SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission file number 1-8223
National Gas & Oil Company
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio 31-1004640
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1500 Granville Road, Newark, Ohio 43055
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (614) 344-2102
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Shares, $1 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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 PRECEDING 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. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K (Subsection 229.405 OF THIS CHAPTER)
IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF
REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-
K OR ANY AMENDMENT TO THIS FORM 10-K. ( X )
PAGE 1 OF 62
Exhibit Index at Page 52-53
THE AGGREGATE MARKET VALUE OF THE VOTING SHARES HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 1, 1995 IS $67,130,415.
AS OF MARCH 1, 1995, THE NUMBER OF SHARES OUTSTANDING OF THE
REGISTRANT'S $1.00 PAR VALUE COMMON SHARES WAS 6,661,477 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the definitive Proxy Statement for the 1995 Annual
Meeting of Shareholders are incorporated by reference into Part
III of this 10-K.
PART I
Item 1 - BUSINESS
National Gas & Oil Company (the Company) was organized
under the laws of the State of Ohio on March 24, 1981, as a holding
company. The Company derives substantially all of its revenues and
earnings from the operating results of its subsidiaries.
The Company's subsidiaries are engaged in two principal
businesses: gas sales and transportation, and oil and gas
production and marketing. National Gas & Oil Corporation (National
Gas) is a public utility engaged directly in the purchase, storage,
distribution, sale and transportation of natural gas in a 12 county
area in East Central and Southeastern Ohio. NGO Development
Corporation (NGO Development), and its subsidiary Coshocton Energy
Corporation (Coshocton Energy), operate as oil and gas production
and development companies within the Appalachian area. Producers
Gas Sales, Inc. (Producers Gas) is a service company for the
marketing of natural gas directly to end-use customers.
Total annual revenues during the periods 1992 through
1994 are set forth as follows:
1994 1993 1992
Gas Sales & Transportation (1)
Industrial and
Off-system $ 8,369,981 $ 6,271,697 $ 7,443,203
Residential 15,111,291 13,035,406 13,896,313
Commercial 5,894,331 5,066,273 5,584,277
Transportation 5,146,050 4,241,745 4,303,201
Subtotal 34,521,653 28,615,121 31,226,994
Oil & Gas Sales (2) 27,201,139 18,067,652 7,071,107
Total Operating Revenues $61,722,792 $46,682,773 $38,298,101
=========== =========== ===========
Income from continuing operations before provision for
federal income taxes during the periods 1992 through 1994 are set
forth below:
1994 1993 1992
Gas Sales & Transportation(1) $ 4,235,949 $ 2,922,721 $ 2,972,103
Oil & Gas Sales (2) 1,162,595 452,534 984,044
Total $ 5,398,544 $ 3,375,255 $ 3,956,147
=========== =========== ===========
(1) Includes National Gas and Producers Gas.
(2) Includes NGO Development and Coshocton Energy.
Gas throughput for the periods 1992 through 1994 is set
forth on Page 15.
GAS SALES AND TRANSPORTATION
The Company's gas sales and transportation segment is
comprised of National Gas, a public utility, and Producers Gas, a
gas marketing company which sells gas to customers both on and off
National Gas' pipeline system. Producers Gas aggregates supply to
be delivered to end use customers by National Gas or other local
distribution companies.
In 1994, approximately 73% of National Gas' throughput
within its service territory was to industrial customers to which
National Gas is providing sales or transportation service. These
industrial customers are engaged primarily in the manufacture of
ceramic products, steel and aluminum products and fiberglass, and
use gas primarily for industrial processing purposes.
Transportation represents the service provided to
industrial customers whereby National Gas merely transports gas and
does not purchase and resell the gas. In contrast, gas sales
consist of gas purchased by National Gas and resold to residential,
commercial and certain industrial customers.
Transportation service rates are based on separate
agreements signed by each customer and are derived from the cost
of providing the transportation service. Industrial sales rates
are based on separate large and small gas service contracts signed
with each customer.
The sale and transportation of natural gas continued to
be a competitive business in 1994, and is expected to remain
competitive in the future. The factors affecting the level of
competition include the continuation of ample gas supply,
regulatory policies, and price competition between sellers and
marketers of natural gas as well as between the use of natural gas
and other sources of energy. Specifically, many of the industrial
customers have alternate fuel capability.
In addition to its industrial sales and transportation
services, National Gas supplies gas to approximately 23,800
residential and commercial customers in the Ohio cities of Newark,
Heath, Caldwell, Buckeye Lake and Zanesville and in the surrounding
area, including various small communities in Perry, Licking,
Muskingum, Noble, Belmont, Washington and Meigs Counties. Gas sold
to these residential and commercial customers is primarily used for
heating purposes and is directly affected by the seasonal nature
of this type of service.
The base rates charged to residential and commercial
customers by National Gas are based on local rate ordinances
negotiated and signed with the Ohio cities or villages of
Batesville, Buckeye Lake, Caldwell, Crooksville, Dexter City,
Glenford, Granville, Gratiot, Hanover, Heath, Macksburg, Newark,
Philo, Roseville, Zanesville, Racine, Rutland and Syracuse, and
include rates to their contiguous areas and rural areas in
Fairfield, Licking, Muskingum, Perry, Noble, Belmont, Washington
and Meigs Counties. The cost of gas charged to these customers is
based upon the gas cost recovery (GCR) mechanism administered by
the Public Utilities Commission of Ohio (PUCO).
Columbia Gas of Ohio (Columbia), a large distribution
company headquartered in Columbus, Ohio, also sells gas in Newark,
Caldwell and Zanesville. National Gas and Columbia have
residential and commercial customers in contiguous areas in and
around Newark and Caldwell, but neither, with few exceptions, has
a distribution system in an area served by the other. A majority
of the industrial customers could be served by either National Gas
or Columbia, or both.
National Gas and Columbia are in competition with each
other and the same electric company, The Ohio Power Company, for
heating, air conditioning and other domestic and commercial uses.
In the State of Ohio there are no exclusive franchises granted to
natural gas distribution companies. National Gas relies upon its
ability to react quickly to customer's needs, and has the added
benefit of local storage fields which serve to enhance the
Company's competitive position. Columbia has no storage of its
own, however, it can contract for this service. Additionally, the
Company's access to local Ohio production through an extensive
gathering system provides gas supply and marketing flexibility.
Columbia has similar access. National Gas has a history of
providing reliable service to the customers in its service area.
National Gas has contracted for pipeline capacity with
Texas Eastern Transmission Corporation (Texas Eastern), Tennessee
Gas Pipeline Company (Tennessee), Columbia Gas Transmission
Corporation (Columbia Transmission) and CNG Transmission
Corporation (CNG) to transport a substantial portion of its gas at
rates which are subject to the jurisdiction of the Federal Energy
Regulatory Commission (FERC). During 1993, all of National Gas'
interstate pipeline suppliers began the restructuring of their
operations to comply with FERC Order 636, which dictated the
unbundling of gas supply and transportation services provided by
the interstate pipelines.
As a part of the restructuring to comply with FERC Order
636, the FERC has authorized the recovery of prudently incurred
transition costs by the interstate pipeline companies. As of
December 31, 1994, National Gas has paid $1,275,000 to its
interstate pipeline suppliers for transition costs. Approximately
$1,300,000 remains to be paid over the next 10 years and,
accordingly, has been accrued at December 31, 1994. National Gas
has received authorization from the PUCO to recover 79% of those
transition costs from its rate-regulated customers through the GCR
mechanism and 21% from its transportation customers via a
transition cost surcharge. The majority of transition costs which
have been paid and allocated to the rate-regulated customers have
been collected while collections from the transportation customers
are to begin in 1995.
A summary of the contracts between National Gas and its
interstate suppliers in a post-636 environment follows.
Maximum
Rate Contract Termination Daily Quantity
Supplier Schedule Date Date Dth
Texas Eastern FT-1 11/01/89 10/31/03 15,275
Texas Eastern SS-I 11/01/89 10/31/99 3,380
CNG SS-II 04/16/80 04/15/00 2,500
Tennessee FT-G 09/01/85 11/01/00 1,479
Columbia Trans. GTS 11/01/88 11/01/00 3,830
During 1994, National Gas transported 58% of its total
gas purchased for resale or transportation from the four interstate
pipeline companies detailed above. National Gas acquired the
remaining 42% of its supply requirements from independent Ohio
producers. Historically, this mix of supply has remained
relatively constant since 1991 with 70% to 75% of the gas
transported by the interstate pipeline companies and 25% to 30%
supplied from Ohio producers. During 1994, purchases of Ohio gas
began to increase due to increased development of the Rose Run
formation by Ohio producers.
Additionally, National Gas utilizes its gas storage
fields and contract storage to satisfy peak on-system loads during
the heating season and markets excess storage capacity to off-
system customers. Consequently, excess gas is purchased during the
summer months, when prices may be lower, and utilized during the
winter months. During 1994, approximately 2,200,000 Mcf's were
injected into underground storage and approximately 1,760,000 Mcf's
were withdrawn.
In 1994, National Gas connected approximately 700 new
residential and commercial customers. In addition, National Gas
continued to expand the local Ohio gas gathering system in an
effort to assure an adequate supply of gas for all of its current
and prospective customers.
Capital expenditures for National Gas during 1994 were
$6,082,000 which included normal system expansion and replacement,
the construction of a pipeline to transport gas to American
Electric Power Company's Conesville, Ohio electric generating
plant, and storage field enhancements. Capital expenditures in
1995 are expected to be approximately $2,200,000 to support
existing operations and the replacement of some current facilities
and lines.
National Gas is subject to the jurisdiction of the PUCO
with respect to certain rates, accounts, service, issuance of
securities, safety and certain other matters. In the event of
certain declared national or state emergencies, National Gas' gas
supplies may also be subject to further regulation by federal and
state agencies and officials.
There were no sales to individual customers in excess of
10% of operating revenues during the period from 1992 through 1994.
However, National Gas is dependent upon several industrial
customers for a significant portion of its throughput.
Approximately 25% of the total throughput results from serving four
major industrial customers which operate in different industries.
This customer concentration has remained relatively constant since
1991. Competition for these end-users is intense with other
natural gas utilities, fuel oil, propane, and electric utilities.
As reflected in the quarterly information in the notes
to the consolidated financial statements, operating revenues and
net income of National Gas are seasonal in nature. While the
industrial throughput is relatively constant, the gas sold to
residential and commercial customers for heating purposes mirrors
the changes in the Ohio climate.
