SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______
Commission file number 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_____
PAGE 1 OF 74
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K (SECTION 229.405 OF THIS CHAPTER) IS NOT CONTAINED
HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINI- TIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10- K OR ANY AMENDMENT TO THIS FORM 10-K. ( X )
THE AGGREGATE MARKET VALUE OF THE VOTING SHARES HELD BY NONAFFILIATES OF
THE REGISTRANT AS OF MARCH 1, 1996 IS $58,275,722
AS OF MARCH 1, 1996, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
$1.00 PAR VALUE COMMON SHARES WAS 6,858,789 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III of this 10-K.
Exhibit Index at Page ..................................... 52-53
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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) operates as
an oil and gas production and development company within the Appalachian area.
As of January 1, 1995 Coshocton Energy Corporation (Coshocton Energy) was
merged with it's parent, NGO Development. 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 1993 through 1995 are set
forth as follows:
1995 1994 1993
---- ---- ----
Gas Sales & Transportation (1)
Industrial and
Off-system ............. $ 2,324,188 $ 8,369,981 $ 6,271,697
Residential .............. 13,736,465 15,111,291 13,035,406
Commercial ............... 5,302,480 5,894,331 5,066,273
Transportation ........... 6,124,990 5,146,050 4,241,745
----------- ----------- -----------
Subtotal ............... 27,488,123 34,521,653 28,615,121
Oil & Gas Sales (2) ............ 20,630,712 27,201,139 18,067,652
----------- ----------- -----------
Total Operating Revenues ....... $48,118,835 $61,722,792 $46,682,773
=========== =========== ===========
Income from continuing operations before provision for federal
income taxes during the periods 1993 through 1995 are set forth below:
1995 1994 1993
---- ---- ----
Gas Sales & Transportation(1) .. $4,498,225 $4,235,949 $2,922,721
Oil & Gas Sales (2) ............ 792,409 1,162,595 452,534
---------- ---------- ----------
Total .......................... $5,290,634 $5,398,544 $3,375,255
========== ========== ==========
_________________
(1) Includes National Gas and Producers Gas.
(2) Includes NGO Development.
Gas throughput for the periods 1993 through 1995 is set forth on Page 15.
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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 1995, approximately 69 percent 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 service provided to industrial customers
whereby National Gas 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 1995, 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 24,500 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, Hebron, Macksburg,
Newark, Philo, Roseville, Zanesville, Racine, Rutland and Syracuse, and
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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, 1995, National Gas has paid
approximately $1,444,000 to its interstate pipeline suppliers for transition
costs. Approximately $1,357,000 remains to be paid over the next eight years
and, accordingly, has been accrued at December 31, 1995. National Gas has
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received authorization from the PUCO to recover 79 percent of those transition
costs from its rate-regulated customers through the GCR mechanism and 21
percent 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 began in 1995.
A summary of the contracts between National Gas and its interstate
suppliers follows:
Maximum
Rate Contract Termination Daily Quantity
Supplier Schedule Date Date Dth
____________________________________________________________________________
Texas Eastern FT-1 11/10/95 10/31/12 15,275
Texas Eastern SS-I 11/01/89 10/31/99 3,380
CNG SS-II 04/12/90 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 1995, National Gas transported 50 percent of its total gas
purchased for resale or transportation from the four interstate pipeline
companies detailed above. National Gas acquired the remaining 50 percent of
its supply requirements from independent Ohio producers. During 1994 and 1995,
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 1995, approximately 1,910,000 Mcf were
injected into underground storage and approximately 2,300,000 Mcf were
withdrawn.
In 1995, 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 1995 were approximately
$4,490,000 which included normal system expansion and replacement, the
construction of a pipeline to transport gas to American Electric Power
Company's electric generating plant in Conesville, Ohio, storage field
enhancements and the construction of a natural gas processing facility.
Capital expenditures in 1996 are expected to be approximately $4,200,000 to
support existing operations and the replacement of selected current facilities
and lines.
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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.
Although there were no sales to individual customers in excess of 10
percent of operating revenues during the period 1993 through 1995, one
customer comprised 14 percent of total system throughput in 1995. However,
National Gas is dependent upon several industrial customers for a significant
portion of its throughput. Approximately 25 percent of the total throughput
results from serving five 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 reflects variations in weather conditions.
