in investing activities (743,205) (555,819)
----------- ------------
Cash flows from financing activities:
Payment of loan principal (50,000) (29,952)
Proceeds from new loans -- 1,000,000
----------- ------------
Net cash provided by (used in) financing
activities (50,000) 970,048
----------- ------------
Net increase in cash 18,326 349,933
Cash, beginning of period 375,958 148,619
----------- ------------
Cash, end of period $ 394,284 $ 498,552
----------- ------------
----------- ------------
Supplemental disclosure:
Interest paid $ 105,562 $ 166,083
----------- ------------
----------- ------------
Income taxes paid $ -- $ 17,635
----------- ------------
----------- ------------
</TABLE>
9
<PAGE>
VIRGINIA GAS STORAGE COMPANY
Notes to Financial Statements
(Unaudited)
The accompanying unaudited financial statements as of March 31, 1998, and
for the three months ended March 31, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report on Form 10-KSB for the year ended
December 31, 1997 of Virginia Gas Company, the parent of Virginia Gas Storage
Company. 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 the Virginia Gas Storage
Company have been included. Operating results for the three months ended
March 31, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 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 a $24 million note to John Hancock. 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
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 79,207 $ 45,939
Accounts receivable 933,149 220,389
Current portion of notes receivable 17,686 248,062
Other current assets 97,974 21,223
------------- -------------
Total current assets 1,128,016 535,613
Property and equipment, net 6,423,311 6,416,465
Notes receivable 2,898,121 2,948,121
Deferred tax asset 30,215 31,736
Other assets 704,500 1,204,387
------------- -------------
Total assets $ 11,184,163 $ 11,136,322
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 34,455 $ 41,347
Accounts payable 1,140,830 980,560
Other current liabilities 44,250 31,840
------------- -------------
Total current liabilities 1,219,535 1,053,747
Long-term debt 8,626,717 8,626,717
------------- -------------
Total liabilities 9,846,252 9,680,464
------------- -------------
Stockholders' equity:
Common stock - no par value, 100,000 shares authorized,
75,000 shares issued and outstanding as of March 31, 1998
and December 31, 1997 1,500,000 1,500,000
Retained earnings (deficit) (162,089) (44,142)
------------- -------------
Total stockholders' equity 1,337,911 1,455,858
------------- -------------
Total liabilities and stockholders' equity $ 11,184,163 $ 11,136,322
------------- -------------
------------- -------------
</TABLE>
11
<PAGE>
Virginia Gas Distribution Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenue:
Operating revenue $281,093 $220,084
Interest income 73,022 96,422
Other income 19,343 21,844
--------- ---------
373,458 338,350
--------- ---------
Expenses:
Purchased gas expense 195,150 120,530
Operation and maintenance expense 41,492 18,955
Depreciation, depletion, and amortization 56,771 23,149
General and administrative 41,788 31,104
--------- ---------
335,201 193,738
--------- ---------
Other expense:
Interest 193,599 86,778
Other 23,318 8,618
--------- ---------
216,917 95,396
--------- ---------
Income (loss) before income taxes (178,660) 49,216
Provision for income taxes (60,743) 16,734
--------- ---------
Net income (loss) $(117,917) $ 32,482
--------- ---------
--------- ---------
Virginia Gas Company's equity in Virginia Gas
Distribution Company's earnings (loss) $ (58,959) $ 16,241
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
Virginia Gas Distribution Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (117,917) $ 32,482
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 56,771 23,149
Deferred income taxes 1,521 16,734
Increase in accounts receivable (712,760) (508,379)
Decrease (increase) in other current assets (80,253) 52,882
Decrease (increase) in other assets 499,857 (4,723)
Increase in accounts payable 160,270 85,541
Increase in other current liabilities 5,519 16,387
------------ ------------
Net cash used in operating activities (186,992) (285,927)
------------ ------------
Cash flows from investing activities:
Capital expenditures (60,116) (583,239)
Loans made to affiliated companies -- (1,000,000)
Payments received on notes receivable 280,376 42,157
------------ ------------
Net cash provided by (used in) investing activities 220,260 (1,541,082)
------------ ------------
Cash flows from financing activities:
Payment of loan principal -- (10,938)
Proceeds from new loans -- 3,650,000
Payment of financing costs -- (75,502)
Establishment of financing reserve fund -- (328,500)
------------ ------------
Net cash provided by financing activities -- 3,235,060
------------ ------------
Net increase in cash 33,268 1,408,051
Cash, beginning of period 45,939 16,166
------------ ------------
Cash, end of period $ 79,207 $1,424,217
------------ ------------
------------ ------------
Supplemental disclosure:
Interest paid $ 129,066 $ 137,163
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
Notes to Financial Statements
(Unaudited)
The accompanying unaudited financial statements as of March 31, 1998, and
for the three months ended March 31, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report on Form 10-KSB for the year ended
December 31, 1997 of Virginia Gas Company, the parent of Virginia Gas
Distribution Company. 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 have been included. Operating results for
the three months ended March 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 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 a $24 million note to John Hancock. 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 months ended March 31, 1998, Virginia Gas
Company (the "Company") recorded a net loss of $17,238 compared to net income
of $241,794 for the same period in 1997. Basic and diluted net income per
common share available to common stockholders for the corresponding periods
was $0.00 in 1998 compared to $0.08 in 1997. The number of weighted-average
shares used in calculating income per common share was 5,504,906 and
3,188,659 for the three months ended March 31, 1998 and 1997, respectively.