OIL AND GAS SALES
The oil and gas sales segment is comprised of NGO
Development and Coshocton Energy.
NGO Development and Coshocton Energy are oil and gas
exploration, production, development and marketing companies
operating in the Appalachian Area and, as such, they maintain
working interest ownerships ranging from 100% to 15% in 669
producing wells. The oil and gas produced from these wells is sold
to crude oil and natural gas purchasers in the Appalachian Area,
as well as to end-use customers. Oil and gas production is
relatively constant throughout the year. Associated revenues and
net income fluctuate based upon changes in oil and gas prices. NGO
Development and Coshocton Energy are in competition with many other
Appalachian Area exploration, production and development companies
for new oil and gas reserves and undeveloped acreage.
In addition to oil and gas exploration and production,
NGO Development is active in marketing gas it produces and gas it
purchases from third parties. This marketing activity has expanded
in 1993 and grew even more in 1994. NGO Development is in
competition with many other gas producing and marketing companies,
as well as local distribution companies, for new customers.
In 1994, the oil and gas sales segment had capital
expenditures of approximately $2,509,000 covering the purchase,
development and/or completion of various interests in oil and gas
wells and for additions to its gas gathering facilities.
In 1995 NGO Development expects to incur capital
expenditures for oil and gas operations totaling approximately
$300,000. The anticipated reduction in 1995 capital expenditures
is due to the current low prices for natural gas. If natural gas
prices increase significantly during 1995, capital expenditures may
increase accordingly.
NATIONAL ENERGY SERVICE COMPANY (DISCONTINUED OPERATIONS)
National Energy provided gas measurement and pressure
control equipment and service to companies in the natural gas
industry. National Joy CNG Division provided equipment and service
for natural gas powered vehicles.
Operating results attributable to the product sales and
services of National Energy have been segregated and presented as
Discontinued Operations. See the Discontinued Operations footnote
for additional information (Note 10).
*****************************************************************
At December 31, 1994, the Company's operating
subsidiaries had 138 full-time active employees.
For financial information regarding industry segments,
see Note 9 of the notes to consolidated financial statements.
*****************************************************************
EXECUTIVE OFFICERS OF REGISTRANT
Birth Family Office Held as of
Name Date Age Relationship December 31,1994
J. W. Straker 10/01/21 73 None Chairman of the
Board
Patrick J. McGonagle 07/08/54 40 None President and Chief
Executive Officer
Lawrence P. Haren 08/03/54 40 None Executive Vice
President,
Treasurer and
Chief Financial
Officer
John B. Hartnett 09/06/34 60 None Vice President
and Chief
Operating
Officer
John B. Denison 02/14/40 54 None Vice President
and Secretary
Kelley L. Crookston 11/18/65 29 None Controller
All of the executive officers listed were elected to
their respective offices in the Company on May 19, 1994. With the
exception of John B. Hartnett, all executive officers hold similar
positions with National Gas, NGO Development and Producers Gas.
Mr. Hartnett is Vice President and Chief Operating Officer of
National Gas.
J. W. Straker was elected Chairman of the Board on May
18, 1978. William H. Sullivan, a current Director of the Company,
was elected to succeed Mr. Straker as Chairman of the Board on May
18, 1995. Patrick J. McGonagle was elected to the position of
President and Chief Executive Officer on February 19, 1993.
Previously, Mr. McGonagle held the position of Vice President and
General Counsel since May 19, 1988. Lawrence P. Haren was elected
to the position of Executive Vice President, Treasurer and Chief
Financial Officer on February 19, 1993. Previously, Mr. Haren held
the position of Vice President, Treasurer and Chief Financial
Officer since January 1, 1988. John B. Hartnett, a 18-year
employee, was elected to the position of Vice President and Chief
Operating Officer of the Company and National Gas on May 23, 1991,
and to the position of Vice President and Chief Operating Officer
of National Production on May 19, 1988. John B. Denison, a 23-year
employee, was elected to the position of Vice President and
Secretary on May 18, 1978. Kelley L. Crookston was employed on
November 1, 1991, and was elected to the position of Controller on
May 21, 1992. Previously, Ms. Crookston was employed by Price
Waterhouse in Columbus, Ohio.
Item 2 - PROPERTIES
National Gas owns and operates a system consisting of
approximately 1,321 miles of distribution, transmission and
gathering mains, ranging in size from one inch to ten inches in
diameter. The mains are located on easements or private rights-
of-way. In addition, the Company owns and operates seven gathering
compressor stations and one distribution (main line boost)
compressor station consisting of 2,175 brake horsepower. Five of
these compressor stations are situated on lands totaling 19.77
acres owned by National Gas.
Complementing the above pipeline and compressor station
facilities, National Gas also owns and operates three underground
natural gas storage fields. These fields have a combined estimated
reservoir capacity of 5,300,000 Mcf, and consist of 39 wells and
five compressors, totaling 1,912 brake horsepower. The majority
of the subsurface rights are held by lease with 955.39 acres held
in fee.
National Gas owns workhouses, garages, offices, shops and
various metering and regulating buildings in its operating area.
These facilities are located on 35.42 acres and are owned in fee.
The corporate headquarters are located in a 20,000 square foot
building which is owned by the Company and is located in Newark,
Ohio. In addition, the Company owns a warehouse, office, and meter
shop buildings in Zanesville, Ohio, which are leased to a third
party.
The Company's investment in its natural gas system is
considered suitable to do all things necessary to bring gas to the
consumer. National Gas, as is typical in the industry, does
provide for an ongoing maintenance and replacement program.
The oil and gas properties consist of 669 gross and 440
net producing wells as of December 31, 1994. Nearly all wells are
combination wells producing both oil and gas. Additionally, NGO
Development has leasehold acreage at December 31, 1994, as follows:
Gross Net
Developed acreage 64,793 52,697
Undeveloped acreage 68,639 60,464
The following table summarizes the average selling prices
for oil and gas, the average production cost per equivalent Mcf
(one barrel of oil equals six Mcf), and the average daily oil and
gas production for the period 1992 through 1994:
1994 1993 1992
Average sales
price per Mcf $ 3.34 $ 3.03 $ 2.65
Average sales
price per barrel $15.81 $17.10 $18.59
Average production
cost per
equivalent Mcf $ 0.45 $ 0.57 $ 0.52
Average daily
production of
gas (Mcf) 3,023 3,046 3,279
Average daily
production of
oil (barrels) 130 94 72
In 1994, 1993 and 1992, NGO Development participated in
the drilling of 12, 7 and 8 exploratory wells which were completed
and 7, 5 and 5 dry holes, respectively. Also NGO Development
participated in the drilling of eight development wells which were
completed in 1994. As of December 31, 1994 there were three
exploratory wells and two development wells in the process of being
drilled or completed.
Item 3 - LEGAL PROCEEDINGS
The Company and its subsidiaries are not parties at this
time to any legal proceedings which are expected to have a material
effect on the consolidated financial position, results of
operations or liquidity of the Company.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Registrant's $1.00 par value common shares are traded
on the American Stock Exchange (Symbol NLG). The sales prices
traded on the American Stock Exchange are stated below:
Sale Prices
1994 High Low
First Quarter 18 7/8 16 1/2
Second Quarter 18 5/8 15 5/8
Third Quarter 17 3/4 14 1/4
October 1 through December 19 17 1/2 15 1/8
December 20 through December 31
after three-for-two stock split 12 1/2 10 1/4
Sale Prices
1993 High Low
First Quarter 14 12 1/2
Second Quarter 14 3/4 12 1/2
Third Quarter 17 1/2 14 1/4
October 1 through November 21 17 15 7/8
November 22 through December 31
after 5% stock dividend 18 1/8 15
At February 28, 1995, there were 1,715 equity
shareholders of record of the Company's $1.00 par value common
shares. Of the total shares outstanding, approximately 106,000,
or 1.6%, were held by the Company's employee benefit plans.
Dividends in the amount of $.09 per share were paid quarterly for
all of 1994 and 1993. A three-for-two stock split was issued in
December 1994, and a 5% stock dividend was issued in December 1993.
Dividend policy is established by the Company's Board of
Directors. The Board's decision takes into consideration covenants
included in loan agreements, results of operations and retained
earnings of the Company. Presently, there are no restrictions on
the payment of dividends, as long as the Company is not in default
under the terms of its long-term bank loans.
Item 6 - SELECTED FINANCIAL DATA
(In Thousands, Except for Per Share Data)
1994 1993 1992 1991 1990
Total
operating
revenues $61,723 $46,683 $38,298 $30,624 $27,255
Income from
continuing
operations $ 3,489 $ 2,072 $ 2,612 $ 2,134 $ 2,803
Discontinued
operations $ -- $ -- $ (364) $ (15) $ (644)
Cumulative
effect of
accounting
changes $ -- $ -- $( 235) -- --
Net income $ 3,489 $ 2,072 $ 2,013 $ 2,119 $ 2,159
Income from
continuing
operations
- per share
(1) $ 0.52 $ 0.31 $ 0.39 $ 0.32 $ 0.42
Discontinued
operations
- per share
(1) $ -- $ -- $ (0.05) $ -- $ (0.09)
Cumulative
effect of
accounting
changes - per
share (1) $ -- $ -- $ (0.04) -- --
Net income
per share
(1) $ 0.52 $ 0.31 $ 0.30 $ 0.32 $ 0.33
Total assets $80,529 $77,897 $69,195 $66,189 $52,253
Long-term
obligations $12,956 $ 9,002 $ 6,905 $ 7,438 $ --
Cash divi-
dends per
share (1) $ 0.24 $ 0.23 $ 0.22 $ 0.22 $ 0.21
(1) Based upon the average number of shares outstanding of
6,661,477 in 1994 and 1993, 6,635,769 in 1992, 6,635,556 for
1991 and 1990. These shares were adjusted for the three-for-
two stock split in December 1994.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
The consolidated operating results have been segregated
into continuing operations and discontinued operations because of
the sale of National Energy. The loss on the disposal, net of tax
benefits of $364,935, for National Energy is presented as a single
line item after the results from continuing operations.
Additionally, the cumulative effects of changes in accounting
principles due to the adoption of SFAS Nos. 106 and 109 in 1992
have been segregated from income from continuing operations.
Operating revenues have been separated into revenues
generated from the sale and transportation of natural gas by
National Gas and Producers Gas and the sale of oil and gas
purchased and produced by NGO Development and Coshocton Energy.
