<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, 2000
[ ] 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
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock-Par Value $.001, 5,504,906 shares issued and outstanding.
Transition Small Business Issues Disclosure Format (Check One)
[ ] Yes [ ] No
<PAGE>
VIRGINIA GAS COMPANY
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
- ------ ------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
1 Financial Statements:
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets at March 31, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Virginia Gas Storage Company
Balance Sheets at March 31, 2000 (Unaudited) and
December 31, 1999 9
Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2000 and 1999 10
Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2000 and 1999 11
Notes to Financial Statements (Unaudited) 12
Virginia Gas Distribution Company
Balance Sheets at March 31, 2000 (Unaudited) and
December 31, 1999 13
Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2000 and 1999 14
Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2000 and 1999 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
3 Defaults Upon Senior Securities 20
6 Exhibits and Reports on Form 8-K 20
List of Exhibits 21
Signature 22
Index to Exhibits 23
</TABLE>
2
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 940,763 $ 1,444,731
Accounts receivable 1,037,771 1,212,685
Notes receivable 39,900 40,100
Other current assets 638,080 899,168
----------- ------------
Total current assets 2,656,514 3,596,684
PROPERTY AND EQUIPMENT, net 44,826,988 43,145,750
INVESTMENT IN AFFILIATED COMPANIES 4,368,520 4,343,460
NOTES RECEIVABLE - AFFILIATED COMPANIES 13,000,912 13,000,912
OTHER ASSETS 363,092 639,714
----------- ------------
Total assets $65,216,026 $64,726,520
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $24,034,826 $24,045,144
Line of credit 6,000,000 6,000,000
Accounts payable 694,482 316,666
Funds held for future distribution 66,520 248,136
Other current liabilities 334,421 242,011
----------- ------------
Total current liabilities 31,130,249 30,851,957
LONG-TERM DEBT 209,709 209,709
DEFERRED INCOME TAXES 908,980 907,821
----------- ------------
Total liabilities 32,248,938 31,969,487
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.001, 100,000,000 shares authorized,
5,504,906 shares issued and outstanding 5,505 5,505
Additional paid-in capital 31,375,267 31,375,267
Retained earnings 1,586,316 1,376,261
----------- ------------
Total stockholders' equity 32,967,088 32,757,033
----------- ------------
Total liabilities and stockholders' equity $65,216,026 $64,726,520
=========== ===========
</TABLE>
3
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
REVENUE:
Operating revenue $2,804,159 $2,498,965
Interest and other income 379,516 368,031
---------- ----------
3,183,675 2,866,996
---------- ----------
EXPENSES:
Cost of natural gas sold 551,647 464,236
Propane gas expense 498,702 251,883
General and administrative 526,462 441,835
Depreciation, depletion, and amortization 358,497 328,485
Operations and maintenance 307,444 347,345
Production expense 18,534 16,958
---------- ----------
2,261,286 1,850,742
---------- ----------
OTHER EXPENSES:
Interest expense 497,426 365,840
Other taxes 146,383 63,759
---------- ----------
643,809 429,599
---------- ----------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES AND
INCOME TAXES 278,580 586,655
Equity in earnings of affiliated companies 25,060 440,621
---------- ----------
INCOME BEFORE INCOME TAXES 303,640 1,027,276
Provision for income taxes 93,585 195,144
---------- ----------
NET INCOME $ 210,055 $ 832,132
========== ==========
WEIGHTED AVERAGE, SHARES ISSUED AND OUTSTANDING 5,504,906 5,504,906
========== ==========
EARNINGS PER COMMON SHARE, BASIC AND DILUTED:
Net income $ 0.04 $ 0.15
========== ==========
</TABLE>
4
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 210,055 $ 832,132
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 358,497 328,485
Undistributed earnings of affiliated companies (25,060) (440,621)
Deferred income taxes 1,159 --
Decrease in accounts receivable 175,114 2,406,060
Decrease (increase) in other current assets 261,088 (361,223)
Decrease (increase) in other assets 271,938 (94,367)
Increase in accounts payable 377,816 1,123,819
Decrease in other current liabilities (89,206) (70,213)
----------- -----------
Net cash provided by operating activities 1,541,401 3,724,072
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,035,051) (2,223,022)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (10,318) (511,870)
Dividends paid -- (96,336)
----------- -----------
Net cash used in financing activities (10,318) (608,206)
----------- -----------
NET INCREASE (DECREASE) IN CASH (503,968) 892,844
CASH, beginning of period 1,444,731 1,763,753
----------- -----------
CASH, end of period $ 940,763 $ 2,656,597
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 579,379 $ 714,274
=========== ===========
</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, 2000, and for the three months ended March 31, 2000 and 1999, 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" or "VGC")
annual report on Form 10-KSB for the year ended December 31, 1999. 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, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
The consolidated financial statements for 1999 and the unaudited
consolidated financial statements for 2000 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
percentages of interest owned consist of Virginia Gas Storage Company (50
percent) and Virginia Gas Distribution Company (50 percent).