The quarter was impacted by an extraordinary loss on extinquishment of debt,
which totaled $233,305. Before the extraordinary loss, the Company earned
$0.04 per common share.
Revenues. Total revenues increased 26% to $2.7 million for the three
months ended March 31 1998, compared to $2.1 million for the same period in
1997. The company experienced significant growth in its propane operations.
Propane gas sales increased significantly to $505,000 from $32,000. The
increase reflects a mid-1997 acquisition and the continued growth of the
existing propane operation. Natural gas sales decreased to $992,000 from
$1,068,000 largely due to the warmer than usual weather in the Company's
service area. The company sold 327,320 Dth of gas during the first quarter of
1998 compared to 347,597 Dth during the same period in 1997, a 6% decrease.
Natural gas storage revenues totaled $609,000 and $626,000, respectively, for
the three months ended March 31, 1998 and 1997. Withdrawals decreased from
576,330 to 327,936 Dth, reflective of the warmer weather. However, revenue
remained stable due to consistent demand charges. Interest income increased
from $251,000 to $433,000, which reflects the Company's increased liquidity
from the September 1997 secondary offering.
Costs and Expenses. Total operating costs and expenses totaled $1,955,000
for the three months ended March 31, 1998, compared to $1,484,000 for the same
period in 1997. Production and purchased gas expenses increased to $1,195,000
from $1,002,000, which reflects the increase in purchased propane and a slight
decrease in the cost of natural gas sold due to the lower sales volume.
Operations and maintenance expenses totaled $234,000 for the three months
ended March 31, 1998 compared to $100,000 for the same period in 1997, primarily
reflecting increased operating costs related to the Saltville storage facility
in addition to the propane distribution operations.
General and administrative costs increased to $323,000 from $215,000. This
increase reflects higher expenses in support of construction on the first
portion of the Tidewater pipeline. This segment runs 72 miles from the Company's
Saltville storage facility to Radford, VA.
Depreciation, depletion and amortization increased 24% to $206,000 in the
first quarter of 1998 from $166,000 for the first quarter of 1997. These
increases reflect the recovery of costs
15
<PAGE>
Item 2. Continued
for capital projects recently placed into service, primarily the Company's
Saltville storage facility.
Interest Expense. Interest expense increased 35% to $428,000 during the
first quarter of 1998 from $318,000 for the same period in 1997. These increases
are due primarily to additional tax-exempt bond financing, particularly the
Russell County 1997 issue that was closed in February of 1997. 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 months ended March 31, 1998 totaled $51,000 compared to $71,000
during the same period in 1997.
Equity in Earnings of Affiliates. The Company has a 50% ownership interest
in two affiliated companies which provide natural gas storage, gathering and
distribution services. The Company accounts for its investments in these
companies using the equity method. For the three months ended March 31, 1998,
the Company's equity in earnings of these affiliates decreased 73% to $25,000
from $94,000 for the comparable period in 1997. These decreases reflect
significant margin deterioration in the Company's distribution subsidiary as a
result of petroleum indexed contracts.
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 35% to 25% for the
three months ended March 31, 1998 and 1997.
Equity Investments
Natural Gas Storage. Storage revenues from the Early Grove facility for the
three months ended March 31, 1998, were $614,000 compared to $655,000 for the
same period in 1997. The Early Grove facility also experienced lower natural gas
sales. Gas sales decreased from $612,000 to $576,000 as volume increased from
131,000 to 181,012 Dths. The lower revenue resulted from an approximate $1.50
decrease in the average sales price of gas. Consistent with the reduction in
sales price was the purchase price of gas. Purchased gas expense decreased from
$509,042 to $431,535 reflecting a $1.50 decrease in average purchase price.