Other income includes the revenues of the holding company, National
Gas & Oil Company, other income from all subsidiaries and the
Company's 50% interest in the results of Roscoe Gas, a
nonconsolidated entity prior to 1993.
Consolidated revenue of $61,723,000 in 1994 increased 32%
from 1993 consolidated revenue and consolidated revenue of
$46,683,000 in 1993 increased 22% from 1992 consolidated revenue.
The major change in revenue for both years can be attributed to gas
marketing activity by the oil and gas sales segment.
Interest expense increased from 1992 through 1994 due to
the short-term borrowings of National Gas for working capital
requirements, long-term borrowings associated with the acquisition
of NGO Development and its capital construction programs, and long-
term borrowings by National Gas primarily for the construction of
a pipeline to an Ohio electric generating facility.
Income from continuing operations and net income amounted
to $3,489,000 in 1994, an increase of $1,418,000 from 1993. The
68% increase was generated by all business segments. In 1993,
income from continuing operations of $2,072,000 was down $541,000,
or 21%, from 1992 because of decreased income in all business
segments. Net income in 1993 of $2,072,000 represented a 3%
increase over net income in 1992 because of the charges in 1992
attributed to discontinued operations and changes in accounting
principles.
Net income per common share in 1994 was $.52, as compared
to net income per common share in 1993 of $.31, and in 1992 of
$.30. Income per common share from continuing operations was $.52,
<PAGE>
$.31 and $.39 in 1994 through 1992, respectively. All per share
amounts prior to 1994 have been restated to reflect the three-for-
two stock split in December, 1994.
Financial Information by Business Segment
The following tables compare operating revenues,
operating income before federal income taxes and gas throughput for
the last three years.
Operating Revenues 1994 1993 1992
Gas Sales & Transportation:
Industrial & Off-System $ 8,369,981 $ 6,271,697 $ 7,443,203
Residential 15,111,291 13,035,406 13,896,313
Commercial 5,894,331 5,066,273 5,584,277
Transportation 5,146,050 4,241,745 4,303,201
Subtotal 34,521,653 28,615,121 31,226,994
Oil & Gas Sales 27,201,139 18,067,652 7,071,107
Total Operating Revenues $61,722,792 $46,682,773 $38,298,101
=========== =========== ===========
Operating Income Before Federal Income Taxes
1994 1993 1992
Gas Sales & Transportation $ 4,235,949 $ 2,922,721 $ 2,972,103
Oil & Gas Sales 1,162,595 452,534 984,044
Total Operating Income Before
Federal Income Taxes $ 5,398,544 $ 3,375,255 $ 3,956,147
=========== =========== ===========
Gas Throughput (Mcf) 1994 1993 1992
Gas Sales:
Industrial 76,470 104,346 99,000
Residential 2,016,487 1,926,279 1,904,547
Commercial 866,696 827,704 841,155
Off-System 2,889,748 3,371,665 4,264,280
Subtotal 5,849,401 6,229,994 7,108,982
Transportation 6,807,571 6,447,650 6,151,432
Oil & gas sales 10,626,768 5,535,765 2,747,484
Total 23,283,740 18,213,409 16,007,898
========== ========== ==========
Gas Sales and Transportation
Operating revenues associated with this segment of the
business increased 21% in 1994, primarily as a result of an
increase in the volumes sold to each customer class, as well as
rate increases to each customer class. The decrease in 1993
revenues from 1992 resulted primarily from a decrease in the gas
cost component included in revenues. A portion of the Company's
gas throughput is effected by weather. Annual degree days which
measure the effect of weather were 6,477, 6,472 and 6,263 for 1994,
1993 and 1992, respectively. The thirty year average is 6,129.
Operating income before federal income taxes of the gas
sales and transportation segment increased $1,313,000 in 1994 after
increasing $21,000 in 1993. The increase in 1994 is primarily
attributed to increased volume and margins earned on the
residential/commercial and transportation customer classes. The
change in gross margins for each on-system customer class of
National Gas during 1994 was affected by volume and price as
follows:
Volume Price Total
Industrial $(27,702) $ 3,959 $ (23,743)
Residential/
Commercial 332,372 519,463 851,835
Transportation 396,624 988,326 1,384,950
In order to protect transportation margins, the Company
instituted a hedging program whereby gas futures contracts are
purchased to hedge against rising prices of gas which is allocated
to fixed price transportation customers. The Company has reduced
the risk it faced in a market of rising gas prices.
Management negotiated with the cities and villages in
National Gas' operating area to increase base rates for residential
and commercial customers which were made effective in the third and
fourth quarters of 1991 with additional increases effective during
the first and second quarters of 1992. During the third quarter
of 1993, the Company analyzed the need for additional base rate
increases and decided to apply for rate increases to cover
anticipated increases in operating expenses. Rate increases over
a three-year period have been successfully negotiated with all
municipalities served by National Gas. The initial rate increases
were effective December 1, 1993. Industrial, transportation and
off-system rates are subject to competitive pressures. There were
no unusual changes in operating or maintenance expenditures during
the three-year period.
Gas sales to industrial customers decreased by 28,000 Mcf
in 1994 after increasing by 5,000 Mcf in 1993. In 1994 and 1993,
off-system throughput by the gas sales and transportation segment
declined. The oil and gas sales segment focuses on the Company's
efforts in this area. Residential and commercial throughput
increased approximately 5% in 1994 after remaining relatively
constant in 1993.
The increase in purchased gas expense of 16% in 1994 is
primarily the result of increased sales volume. The decrease in
purchased gas expense of 10% in 1993 resulted primarily from a
decrease in the cost of gas.
The Company utilizes its resources to take advantage of
the seasonal nature of natural gas pricing. Spot market purchasing
is accomplished when possible, and the Company's storage facilities
are utilized not only to satisfy peak demand, but to facilitate the
seasonal nature of spot market purchasing.
Oil and Gas Sales
Operating revenues from the oil and gas sales segment in
1994 increased to $27,201,000 due to the increased gas marketing
activity of NGO Development. Revenues in 1993 also increased
significantly over 1992 for the same reason. Gas marketing
contributed approximately 61% of the total revenue for this
business segment in 1994.
Volumes of gas sold by NGO Development in 1994 and 1993
increased significantly primarily because of off-system gas
marketing activity.
NGO Development's gas marketing activity generally
consists of selling gas to off-system customers in a highly
competitive environment. Unit margins on these off-system sales
are relatively low when compared to unit margins on sales to on-
system customers in the Gas Sales and Transportation segment.
Operating income before federal income taxes from the oil
and gas sales segment in 1994 amounted to $1,163,000, an increase
of $710,000 from income in 1993 of $453,000. Income in 1993
represented a $532,000 decrease from 1992 income. The increase in
income in 1994 is primarily the result of increased oil production
and gas marketing activity, while the decrease in 1993 is the
result of unsuccessful drilling efforts and increases in operating
expenses, including health care costs. Gas marketing activity
contributed approximately 42% of the total income for this business
segment in 1994.
Operating income before federal income taxes includes
income from the equity investment in Roscoe Gas through September
30, 1992. Effective October 1, 1992, the Company's equity
investment was exchanged for 100% of the stock in Coshocton Energy.
General
The Company's depreciation, depletion and amortization
expenses have increased over the three-year period primarily as
a result of the increased level of capital invested. The provision
for depreciation of utility property, plant and equipment,
excluding transportation and construction equipment, is based on
a composite rate of 3.12 percent. Depletion expense for the oil
and gas sales segment increased over the three-year period
reflecting the higher level of activity resulting from the
increased level of capital invested, and also by approximately
$300,000 because of adoption of SFAS No. 109 in 1992 which served
to increase depreciation and depletion expense for NGO Development.
(See Note 3 to the Consolidated Financial Statements.)
Real estate and personal property taxes for the gas
utility segment increased in 1994 because of increases in utility
property and in property tax rates. Gross receipts tax applicable
to public utilities is based on revenues, and accordingly, such
taxes increased in 1994. Overall, taxes other than income taxes
increased $328,000 and $20,000 in 1994 and 1993, respectively.
The 1993 decrease in other income as compared to prior
years is primarily the result of the absence of equity earnings in
Roscoe Gas after 1992. Other income includes equity earnings in
Roscoe Gas in the amount of $377,000 in 1992.
Federal Income Taxes
The change in federal income tax expense in the three-
year period directly reflects the changes in income for the
consolidated companies.
Discontinued Operations
In 1992, the Company recognized a loss on disposal of
$364,395, net of income tax benefits of $187,718, which represented
the establishment of a reserve for the full value of a $552,113
promissory note due from the sale of the discontinued operation.
In January 1994, the Company learned that the debtor's assets were
confiscated by its primary lender and the debtor ceased to continue
as a going concern. The debtor's primary lender liquidated the
assets and retained 100% of the proceeds to satisfy its lien.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The primary sources and uses of cash during the last
three years are summarized in the following condensed cash flow
statement:
Sources and (Uses) of Cash ($000)
1994 1993 1992
Provided by Operating Activities $ 7,167 $ 1,025 $ 7,342
Capital Expenditures, net of salvage (8,398) (5,419) (5,374)
Net Proceeds from long-term debt 3,950 2,117 (520)
Net Borrowings under short-term
bank loans (400) 1,250 (700)
Common Dividends (1,603) (1,535) (1,425)
Net Increase (Decrease) in
Cash & Cash Equivalents $ 716 $(2,562) $ (677)
======= ======= =======
Cash provided by operating activities consists of net
income and noncash items including depreciation, depletion,
amortization and deferred income taxes. Additionally, changes in
working capital are also included in cash provided by operating
activities. In 1993, working capital changes had a substantial
negative impact on cash provided by operating activities. Cash was
utilized to purchase gas futures contracts and more cash was tied
up in accounts receivable at year-end reflecting the increase in
revenues. Additionally, a substantial amount of purchased gas
expense was deferred until it is included in rates and recovered
from customers. The Company expects that internally generated cash
and cash reserves, coupled with seasonal short-term borrowings,
will continue to be sufficient to satisfy the operating, normal
capital expenditure and dividend requirements of the Company's
existing operations in the near future.
