<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, 1999
/ / 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, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER PAGE NUMBER
----------- -----------
PART I - FINANCIAL INFORMATION
<S> <C> <C>
1 Financial Statements:
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the Three and Six Months
Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Virginia Gas Storage Company
Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 9
Statements of Operations (unaudited) for the Three and Six Months Ended
June 30, 1999 and 1998 10
Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1999 and
1998 11
Notes to Financial Statements (unaudited) 12
Virginia Gas Distribution Company
Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 13
Statements of Operations (unaudited) for the Three and Six Months Ended June 30,
1999 and 1998 14
Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1999 and
1998 15
Notes to Financial Statements (unaudited) 16
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
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
Financial Data Schedule 23
</TABLE>
2
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 677,824 $ 1,763,753
Accounts receivable 524,060 3,469,757
Notes receivable 39,500 38,800
Other current assets 964,152 498,707
----------- -----------
Total current assets 2,205,536 5,771,017
PROPERTY AND EQUIPMENT, net 40,267,231 37,139,538
INVESTMENT IN AFFILIATED COMPANIES 4,361,063 3,930,554
NOTES RECEIVABLE - AFFILIATED COMPANIES 13,007,624 13,000,912
OTHER ASSETS 711,777 619,533
----------- -----------
Total assets $60,553,231 $60,461,554
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 22,798 $ 2,546,734
Accounts payable 638,288 542,626
Funds held for future distribution 29,910 266,806
Other current liabilities 285,568 261,624
----------- -----------
Total current liabilities 976,564 3,617,790
LONG-TERM DEBT 26,254,444 24,254,444
DEFERRED INCOME TAXES 645,674 645,674
----------- -----------
Total liabilities 27,876,682 28,517,908
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - par value $.001, 100,000,000 (unaudited)
shares authorized and 5,504,906 outstanding as of
June 30, 1999 and December 31, 1998, respectively 5,505 5,505
Additional paid-in capital 31,375,267 31,375,267
Retained earnings 1,295,777 562,874
----------- -----------
Total stockholders' equity 32,676,549 31,943,646
----------- -----------
Total liabilities and stockholders' equity $60,553,231 $60,461,554
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(restated- (restated-
see note 1) see note 1)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $2,059,222 $1,552,128 $4,558,188 $3,780,189
Interest and other income 330,744 424,749 698,774 885,567
---------- ---------- ---------- ----------
2,389,966 1,976,877 5,256,962 4,665,756
---------- ---------- ---------- ----------
EXPENSES:
Cost of natural gas sold 636,070 631,371 1,100,306 1,547,716
Purchased propane gas expense 100,622 73,921 352,504 314,844
Operation and maintenance expense 304,631 253,648 732,693 564,824
Depreciation, depletion, and amortization 381,138 225,390 709,621 431,449
General and administrative 429,124 366,925 870,961 690,291
---------- ---------- ---------- ----------
1,851,585 1,551,255 3,766,085 3,549,124
---------- ---------- ---------- ----------
Other expense-interest 412,007 316,802 777,847 744,380
---------- ---------- ---------- ----------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES, INCOME 126,374 108,820 713,030 372,252
TAXES, AND EXTRAORDINARY LOSS
Equity in earnings (losses) of affiliated companies (10,097) (29,386) 430,523 (3,896)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 116,277 79,434 1,143,553 368,356
Provision for income taxes 22,835 26,303 217,978 99,157
---------- ---------- ---------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEM 93,442 53,131 925,575 269,199
Extraordinary loss on extinguishment of debt (net of tax) -- -- -- (832,493)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 93,442 $ 53,131 $ 925,575 $ (563,294)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.02 $ 0.01 $ 0.17 $ 0.05
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT (NET OF TAX) -- -- -- (0.15)
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ 0.17 $ (0.10)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 5,504,906 5,504,906 5,504,906 5,504,906
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1999 1998
------------ ------------
(restated- see note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 925,575 $ (563,294)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation, depletion, and amortization 709,621 431,449
