<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, 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 MARCH 31, 1999
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, 1999 (Unaudited) and December 31,
1998 3
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Virginia Gas Company Affiliates
Combined Balance Sheets at March 31, 1999 (Unaudited) and December 31,
1998 9
Combined Statements of Operations (Unaudited) for the Three Months Ended
March 31, 1999 and 1998 10
Combined Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 1999 and 1998 11
Notes to Financial Statements (Unaudited) 12
2 Management's Discussion and Analysis of Financial Condition and Results of 13
Operations
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 17
List of Exhibits 18
Signature 19
Index to Exhibits 20
</TABLE>
2
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,656,597 $ 1,763,753
Accounts receivable 1,063,697 3,469,757
Notes receivable 38,800 38,800
Other current assets 859,930 498,707
----------- -----------
Total current assets 4,619,024 5,771,017
PROPERTY AND EQUIPMENT, net 39,031,556 37,139,538
INVESTMENT IN AFFILIATED COMPANIES 4,371,161 3,930,554
NOTES RECEIVABLE - AFFILIATED COMPANIES 13,000,912 13,000,912
OTHER ASSETS 716,434 619,533
----------- -----------
Total assets $61,739,087 $60,461,554
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,034,864 $ 2,546,734
Accounts payable 1,666,445 542,626
Funds held for future distribution 48,705 266,806
Other current liabilities 409,512 261,624
----------- -----------
Total current liabilities 4,159,526 3,617,790
LONG-TERM DEBT 24,254,444 24,254,444
DEFERRED INCOME TAXES 645,674 645,674
----------- -----------
Total liabilities 29,059,644 28,517,908
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - par value $.001, 10,000,000 shares authorized,
5,504,906 shares issued and outstanding as of March 31,
1999 and December 31, 1998 5,505 5,505
Additional paid-in capital 31,375,267 31,375,267
Retained earnings 1,298,671 562,874
----------- -----------
Total stockholders' equity 32,679,443 31,943,646
----------- -----------
Total liabilities and stockholders' equity $61,739,087 $60,461,554
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
---------- ----------
(restated-see note 1)
<S> <C> <C>
REVENUE:
Operating revenue $2,498,965 $2,228,061
Interest and other income 368,031 460,818
---------- ----------
2,866,996 2,688,879
---------- ----------
EXPENSES:
Cost of natural gas sold 464,236 916,345
Purchased propane gas expense 251,883 240,923
Operation and maintenance expense 428,062 311,176
Depreciation, depletion, and amortization 328,485 206,059
General and administrative 441,835 323,366
---------- ----------
1,914,501 1,997,869
---------- ----------
Other expense-interest 365,840 427,578
---------- ----------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES, INCOME TAXES, AND
EXTRAORDINARY LOSS 586,655 263,432
Equity in earnings of affiliated companies 440,621 25,491
---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 1,027,276 288,923
Provision for income taxes (195,144) (72,856)
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 832,132 216,067
Extraordinary loss on extinguishment of debt (net of tax) - (832,493)
---------- ----------
NET INCOME (LOSS) $ 832,132 $ (616,426)
---------- ----------
---------- ----------
EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED:
Income before extraordinary item $ 0.15 $ 0.04
---------- ----------
Extraordinary loss on extinguishment of debt (net of tax) - (0.15)
---------- ----------
Net income (loss) $ 0.15 $ (0.11)
---------- ----------
---------- ----------
</TABLE>
4
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
------------ ------------
(restated-see note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 832,132 $ (616,423)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion, and amortization 328,485 206,059
Undistributed earnings of affiliated companies (440,621) (25,491)
Extraordinary loss on extinguishment of debt - 1,013,394
Deferred income taxes - 224,407
Decrease (increase) in accounts receivable 2,406,060 (47,819)
Increase in other current assets (361,223) (24,753)
Decrease (increase) in other assets (94,367) 80,008
Increase in accounts payable 1,123,819 1,867,422
Increase (decrease) in other current liabilities (70,213) (394,117)
------------ ------------
Net cash provided by operating activities 3,724,072 2,282,687
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,223,022) (4,946,246)
------------ ------------
Net cash used in investing activities (2,223,022) (4,946,246)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (511,870) (19,630,924)
Proceeds from new loans - 24,000,000
Payment of debt issuance costs - (550,569)
Proceeds from exercised warrants - 5,015
Refund of financing reserve fund - 688,792
Dividends paid (96,336) (96,336)
------------ ------------
Net cash provided by (used in) financing activities (608,206) 4,415,978
------------ ------------
NET INCREASE IN CASH 892,844 1,752,419
CASH, beginning of period 1,763,753 11,750,899
------------ ------------
CASH, end of period $ 2,656,597 $ 13,503,318
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 527,106 $ 226,659
------------ ------------
------------ ------------
</TABLE>
5
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The accompanying unaudited consolidated financial statements as of
March 31, 1999, and for the three months ended March 31, 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 months ended March 31, 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).