2. MANAGEMENT'S PLANS:
These statements have been prepared with the assumption that the
Company will continue as a going concern. The Company has classified $24
million of long-term debt as current due to non-compliance with the Company's
debt covenants. The Company's covenants require it to maintain certain
financial ratios. As of March 31, 2000, one covenant requires the Company to
maintain historical EBITDA of one and three-quarters times current debt
service. The Company's Line of Credit (the "Line") with Wachovia Bank N.A.
("Wachovia") is currently due on July 1, 2000, and as of March 31, 2000, had
a balance outstanding of $6.0 million. The $6.0 million, in its entirety by
definition, must be included in the Company's current debt service and, as a
consequence, causes the non-compliance. Furthermore, due to construction
delays, the Company's revenue has not grown at the expected pace.
Consequently, the Company, with its current debt structure, will have
difficulty in meeting this covenant in the future.
Waivers have been requested from the Company's senior lenders, John
Hancock and Wachovia, but to date neither lender has provided a waiver nor
have they acted to accelerate their loans or otherwise access remedies which
are available to them as a result of the default. Although the Company has
not been formally notified of the lenders' plans, management believes that
they have determined temporarily to postpone any action pending the outcome
of the Company's exploration of the strategic initiatives that the Company
has previously disclosed are under active consideration. There can be no
assurance that the strategic alternatives under consideration will lead to
waivers or amendments from the lenders or that the lenders will continue to
postpone the exercise of their remedies.
In addition to exploring strategic alternatives, the Company is
investigating options to refinance its Line in a manner that will avoid
non-compliance with its covenants. One of those options is a partial
liquidation of assets and a complete repayment of the Line. There can be no
assurance that the Company will be successful in refinancing the Line. If it
is unsuccessful, the Company plans to renegotiate the debt covenants, which
will be at the discretion of the Company's lenders.
3. 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 MARCH 31
2000 1999
------------ ------------
<S> <C> <C>
STORAGE:
Total assets $ 24,500,600 $ 20,813,406
Capital expenditures $ 1,710,574 $ 1,641,785
Operating revenues $ 753,452 $ 743,124
Other income 7,241 --
Operation and maintenance (104,305) (148,874)
Depreciation, depletion, and amortization (154,091) (134,032)
------------ ------------
STORAGE OPERATING INCOME $ 502,297 $ 460,218
============ ============
PRODUCTION:
Total assets $ 4,016,110 $ 3,057,518
Capital expenditures $ 4,249 $ 20,633
Operating revenues $ 780,228 $ 787,557
Interest income 20,599 10,953
Other income 1,500 2,818
Cost of natural gas sold (551,647) (464,236)
Production expense (18,534) (16,958)
Operations and maintenance (34,422) (24,088)
Depreciation, depletion, and amortization (39,824) (45,275)
------------ ------------
PRODUCTION OPERATING INCOME $ 157,900 $ 250,771
============ ============
TRANSPORTATION:
Total assets $ 14,648,595 $ 13,915,611
Capital expenditures $ 99,508 $ 282,726
Operating revenues $ 287,141 $ 288,912
Other income 2,759 --
Operation and maintenance (40,563) (57,895)
Depreciation, depletion, and amortization (59,924) (66,280)
------------ ------------
TRANSPORTATION OPERATING INCOME $ 189,413 $ 164,737
============ ============
PROPANE DISTRIBUTION:
Total assets $ 5,067,100 $ 3,909,741
Capital expenditures $ 302,528 $ 273,325
Operating revenue $ 1,032,370 $ 708,593
Other income 63,004 78,887
Propane gas expense (498,702) (251,883)
Operation and maintenance (128,154) (116,488)
Depreciation, depletion, and amortization (74,471) (52,097)
------------ ------------
PROPANE DISTRIBUTION OPERATING INCOME $ 394,047 $ 367,012
============ ============
</TABLE>
7
<PAGE>
PARENT COMPANY:
<TABLE>
<S> <C> <C>
Investments in subsidiaries and affiliates $ 29,118,520 $ 29,121,161
Notes receivable from subsidiaries and affiliates $ 23,737,514 $ 21,469,845
Total assets $ 57,574,169 $ 54,162,941
Capital expenditures $ (81,808) $ 4,553
Operating revenue $ 175,386 $ 219,814