Undistributed (earnings) losses of affiliated companies (430,523) 475,177
Decrease (increase) in accounts receivable 2,945,697 (231,908)
Increase in other current assets (465,445) (107,126)
Decrease (increase) in other assets (92,244) 330,333
Increase (decrease) in accounts payable 95,662 (751,857)
Decrease in other current liabilities (212,950) (157,035)
------------ ------------
Net cash provided by (used in) operating activities 3,475,393 (574,261)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,837,302) (9,839,068)
Issuance of notes receivable (7,412) --
Payments received on notes receivable -- 20,149
------------ ------------
Net cash used in investing activities (3,844,714) (9,818,919)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (523,936) (19,630,924)
Proceeds from new loans -- 24,000,000
Payment of debt issuance costs -- (96,057)
Proceeds from exercised warrants -- 5,015
Refund of financing reserve -- 688,792
Dividends paid (192,672) (192,672)
------------ ------------
Net cash provided by (used in) financing activities (716,608) 4,774,154
------------ ------------
NET DECREASE IN CASH (1,085,929) (5,619,026)
CASH, beginning of period 1,763,753 11,750,899
------------ ------------
CASH, end of period $ 677,824 $ 6,131,873
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 1,080,569 $ 736,659
------------ ------------
------------ ------------
Income taxes paid $ 100,000 $ 2,075
------------ ------------
------------ ------------
</TABLE>
5
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The accompanying unaudited consolidated financial statements as of June
30, 1999, and for the three and six months ended June 30, 1999 and 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, 1998. 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 and six months ended June 30, 1999, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
The consolidated financial statements for 1998 and the unaudited
consolidated financial statements for 1999 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).
Due to certain non-cash charges recorded by the Company during the
fourth quarter of 1998, the Company breached its debt service coverage
covenant related to its debt agreements as of June 30, 1999. The Company
received a waiver of this covenant from its creditors through December 31,
1999.
In March 1998, the Company completed a refinancing transaction whereby
the Company issued a $24 million note to John Hancock Mutual Life Insurance
Company. With the proceeds, the Company retired or defeased $19.6 million of
industrial revenue bonds. The remaining proceeds were used to develop the
Company's pipeline projects. As a result of this refinancing, the Company
incurred a one time after-tax charge of approximately $832,000. The Company and
its affiliates had originally capitalized as a regulatory asset a portion of
this loss. Later in 1998, in connection with the completion of administrative
proceedings with the Virginia State Corporation Commission, the Company
determined that neither it nor its affiliates qualify as regulated entities as
defined by FASB Statement No. 71, "ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES
OF REGULATION." Accordingly, the Company restated 1998 earnings to reflect the
entire $832,000 extraordinary loss and adjusted for amortization expense that
was previously recorded throughout 1998. The loss related to the accelerated
amortization of issue costs associated with the industrial revenue bonds, and
defeasement premiums, interest, and other fees related to the 1994 Russell
County bond issue.
2. SEGMENT INFORMATION:
The Company classifies its business into five fundamental areas: natural gas
storage, production, transportation, propane distribution and parent company
activities. Storage activities include revenues derived from and expenses
incurred in the operation of the Saltville Storage Facility. The production
segment includes gas sales from Company operated wells through its Virginia Gas
Marketing Company and the related expenses. Transportation activities include
revenue derived from the Company's P-25 pipeline system and the expenses
incurred to operate that system. The propane distribution segment includes all
revenues obtained through the retail distribution of propane and the related
expenses. The parent company activities relate solely to activities of Virginia
Gas Company as a holding company. Information as to the operations of the
Company in different business segments is set forth below based on the nature of
the products and services offered.