Natural Gas Distribution. Distribution revenues for the three months ended
March 31, 1998, were $281,000, an increase of $61,000 over revenues of $220,000
for the same period in 1997. These increases primarily reflect increased usage
during 1998 by industrial customers. Usage increased to 56,387 Dths compared to
38,365 Dths. Purchased gas costs related to these sales totaled $195,000 and
$120,000 for the three months ended March 31, 1998. Natural gas gross margin
during the first quarter of 1998 decreased from 45% during the first quarter of
1997 to 31%. This is primarily due to the drop in petroleum prices. The
distribution subsidiary has contracts indexed to petroleum prices.
16
<PAGE>
Item 2. Continued
Financial Condition, Liquidity and Capital Resources
The Company's working capital improved from $13.0 million on December 31,
1997 to $13.3 million on March 31, 1998. The combined working capital of the
Company's affiliates, Virginia Gas Storage Company and Virginia Gas Distribution
Company, increased to a $975,000 deficit at March 31, 1998, from a $1,311,000
deficit at December 31, 1997. Cash increased to $13.5 million at March 31, 1998
from $11.8 million at December 31, 1997.
In March 1998, the Company completed a refinancing transaction whereby the
Company issued a $24,000,000 note to John Hancock. 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.
17
<PAGE>
Item 5. Other Events
Virginia Gas Company ("the Company") filed on March 31, 1998 a Form
10-KSB for the fiscal year ended December 31, 1997. The Company's 10-KSB
contained disclosures concerning a one-time extraordinary loss relating to a
debt refinancing which was consummated on March 19, 1998. Specifically, the
following sections refer to this refinancing: Item 6. "Management's
Discussion and Analysis" under the heading "Debt Refinancing"; Item 7.
"Financial Statements", Footnote 15 "Subsequent Event"; Exhibit 99.1,
Virginia Gas Storage Company financial statements, Footnote 14 "Subsequent
Event", Exhibit 99.2, Virginia Gas Distribution Company financial statements,
Footnote 10 "Subsequent Event".
The Company's orginal estimate of the one-time extraordinary loss, net of
tax, was disclosed as $815,000 for the consolidated entity, and $600,000 and
$375,000 for the affiliated Virginia Gas Storage and Distribution Companies
(the "Affiliates"), respectively. The Company completed its research of this
issue and concluded that the magnitude of the loss, net of tax, was $233,000
rather than $815,000 for the consolidated entity. The Company recognized the
remaining costs as a regulatory asset on its wholly-owned regulated
subsidiary Viriginia Gas Pipeline Company. In addition, the company
recognized all the costs as regulatory assets on its Affiliates. This
recognition is appropriate under the provisions of Statement of Financial
Accounting Standards No. 71 "Accounting for Effects of Certain Types of
Regulation".
The regulatory assets on the affiliated companies and wholly-owned
subsidiary will be amortized over the 14-year life of the refinanced notes.
The Company believes it will be permitted to include the regulatory asset in
its rate filings with the Virginia State Corporation Commission and may
obtain rate recovery for the related amortization.
SIGNATURES
Purusuant to the requirements of the Securities Exchange Act of 1934,
Virginia Gas Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VIRGINIA GAS COMPANY
(Registrant)
By:
-----------------------------------------------
Michael L. Edwards
President, Chief Executive Officer and Director
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Part II. Other Information
For the Three Months Ended March 31, 1998
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See list of Exhibits on page 19 hereof.
(b) Reports on Form 8-K:
Virginia Gas Company issued an 8-K on May 15, 1998 explaining
the change in an accounting estimate, from that which was
originally reported as a subsequent event on the December 31, 1997
10-KSB, with respect to certain issuance and defeasance costs
pursuant to a bond refinancing that occurred on March 19, 1998.
18
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
List of Exhibits
27 Financial Data Schedule for the three months ended March 31, 1998
19
<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, Director, and
acting Chief Financial Officer
20
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<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> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,503,318
<SECURITIES> 0
<RECEIVABLES> 2,729,637
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,683,829
<PP&E> 27,201,261
<DEPRECIATION> 206,059
<TOTAL-ASSETS> 61,857,894
<CURRENT-LIABILITIES> 3,402,367
<BONDS> 0
0
0
<COMMON> 5,505
<OTHER-SE> 33,202,209
<TOTAL-LIABILITY-AND-EQUITY> 61,857,894
<SALES> 2,228,061
<TOTAL-REVENUES> 2,688,879
<CGS> 1,157,268
<TOTAL-COSTS> 1,955,203
<OTHER-EXPENSES> 470,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427,578
<INCOME-PRETAX> 288,923
<INCOME-TAX> 72,856
<INCOME-CONTINUING> 216,067
<DISCONTINUED> 0
<EXTRAORDINARY> 233,305
<CHANGES> 0
<NET-INCOME> 17,238
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