Interest income 589,594 462,358
Other income -- 20
Depreciation, depletion, and amortization (30,187) (30,801)
------------ ------------
PARENT COMPANY OPERATING INCOME $ 734,793 $ 651,391
============ ============
ELIMINATION OF INTERCOMPANY/INTERSEGMENT ACTIVITY:
Total assets $(40,590,548) $(34,120,130)
Operating revenues $ (224,418) $ (249,035)
Interest and other income $ (305,181) $ (187,005)
VIRGINIA GAS COMPANY CONSOLIDATED:
Total assets $ 65,216,026 $ 61,739,087
Capital expenditures $ 2,035,051 $ 2,223,022
Operating revenues $ 2,804,159 $ 2,498,965
Interest and other income 379,516 368,031
Cost of gas sold (551,647) (464,236)
Propane gas expense (498,702) (251,883)
Production expense (18,534) (16,958)
Operations and maintenance (307,444) (347,345)
Depreciation, depletion, and amortization (358,497) (328,485)
------------ ------------
VIRGINIA GAS COMPANY CONSOLIDATED OPERATING INCOME $ 1,448,851 $ 1,458,089
============ ============
</TABLE>
8
<PAGE>
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 842,388 $ 411,520
Accounts receivable 232,647 452,468
Other current assets 17,832 31,378
------------- -------------
Total current assets 1,092,867 895,366
PROPERTY AND EQUIPMENT, net 13,627,136 13,687,248
OTHER ASSETS 210,986 213,249
------------- -------------
Total assets $ 14,930,989 $ 14,795,863
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 634,690 $ 280,816
Other current liabilities 57,651 24,659
------------- -------------
Total current liabilities 692,341 305,475
LONG-TERM DEBT 4,885,547 5,255,547
DEFERRED INCOME TAXES 694,731 694,731
------------- -------------
Total liabilities 6,272,619 6,255,753
------------- -------------
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 3,018,370 2,900,110
------------- -------------
Total stockholders' equity 8,658,370 8,540,110
------------- -------------
Total liabilities and stockholders' equity $ 14,930,989 $ 14,795,863
============= =============
</TABLE>
9
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
REVENUE:
Operating revenue $1,261,175 $1,170,594
Gain on sale of Haysi Gathering System -- 1,215,850
Interest and other income 29,452 13,202
---------- ----------
1,290,627 2,399,646
---------- ----------
EXPENSES:
Purchased gas expense 544,907 362,386
Operation and maintenance expense 232,338 241,447
Depreciation, depletion, and amortization 101,428 122,161
General and administrative 121,092 82,174
---------- ----------
999,765 808,168
---------- ----------
INTEREST EXPENSE 111,680 133,674
---------- ----------
INCOME BEFORE INCOME TAXES 179,182 1,457,804
Provision for income taxes 60,922 495,653
---------- ----------
NET INCOME $ 118,260 $ 962,151
========== ==========
</TABLE>
10
<PAGE>
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 118,260 $ 962,151
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, depletion, and amortization 101,428 122,161
Gain on sale of fixed assets -- (1,355,669)
Decrease (increase) in accounts receivable 219,821 (216,675)
Decrease in other current assets 13,546 6,564
Increase in other assets -- (15,629)
Increase (decrease) in accounts payable 353,874 (891,510)
Increase in other current liabilities 32,992 731,759
----------- -----------
Net cash provided by (used in) operating activities 839,921 (656,848)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (39,053) (13,879)
Proceeds from sale of fixed assets -- 2,700,000
----------- -----------
Net cash provided by (used in) investing activities (39,053) 2,686,121
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (370,000) (2,002,915)
----------- -----------
NET INCREASE IN CASH 430,868 26,358
CASH, beginning of period 411,520 36,800
----------- -----------
CASH, end of period $ 842,388 $ 63,158
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 111,680 $ 92,457
=========== ===========
</TABLE>
11
<PAGE>
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. GENERAL:
The accompanying unaudited financial statements as of March 31, 2000,
and for the three months ended March 31, 2000 and 1999, include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and cash flows of Virginia Gas Storage Company (VGSC). Operating
results for the three months ended March 31, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Form 10-KSB filed
with the Securities and Exchange Commission on April 13, 2000.