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STORAGE:
Total assets $ 20,814,998 $ 30,808,963 $ 20,814,998 $ 30,808,963
Capital expenditures $ 774,339 $ 3,772,948 $ 2,416,124 $ 5,751,904
Operating revenues $ 710,264 $ 659,068 $ 1,453,388 $ 1,294,761
Interest income -- 88,654 -- 324,754
Other income 2,729 425 2,729 425
Operation and maintenance (146,098) (156,926) (336,828) (327,595)
Depreciation, depletion, and
Amortization (125,211) (108,846) (259,243) (208,543)
------------ ------------ ------------ ------------
STORAGE OPERATING INCOME $ 441,684 $ 482,375 $ 860,046 $ 1,083,802
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PRODUCTION:
Total assets $ 3,854,102 $ 5,535,834 $ 3,854,102 $ 5,535,834
Capital expenditures $ 8,776 $ 19,397 $ 29,409 $ 48,667
Operating revenues $ 855,551 $ 821,648 $ 1,643,109 $ 1,990,715
Interest income 11,165 10,430 22,117 21,776
Other income 3,019 2,270 5,836 3,668
Cost of natural gas sold (636,070) (631,371) (1,100,306) (1,547,716)
Operations and maintenance (36,255) (43,809) (78,387) (101,804)
Depreciation, depletion, and
Amortization (45,039) (61,312) (90,314) (123,195)
------------ ------------ ------------ ------------
PRODUCTION OPERATING INCOME $ 152,371 $ 97,856 $ 402,055 $ 243,444
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TRANSPORTATION:
Total assets $ 13,876,666 $ 4,313,255 $ 13,876,666 $ 4,313,255
Capital expenditures $ 550,086 $ 539,201 $ 832,812 $ 3,086,888
Operating revenues $ 285,880 $ -- $ 574,792 $ --
Other Income 1,099 -- 1,099 --
Operation and maintenance (58,804) -- (132,955) --
Depreciation, depletion, and
amortization (85,200) -- (151,480) --
------------ ------------ ------------ ------------
TRANSPORTATION OPERATING INCOME $ 142,975 $ -- $ 291,456 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PROPANE DISTRIBUTION:
Total assets $ 2,460,960 $ 2,879,768 $ 2,460,960 $ 2,879,768
Capital expenditures $ 216,841 $ 209,871 $ 490,166 $ 541,530
Operating revenue $ 217,780 $ 168,712 $ 926,372 $ 686,693
Interest income -- 7,214 -- 7,214
Other income 30,211 6,500 109,097 33,322
Propane gas expense (100,622) (73,921) (352,504) (314,844)
<CAPTION>
7
<PAGE>
<S> <C> <C> <C> <C>
Operation and maintenance (63,474) (52,913) (184,523) (135,425)
Depreciation, depletion, and
amortization (56,527) (39,949) (108,624) (68,281)
------------ ------------ ------------ ------------
PROPANE DISTRIBUTION OPERATING INCOME $ 27,368 $ 15,643 $ 389,818 $ 208,679
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PARENT COMPANY:
Investments in subsidiaries and
affiliates $ 29,111,063 $ 28,734,745 $29,111,063 $ 28,734,745
Notes receivable from subsidiaries and
affiliates $ 21,469,845 $ 21,393,612 $21,469,845 $ 21,393,612
Total assets $ 55,038,715 $ 54,850,003 $55,038,715 $ 54,850,003
Capital expenditures $ 64,239 $ 352,238 $ 68,791 $ 410,079
Operating revenue $ 191,092 $ -- $ 410,907 $ --
Interest income 483,985 596,318 946,343 1,101,070
Other income 236 2,420 256 2,420
Depreciation, depletion, and
Amortization (69,161) (15,283) (99,960) (31,430)
------------ ------------ ------------ ------------
PARENT COMPANY OPERATING INCOME $ 606,152 $ 583,455 $ 1,257,546 $ 1,072,060
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ELIMINATION OF INTERCOMPANY/INTERSEGMENT
ACTIVITY:
Total assets $(35,492,210) $(35,428,080) $(35,492,210) $(35,428,080)
Operating revenues $ (201,345) $ (97,300) $ (450,380) $ (191,980)
Interest and other income $ (201,700) $ (289,482) $ (388,703) $ (609,082)
VIRGINIA GAS COMPANY CONSOLIDATED:
Total assets $ 60,553,231 $ 62,959,743 $ 60,553,231 $ 62,959,743
Capital expenditures $ 1,614,281 $ 4,893,655 $ 3,837,302 $ 9,839,068
Operating revenues $ 2,059,222 $ 1,552,128 $ 4,558,188 $ 3,780,189
Interest income 293,450 413,134 579,757 845,732
Other income 37,294 11,615 119,017 39,835
Cost of gas sold (636,070) (631,371) (1,100,306) (1,547,716)
Propane gas expense (100,622) (73,921) (352,504) (314,844)
Operations and maintenance (304,631) (253,648) (732,693) (564,824)
Depreciation, depletion, and
amortization (381,138) (225,390) (709,621) (431,449)
------------ ------------ ------------ ------------
VIRGINIA GAS COMPANY CONSOLIDATED
OPERATING INCOME $ 967,505 $ 792,547 $ 2,361,838 $ 1,806,923
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
8
<PAGE>
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 434,274 $ 36,800
Accounts receivable 543,453 740,748
Other current assets 29,441 33,932
----------- -----------