OIL AND GAS SALES
The oil and gas sales segment is comprised of NGO Development, an oil and
gas exploration, production, development and marketing company operating in
the Appalachian Basin. NGO Development maintains working interest ownerships
ranging from 100 percent to 5 percent in 618 producing wells. The oil and gas
produced from these wells is sold to crude oil and natural gas purchasers in
the Appalachian Basin, 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 is in
competition with many other Appalachian Basin 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 expanded in 1993 and 1994, but was slightly lower in
1995 due to increased competition in this business segment. NGO Development is
in competition with many other gas producing and marketing companies, as well
as local distribution companies, for new customers.
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In 1995, the oil and gas sales segment scaled down its capital
expenditures due to market conditions to $372,000 covering the purchase,
development and/or completion of various interests in oil and gas wells and
for additions to its gas gathering facilities.
In 1996 NGO Development expects to incur capital expenditures for oil and
gas operations totaling approximately $725,000.
********************************************************************************
At December 31, 1995, the Company's operating subsidiaries had 130
full-time active employees.
For financial information regarding industry segments, see Note 9 of the
notes to consolidated financial statements.
********************************************************************************
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EXECUTIVE OFFICERS OF REGISTRANT
Birth Family Office Held as of
Name Date Age Relationship December 31,1995
________________________________________________________________________________
William H.Sullivan,Jr. 10/21/38 57 None Chairman of the Board
Patrick J. McGonagle 07/08/54 41 None President and Chief
Executive Officer
Lawrence P. Haren 08/03/54 41 None Executive Vice
President,
Treasurer and
Chief Financial
Officer
John B. Denison 02/14/40 55 None Vice President
and Secretary
All of the executive officers listed were elected to their respective
offices in the Company on May 18, 1995. All executive officers hold similar
positions with National Gas, NGO Development and Producers Gas.
William H. Sullivan was elected as Chairman of the Board on May 18, 1995,
after having served as a Director of the Company since 1978. 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. Mr. Haren's employment with the Company ceased on March 7,
1996. John B. Denison, a 24-year employee, was elected to the position of Vice
President and Secretary on May 18, 1978.
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Item 2 - PROPERTIES
National Gas owns and operates a system consisting of approximately 1,347
miles of distribution, transmission and gathering mains, ranging in size from
one inch to 16 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 2,242 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 44 wells and six compressors, totaling 2,650 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 an unrelated
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, provides for an ongoing maintenance and replacement
program.
The oil and gas properties consist of 618 gross and 336 net producing
wells as of December 31, 1995. Nearly all wells are combination wells
producing both oil and gas. Additionally, NGO Development has leasehold
acreage at December 31, 1995, as follows:
Gross Net
-------- --------
Developed acreage ................. 64,993 52,897
Undeveloped acreage ............... 53,902 45,727
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 1993
through 1995:
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1995 1994 1993
---- ---- ----
Average sales
price per Mcf ........... $ 2.96 $ 3.34 $ 3.03
Average sales
price per barrel ........ $16.66 $15.81 $17.10
Average production
cost per
equivalent Mcf .......... $ 0.31 $ 0.45 $ 0.57
Average daily
production of
gas (Mcf) ............... 2,902 3,023 3,046
Average daily
production of
oil (barrels) ........... 110 130 94
In 1995, 1994 and 1993, NGO Development participated in the drilling of
6, 12 and 7 exploratory wells which were completed and 4, 7 and 5 dry holes,
respectively. Also, NGO Development participated in the drilling of eight
developmental wells which were completed in 1995. As of December 31, 1995
there were three exploratory wells and two developmental 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.
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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
1995 High Low
- ------------------------------------- ------ ------
First Quarter ............................... 12 1/2 10 1/2
Second Quarter ............................. 12 - 9 7/8
Third Quarter .............................. 11 7/8 10 -
October 1 through November 22 .............. 11 1/8 10 1/2
November 23 through December 31
after 3% stock dividend .................. 10 1/4 9 1/2
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
At February 28, 1996, there were 1,642 equity shareholders of record of
the Company's $1.00 par value common shares. Of the total shares outstanding,
approximately 106,800, or 1.56 percent, 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 in the amount of $.06 per share per quarter in 1995 after
the stock split. A three-for-two stock split was issued in December 1994, and
a three percent stock dividend was issued in December 1995.