Capital Expenditures
Capital expenditures by business segment for each of the
three years are presented in the following table: ($000)
1994 1993 1992
Gas Sales & Transportation $6,082 $3,056 $2,848
Oil & Gas Sales 2,509 2,488 2,187
$8,591 $5,544 $5,035
====== ====== ======
In 1994, the gas sales and transportation segment
accounted for 71% of the total capital expenditures. The funds
were expended primarily for expansion and upgrading of existing
pipeline systems, construction of a new pipeline to provide gas
service to an electric generating facility, and gas storage field
enhancements. The oil and gas sales segment accounted for 29% of
total capital expenditures which were primarily used for the
purchase, development and/or completion of various interests in oil
and gas wells and for additions to the production company's gas
gathering facilities.
Approximately $1,000,000 of the total capital
expenditures in 1993 were used for the acquisition of existing oil
and gas producing properties and pipelines, and approximately
$2,000,000 of the total capital expenditures in 1992 were used for
construction of new pipeline facilities outside of the normal realm
of operations.
The Company estimates that normal capital expenditures
to support existing operations in 1995 will be approximately
$2,500,000. The construction program is continually evaluated and
actual expenditures may be more or less.
The Company continually assesses various alternatives for
expanding its business, including the acquisition of other business
entities.
Financing and Liquidity
In March 1994, National Gas issued $6 million of Senior
Unsecured Notes in a private placement to a qualified investor.
Part of the proceeds were used to fund capital projects in 1994,
with the balance to be used to fund future capital projects
contemplated for 1995 and 1996. The notes bear a fixed interest
rate of 6.63% and have a maturity of 15 years and an average life
of 9 years. The notes carry a 100% guaranty by the Company.
In February 1993, the Company, and all of its
subsidiaries except National Gas, entered into a $3 million
revolving line of credit for a term of three years. The committed
credit line is unsecured and may be utilized by any of the
subsidiaries, except National Gas. During 1994, NGO Development
had a maximum of $2.55 million outstanding against this credit line
and $1.45 million remained outstanding as of December 31, 1994.
In September, 1992, the Company entered into a 15-year
mortgage note to finance construction of additional office
facilities to replace leased facilities and to remodel some
existing facilities. The mortgage is secured by the Company's
Granville Road property. The maximum amount drawn on the note
during 1993 was $700,000, and $646,000 remained outstanding as of
December 31, 1994.
In October 1991, the Company entered into a $8.5 million
bank loan in conjunction with the acquisition of NGO Development.
To secure the bank loan, NGO Development granted to the Bank
mortgages on all of its leaseholds and security interests in all
of its other assets, and the Company guaranteed the bank loan. As
of December 31, 1994, $5,738,000 remained outstanding on this note.
As of December 31, 1994, the Company and its subsidiaries
had short-term lines of credit with various banks aggregating in
excess of $6,000,000, the upper limit on short-term borrowing
imposed by the Board of Directors. The terms of each borrowing
under the lines of credit are negotiated at the time the funds are
requested. During 1994, the Company utilized these credit lines
and as of December 31, 1994, a short-term draw of $3,050,000
remained outstanding.
The Company is not aware of any material events or
uncertainties which would materially limit or restrict its ability
to secure additional funds from external sources in either the debt
or equity markets.
The Company is engaged in certain natural gas futures
contracts as a means of hedging a portion of the market risk
associated with fluctuations in the market price of natural gas.
As of December 31, 1994, the Company and its subsidiaries had
$1,843,000 invested in 308 open contracts with a contracted value
of $5,999,000. The fair market value of these investments at
December 31, 1994, was $5,350,000. Gains or losses on these
investments are offset by increases or decreases in gas cost
thereby reducing the market risk of fluctuating gas prices.
Dividends
The Company paid total cash dividends of $1,603,000,
$1,535,000 and $1,425,000 in 1994, 1993 and 1992 respectively.
Additionally, the Company issued a three-for-two stock split in
1994, a 5% stock dividend in 1993 and a 7% stock dividend in 1992.
Presently, there are no restrictions on the payment of dividends,
as long as the Company is not in default of the terms in its long-
term bank loans. The quarterly cash dividend of $.09 per share was
continued throughout 1992, 1993 and 1994. Dividend policy is
established by the Company's Board of Directors. The Board's
decision takes into consideration results of operations and
retained earnings of the Company. There are currently no
restrictions on the present ability to pay such dividends.
Effects of Inflation
The $8.5 million bank loan entered into in October 1991
and the $3 million revolver entered into in February 1993, accrue
interest at a fluctuating rate equal to either the bank's prime
rate or to the London Interbank Offered Rate (LIBOR). Because of
the fluctuating rate, the Company is exposed to increases in
interest expense should rates increase due to inflation. This same
interest expense risk is present with the $700,000 mortgage note
which accrues interest at the prime rate.
National Gas' rates were sufficient to provide for the
effect of inflation on the replacement costs of its investment in
property, plant and equipment up through 1989. In 1991, however,
National Gas applied for rate increases to offset increases in
operating expenses in 1990, 1991 and 1992. The rate increases were
granted by the majority of the municipalities served by National
Gas and were implemented during the third and fourth quarters of
1991 and additional increases were implemented in the third and
fourth quarters of 1992. In 1993, National Gas began negotiations
for further rate increases to cover anticipated increases in
operating expenses. Rate increases over a three-year period have
been granted by all the municipalities with the initial increase
effective December 1, 1993.
<PAGE>
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
Management's Statement of Responsibility for
Financial Reporting and Accounting 27
Report of Independent Accountants 28
Consolidated Statement of Income for each of the
Three Years in the period ended December 31, 1994 29
Consolidated Balance Sheet at December 31, 1994
and 1993 30-31
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1994 32
Consolidated Statement of Common Shareholders' Equity
for each of the three years in the period ended
December 31, 1994 33
Notes to Consolidated Financial Statements 34-51
Schedules other than those listed above are omitted
because they are not required, not applicable or the required
information is shown in the financial statements or notes thereto.
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements of the nature described
in Item 304 of Regulation S-K with the Company's independent
accountants on accounting principles or financial statements.
PART III
The information called for by PART III is incorporated
by reference from the Registrant's definitive proxy statement
relating to the Company's annual meeting of shareholders to be held
May 18, 1995 (the "definitive proxy statement"), which involves the
election of directors, to be filed pursuant to Regulation 14A not
later than 120 days after the close of the fiscal year ended
December 31, 1994. Neither the report on Executive Compensation
nor the performance graph included in the Company's definitive
proxy statement shall be deemed incorporated herein by reference.
PART IV
Item 14 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Exhibit
Number Description
2 Stock Purchase Agreement dated September 12, 1991 by
and between National Gas & Oil Company and Stone
Container Corporation.
3(a) Articles of Incorporation of National Gas & Oil Company
3(b) Code of Regulations of National Gas & Oil Company
10(a)* National Gas & Oil Company Salary Deferral Plan
10(b)* Amended and Restated National Gas & Oil Company
Compensation Plan for Outside Directors
10(c)* Summary of Salary Administration Plan
21 Subsidiaries of the Registrant
24 Powers of Attorney of Directors
27 Financial Data Schedule
99(a) Credit Agreement dated October 1, 1991 by and among
National Gas & Oil Company, Stone Resource and Energy
Corporation and BancOhio National Bank.
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NATIONAL GAS & OIL COMPANY
(Registrant)
Date March 24, 1995 By: /s/ Lawrence P. Haren
Lawrence P. Haren, Executive Vice
President, Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date March 24, 1995 By: /s/ J. W. Straker
J. W. Straker, Chairman of the
Board and Director*
Date March 24, 1995 By: /s/ Patrick J. McGonagle
Patrick J. McGonagle, President and
Chief Executive Officer
Date March 24, 1995 By: /s/ Lawrence P. Haren
Lawrence P. Haren, Executive Vice
President, Treasurer and Chief
Financial Officer
Date March 24, 1995 By: /s/ Kelley L. Crookston
Kelley L. Crookston, Controller
Date March 24, 1995 By: James H. Cameron
James H. Cameron, Director*
Date March 24, 1995 By: /s/ David C. Easley
David C. Easley, Director*
Date March 24, 1995 By: /s/ Edwin L. Heminger
Edwin L. Heminger, Director*
Date March 24, 1995 By: /s/ Richard O. Johnson
Richard O. Johnson, Director*
Date March 24, 1995 By: /s/ Mason B. Starring, III
Mason B. Starring, III, Director*
Date March 24, 1995 By: /s/ William H. Sullivan, Jr.
William H. Sullivan, Jr.,
Director*
<PAGE>
Date March 24, 1995 By: /s/ Graham R. Robb
Graham R. Robb, Director*
* Executed pursuant to Power of Attorney attached to this report
by John B. Denison, Vice President and Secretary.
/s/ John B. Denison
John B. Denison, Vice President and
Secretary
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR
FINANCIAL REPORTING AND ACCOUNTING
The management of the Company is responsible for the
preparation and integrity of the consolidated financial statements
and all other financial information included in this Annual Report.
The financial statements were prepared in conformity with generally
accepted accounting principles consistently applied, and they
necessarily include amounts which are based on estimates and
judgments made with due consideration to materiality. The
statements are not misstated due to material fraud or error.
Management maintains a system of internal accounting
controls which it believes provides reasonable assurance that
Company policies and procedures are complied with, assets are
safeguarded, and transactions are executed in accordance with
appropriate corporate authorization and recorded in a manner which
permits management to meet its responsibility for the preparation
of financial statements. The Company's system of controls includes
the communication and enforcement of written policies and
procedures.
The Audit Committee of the Board of Directors, comprised
of four non-employee Directors, meets periodically, and as
necessary, with management and Price Waterhouse LLP to review audit
plans and the Company's accounting, financial reporting and
internal control practices and procedures. Price Waterhouse LLP
has full and free access to all levels of management. Management
has made available to Price Waterhouse LLP all the Company's
financial records and related data, as well as the minutes of
shareholders' and directors' meetings. Furthermore, management
believes that all representations made to Price Waterhouse LLP
during its audit were valid and appropriate.
Patrick J. McGonagle
President and Chief Executive
Officer
Lawrence P. Haren
Executive Vice President,
Treasurer and Chief Financial
Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of National Gas & Oil Company:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 8 on Page 23 present fairly, in all
material respects, the financial position of National Gas & Oil
Company and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 3 and 4 to the Consolidated Financial
Statements, the Company changed its method of accounting for income
taxes and postretirement health care benefits, effective January
1, 1992.