In February 1999, the Company sold its 60 percent interest in the Haysi
Gathering System for $2,700,000. This resulted in a net before tax gain of
$1,216,000 recorded during the quarter ending March 31, 1999.
12
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER, 31
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 164,282 $ 287,928
Accounts receivable 249,698 215,826
Other current assets 394,579 63,477
----------- -----------
Total current assets 808,559 567,231
PROPERTY AND EQUIPMENT, net 6,772,115 6,757,670
NOTES RECEIVABLE 545,807 915,807
DEFERRED TAX ASSET 720,979 720,979
OTHER ASSETS 115,796 117,588
----------- -----------
Total assets $ 8,963,256 $ 9,079,275
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 202,665 $ 238,261
Other current liabilities 20,749 33,033
----------- -----------
Total current liabilities 223,414 271,294
LONG-TERM DEBT 8,661,172 8,661,172
----------- -----------
Total liabilities 8,884,586 8,932,466
----------- -----------
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 (1,421,330) (1,353,191)
----------- -----------
Total stockholders' equity 78,670 146,809
----------- -----------
Total liabilities and stockholders' equity $ 8,963,256 $ 9,079,275
=========== ===========
</TABLE>
13
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
REVENUE:
Operating revenue $ 477,377 $ 348,733
Interest and other income 38,113 66,741
--------- ---------
515,490 415,474
--------- ---------
EXPENSES:
Purchased gas expense 269,745 219,626
Operation and maintenance expense 57,515 54,264
Depreciation, depletion, and amortization 62,560 55,923
General and administrative 44,849 24,176
--------- ---------
434,669 353,989
--------- ---------
INTEREST EXPENSE 184,062 184,072
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT (103,241) (122,587)
Income tax benefit (35,102) (41,679)
--------- ---------
NET LOSS $ (68,139) $ (80,908)
========= =========
</TABLE>
14
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (68,139) $ (80,908)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation, depletion, and amortization 62,560 55,923
Decrease in accounts receivable (33,872) (481,736)
Decrease (increase) in other current assets (331,102) 62,526
Decrease in accounts payable (35,596) (1,467,253)
Decrease (increase) in other current liabilities (12,284) 156,327
----------- -----------
Net cash used in operating activities (418,433) (1,755,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (75,213) (60,261)
Payments received on notes receivable 370,000 2,000,000
----------- -----------
Net cash provided by investing activities 294,787 1,939,739
----------- -----------
NET INCREASE (DECREASE) IN CASH (123,646) 184,618
CASH, beginning of period 287,928 64,034
----------- -----------
CASH, end of period $ 164,282 $ 248,652
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 184,050 $ 184,072
=========== ===========
</TABLE>
15
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited financial statements as of March 31, 2000,
and for the three months ended March 31, 2000 and 1999, include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and cash flows of Virginia Gas Distribution Company (VGDC). Operating
results for the three months ended March 31, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
The financial statements should be read in conjunction with the Notes
to Financial Statements included in the Virginia Gas Company's Form 10-KSB/A
filed with the Securities and Exchange Commission on May 1, 2000.
2. MANAGEMENT'S PLANS
These statements have been prepared with the assumption that the
Company will continue as a going concern. As discussed in Note 1 of VGDC's
financial statements in VGC's Form 10-KSB/A filed with Securities and
Exchange Commission on May 1, 2000, VGDC relies upon the support of its 50
percent owner, VGC. VGC's and VGDC's future plans are inexorably linked. VGC
has classified $24 million of long-term debt as current due to non-compliance
with its debt covenants. VGC's covenants require it to maintain certain
financial ratios. As of March 31, 2000, one covenant requires VGC to maintain
historical EBITDA of one and three-quarters times current debt service. VGC's
Line of Credit (the "Line") with Wachovia Bank N.A. ("Wachovia") is currently
due on July 1, 2000, and as of March 31, 2000, had a balance outstanding of
$6.0 million. The $6.0 million, in its entirety by definition, must be
included in VGC's current debt service and, as a consequence, causes the
non-compliance. Furthermore, due to construction delays, VGC's revenue has
not grown at the expected pace. Consequently, VGC, with its current debt
structure, will have difficulty in meeting this covenant in the future.