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 VSCC, 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 first quarter earnings to reflect the entire $832,000
extraordinary loss. The loss related 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.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
---- ----
<S> <C> <C>
STORAGE:
Total assets $ 20,813,406 $ 28,884,202
Capital expenditures $ 1,641,785 $ 1,978,956
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Operating revenues $ 743,124 $ 635,692
Interest income - 236,100
Operation and maintenance (190,729) (170,669)
Depreciation, depletion, and amortization (134,032) (99,697)
------------ ------------
STORAGE OPERATING INCOME $ 418,363 $ 601,426
------------ ------------
------------ ------------
PRODUCTION:
Total assets $ 3,057,518 $ 6,057,489
Capital expenditures $ 20,633 $ 29,270
Operating revenues $ 787,557 $ 1,169,067
Interest income 10,953 11,346
Other income 2,818 1,398
Cost of natural gas sold (464,236) (916,345)
Operations and maintenance (42,133) (57,995)
Depreciation, depletion, and amortization (45,275) (61,883)
------------ ------------
PRODUCTION OPERATING INCOME $ 249,684 $ 145,588
------------ ------------
------------ ------------
TRANSPORTATION:
Total assets $ 13,915,611 $ 4,799,144
Capital expenditures $ 282,726 $ 2,547,687
Operating revenues $ 288,912 $ -
Operation and maintenance (74,151) -
Depreciation, depletion, and amortization (66,280) -
------------ ------------
TRANSPORTATION OPERATING INCOME $ 148,481 $ -
------------ ------------
------------ ------------
PROPANE DISTRIBUTION:
Total assets $ 3,909,741 $ 2,714,333
Capital expenditures $ 273,325 $ 331,659
Operating revenue $ 708,593 $ 517,981
Other income 78,887 26,822
Propane gas expense (251,883) (240,923)
Operation and maintenance (121,049) (82,512)
Depreciation, depletion, and amortization (52,097) (28,333)
------------ ------------
PROPANE DISTRIBUTION OPERATING INCOME $ 362,451 $ 193,035
------------ ------------
------------ ------------
PARENT COMPANY:
Investments in subsidiaries and affiliates $ 29,121,161 $ 33,764,145
Notes receivable from subsidiaries and affiliates $ 21,469,845 $ 16,482,684
Total assets $ 54,162,941 $ 67,995,482
Capital expenditures $ 4,553 $ 58,674
Operating revenues $ 219,814 $ -
Interest income 462,358 504,751
Other income 20 -
Depreciation, depletion, and amortization (30,801) (16,146)
------------ ------------
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
PARENT COMPANY OPERATING INCOME $ 651,391 $ 488,605
------------ ------------
------------ ------------
ELIMINATION OF INTERCOMPANY/ INTERSEGMENT ACTIVITY:
Total assets $(34,120,130) $(49,252,134)
Operating revenues $ (249,035) $ (94,679)
Interest and other income $ (187,005) $ (319,599)
VIRGINIA GAS COMPANY CONSOLIDATED:
Total assets $ 61,739,087 $ 61,198,516
Capital expenditures $ 2,223,022 $ 4,946,246
Operating revenues $ 2,498,965 $ 2,228,061
Interest and other income 368,031 460,818
Cost of gas sold (464,236) (916,345)
Propane gas expense (251,883) (240,923)
Operations and maintenance (428,062) (311,176)
Depreciation, depletion, and amortization (328,485) (206,059)
------------ ------------
VIRGINIA GAS COMPANY CONSOLIDATED OPERATING INCOME $ 1,394,330 $ 1,014,376
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
VIRGINIA GAS COMPANY AFFILIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 311,810 $ 100,834
Accounts receivable 1,641,365 945,244
Other current assets 182,286 201,471
----------- -----------
Total current assets 2,135,461 1,247,549
PROPERTY AND EQUIPMENT, net 20,762,653 22,206,543
OTHER ASSETS 243,001 231,757
----------- -----------
Total assets $23,141,115 $23,685,849