PRICE WATERHOUSE LLP
Houston, Texas
February 16, 1995
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,
1994 1993 1992
OPERATING REVENUES:
Gas sales $29,375,603 $24,373,376 $26,923,793
Transportation 5,146,050 4,241,745 4,303,201
Oil and gas sales 27,201,139 18,067,652 7,071,107
TOTAL OPERATING REVENUES 61,722,792 46,682,773 38,298,101
OPERATING EXPENSES:
Purchased gas - gas sales 19,732,082 17,019,953 18,823,426
Purchased gas - oil and
gas sales 21,524,667 12,043,012 2,416,375
Operation and maintenance 8,684,010 8,501,325 7,768,132
Depreciation, depletion and
amortization 3,318,064 3,225,037 3,024,432
Taxes other than income 3,124,163 2,796,101 2,776,581
TOTAL OPERATING EXPENSES 56,382,986 43,585,428 34,808,946
OPERATING INCOME 5,339,806 3,097,345 3,489,155
Other income 376,771 343,124 715,128
Interest expense 887,947 555,111 492,998
Federal income taxes 1,339,189 813,722 1,098,882
INCOME FROM CONTINUING
OPERATIONS 3,489,441 2,071,636 2,612,403
DISCONTINUED OPERATIONS:
Loss on disposal of
discontinued operations
(net of tax of $187,718) -- -- (364,395)
CHANGES IN ACCOUNTING PRINCIPLES:
Income taxes and postretirement
health care benefits
(net of tax of $439,023) -- -- (234,608)
NET INCOME $ 3,489,441 $ 2,071,636 $ 2,013,400
=========== =========== ===========
Earnings (loss) per share:
Continuing operations $ 0.52 $ 0.31 $ 0.39
Loss on disposal -- -- (0.05)
Changes in accounting
principles -- -- (0.04)
Net income per share $ 0.52 $ 0.31 $ 0.30
=========== =========== ===========
Average number of
shares outstanding 6,661,477 6,661,477 6,635,769
=========== =========== ===========
Cash dividends per share $ 0.24 $ 0.23 $ 0.22
=========== =========== ===========
The per share amounts and the average number of shares outstanding have been
restated to reflect the three-for-two stock split in December 1994.
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1994 1993
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $58,155,708 $52,640,442
Less-Accumulated depreciation 20,637,405 19,299,335
37,518,303 33,341,107
Oil and gas properties,
successful efforts 21,543,577 19,488,940
Less-Accumulated depreciation,
depletion and amortization 6,414,352 5,064,994
15,129,225 14,423,946
Other, net 5,748,532 5,984,313
CURRENT ASSETS:
Cash and cash equivalents 1,271,186 554,761
Short-term investments 1,842,848 1,232,086
Accounts receivable, less allowance
for doubtful accounts of $139,222
and $197,585, respectively 9,770,469 12,820,665
Gas in underground storage 3,333,358 1,646,950
Materials and supplies, at
average cost 1,004,369 927,685
Recoverable gas costs -- 1,158,790
Other, primarily prepaid taxes 2,802,679 3,821,569
20,024,909 22,162,506
OTHER ASSETS:
Recoverable transition costs 1,206,941 1,154,476
Other 901,178 830,820
2,108,119 1,985,296
TOTAL ASSETS $80,529,088 $77,897,168
=========== ===========
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
December 31,
1994 1993
CAPITALIZATION:
Shareholders' equity--
Common stock, $1 par value,
authorized 7,000,000 shares,
issued 6,819,400 and 4,599,180
shares, respectively $ 6,819,400 $ 4,599,180
Paid in capital 29,498,107 31,718,327
Retained earnings 4,278,964 2,392,665
Treasury stock, 157,923 shares,
at cost (1,550,509) (1,550,509)
TOTAL SHAREHOLDERS' EQUITY 39,045,962 37,159,663
Long-term debt 12,955,973 9,002,347
52,001,935 46,162,010
CURRENT LIABILITIES:
Current maturities of long-term debt 877,695 881,041
Short-term bank loans 3,050,000 3,450,000
Accounts payable 4,498,197 8,708,674
Accrued income and other taxes 3,988,887 4,492,100
Refundable gas costs 1,450,973 --
Other 1,522,889 1,561,998
15,388,641 19,093,813
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,521,800 8,134,245
Investment tax credits 1,182,072 1,280,826
Accrued transition costs 1,177,621 900,000
Health care and other 2,257,019 2,326,274
13,138,512 12,641,345
TOTAL CAPITALIZATION AND LIABILITIES $80,529,088 $77,897,168
=========== ===========
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
CASH FLOWS FROM OPERATING 1994 1993 1992
ACTIVITIES:
Net income $ 3,489,441 $ 2,071,636 $ 2,013,400
Reconciliation of net income
to net cash provided by
operating activities:
Depreciation, depletion
and amortization 3,455,254 3,388,408 3,144,917
Deferred income taxes (579,264) 354,974 (1,387,215)
Other, net (157,117) (9,831) 214,154
Change in assets and
liabilities:
Short-term investments (610,762) (1,232,086) --
Accounts receivable 3,108,559 (4,592,692) (663,017)
Gas in underground storage (1,686,408) 93,272 (432,508)
Materials and supplies (76,684) 39,702 260,222
Deferred gas cost 2,557,298 (2,537,611) 1,769,168
Accounts payable (4,210,477) 2,782,901 (94,214)
Prepaid and accrued taxes 1,482,497 (335,469) 913,446
Other, net 394,656 1,002,106 1,603,587
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,166,993 1,025,310 7,341,940
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (8,590,657) (5,543,582) (5,035,396)
Proceeds from retirements 192,951 124,683 (338,547)
NET CASH USED BY INVESTING
ACTIVITIES (8,397,706) (5,418,899) (5,373,943)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt 6,000,000 2,920,505 329,495
Payments of long-term debt (2,049,720) (804,112) (850,000)
Net borrowings under
short-term bank loans (400,000) 1,250,000 (700,000)
Dividends paid (1,603,142) (1,534,770) (1,424,566)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 1,947,138 1,831,623 (2,645,071)
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 716,425 (2,561,966) (677,074)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 554,761 3,116,727 3,793,801
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,271,186 $ 554,761 $ 3,116,727
=========== =========== ===========
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Common
Stock $1 Paid in Retained Treasury
Par Value Capital Earnings Stock
BALANCE DECEMBER 31,
1991 $4,114,164 $25,835,029 $7,573,784 $(1,835,707)
Net income -- -- 2,013,400 --
Cash dividends on
common stock -- -- (1,424,566) --
7% stock dividend 274,253 2,769,955 (3,044,208) --
Issuance of
treasury stock -- 61,495 -- 285,198
BALANCE DECEMBER 31,
1992 4,388,417 28,666,479 5,118,410 (1,550,509)
Net income -- -- 2,071,636 --
Cash dividends on
common stock -- -- (1,534,770) --
5% stock dividend 210,763 3,051,848 (3,262,611) --
BALANCE DECEMBER 31,
1993 4,599,180 31,718,327 2,392,665 (1,550,509)
Net income -- -- 3,489,441 --
Cash dividends on
common stock -- -- (1,603,142) --
Three-for-two
stock split 2,220,220 (2,220,220) -- --
BALANCE DECEMBER 31,
1994 $6,819,400 $29,498,107 $ 4,278,964 $ (1,550,509)
========== =========== =========== ============
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
National Gas & Oil Company (the Company) was organized
under the laws of the State of Ohio on March 24, 1981 as a holding
company. The Company derives substantially all of its revenues and
earnings from the operating results of its subsidiaries.
The Company's subsidiaries are engaged in two principal
businesses: gas sales and transportation, and oil and gas
production and development. National Gas & Oil Corporation
(National Gas) is a public utility engaged directly in the
purchase, storage, distribution, sale and transportation of natural
gas in a 12 county area in East Central and Southeastern Ohio. NGO
Development Corporation (NGO Development) and Coshocton Energy
Corporation (Coshocton Energy), operate as oil and gas production
and marketing companies. National Production Corporation (National
Production), formerly a wholly-owned oil and gas production
subsidiary of the Company, was merged into NGO Development as of
July 1, 1993. Producers Gas Sales, Inc. (Producers Gas) is a
service company for the marketing of natural gas directly to
end-use customers.
Approximately 73% of the Company's natural gas throughput
within its service territory is to industrial end users.
Competition for these end users is intense with other natural gas
utilities, fuel oil, propane and electric utilities. One customer
comprises 14% of total system throughput. System throughput
increased as a direct result of incremental sales to this customer
during 1994. Approximately 25% of the total throughput results
from serving four major industrial customers which operate in
different industries.
The Company sold substantially all of the assets of its
product sales and service segment, National Energy Service Company
(National Energy) on March 18, 1991. See Note 10 for additional
information.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. National Gas maintains its accounting records in
conformity with the Uniform System of Accounts as prescribed by the
Federal Energy Regulatory Commission (FERC) and adopted by the
Public Utilities Commission of Ohio (PUCO).
All intercompany transactions have been eliminated,
except for profits on sales of natural gas. These sales were made
at prices that were at least as favorable as with those that could
have been obtained from independent parties.
Certain reclassifications have been made for comparative
purposes.
Gas Utility Property, Plant and Equipment
Gas utility property, plant and equipment is stated at
original cost, including overheads of payroll related costs,
administrative and general expenses. The Company follows the
policy of capitalizing major renewals and betterments. Maintenance
and repairs are charged to expense as incurred. Upon retirement
the cost, together with the cost of removal less salvage, is
charged to accumulated depreciation.
Oil and Gas Properties
Oil and gas properties are accounted for using the
successful-efforts method. Costs of acquiring nonproducing
acreage, costs of drilling successful exploration wells and
development costs are capitalized. Annual lease rentals and
exploration costs, including geologic and geophysical costs and
exploratory dry-hole costs, are expensed as incurred. Oil and gas
properties and other property, plant and equipment are stated at
cost. Upon abandonment of a property, the cost less salvage value
of the property net of plugging is charged to accumulated
depletion.
Depreciation and Depletion
The provision for depreciation of gas utility property,
plant and equipment, excluding transportation and construction
equipment, described below, is based on a composite rate of 3.12%.
Depreciation of transportation and construction equipment is
provided using the straight-line method on estimated service lives
of 3 to 10 years.
Depletion and depreciation of proved oil and gas
properties are computed using the unit-of-production method based
upon proved reserves. Depreciation of other property, plant and
equipment is provided using the straight-line method based on
estimated service lives of 3 to 15 years.