Total current assets 1,007,168 811,480
PROPERTY AND EQUIPMENT, net 13,871,443 15,420,259
OTHER ASSETS 158,230 132,001
----------- -----------
Total assets $15,036,841 $16,363,740
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 745 $ 5,943
Accounts payable 117,149 1,123,993
Other current liabilities 673,581 57,580
----------- -----------
Total current liabilities 791,475 1,187,516
LONG-TERM DEBT - VIRGINIA GAS COMPANY 5,255,547 7,255,547
DEFERRED INCOME TAXES 626,136 626,136
----------- -----------
Total liabilities 6,673,158 9,069,199
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000 shares authorized and 38,200
shares issued and outstanding 5,640,000 5,640,000
Retained earnings 2,723,683 1,654,541
----------- -----------
Total stockholders' equity 8,363,683 7,294,541
----------- -----------
Total liabilities and stockholders' equity $15,036,841 $16,363,740
----------- -----------
----------- -----------
</TABLE>
9
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------------ --------- ----------- -----------
(restated- (restated-
see note 1) see note 1)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 580,778 $ 693,885 $ 1,762,756 $ 1,970,856
Interest and other income 7,741 528 1,225,410 8,319
------------ --------- ----------- -----------
588,519 694,413 2,988,166 1,979,175
------------ --------- ----------- -----------
EXPENSES:
Purchased gas expense 7,676 10 370,063 431,546
Operation and maintenance expense 137,888 224,436 379,334 458,169
Depreciation, depletion, and amortization 101,136 138,105 223,298 273,689
General and administrative 67,948 92,296 150,122 162,084
------------ --------- ----------- -----------
314,648 454,847 1,122,817 1,325,488
------------ --------- ----------- -----------
Other expense - interest 111,763 147,771 245,437 305,984
------------ --------- ----------- -----------
INCOME BEFORE INCOME TAXES 162,108 91,795 1,619,912 347,703
Provision for income taxes 55,117 31,210 550,770 118,219
------------ --------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS 106,991 60,585 1,069,142 229,484
Extraordinary loss on extinguishment of debt (net of tax) - - - (478,685)
------------ --------- ----------- -----------
NET INCOME (LOSS) $ 106,991 $ 60,585 $ 1,069,142 $ (249,201)
------------ --------- ----------- -----------
------------ --------- ----------- -----------
</TABLE>
10
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1999 1998
----------- -----------
(as restated
- see note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,069,142 $ (249,201)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, depletion, and amortization 223,398 273,689
Extraordinary loss on extinguishment of debt - 725,281
Gain on sale of fixed assets (1,355,669) -
Decrease in accounts receivable 197,295 724,268
Decrease in other current assets 4,491 15,175
Increase in other assets (26,229) (196,118)
Decrease in accounts payable (1,006,844) (958,520)
Increase (decrease) in other current liabilities 616,001 (208,760)
----------- -----------
Net cash provided by (used in) operating activities (278,415) 125,814
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,913) (787,125)
Proceeds from sale of fixed assets 2,700,000 -
----------- -----------
Net cash provided by (used in) investing activities 2,681,087 (787,125)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - (156,731)
Refund of reserve funds - 617,982
Payment of loan principal (2,005,198) (71,048)
----------- -----------
Net cash provided by (used in) financing activities (2,005,198) 390,203
----------- -----------
NET INCREASE (DECREASE) IN CASH 397,474 (271,108)
CASH, beginning of period 36,800 375,958
----------- -----------
CASH, end of period $ 434,274 $ 104,850
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 92,300 $ 228,734
----------- -----------
----------- -----------
Income taxes paid $ 185,000 $ 19,500
----------- -----------
----------- -----------
</TABLE>
11
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited financial statements as of June 30, 1999,
and for the three and six month periods ended June 30, 1999 and 1998,
include, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to present fairly the combined
financial position, results of operations and cash flows of Virginia Gas
Storage Company (the Company). Operating results for the three and six months
ended June 30, 1999, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's (VGC) Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 1999.