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,028 $ 5,943
Accounts payable 308,615 2,669,668
Other current liabilities 966,493 78,406
----------- -----------
Total current liabilities 1,278,136 2,754,017
LONG-TERM DEBT 13,000,912 13,000,912
DEFERRED INCOME TAXES 136,281 136,281
----------- -----------
Total liabilities 14,415,329 15,891,210
----------- -----------
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock
Virginia Gas Storage Company; no par value,
50,000 shares authorized , 38,200 issued and outstanding 5,640,000 5,640,000
Virginia Gas Distribution Company; no par value, 100,000 shares authorized,
75,000 shares issued and outstanding 1,500,000 1,500,000
Retained earnings 1,585,786 654,639
----------- -----------
Total stockholders' equity 8,725,786 7,794,639
----------- -----------
Total liabilities and stockholders' equity $23,141,115 $23,685,849
----------- -----------
----------- -----------
</TABLE>
9
<PAGE>
VIRGINIA GAS COMPANY AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
----------- ----------
<S> <C> <C>
REVENUE:
Operating revenue $ 1,514,852 $1,543,389
Interest and other income 1,243,193 34,419
----------- ----------
2,758,045 1,577,808
----------- ----------
EXPENSES:
Purchased gas expense 517,089 621,555
Operation and maintenance expense 295,713 298,545
Depreciation, depletion, and amortization 178,085 192,355
General and administrative 105,510 111,436
----------- ----------
1,096,397 1,223,891
----------- ----------
Other expense-interest 276,528 286,075
----------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 1,385,120 67,842
Provision for income taxes 453,973 26,264
----------- ----------
INCOME BEFORE EXTRAORDINARY LOSS 931,147 41,578
Extraordinary loss on extinguishment of debt - (942,563)
----------- ----------
NET INCOME (LOSS) $ 931,147 $ (900,985)
----------- ----------
----------- ----------
</TABLE>
10
<PAGE>
VIRGINIA GAS COMPANY AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 931,147 $ (900,985)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, depletion, and amortization 178,085 192,355
Extraordinary loss on extinguishment of debt - 1,428,125
Gain on sale of fixed assets (1,355,669) -
Deferred income taxes - 1,521
Increase in accounts receivable (696,121) (896,673)
Decrease in other current assets 19,185 149,979
Decrease (increase) in other assets (15,629) 204,246
(Decrease) increase in accounts payable (2,361,053) 474,772
(Decrease) increase in other current liabilities 888,087 (466,631)
----------- -----------
Net cash provided by (used in) operating activities (2,411,968) 186,709
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (74,141) (806,058)
Proceeds from sale of fixed assets 2,700,000 -
----------- -----------
Net cash provided by (used in) investing activities 2,625,859 (806,058)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - (689,977)
Refund of reserve fund - 1,383,176
Payment of loan principal (2,915) (22,256)
----------- -----------
Net cash provided by (used in) financing activities (2,915) 670,943
----------- -----------
NET INCREASE IN CASH 210,976 51,594
CASH, beginning of period 100,834 421,897
----------- -----------
CASH, end of period $ 311,810 $ 473,491
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 276,529 $ 286,075
----------- -----------
----------- -----------
</TABLE>
11
<PAGE>
VIRGINIA GAS COMPANY AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
These unaudited combined financial statements as of March 31, 1999, and
for the three months ended March 31, 1999 and 1998, contain the combined
operations of Virginia Gas Distribution Company ("VGDC") and Virginia Gas
Storage Company ("VGSC") ("the Companies" or "Virginia Gas Company Affiliates").