<PAGE>
Short Term Investments
The Company purchases gas futures contracts in order to
hedge against rising gas prices for fixed price sales contracts.
Accordingly, the realized and unrealized gains and losses are
deferred until the physical gas sale is made, at which time gains
and losses are recorded as a component of gas cost.
The Company had the following gas futures positions on
the New York Mercantile Exchange (NYMEX) at December 31, 1994 and
1993. Fair market value is based upon the NYMEX closing price.
December 31,
1994 1993
Open contracts 308 171
Natural gas
purchases hedged 3.08 MMBtu 1.71 MMBtu
Deposits with brokers $1,842,848 $1,232,086
Contracted value $5,998,620 $3,759,000
Fair market value $5,349,530 $3,333,000
Cash and Cash Equivalents
The Company considers cash, time deposits and all other
highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Supplemental disclosures of cash flow information is as
follows:
Cash paid for: 1994 1993 1992
Income taxes $ 1,200,000 $ 650,000 $1,450,000
Interest $ 747,736 $ 429,735 $ 471,038
During 1992, the Company issued 25,921 shares of treasury
stock in order to settle deferred compensation owed to Directors
totalling $347,000.
On November 9, 1992, National Production entered into a
Plan of Reorganization whereby its equity investment in Roscoe Gas
& Oil Co. was exchanged for 100% of the ownership in Coshocton
Energy. Coshocton Energy's results of operations are included in
the Company's Consolidated Statement of Income, effective October
1, 1992.
Gas in Underground Storage
Gas in underground storage includes gas stored by
National Gas and Producers Gas. Gas stored by National Gas is
valued at cost using the last-in, first-out method (LIFO). If the
first-in, first-out (FIFO) method had been used, gas in underground
storage would have been $4,954,000 and $5,485,000 higher than
reported at December 31, 1994 and 1993, respectively. Gas stored
by Producers Gas as of December 31, 1994 and 1993, respectively,
of $1,503,140 and $752,000 is valued at cost using the average cost
method.
Revenues and Purchased Gas
National Gas records unbilled revenues for gas delivered
but not billed. As of December 31, 1994 and 1993, National Gas had
unbilled revenues of $1,296,841 and $1,475,628, respectively,
included in accounts receivable.
National Gas has provisions in sales contracts and
tariffs to include a Gas Cost Recovery (GCR) mechanism whereby any
over or under recovery of purchased gas cost is reflected in the
computation of future billings to customers. Amounts collected
through the GCR mechanism are subject to annual review by the PUCO.
Revenues from the sale of oil and gas produced are
generally recognized upon the passage of title, net of royalties
and net profit interests.
NOTE 2 - GAS SUPPLY
National Gas has contracted for pipeline capacity with
Texas Eastern Transmission Corporation (Texas Eastern), Tennessee
Gas Pipeline Company (Tennessee), Columbia Gas Transmission
Corporation (Columbia Transmission) and CNG Transmission
Corporation (CNG) to transport a substantial portion of its gas at
rates which are subject to the jurisdiction of the FERC. In 1993,
all of National Gas' interstate pipeline suppliers began the
restructuring of their operations to comply with FERC Order 636,
which dictated the unbundling of gas supply and transportation
services provided by the interstate pipelines.
As a part of the restructuring to comply with FERC Order
636, the FERC has authorized the recovery of prudently incurred
transition costs by the interstate pipeline companies. As of
December 31, 1994, National Gas has paid $1,275,000 to its
interstate pipeline suppliers for transition costs. Approximately
$1,300,000 remains to be paid over the next 10 years and,
accordingly, has been accrued at December 31, 1994. National Gas
has received authorization from the PUCO to recover 79% of these
transition costs from its rate-regulated customers through the GCR
mechanism and 21% from its transportation customers via a
transition cost surcharge. The majority of transition costs which
have been paid and allocated to the rate-regulated customers have
been collected while collections from the transportation customers
are to begin in 1995.
A summary of the contracts between National Gas and its
interstate suppliers in a post-636 environment follows.
Maximum
Rate Contract Termination Daily Quantity
Supplier Schedule Date Date Dth
Texas Eastern FT-1 11/01/89 10/31/03 15,275
Texas Eastern SS-I 11/01/89 10/31/99 3,380
CNG SS-II 04/16/80 04/15/00 2,500
Tennessee FT-G 09/01/85 11/01/00 1,479
Columbia Trans. GTS 11/01/88 11/01/00 3,830
During 1994, National Gas transported 58% of its total
gas purchased for resale or transportation from the four interstate
pipeline companies detailed above. National Gas acquired the
remaining 42% of its supply requirements from independent Ohio
producers.
NOTE 3 - FEDERAL INCOME TAXES
Effective January 1, 1992, the Company adopted Statement
of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 requires the liability method
of accounting for income taxes which calculates deferred income
taxes at the statutory rate applicable for future years based upon
temporary differences between book and tax bases of existing assets
and liabilities. Under SFAS No. 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period
which the rate change is enacted.
As a result of adoption, the Company recorded a benefit
from the cumulative effect of the change in accounting principle
of $617,614 in its Consolidated Statement of Income.
The Tax Reform Act of 1986 repealed investment tax
credits for all property placed in service after December 31, 1985.
Prior to 1986, investment tax credits were deferred and are
presently being amortized over the lives of the applicable property
additions.
Federal income tax expense was computed as follows:
1994 1993 1992
Tax at statutory rates
applied to pre-tax book
income $1,641,734 $ 981,022 $1,261,837
Increase (decrease) in tax
caused by --
Depreciation, depletion
and basis differences (230,212) (104,015) (17,036)
Investment credit
amortization (81,103) (79,954) (77,529)
Dividend deduction -- -- (100,474)
Other (net) 8,770 16,669 32,084
Federal income tax
expense $1,339,189 $ 813,722 $1,098,882
========== ========= ==========
Effective income tax rate 27.7% 28.2% 29.6%
========== ========== ==========
Taxes currently payable $2,067,818 $ 380,404 $1,290,461
Deferred provision:
Intangible drilling
costs/depletion (260,308) (337,017) (159,355)
Deferred gas cost (1,012,886) 460,788 (416,453)
Property timing differences 519,177 440,295 401,326
Property tax (170,000) (170,000) (170,000)
Note receivable write-off -- 187,718 --
Alternative minimum tax
credit carryforward 158,717 (158,717) --
Deferred compensation 2,535 1,911 87,242
Deferred taxes from
reorganization -- -- 117,758
Other, net 34,136 8,340 (52,097)
Federal income tax expense $1,339,189 $ 813,722 $1,098,882
========== ========= ==========
Temporary differences which give rise to deferred tax
assets and liabilities are as follows:
December 31,
1994 1993
Percentage depletion $ 132,135 $ 132,135
Vacation accrual 70,125 65,343
Inventory capitalization 36,764 10,400
Reserve for accounts
and notes receivable 47,336 67,179
Postretirement benefits
other than pension 580,494 516,610
Investment tax credit 506,288 548,078
Deferred Gas 278,533 --
Alternative minimum tax
credit carryforward -- 158,717
Other 140,716 49,631
1,792,391 1,548,093
Valuation allowance (155,351) (155,760)
Total deferred
tax assets 1,637,040 1,392,333
Prepaid taxes (281,664) (471,451)
Deferred gas -- (640,302)
Property (9,503,338) (9,161,462)
Other (128,701) (107,174)
Total deferred
tax liabilities (9,913,703) (10,380,389)
Net deferred taxes $ (8,276,663) $ (8,988,056)
============= =============
NOTE 4 - RETIREMENT INCOME PLAN AND POSTRETIREMENT HEALTH CARE
BENEFITS
The Company has a trusteed, non-contributory retirement
income plan (the Plan) which covers all full-time employees of the
affiliated companies between the ages of 21 and 65 with more than
one year of service. Retirement income is based on accumulated
benefits throughout an employee's eligible years of service
calculated as a portion of the employee's annual compensation. The
Company's Board of Directors determines annual funding levels based
upon the funded status of the Plan.
In September 1994, the Plan purchased annuities for all
retirees and all former employees who were vested in the Plan. The
purchase of these annuities was treated as a partial plan
settlement which resulted in a gain of $123,702. The purchase of
the annuities was made with Plan assets and resulted in a decrease
in the projected benefit obligation of $1,766,276.
The funded status of the retirement plan and the amount
recognized in the Company's Consolidated Balance Sheet were as
follows:
September 30,
1994 1993
Plan assets at fair value
(principally unallocated
insurance contracts) $2,356,649 $4,257,178
Actuarial present value of
benefit obligations:
Vested benefits 1,254,515 3,122,299
Nonvested benefits 24,172 20,867
Accumulated benefit obligation 1,278,687 3,143,166
Additional amounts related to
projected salary increases 809,745 1,147,563
Total projected benefit obligation 2,088,432 4,290,729
Plan assets in excess (deficit)
of projected benefit obligation 268,217 (33,551)
Amounts necessary to reconcile
excess assets to prepaid
pension cost included in
Consolidated Balance Sheet:
Unamortized net asset (322,115) (614,727)
Unrecognized prior service cost 349,760 381,728
Unrecognized net loss (gain) (188,182) 310,914
Prepaid pension cost included
in other assets $ 107,680 $ 44,364
========== ==========
Net pension cost for the Retirement Plan includes the following:
1994 1993 1992
Benefits earned during the year
(service cost) $ 209,894 $ 260,109 $ 223,661
Interest accrued on projected
benefit obligation 275,337 261,677 239,563
Actual return on plan assets (318,080) (387,779) (391,142)
Net amortization and deferral (106,765) (31,786) (20,277)
Net periodic pension cost $ 60,386 $ 102,221 $ 51,805
========= ========= =========
The Company's assumptions used during the years 1994,
1993 and 1992 in determining net periodic pension cost and pension
liability are as follows:
1994 1993 1992
Discount rate 8.00% 7.00% 8.00%
Return on plan assets 10.00% 10.00% 10.00%
Estimated increase in
future compensation 5.00% 6.00% 6.00%
In 1994, the Company changed its discount rate assumption
from 7.0% to 8.0% and its assumption for future annual compensation
increases from 6.0% to 5.0% resulting in decreases to the projected
benefit obligation of $449,696 and $126,979, respectively.
Decreases to the discount rate assumption in 1993 resulted in an
increase in the projected benefit obligation of $422,302.