In February 1999, VGSC sold its 60% interest in the Haysi Gathering
System for $2,700,000. This resulted in a net before tax gain of $1,216,000 that
is recorded as other income during the quarter ending March 31, 1999.
In March 1998, VGC completed a refinancing transaction whereby VGC
issued a $24 million note to John Hancock Mutual Life Insurance Company. With
the proceeds, VGC retired or defeased $19.6 million of industrial revenue
bonds, most of which had been previously allocated to the Virginia Gas
Storage Company and other affiliated companies. As a result of this
refinancing, the Company incurred a one time after-tax charge of $479,000.
The Company had originally capitalized as a regulatory asset a portion of
this loss. Later in 1998, in connection with the completion of administrative
proceedings with the Virginia State Corporation Commission, the Company
determined that it did not qualify as regulated entities as defined by FASB
Statement No. 71, "ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF
REGULATION." Accordingly, the Company restated 1998 earnings to reflect the
entire $479,000 extraordinary loss and adjusted for amortization expense that
was previously recorded throughout 1998. The loss related to accelerated
amortization of issue costs associated with the industrial revenue bonds, and
defeasement premiums, interest, and other fees related to the 1994 Russell
County bond issue.
12
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 530,376 $ 64,034
Accounts receivable 325,806 204,495
Other current assets 123,024 233,980
----------- -----------
Total current assets 979,206 502,509
PROPERTY AND EQUIPMENT, net 6,783,836 6,786,284
NOTES RECEIVABLE 915,808 2,915,807
DEFERRED TAX ASSET 489,855 489,855
OTHER ASSETS 96,171 99,756
----------- -----------
Total assets $ 9,264,876 $10,794,211
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 127,941 $ 1,545,675
Other current liabilities 117,320 20,826
----------- -----------
Total current liabilities 245,261 1,566,501
LONG TERM DEBT 8,661,172 8,661,172
----------- -----------
Total liabilities 8,906,433 10,227,673
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares authorized, 75,000
shares issued and outstanding 1,500,000 1,500,000
Retained earnings (1,141,557) (933,462)
----------- -----------
Total stockholders' equity 358,443 566,538
----------- -----------
Total liabilities and stockholders' equity $ 9,264,876 $10,794,211
----------- -----------
----------- -----------
</TABLE>
13
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(restated- (restated-
see note 1) see note 1)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 256,220 $ 190,066 $ 604,953 $ 471,159
Interest and other income 42,334 94,396 109,075 186,760
--------- --------- --------- ---------
298,554 284,462 714,028 657,919
--------- --------- --------- ---------
EXPENSES:
Purchased gas expense 166,956 127,990 386,582 323,140
Operation and maintenance expense 57,011 49,007 111,275 113,817
Depreciation, depletion, and amortization 56,293 40,005 112,216 96,776
General and administrative 26,935 33,654 51,111 75,442
--------- --------- --------- ---------
307,195 250,656 661,184 609,175
--------- --------- --------- ---------
Other expense - interest 184,066 214,650 368,138 408,249
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (192,707) (180,844) (315,294) (359,505)
Provision for income taxes (65,520) (61,487) (107,199) (122,231)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY LOSS (127,187) (119,357) (208,095) (237,274)
Extraordinary loss on extinguishment of debt (net of tax) - - - (463,877)
--------- --------- --------- ---------
NET LOSS $(127,187) $(119,357) $(208,095) $(701,151)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
14
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1999 1998
----------- ----------
(as restated
- see note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (208,095) $ (701,151)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation, depletion, and amortization 112,216 96,776
Extraordinary loss on extinguishment of debt - 702,844
Deferred income taxes - 1,521
Decrease (increase) in accounts receivable (121,310) 57,717
Decrease (increase) in other current assets 110,954 (184,699)
Decrease in other assets 3,584 2,614
Increase (decrease) in accounts payable (1,417,735) 437,662
Increase (decrease) in other current liabilities 96,494 (352,462)
----------- ----------