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 the
Company is not in default under the terms of its long-term bank loans.
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Item 6 - SELECTED FINANCIAL DATA
(In Thousands, Except for Per Share Data)
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Total
operating
revenues ............... $48,119 $61,723 $46,683 $ 38,298 $ 30,624
Income from
continuing
operations ............. $ 3,230 $ 3,489 $ 2,072 $ 2,612 $ 2,134
Discontinued
operations ............. $ -- $ -- $ -- $ (364) $ (15)
Cumulative
effect of
accounting
changes ................ $ -- $ -- $ -- $ (235) --
Net income ............... $ 3,230 $ 3,489 $ 2,072 $ 2,013 $ 2,119
Income from
continuing
operations
- per share
(1) .................... $ 0.47 $ 0.51 $ 0.30 $ 0.38 $ 0.31
Discontinued
operations
- per share
(1) .................... $ -- $ -- $ -- $ (0.05) $ --
Cumulative
effect of
accounting
changes -
per share (1) .......... $ -- $ -- $ -- $ (0.04) --
Net income
per share
(1) .................... $ 0.47 $ 0.51 $ 0.30 $ 0.29 $ 0.31
Total assets ............. $79,430 $80,620 $77,897 $ 69,195 $ 66,189
Long-term
obligations ............ $11,079 $12,956 $ 9,002 $ 6,905 $ 7,438
Cash divi-
dends per
share (1) .............. $ 0.23 $ 0.23 $ 0.22 $ 0.22 $ 0.22
(1) Based upon the average number of shares outstanding of 6,860,589 in 1995
and 1994, 6,834,881 in 1992, 6,834,668 for 1991. These shares were
adjusted for the three percent stock dividend in December 1995.
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Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
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. Other
income includes the revenues of the holding company, National Gas & Oil
Company and other income from all subsidiaries.
Consolidated revenue of $48,119,000 in 1995 decreased 22 percent from
1994 consolidated revenue and consolidated revenue of $61,723,000 in 1994
increased 32 percent from 1993 consolidated revenue. The decrease in revenue
in 1995 is primarily attributed to lower gas volumes sold and declining gas
prices. The increase in 1994 revenue over 1993 is primarily due to off-system
gas marketing activity.
Purchase gas expense decreased from 1995 to 1994 and increased from 1994
to 1993 as a result of changes in gas sales activities. Interest expense has
increased each year since 1993 as a result of additional borrowings to
maintain working capital requirements and upgrade storage facilities for
National Gas, to finance the acquisition of NGO Development and its capital
construction programs and to finance the construction of the pipeline to the
American Electric Power Company's electric generating plant.
Net income amounted to $3,230,000 in 1995, a decrease of $259,000 from
1994. The seven percent decrease was attributable to the oil and gas sales
segment. In 1994, net income was up $1,418,000, or 68 percent, from 1993
because of increased income in all business segments.
Net income per common share in 1995 was $.47, as compared to net income
per common share in 1994 of $.51, and in 1993 of $.30. All per share amounts
have been restated to reflect the three percent stock dividend in December
1995.
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.