In 1993, the Company offered a one-time voluntary early
retirement package to certain employees. Of the eligible
employees, five employees accepted the early retirement option,
thus resulting in a $144,477 increase in the Company's projected
benefit obligation as of September 30, 1993.
In addition to the Retirement Income Plan, the Company
provides health care benefits to all eligible active employees and
to all retired employees. The heath care plan covers 153
employees, of which 24 are retirees. These benefits are provided
through a partially self-funded and partially insured program to
which employees contribute a percentage of the cost.
The Company adopted Statement of Financial Accounting
Standard No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS No. 106) on January 1, 1992. SFAS No.
106 requires the accrual method of accounting for postretirement
health care benefits based on actuarially determined costs to be
recognized over the service life of the employees. As of January
1, 1992 the Company recognized the full amount of the estimated
accumulated postretirement benefit obligation (APBO) earned to
date, which represents the present value of the estimated future
benefits payable to current retirees and active employees.
The Company anticipated collecting $200,000 of the APBO
from its rate-regulated customers, accordingly, that portion of the
APBO was deferred. In late 1993, National Gas negotiated new base
rates with the municipalities that it serves. The rates in effect
during 1994 include recovery of the deferred APBO over a 10 year
period. At December 31, 1994, $203,000 remained to be collected.
The portion of the APBO which related to non-regulated business or
was not probable of being collected in rates was charged to 1992
earnings as the transition effect of the change in accounting
principle. The amount charged to earnings was $852,222 net of
a tax benefit of $439,023.
The components of net periodic postretirement benefit
expense were as follows:
1994 1993
Service cost $ 61,421 $ 67,830
Interest cost on
accumulated post-
retirement benefit
obligation 145,532 124,937
Net periodic post-
retirement benefit
expense 206,953 192,767
Deferral of benefits
earned to be col-
lected in future
rates 22,620 (19,104)
Net periodic post-
retirement benefit
expense $ 229,573 $ 173,663
========== ==========
The amount recognized in the Company's Consolidated
Balance Sheet was as follows:
September 30,
1994 1993
Retirees $ 1,242,859 $ 795,951
Active employees 774,712 1,139,025
Accumulated post-
retirement health
care benefits 2,017,571 1,934,976
Unrecognized net loss (122,852) (182,867)
Accrued postretirement
health care benefits $ 1,894,719 $ 1,752,109
=========== ===========
The Company's assumptions used during the years 1994,
1993 and 1992 in determining the net periodic postretirement
benefit expense and the liability for postretirement health care
benefits as of September 30, 1993 and December 31, 1992 are as
follows:
1994 1993 1992
Discount rate 7.00% 7.00% 8.00%
Health care 10.75% 12.25% 13.00%
trend rate gradually gradually gradually
decreasing to decreasing to decreasing to
5.5% in 2004 5.5% in 2004 5.5% in 2004
As of September 30, 1994, the discount rate was changed from 7.0%
to 8.0% and the health care trend rate was changed to gradually
decrease from 11.0% in 1995 to 5.0% in 2001 and thereafter. These
changes resulted in decreases in the liability for postretirement
health care benefits of $270,300 and $143,500, respectively.
Additionally, changes in the medical claims cost by retiree and
retirement age assumptions resulted in a net increase in the
liability for postretirement health care benefits of $305,200 as
of September 30, 1994.
If the health care trend rate would increase by one
percent in each year, the accumulated benefit obligation would
increase by approximately $285,800 at September 30, 1994 and net
periodic postretirement benefit expense in 1994 would increase by
approximately $46,500.
NOTE 5 - LONG-TERM DEBT
The long-term debt outstanding was as follows:
December 31,
1994 1993 1992
Senior notes, 6.63% interest
rate, due 2009 $ 6,000,000 -- --
Promissory note,
variable interest rate,
due 1996 5,737,500 $6,658,333 $7,437,500
Mortgage note,
variable interest rate,
due 2008 646,168 675,055 329,495
Revolving note,
variable interest rate,
due 1996 1,450,000 2,550,000 --
Total debt 13,833,668 9,883,388 7,766,995
Less-current maturities (877,695) (881,041) (861,588)
Long-term debt $12,955,973 $9,002,347 $6,905,407
=========== ========== ==========
On March 15, 1994, National Gas issued $6 million of
Senior Unsecured Notes to an accredited investor. The proceeds of
the Notes have been utilized to construct a pipeline and related
facilities to transport gas to an Ohio electric generating plant
($3.5 million) and to complete upgrades on National Gas' indigenous
storage fields and other various projects ($2.5 million). The
notes bear a fixed interest rate of 6.63% with interest payments
due semi-annually. Annual principal payments of $461,539 commence
on March 16, 1997 with the final payment due March 15, 2009. The
notes carry a 100% guarantee of the Company.
In conjunction with the acquisition of NGO Development
on October 1, 1991, the Company entered into an $8,500,000
promissory note. The terms of the note require 59 monthly
principal installments of $70,833 plus accrued interest with the
remaining balance of $4,320,834 due on October 1, 1996. The
variable interest rate on the note at December 31, 1994 was 7.735%
which represented the London Interbank Offer Rate (LIBOR) plus
1.25% per annum as of November 17, 1994 when the Company entered
into a six month contracted rate. The note agreement allows the
Company to choose either the prime rate or LIBOR plus 1.25% for
contracted periods. The note is secured by the oil and gas
properties of NGO Development and is guaranteed by the Company.
Additionally, the Company is required to maintain certain working
capital, debt to equity and cash flow ratios. If the Company
should default on any of the financial covenants or other terms of
the agreement, the Company becomes subject to certain dividend
restrictions.
In September 1992, the Company entered into a mortgage
note to finance the construction of new office facilities. The
note has a 15-year amortization period, accrues interest at the
prime rate, and monthly payments commenced on March 15, 1993. As
of December 31, 1994, the prime rate was 8.50%. The mortgage is
secured by the Company's Granville Road property.
In February 1993, the Company, and all of its
subsidiaries except National Gas, entered into a $3 million
revolving line of credit for a term of three years. The committed
credit line is unsecured and may be utilized by any of the
subsidiaries, except National Gas. As of December 31, 1994, NGO
Development Corporation had borrowed $1,450,000 from three separate
draws with interest rates of 6.6875%, 8.50% and 7.1875%.
Annual maturities from 1995 to 1999 of long-term debt are
as follows:
1995 $ 877,695
1996 6,367,678
1997 494,423
1998 494,371
1999 500,585
NOTE 6 - NOTES PAYABLE
The Company has lines of credit with various banks in
excess of $6,000,000, the upper limit on short-term borrowings
imposed by Board Resolution. The terms of each borrowing under the
lines of credit are negotiated at the time the funds are requested.
The Company is not required to maintain any compensating balances.
At December 31, 1994, National Gas had four draws
totalling $3,050,000 on one of these credit lines for working
capital requirements at interest rates of 8.50%, 7.125%, 6.875% and
6.687%. National Gas expects to repay these notes in 1995.
NOTE 7 - CAPITAL STOCK
The Company has 100,000 shares of authorized and unissued
preferred stock with no par value. National Gas has 10,000 shares
of authorized and unissued preferred stock, with a par value of
$100 per share.
The Company has recommended and included in its 1995
proxy a proposal to amend the Company's Articles of Incorporation
to increase the authorized common shares from 7,000,000 to
14,000,000. A vote of the shareholders will be conducted at the
May 1995 meeting.
The average common shares outstanding and earnings and
cash dividends per common share include retroactive recognition of
2,220,220 shares issued in December 1994 as a three-for-two stock
split. The par value of the stock issued as a result of the stock
split was transferred from Paid in Capital to Common Stock.
Transfers from retained earnings to common stock and paid in
capital for common stock dividends are based on estimated fair
market value of the common stock and include cash paid in lieu of
fractional shares.
There are no restrictions on dividends to the Company by
the subsidiaries. National Gas may not make advances or loans to
the Company for periods longer than one year without approval of
the PUCO.
NOTE 8 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
The amounts of rents, royalties, advertising and research
and development expenses were not significant. Maintenance
expenses were $1,061,256, $1,067,341 and $862,528 for the years
1994 through 1992, respectively, and are included in the operation
and maintenance expense caption of the Consolidated Statement of
Income. Details with respect to taxes other than income included
in expense are set forth below.
1994 1993 1992
Taxes other than income:
State excise tax on
utility gross receipts $1,193,534 $1,032,095 $ 980,974
Real estate and personal
property 1,743,105 1,561,654 1,577,790
Franchise taxes and other 187,524 202,352 217,817
Total $3,124,163 $2,796,101 $2,776,581
========== ========== ==========
NOTE 9 - FINANCIAL INFORMATION BY BUSINESS SEGMENT
1994 1993 1992
Revenues:
Gas sales $29,375,603 $24,373,376 $26,923,793
Transportation 5,146,050 4,241,745 4,303,201
Subtotal 34,521,653 28,615,121 31,226,994
Oil and gas production 27,201,139 18,067,652 7,071,107
Total $61,722,792 $46,682,773 $38,298,101
=========== =========== ===========
Income from continuing
operations before provision
for federal income taxes:
Gas sales and transpor-
tation $ 4,235,949 $ 2,922,721 $ 2,972,103
Oil and gas production 1,162,595 452,534 984,044
Total $ 5,398,544 $ 3,375,255 $ 3,956,147
=========== =========== ===========
Depreciation, depletion
and amortization:
Gas sales and transpor-
tation $ 1,643,738 $ 1,570,769 $ 1,491,127
Oil and gas production 1,674,326 1,654,268 1,533,305
Total $ 3,318,064 $ 3,225,037 $ 3,024,432
=========== =========== ===========
Capital expenditures:
Gas sales and transpor-
tation and other $ 6,081,623 $ 3,055,855 $ 2,847,869
Oil and gas production 2,509,034 2,487,727 2,187,527
Total $ 8,590,657 $ 5,543,582 $ 5,035,396
=========== =========== ===========
Identifiable assets:
Gas sales and transpor-
tation $54,236,774 $51,168,979 $44,385,944
Oil and gas production 25,090,920 25,436,422 23,241,343
Non-operating 1,201,394 1,291,767 1,568,095
Total $80,529,088 $77,897,168 $69,195,382
=========== =========== ===========
<PAGE>
NOTE 10 - DISCONTINUED OPERATIONS
On March 18, 1991, the Company sold substantially all of
the assets of National Energy and its subsidiary Flow Controls,
Inc. (previously reported as the product sales and services segment
of the business) for a cash payment of $1,439,175 plus a secured
promissory note in the principal amount of $552,113.