Net cash provided by (used in) operating activities (1,423,892) 60,822
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (109,766) (248,133)
Proceeds from notes receivable 2,000,000 53,537
----------- ----------
Net cash provided by (used in) investing activities 1,890,234 (194,596)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - (363,424)
Refund of reserve funds - 765,194
Payment of loan principal - (6,892)
----------- ----------
Net cash used in financing activities - 394,878
----------- ----------
NET INCREASE IN CASH 466,342 261,104
CASH, beginning of period 64,034 45,939
----------- ----------
CASH, end of period $ 530,376 $ 307,043
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 184,088 $ 428,020
----------- ----------
----------- ----------
</TABLE>
15
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited financial statements as of June 30, 1999,
and for the three and six month periods ended June 30, 1999 and 1998,
include, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to present fairly the combined
financial position, results of operations and cash flows of Virginia Gas
Distribution Company (the Company). Operating results for the three and six
months ended June 30, 1999, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's (VGC) Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 1999.
In March 1998, VGC completed a refinancing transaction whereby VGC
issued a $24 million note to John Hancock Mutual Life Insurance Company. With
the proceeds, VGC retired or defeased $19.6 million of industrial revenue
bonds, most of which had been previously allocated to the Virginia Gas
Distribution Company and other affiliated companies. As a result of this
refinancing, the Company incurred a one time after-tax charge of $464,000.
The Company had originally capitalized as a regulatory asset a portion of
this loss. Later in 1998, in connection with the completion of administrative
proceedings with the Virginia State Corporation Commission, the Company
determined that it did not qualify as regulated entities as defined by FASB
Statement No. 71, "ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF
REGULATION." Accordingly, the Company restated 1998 earnings to reflect the
entire $464,000 extraordinary loss and adjusted for amortization expense
that was previously recorded throughout 1998. The loss related to accelerated
amortization of issue costs associated with the industrial revenue bonds, and
defeasement premiums, interest, and other fees related to the 1994 Russell
County bond issue.
16
<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,
1998, and the Notes to Consolidated Financial Statements set forth in this
report.
RESULTS OF OPERATIONS
During the three months ended June 30, 1999, Virginia Gas Company (the
"Company") recorded net income of $93,000 compared to restated net income of
$53,000 for the same period in 1998. Basic and diluted net income per common
share for the quarter was $0.02 compared to $0.01 for the second quarter of
1998. For the six months ending June 30, 1999, the Company recorded net income
of $926,000 compared to a restated loss of $563,000 for the same period in 1998.
Basic and diluted net income per common share for the six months ending June 30,
1999 is $0.17 compared to a loss of $0.10 for the same period in 1998.
Virginia Gas Company recorded revenues of $2.39 million for the period
ending June 30, 1999 compared to $1.98 million in 1998 representing a 21%
increase. Revenue growth was primarily derived from the Company's P-25 pipeline
that began service late in 1998, growth in the Company's propane distribution
operation, and additional storage revenues. The Company recorded $285,000 in
pipeline revenue during the second quarter of 1999 from P-25. The revenue was
derived from demand charges for connections at Wytheville and Marion, Virginia,
which were not established until late 1998. Propane gas sales increased 37% to
$201,000 in the second quarter of 1999 from $147,000 in 1998 as the Company's
customer base increased to 3,500 from 2,300 and gallons sold increased to
250,000 from 182,000. Storage revenues improved 20% to $708,000 from $592,000 as
stored gas volume increased to 657,000 dths from 417,000 dths. The largest
decline in revenues occurred in interest and other income, which decreased
sharply to $331,000 from $425,000. This resulted from a reduction in cash
available to be invested in short-term securities.