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Operating Revenues 1995 1994 1993
- ------------------ ---- ---- ----
Gas Sales & Transportation:
Industrial & Off-System ......... $ 2,324,188 $ 8,369,981 $ 6,271,697
Residential ..................... 13,736,465 15,111,291 13,035,406
Commercial ...................... 5,302,480 5,894,331 5,066,273
Transportation .................. 6,124,990 5,146,050 4,241,745
Subtotal ....................... 27,488,123 34,521,653 28,615,121
Oil & Gas Sales ................... 20,630,712 27,201,139 18,067,652
----------- ----------- -----------
Total Operating Revenues .......... $48,118,835 $61,722,792 $46,682,773
=========== =========== ===========
Operating Income Before Federal Income Taxes
1995 1994 1993
---- ---- ----
Gas Sales & Transportation ........ $ 4,498,225 $ 4,235,949 $ 2,922,721
Oil & Gas Sales ................... 792,409 1,162,595 452,534
----------- ----------- -----------
Total Operating Income Before
Federal Income Taxes ............ $ 5,290,634 $ 5,398,544 $ 3,375,255
=========== =========== ===========
Gas Throughput (Mcf) 1995 1994 1993
---- ---- ----
Gas Sales:
Industrial ...................... 76,025 76,470 104,346
Residential ..................... 1,984,301 2,016,487 1,926,279
Commercial ...................... 845,353 866,696 827,704
Off-System ...................... 1,237,315 2,889,748 3,371,665
----------- ----------- -----------
Subtotal ...................... 4,142,994 5,849,401 6,229,994
Transportation .................... 5,552,184 6,807,571 6,447,650
Oil & gas sales ................... 9,489,180 10,626,768 5,535,765
Total ............................. 19,184,358 23,283,740 18,213,409
=========== =========== ===========
Gas Sales and Transportation
Operating revenues associated with this segment of the business decreased
20 percent in 1995, primarily as a result of a decrease in the volumes sold to
each customer class which was only partially offset by rate increases to each
customer class. Changes in the level of over or under recovery of gas costs
and customer conservation contributed to the reduction in residential and
commercial operating revenues in 1995. The increase in 1994 revenues from 1993
resulted primarily from an increase in the volumes sold. A portion of the
Company's gas throughput is effected by weather. Annual degree days which
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measure the effect of weather were 6,742, 6,477, and 6,472 for 1995, 1994 and
1993, respectively. The thirty year average is 6,162.
Operating income before federal income taxes of the gas sales and
transportation segment increased $262,000 in 1995 after increasing $1,313,000
in 1994. The increase in 1995 is primarily attributed to increased margins
earned on the residential/ commercial and transportation customer classes,
while the increase in 1994 was attributed to volume and margin increases. The
change in gross margin for each on-system customer class of National Gas
during 1995 was affected by volume and price as follows:
Volume Price Total
--------- ----------- ----------
Industrial $ (133) $ (3,252) $ (3,385)
Residential/
Commercial (143,923) 732,986 589,063
Transportation (722,269) 1,188,321 466,052
In order to protect transportation margins, the Company utilizes 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.
During the third quarter of 1993, the Company analyzed the need for base
rate increases and decided to apply for rate increases with the cities and
villages in National Gas' operating area to cover anticipated increases in
operating expenses. Rate increases over a three-year period were successfully
negotiated with all municipalities served by National Gas. The initial rate
increases were effective December 1, 1993 with subsequent increases effective
in 1994 and 1995. 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 remained relatively flat in 1995 after
decreasing by 28,000 Mcf in 1994. In 1995 and 1994, off-system throughput by
the gas sales and transportation segment declined. Residential and commercial
throughput decreased approximately two percent in 1995 after increasing
approximately five percent in 1994. Transportation throughput decreased by 18
percent in 1995 after increasing six percent in 1994. The 1995 decrease in
off-system and transportation throughput was caused by a decline in the number
of customers.
The decrease in purchased gas expense of 41 percent in 1995 is primarily
the result of decreased sales volume and a decrease in the cost of gas. The
increase in purchased gas expense of 16 percent in 1994 resulted primarily
from an increase in sales volume.
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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 1995 decreased
to $20,631,000 due to the decreased gas marketing activity of NGO Development
and lower gas prices. Revenues in 1994 increased significantly over 1993
because of increased gas marketing activity. Gas marketing contributed
approximately 66 percent of the total revenue for this business segment in
1995.
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 1995 amounted to $586,000, a decrease of $577,000 from income in
1994 of $1,163,000. Income in 1994 represented a $710,000 increase from 1993
income. The decrease in income in 1995 is primarily the result of decreased
gas and oil production and lower gas prices, while the increase in 1994 is the
result of increased oil production and gas marketing activity. Gas marketing
activity contributed approximately 44 percent of the total income for this
business segment in 1995.
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 remained relatively flat over the three-year period.
Real estate and personal property taxes for the gas sales and
transportation segment increased in 1995 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 decreased in 1995.