Both companies were organized in 1992 under the laws of the Commonwealth of
Virginia. Each company is 50 percent owned by Virginia Gas Company ("VGC") and
50 percent owned by a private investor. In late 1998 and early 1999, VGC and the
50% owner were engaged in negotiations regarding a proposed transaction in which
VGDC would become the parent of VGSC through a contribution of owner's equity.
VGC's management believed that an agreement in principle had been reached
regarding this transaction, however at the present time negotiations are still
ongoing.
These financial statements 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, 1998 of VGC. 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 the Virginia Gas Company
Affiliates have been included. Operating results for the three months ended
March 31, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 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 Company
Affiliates and one other affiliated company. As a result of this refinancing,
the Companies incurred a one time after-tax charge of $943,000. The Companies
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 VSCC, the Companies determined that they did not qualify as regulated
entities as defined by FASB Statement No. 71, "ACCOUNTING FOR THE EFFECTS OF
CERTAIN TYPES OF REGULATION." Accordingly, the Companies restated first quarter
earnings to reflect the entire $943,000 extraordinary loss. The loss related to
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.
12
<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 March 31, 1999, Virginia Gas Company (the
"Company") recorded net income of $832,000 compared to a net loss of $616,000
for the same period in 1998. Basic and diluted net income per common share for
the quarter was $0.15 compared to a net loss of $0.11 for the first quarter of
1998. The first quarter of 1999 was impacted by the sale of the Haysi Gathering
System by Virginia Gas Storage Company, an affiliate of the Company. The sale
resulted in a gain of $401,000 to the Company or $0.07 per share. Additionally,
the quarter ended March 31, 1998 was impacted by an extraordinary loss on
extinguishment of debt of $832,000 or $0.15 per share.
Virginia Gas Company recorded revenues of $2.9 million for the period
ending March 31, 1999 compared to $2.7 million in 1998 representing a 7%
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 first 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 36% to
$688,000 in the first quarter of 1999 from $505,000 in 1998 as the Company's
customer base increased to 3,400 from 2,200 and gallons sold increased to
738,000 from 532,000. Storage revenues improved 20% to $733,000 from $609,000 as
stored gas volume increased to 657,000 dths from 417,000 dths. The largest
decline in revenue resulted from gas sales, which decreased 40% to $599,000 from
$992,000 during the same period in 1998. However, sales volume only declined 6%
to 307,000 Dths compared to 327,000 Dths. The lower revenue is the result of
declining prices. Average prices per Dth declined approximately 36% to $1.95
from $3.03. In addition to decreased gas sales revenue, the Company's interest
and other income decreased sharply to $368,000 from $461,000, which was caused
by the reduction in cash available to be invested in short-term securities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 PERCENTAGE
REVENUE 1999 1998 CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Sales $ 599,000 $ 992,000 (40)%
- --------------------------------------------------------------------------------
Storage Revenues 733,000 609,000 20
- --------------------------------------------------------------------------------
Pipeline Revenues 285,000 - -
- --------------------------------------------------------------------------------
Propane Gas Sales 688,000 505,000 36
- --------------------------------------------------------------------------------
Explor. & Prod. Revenues 93,000 93,000 -
- --------------------------------------------------------------------------------
Management Revenues 101,000 29,000 264
- --------------------------------------------------------------------------------
Interest and Other Income 368,000 461,000 (21)
- --------------------------------------------------------------------------------
Total Revenue $2,867,000 $2,689,000 7%
- --------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1999, cost of gas sold declined
significantly with the decline in pricing to $464,000 from $916,000. Cost of
propane sold increased marginally to $252,000 from $241,000 as a result of
higher volumes, but the propane margins improved dramatically. The Company has
been successful in maintaining propane retail pricing, while benefiting from
declining wholesale prices.