<TABLE>
<CAPTION>
Three Months Ended June 30
Percentage
Revenue 1999 1998 Change
------- ---------- --------- ----------
<S> <C> <C> <C>
Natural Gas Sales $ 709,000 $ 680,000 4%
Storage Revenues 708,000 592,000 20
Pipeline Revenues 285,000 - -
Propane Gas Sales 201,000 147,000 37
Explor. & Prod. Revenues 79,000 86,000 (8)
Management Revenues 77,000 47,000 64
Interest and Other Income 331,000 425,000 (22)
---------- ----------
Total Revenue $2,390,000 $1,977,000 21%
---------- ----------
---------- ----------
</TABLE>
During the second quarter of 1999, cost of gas sold remained consistent
at $636,000 compared to $631,000 in 1998, as volumes were flat. Cost of propane
sold increased to $101,000 from $74,000 as a result of higher volumes. Propane
margins remained consistent.
Total operations and maintenance costs for the quarter was $305,000
compared to $251,000 for the second quarter of 1998,an increase of $54,000. The
primary reasons for the increase were the addition of P-25 and the costs
associated with operating that pipeline. Additionally, to support customer
growth the
17
<PAGE>
Company experienced higher operations and maintenance costs in its propane
operations. Depreciation increased dramatically during the second quarter of
1999 to $381,000 from $225,000. This resulted from depreciation on P-25.
General and administrative expense increased during the quarter ended
June 30, 1999 to $429,000 compared to $370,000 for the same period in 1998. The
increase resulted from infrastructure augmentation necessary to support the
growth in assets, which include the pipeline and propane facilities.
Losses from affiliates improved during the second quarter of 1999 to a
loss of $10,000 from a restated loss of $29,000 during the same period in 1998.
Virginia Gas Storage Company reported net income of $107,000 compared to $61,000
in 1998. The improvement resulted from decreases in both operating expenses and
interest. Virginia Gas Distribution Company recorded a net loss of $127,000
compared to a loss of $119,000 in 1998 as gas sales increased 35% to $256,000
from $190,000. However, Virginia Gas Distribution's assets continued to be
underutilized as growth has yet to offset the cost of recent capital additions.
OUTLOOK
During the second quarter of 1999, the Company continued developing its
growth strategy for its pipeline, storage, and propane assets. Work continues on
the Company's evaporation plant located at the Saltville Storage Facility, which
is critical in developing additional salt cavern storage. The Company estimates
that the plant will be operational in September. The Company continues to expand
its propane territory and expects to open a new retail facility sometime during
the third quarter of 1999. The facility will be opened in an adjacent county to
the Company's existing territory.
The Company filed an application in February 1999 to extend its
pipeline to Roanoke, Virginia, where it will service a contract with Roanoke
Gas Company. Currently, the Virginia State Corporation Commission continues
to review the application and at this time the Company cannot estimate when
that process will be complete. Prior to constructing the Roanoke extension
promulgated in the application, the Company must complete 37 miles of
construction on its P-25 pipeline from Wytheville to Radford Virginia. The
Company initially planned to construct that segment in 1999, however delays
in obtaining an easement through the National Forest have forced the Company
to delay construction. It appears likely that the easement will be granted in
late summer 1999. Accordingly, the Company projects that construction would
begin on the 37 mile segment in early 2000. This delay does not jeopardize
any contract performance dates.
FINANCIAL CONDITION
Through cash generated from operations, the Company was able to
finance capital expenditures in the second quarter without drawing on its
line of credit from Wachovia Bank. Capital expenditures for the Company
totaled $1.6 million for the three months ending June 30, 1999 and the
Company now estimates that its remaining capital budget for 1999 is
approximately $7 million. The Company expects to fund these expenditures
through debt financing. To that end, the Company engaged Wachovia Capital
Markets in April 1999 to explore additional financing opportunities. That
engagement is still ongoing.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this section of the report,
including those under "Outlook" and "Financial Condition" are forward-looking.