Waivers have been requested from VGC's senior lenders, John Hancock
and Wachovia, but to date neither lender has provided a waiver nor have they
acted to accelerate their loans or otherwise access remedies which are
available to them as a result of the default. Although VGC has not been
formally notified of the lenders' plans, VGC's management believes that they
have determined temporarily to postpone any action pending the outcome of
VGC's exploration of the strategic initiatives that VGC has previously
disclosed are under active consideration. There can be no assurance that the
strategic alternatives under consideration will lead to waivers or amendments
from the lenders or that the lenders will continue to postpone the exercise
of their remedies.
In addition to exploring strategic alternatives, VGC is
investigating options to refinance its Line in a manner that will avoid
non-compliance with its covenants. One of those options is a partial
liquidation of assets and a complete repayment of the Line. There can be no
assurance that VGC will be successful in refinancing the Line. If it is
unsuccessful, VGC plans to renegotiate the debt covenants, which will be at
the discretion of VGC's lenders.
3. SIGNIFICANT EVENTS
VGDC has received an approval from the Virginia State Corporation
Commission (VSCC) for an increase in authorized rates. The rates went into
effect in late January 2000.
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,
1999, and the Notes to Consolidated Financial Statements set forth in this
report.
RESULTS OF OPERATIONS
During the three months ended March 31, 2000, the Company recorded net
income of $210,000 compared to net income of $832,000 for the same period in
1999. Basic and diluted net income per common share for the quarter was $0.04
compared to $0.15 for the first quarter of 1999. The quarter ending March 31,
1999 included approximately $400,000 in income from the Company's share of
VGSC's sale of the Haysi Gathering System. The sale resulted in an additional
$0.07 per share.
The Company recorded revenues of $3.18 million for the period ending
March 31, 2000 compared to $2.87 million in 1999 representing an 11%
increase. Revenue growth was derived primarily from the Company's propane
operations. Propane gas sales increased 47% to $1.0 million in the first
quarter of 2000 from $688,000 in 1999. Total gallons sold increased 12% to
828,000 from 738,000, and the average sales price increased 30%. The Company
raised prices in response to the increase in wholesale propane prices, which
resulted from higher oil prices and a supply shortage that occurred during
the first quarter of 2000. The Company's customer growth remained robust at
41% to 4,800 at the close of the quarter from 3,400 on March 31, 1999.
<TABLE>
<CAPTION>
--------------------------- ------------ ------------ ---------
THREE MONTHS ENDED
MARCH 31
PERCENTAGE
REVENUE 2000 1999 CHANGE
--------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Natural Gas Sales $ 610,000 $ 599,000 2%
--------------------------- ------------ ------------ ---------
Storage Revenues 748,000 733,000 2
--------------------------- ------------ ------------ ---------
Pipeline Revenues 285,000 285,000 -
--------------------------- ------------ ------------ ---------
Propane Gas Sales 1,012,000 688,000 47
--------------------------- ------------ ------------ ---------
Explor. & Prod. Revenues 87,000 93,000 -
--------------------------- ------------ ------------ ---------
Management Revenues 62,000 101,000 (39)
--------------------------- ------------ ------------ ---------
Interest and Other Income 380,000 368,000 3
------- -------
--------------------------- ------------ ------------ ---------
Total Revenue $ 3,184,000 $ 2,867,000 11%
--------------------------- ------------ ------------- ---------
</TABLE>
During the first quarter of 2000, cost of gas sold increased
significantly with the rise in pricing to $552,000 from $464,000. The total
amount of dths of gas sold decreased to 234,000 from 387,000 in the first
quarter of 1999. The average cost per unit has increased to $2.36 from $1.20 for
the three months ending March 31, 1999 while the sale price per dth increased to
$2.61 from $1.54. Cost of propane sold increased dramatically to $499,000 from
$252,000 as a result of higher volumes and the rising cost of propane. In spite
of the rising prices, margins on propane gas sales improved slightly. Average
sale price per gallon has increased to $1.22 compared to $.93 in 1999, and the
cost per unit has also increased to $.60/gallon from $.34/gallon.