13
<PAGE>
Average sale price per gallon has declined slightly to $.93 compared to $.95 in
1998, while the cost per unit has declined to $.34/gallon from .45/gallon.
Total operations and maintenance costs for the quarter was $428,000 compared to
$311,000 for the first quarter of 1998,an increase of $117,000. The general
reason for the increase was the addition of P-25 and the costs associated with
operating that pipeline. Additionally to support a 39% customer growth, the
Company experienced higher operations and maintenance costs in its propane
operations. Depreciation increased dramatically during the first quarter of 1999
to $328,000 from $206,000. This resulted from depreciation on P-25.
Earnings from affiliates improved during the first quarter of 1999 to
$441,000 from $25,000. The sale of the Haysi Gathering System resulted in income
to the Company of $401,000. Excluding the revenue generated by the sale and the
extraordinary item in 1998, Virginia Gas Storage Company reported net income of
$160,000 compared to $169,000 in 1998. Virginia Gas Distribution Company
recorded a net loss of $81,000 compared to a loss of $118,000, excluding the
extraordinary item, in 1998 as gas sales increased 24% to $349,000 from
$281,000.
OUTLOOK
During the first quarter of 1999, the Company proceeded to develop
its strategy of slower incremental growth through the development of its
pipeline and storage assets, while continuing the expansion of its propane
operations. The Company's propane customer base increased 11% or 340
customers during the quarter, maintaining the growth experienced by the
Company in 1998. Additionally, the Company continued to plan the expansion of
its storage and pipeline assets that would serve contracts already in place.
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 began initial systems testing in May, which will
continue through the 2nd and 3rd quarters. The Company estimates that the
plant will be operational in September.
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. Prior to constructing the Roanoke extension, the Company must complete
36 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 the mid to late summer 1999. Accordingly, the Company projects that
construction would begin on the 36 mile segment in early 2000. This delay does
not jeopardize any contract performance dates.
FINANCIAL CONDITION
Through cash generated from operations and the Haysi Gathering Sale,
the Company was able to finance capital expenditures in the first quarter and
repay approximately $500,000 of its line of credit with Wachovia Bank.
Capital expenditures for the Company totaled $2.2 million for the three months
ending March 31, 1999 and the Company now estimates that its remaining capital
budget for 1999 is $8.6 million. The capital expenditures budget has been
reduced from original projections, which assumed that the Company would build
the next segment of P-25 during 1999. 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.
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
14
<PAGE>
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:
o 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.
o 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.
o Virginia Gas Company derives 67% of its 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, 1999 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 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 August 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.
15
<PAGE>
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.
16
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See List of Exhibits on page 16 hereof.
(b) Reports on Form 8-K:
The Company filed no Reports on Form 8-K during the
three months ended March 31, 1999
17
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
27 Financial Data Schedule for the three months ended
March 31, 1999
18
<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
19
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,656,597
<SECURITIES> 0
<RECEIVABLES> 1,063,697
<ALLOWANCES> 0
<INVENTORY> 388,172
<CURRENT-ASSETS> 4,619,024
<PP&E> 42,072,731
<DEPRECIATION> 3,041,175
<TOTAL-ASSETS> 61,739,087
<CURRENT-LIABILITIES> 4,159,526
<BONDS> 24,254,444
0
0
<COMMON> 5,505
<OTHER-SE> 32,673,938
<TOTAL-LIABILITY-AND-EQUITY> 61,739,087
<SALES> 2,498,965
<TOTAL-REVENUES> 2,866,996
<CGS> 716,119
<TOTAL-COSTS> 1,914,501
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365,840
<INCOME-PRETAX> 1,027,276
<INCOME-TAX> 195,144
<INCOME-CONTINUING> 832,132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 832,132
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