While Virginia Gas Company believes that these statements are accurate, the
Company's business is dependent upon general economic conditions and various
conditions specific to its industry, and future trends and these factors could
cause actual results to differ materially from the forward looking statements
that have been made. In particular:
18
<PAGE>
- - The Company's growth plans are contingent on its ability to affordably
finance future capital expenditures through the debt and equity markets. If
the Company is unable to finance capital expenditures, revenue growth will
be impacted.
- - Virginia Gas Company's revenue growth depends on future demand for pipeline
and storage services. Many factors impact that demand. A continued trend of
warmer than normal winters in the Company's service area could
substantially curb the demand for natural gas storage and/or pipeline
service. Potential "unbundling" or deregulation in the natural gas industry
could introduce additional competitors and make the viability of long-term
contracts suspect.
- - Virginia Gas Company derived 67% of its 1998 revenues from 4 customers.
Accordingly, the future of the Company is inexorably linked to these
significant customers. If any of these customers experience liquidity
problems or undergo consolidations, it could negatively impact the Company.
RECENT 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, 2000 and may not be applied retroactively. Management has not yet
quantified the impacts of adoption.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") problem concerns the inability of information and
technology-based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. This could result in
systems failures and miscalculations, which could cause business disruptions.
Equipment that uses a date, such as computers and operating control systems, may
be affected. This includes equipment used by our customers and suppliers, as
well as by utilities and governmental entities that provide critical services to
us.
The Company has been addressing the Y2K problem since 1997 and has
adopted a 4 phased approach to remediating the problem as it relates to the
Company. Phase I is SYSTEM IDENTIFICATION AND CLASSIFICATION. During this phase,
the Company will methodically identify all systems within the operations area
and classify those systems as potentially vulnerable or not vulnerable. Phase I
is complete. Phase II is SYSTEM COMPLIANCE. During Phase II, the Company will
perform field investigations to collect component level data for each system
identified as potentially vulnerable. That data will be added to a database,
which will be crosschecked with manufacturer compliance data and vendor
contracts. If compliant, a written statement from the manufacturer will be
obtained that provides the language necessary to confirm that the Y2K issue has
been properly addressed. Phase II is complete. Phase III is entitled
REMEDIATION. During the remediation phase steps will be taken to ensure that
non-compliant systems have been properly readied for the year 2000 and
thoroughly tested. The Company expects this phase to be completed prior to
September 1, 1999. Phase IV is PUBLICATION. This phase will involve
communication of the Company's readiness to our business partners and is
expected to be complete by September 30, 1999.
The Company has completed Phase I and Phase II of the plan to date. Two
systems have been determined to be vulnerable to the Y2K problem. The Company
has received free vendor upgrades that will render the systems Y2K compliant.
Accordingly at this stage in our efforts, the Company does not believe that the
Y2K problem or its remediation will have a material impact on the Company.
19
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
FOR THE THREE MONTHS ENDED JUNE 30, 1999
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
20
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
27 Financial Data Schedule for the Six Months Ended June 30, 1999
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/ William L. Clear
----------------------------------------
William L. Clear, Vice President and Chief Financial Officer
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-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 677,824
<SECURITIES> 0
<RECEIVABLES> 563,560
<ALLOWANCES> 0
<INVENTORY> 456,035
<CURRENT-ASSETS> 2,205,536
<PP&E> 43,621,869
<DEPRECIATION> 3,354,638
<TOTAL-ASSETS> 60,553,231
<CURRENT-LIABILITIES> 976,564
<BONDS> 0
0
0
<COMMON> 5,505
<OTHER-SE> 32,671,044
<TOTAL-LIABILITY-AND-EQUITY> 60,553,231
<SALES> 2,059,222
<TOTAL-REVENUES> 2,389,966
<CGS> 1,041,323
<TOTAL-COSTS> 1,851,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412,007
<INCOME-PRETAX> 116,227
<INCOME-TAX> 22,835
<INCOME-CONTINUING> 93,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,442
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