Total operations and maintenance costs for the quarter was $307,000
compared to $347,000 for the first quarter of 1999, a decrease of $40,000.
The general reason for the decrease was the purchase of compressors that were
originally leased. This has resulted in savings of $42,000 in rental charges.
Other taxes increased dramatically to $146,000 from $64,000. This increase
resulted from higher state franchise
17
<PAGE>
taxes. Depreciation increased during the first quarter of 2000 to $358,000 from
$328,000. This resulted from increased depreciation on propane assets.
Interest expense increased to $497,000 for the three months ending
March 31, 2000 from $366,000 for the same period in 1999. This is due to an
increase in the Company's total outstanding debt to $30.2 million as of March
31, 2000 from $26.3 million as of March 31, 1999.
General and administrative expense increased to $526,000 from
$442,000 for the three months ending March 31, 1999. There are two main
reasons for the increase. The first of these is an increase in net wages for
the period. After allocation to capital projects, wages increased $29,000 in
first quarter 2000 when compared to the same period in 1999. The main reason
for this increase is the fact that the Company had 62 employees as of March
31, 2000 and only 45 as of March 31, 1999. More employees were needed for the
Company's evaporation facility and the Company's propane operations added
employees for a new retail office. The other reason for the increase in
general and administrative expense is higher professional service costs. The
Company incurred $73,000 in additional professional service fees as a result
of the Company's ongoing strategic evaluation.
Earnings from affiliates dropped dramatically during the first quarter
of 2000 to $25,000 from $441,000. The sale of the Haysi Gathering System in
first quarter 1999 resulted in income to the Company of $401,000. Excluding the
revenue generated by the sale in 1999, VGSC reported net income of $118,000
compared to $160,000 in 1999. VGDC recorded a net loss of $68,000 compared to a
loss of $81,000 in 1999 as gas sales increased 37% to $477,000 from $349,000.
FINANCIAL CONDITION
The Company has classified $24 million of long-term debt as current
due to non-compliance with the Company's debt covenants. The Company's
covenants require it to maintain certain financial ratios. As of March 31,
2000, one covenant requires the Company to maintain historical EBITDA of one
and three-quarters times current debt service. The Company's Line of Credit
(the "Line") with Wachovia Bank N.A. ("Wachovia") is currently due on July 1,
2000, and as of March 31, 2000, had a balance outstanding of $6.0 million.
The $6.0 million, by definition, must be included in the Company's current
debt service in its entirety and, as a consequence with the interest
required, causes the non-compliance. Furthermore, due to construction delays,
the Company's revenue has not grown at the expected pace. Consequently, the
Company, with its current debt structure, will have difficulty in meeting
this covenant in the future.
Waivers have been requested from VGC's senior lenders, John Hancock
and Wachovia, but to date neither lender has provided a waiver nor have they
acted to accelerate their loans or otherwise access remedies which are
available to them as a result of the default. Although the Company has not
been formally notified of the lenders' plans, management believes that they
have determined temporarily to postpone any action pending the outcome of the
Company's exploration of the strategic initiatives that the Company has
previously disclosed are under active consideration. There can be no
assurance that the strategic alternatives under consideration will lead to
waivers or amendments from the lenders or that the lenders will continue to
postpone the exercise of their remedies.
The Company is exploring options to refinance its Line in a manner
that will avoid non-compliance with its covenants. One of those options is a
partial liquidation of assets and a complete repayment of the Line. There can
be no assurance that the Company will be successful in refinancing the Line.
If it is unsuccessful, the Company plans to renegotiate the debt covenants,
which will be at the discretion of the Company's lenders.
The Company projects its capital budget for 2000 to be $20.0 million if
the pipeline and storage assets are expanded in the manner the Company believes
is appropriate and for which it has been securing the necessary regulatory
approvals and future contractual commitments. The Company does not have internal
resources currently to support this budget and has, as explained below, been
seeking financing from outside sources and considering other strategic
alternatives, such as potential asset liquidations, to obtain it. If resources
do not become available in the context of the transactions described below
currently under consideration by the Board of Directors, the Company will
postpone construction.