The Company was aware that the debtor had suffered
continued losses since inception on March 18, 1991. As a result
of the losses sustained and the uncertainty as to whether the
debtor would continue as a going concern, the Company established
a reserve for the full value of the note in December 1992. An
after-tax loss on disposal of $364,395 was recorded in the
Company's 1992 Consolidated Statement of Income.
In January 1994, the Company was notified that the
debtor's assets were confiscated by its primary lender and the
debtor ceased to continue as a going concern. The debtor's primary
lender liquidated the assets and retained 100% of the proceeds to
satisfy its lien.
NOTE 11 - QUARTERLY INFORMATION (UNAUDITED)
The following represents the quarterly results for 1994
and 1993, which are unaudited. The first three quarters of 1994
and all of 1993 earnings per common share amounts have been
restated to reflect the three-for-two stock split issued in
December 1994.
Income(Loss)
Before Net Earnings
Quarter Operating Federal Income Per
Ended Revenues Income Tax (Loss) Share
03/31/94 $24,711,066 $3,030,987 $2,041,355 $ 0.31
06/30/94 12,543,002 600,049 436,804 0.06
09/30/94 10,424,906 (182,239) (76,031) (0.01)
12/31/94 14,043,818 1,379,840 1,087,313 0.16
03/31/93 $14,518,902 $2,518,594 $1,706,148 $ 0.25
06/30/93 7,372,229 (276,766) (136,641) (0.02)
09/30/93 6,938,300 (898,444) (562,642) (0.08)
12/31/93 17,853,342 1,541,947 1,064,771 0.16
NOTE 12 - OIL AND GAS INFORMATION
Capitalized costs relating to oil and gas producing
activities and related accumulated depreciation, depletion and
amortization, were as follows:
December 31,
1994 1993
Unproved oil and gas properties $ 1,050,638 $ 300,755
Proved oil and gas properties 20,492,939 19,188,185
Total property costs 21,543,577 19,488,940
Accumulated depreciation,
depletion and amortization (6,414,352) (5,064,994)
Net capitalized costs $15,129,225 $14,423,946
=========== ===========
Costs incurred relating to oil and gas property
acquisition and exploration activities were as follows:
1994 1993 1992
Acquisition of properties $ 797,383 $1,017,502 $1,957,334
Exploration costs $1,092,115 $ 644,645 $ 211,390
Development costs $ 486,212 $ 350,070 $ 346,100
The results of operations of the Company's oil and gas
producing activities, which exclude items such as corporate
overhead and gas marketing activities were as follows:
1994 1993 1992
Operating revenues $3,716,554 $3,435,136 $3,662,236
Production costs 619,619 750,487 688,378
Exploration costs 555,069 644,645 211,390
Depreciation, depletion
and amortization 1,325,551 1,316,092 1,301,347
Operating income 1,216,315 723,912 1,461,121
Income tax expense 286,479 135,004 261,793
Net income $ 929,836 $ 588,908 $1,199,328
========== ========== ==========
Reserves (Unaudited)
The following tables are estimates of the Company's net
interests in quantities of proved reserves of crude oil and natural
gas. All reserves are proved developed. The reserve quantities
and the related standardized measure of discounted net cash flow
are estimates only, and do not purport to reflect realizable fair
market values of the Company's reserves. The Company emphasizes
that reserve estimates are inherently imprecise and that estimates
of new discoveries are more imprecise than those of producing oil
and gas properties. Accordingly, these estimates are expected to
change as future information becomes available.
Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operation methods.
(Oil in barrels, natural gas in thousands of cubic feet)
Oil Gas
Proved developed reserves
Balance at December 31, 1991 177,552 9,758,042
Revision of previous estimates (11,182) (45,624)
Extensions and discoveries 27,808 241,809
Purchase of proved reserves 83,207 1,543,405
Sale of proved reserves (2,047) (207,543)
Production (25,789) (1,172,722)
Balance at December 31, 1992 249,549 10,117,367
Revision of previous estimates (3,875) (976,470)
Extensions and discoveries 10,137 526,693
Purchase of proved reserves 42,745 491,876
Production (35,357) (1,111,835)
Balance at December 31, 1993 263,199 9,047,631
Revision of previous estimates 16,569 28,468
Extensions and discoveries 17,129 360,586
Purchase of proved reserves -- 83,144
Production (47,487) (1,103,483)
Balance at December 31, 1994 249,410 8,416,346
======== ==========
Standardized Measure of Discounted Future Net Cash Flows
(Unaudited)
The standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and gas to the
estimates of quantities of proved developed oil and gas reserves
and the periods during which they are expected to be produced.
Future development and production costs were computed based on year
end costs to be incurred in developing and producing the proved
reserves. The discount was computed by application of a 10%
discount factor. The calculation also assumes the continuation of
the existing economic, operating, and contractual conditions at
December 31, 1994, 1993 and 1992.
The standardized measure of discounted net cash flows
relating to proved developed oil and gas reserves are as follows:
1994 1993 1992
Future cash flows $26,229,302 $27,655,313 $31,239,141
Future production costs (8,090,928) (8,714,573) (9,433,499)
Future net cash flows
before income taxes 18,138,374 18,940,740 21,805,642
Ten percent discount
factor (6,601,884) (7,717,107) (9,345,672)
Standardized measure
before income taxes 11,536,490 11,223,633 12,459,970
Future income tax
expense (2,623,460) (2,030,325) (2,647,934)
Standardized measure
after income taxes $ 8,913,030 $ 9,193,308 $ 9,812,036
=========== =========== ===========
The change in the standardized measure of discounted
future net cash flows related to the proved oil and gas reserves
at December 31, 1994, 1993 and 1992 is as follows.
December 31,
1994 1993 1992
Beginning of year $ 9,193,308 $ 9,812,036 $ 7,134,231
Sales, net of
production costs (3,096,935) (2,684,649) (2,973,858)
Net changes in
prices and pro-
duction costs 464,574 (800,172) 966,728
Net change due to
revisions in
quantity estimates 190,202 (1,067,000) (121,180)
Extensions and
discoveries 412,350 638,789 234,103
Purchase of reserves 75,301 755,004 2,522,598
Sale of reserves -- -- (238,621)
Net change in income
taxes (593,135) 617,609 2,098,814
Accretion of discount 919,331 981,204 713,423
Other 1,348,034 940,487 (524,202)
End of year $ 8,913,030 $ 9,193,308 $ 9,812,036
=========== =========== ===========
EXHIBIT INDEX
Reference
Exhibit Commission
Number Description File No. Exhibit No.
2 Stock Purchase Agreement 1-8223 Incorporated
dated September 12, 1991 by reference
by and between National from Exhibit
Gas & Oil Company and 2 of Form
Stone Container 8-K filed on
Corporation October 14,
1991.
3(a) Articles of Incorporation 2-72682 Incorporated
of National Gas & Oil Co. by reference
from Exhibit
3(a) of Form
S-14 filed
on June 8,
1981.
3(b) Code of Regulations of 2-72682 Incorporated
National Gas & Oil Co. by reference
from Exhibit
3(b) of Form
S-14 filed
on June 8,
1981.
10(a) National Gas & Oil 33-55390 Incorporated
Company Salary by reference
Deferral Plan from Exhibit
28(b) of
Form S-8
filed on
December 4,
1992.
10(b) Amended and Restated 33-55388 Incorporated
National Gas & Oil by reference
Company Compensation from Exhibit
Plan for Outside 28(c) of
Directors Form S-8
filed on
December 4,
1992.
10(c) Summary of Salary Page 54
Administration Plan
21 Subsidiaries of the
Registrant Page 55
24 Powers of Attorney of
Directors Page 56-62
27 Financial Data Schedule Page 63
99(a) Credit Agreement dated 1-8223 Incorporated
October 1, 1991 by and by reference
among National Gas & from Exhibit
Oil Company, Stone 28 of Form
Resource and Energy 8-K filed on
Corporation and October 14,
BancOhio National 1991.
Bank.
EXHIBIT 10(c)
NATIONAL GAS & OIL COMPANY
THE SUMMARY OF SALARY ADMINISTRATION PLAN
In 1992 the Company retained an independent compensation
consultant to assess the Company's compensation program and to
compare the Company's compensation against that of other companies
in the natural gas industry. The independent consultant
recommended, and the Board of Directors approved, a compensation
program comprised of base salary and incentive compensation.
Beginning in 1992, the base salary component of any executive's
compensation is determined in accordance with a Salary
Administration Plan which categorizes employees, including
executive officers, into relative job positions. The category into
which any particular job position is classified is determined based
upon competitive levels, organizational structure and reporting
relationships, the nature of each position and the perceived
internal value of each position. Each category is assigned a
salary range containing a minimum, midpoint and maximum salary
figure. It is anticipated that the minimum, midpoint and maximum
salary figures will be adjusted periodically to reflect, for
example, competitive trends in the industry, changes in the
Company's organization and Company fiscal performance. The level
of compensation earned by each employee within the range of that
employee's job category will vary depending upon the level of
experience and individual performance of the employee.
EXHIBIT 21
NATIONAL GAS & OIL COMPANY
SUBSIDIARIES OF THE REGISTRANT
State of Incorporation
A. National Gas & Oil Corporation Ohio
B. NGO Development Corporation Ohio
C. Producers Gas Sales, Inc. Ohio
EXHIBIT 24
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 10th day of February 1995.
/s/J.W. Straker
J.W. Straker
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 13th day of February 1995.
/s/David C. Easley
David C. Easley
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 15th day of February 1995.
/s/Edwin L. Heminger
Edwin L. Heminger
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 9th day of February 1995.
/s/Richard O. Johnson
Richard O. Johnson
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 12th day of February 1995.
/s/William H. Sullivan, Jr.
William H. Sullivan, Jr.
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 17th day of February 1995.
/s/Mason B. Starring, III
Mason B. Starring, III
NATIONAL GAS & OIL COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Director of National Gas & Oil Company, an Ohio corporation, which
is about to file with the Securities & Exchange Commission an
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as amended, hereby constitutes and appoints Lawrence P. Haren
or John B. Denison his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign such Form
10-K and any or all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith
with the Securities & Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and firming all that said attorneys-in-fact, and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 10th day of February 1995.
/s/Graham R. Robb
Graham R. Robb
<TABLE> <S> <C>
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