OUTLOOK
The Company believes the best prospects for its future require the
continued expansion of the pipeline and storage assets. However, the Company's
internal resources are insufficient to support this
18
<PAGE>
expansion and, to date, the Company's external efforts to attract the
necessary capital have been unsuccessful. The Company believes that resources
could ultimately be found but they are likely to be on less favorable terms
than those historically available and than those needed to best realize the
benefits of expansion. The Company could continue to operate in a status quo
mode, which would not require additional financing. However, the Company
projects that stable to declining results would be associated with the
adoption of a status quo approach.
In consideration of the above factors, and as previously disclosed, the
Company has for some time been exploring both sources of additional external
capital and strategic alternatives, which would promote the expansion strategies
that the Board and management believe are in the long term interest of those
invested in the Company's businesses. The efforts relating to strategic
alternatives have intensified in recent months as it has become clearer that the
level of additional financing and/or investment required is unlikely to be
available directly. Given the projected outcome of a status quo approach, it
appears that completion of an appropriate strategic transaction, if available,
would be in the Company's and its stockholders' best long term interests.
As disclosed, previously, through its financial advisor CIBC
Oppenheimer, the Board received indications of interest in a purchase of the
Company's stock or significant portions of its consolidated assets from third
parties who appear to have the financial resources to complete the
transactions in which they have indicated an interest. Negotiations with
respect to such strategic alternatives are ongoing and are subject to numerous
conditions, such as due diligence, negotiation of definitive agreements,
regulatory approvals, shareholder approval and other conditions. They
continue generally to represent premiums to market value from the standpoint
of the Company's recent share price. However, at the present time, there can
be no assurance that any of these transactions will take place or that if
they do take place, they will do so at the prices initially proposed. It is
the intention of the Board in pursuing these matters to seek the transaction
or transactions, which will maximize available value for the Company's
shareholders. When and if sufficient progress can be made with regard to a
transaction that appears appropriate for the Board to recommend to
stockholders, further disclosure will be made.
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 the 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:
- - The Company's growth plans are contingent on its ability to affordably
finance future capital expenditures. If the Company is unable to finance
capital expenditures, revenue growth will be impacted.
- - The 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. "Unbundling" or deregulation in the natural gas industry could
introduce additional competitors and make the viability of long-term
contracts suspect.
- - The Company derives 52% 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.
- - The Company's negotiations with respect to strategic alternatives may
result in a sale of the significant portions of the Company's assets or a
purchase of the Company's outstanding stock. Such an outcome would
substantially change the nature of the stockholders' investments in the
Company and the Company's future prospects.
- - Substantial uncertainty about the Company's future course exists because
of the current defaults under the Company's senior credit instruments
and the lack of waivers and/or renegotiated covenants. There can be no
assurance as to the outcome of the Company's negotiations with its
lenders.
19
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has breached a financial covenant in its debt agreements
with its senior lenders, John Hancock and Wachovia Bank, N.A. These
agreements encompass $30 million in debt. The Company has paid all debt
service on these agreements when due. Waivers have been requested from the
Company's senior lenders, but to date neither lender has provided a waiver
nor have they acted to accelerate their loans or otherwise access remedies
which are available to them as a result of the default. Although the Company
has not been formally notified of the lenders' plans, management believes
that they have determined temporarily to postpone any action pending the
outcome of the Company's exploration of the strategic initiatives that the
Company has previously disclosed are under active consideration. There can be
no assurance that the strategic alternatives under consideration will lead to
waivers or amendments from the lenders or that the lenders will continue to
postpone the exercise of their remedies.
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:
None.
20
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
27 Financial Data Schedule for the three months ended March 31, 2000
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
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Virginia Gas
Company and Subsidiaries and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<CASH> 940,763
<SECURITIES> 0
<RECEIVABLES> 1,037,771
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,656,514
<PP&E> 49,211,546
<DEPRECIATION> 4,384,558
<TOTAL-ASSETS> 65,216,026
<CURRENT-LIABILITIES> 31,130,249
<BONDS> 0
0
0
<COMMON> 5,505
<OTHER-SE> 32,967,088
<TOTAL-LIABILITY-AND-EQUITY> 65,216,026
<SALES> 2,804,159
<TOTAL-REVENUES> 3,183,675
<CGS> 2,261,286
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497,426
<INCOME-PRETAX> 303,640
<INCOME-TAX> 93,585
<INCOME-CONTINUING> 210,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210,055
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