Overall, taxes other than income taxes increased $180,000 and $328,000 in 1995
and 1994, respectively.
17
<PAGE>
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.
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)
1995 1994 1993
---- ---- ----
Provided by Operating Activities ........... $ 9,319 $ 7,167 $ 1,025
Capital Expenditures, net of salvage ....... (4,958) (8,398) (5,419)
Net Proceeds from long-term debt ........... (1,877) 3,950 2,117
Net Borrowings under short-term
bank loans ............................... (1,700) (400) 1,250
Common Dividends ........................... (1,606) (1,603) (1,535)
Net Increase (Decrease) in
Cash & Cash Equivalents ................ $ (822) $ 716 $(2,562)
======= ======= =======
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 will
continue to be sufficient to satisfy approximately 90 percent of the
operating, normal capital expenditure and dividend requirements of the
Company's existing operations in the near future. The remaining requirements
will be satisfied by seasonal short-term borrowings or other forms of long-
term debt.
18
<PAGE>
Capital Expenditures
Capital expenditures by business segment for each of the three years are
presented in the following table: ($000)
1995 1994 1993
---- ---- ----
Gas Sales & Transportation ............. $4,490 $6,082 $3,056
Oil & Gas Sales ........................ 372 2,509 2,488
------ ------ ------
$4,862 $8,591 $5,544
====== ====== ======
In 1995, the gas sales and transportation segment accounted for 92
percent of the total capital expenditures. The funds were expended primarily
for expansion and upgrading of existing pipeline systems and completion of a
new pipeline commenced in 1994 to provide gas service to an electric
generating facility. The oil and gas sales segment accounted for eight percent
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 million and $2.5 million of the total capital
expenditures in 1995 and 1994, respectively, were used for construction of a
pipeline to the electric generating facility. Approximately $1 million of the
total capital expenditures in 1993 were used for the acquisition of existing
oil and gas producing properties and pipelines.
The Company estimates that normal capital expenditures in 1996 will be
approximately $4.9 million. 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 and 1995 with the balance to be used to fund
future capital projects contemplated for 1996. The notes bear a fixed interest
rate of 6.63 percent and have a maturity of 15 years and an average life of
nine years. The notes carry a 100 percent guaranty by the Company.
19
<PAGE>
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. During 1995, the Company extended the term of this instrument for
an additional year. The committed credit line is unsecured and may be utilized
by any of the subsidiaries, except National Gas. During 1995, NGO Development
had a maximum of $1.45 million outstanding against this credit line and
$450,000 remained outstanding as of December 31, 1995.
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 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 $619,000 remained outstanding as of December 31, 1995.
In October 1991, the Company entered into a $8.5 million bank loan in
conjunction with the acquisition of NGO Development. This loan was originally
scheduled to mature in October 1996. During 1995, the Company extended the
term of this loan for an additional five years. The loan requires monthly
principal payments of $70,833 with the final installment due in October 2001.
As of December 31, 1995, $4,888,000 remained outstanding on this note.
As of December 31, 1995, the Company and its subsidiaries had short-term
lines of credit with various banks aggregating in excess of $6 million, 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 1995, the Company utilized these credit lines
and as of December 31, 1995, a short-term draw of $1,350,000 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, 1995, the Company and its
subsidiaries had $783,000 invested in 307 open contracts with a contracted
value of $5,608,000. The fair market value of these investments at December
31, 1995, was $6,297,000. Gains or losses on these investments are offset by
increases or decreases in gas cost thereby reducing the market risk of
fluctuating gas prices.
20
<PAGE>
Dividends
The Company paid total cash dividends of $1,606,000, $1,603,000 and
$1,535,000 in 1995, 1994 and 1993 respectively. Additionally, the Company
issued a 3 percent stock dividend in 1995, three-for-two stock split in 1994
and a 5 percent stock dividend in 1993. Presently, there are no restrictions
on the payment of dividends, as the Company is not in default of the terms in
its long-term loans. 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.
Although the rate of inflation has been relatively low over the past few
years, and thus has benefitted both the Company and its customers, the
Company's operations remain sensitive to increases in the rate of inflation
because of the capital-intensive and regulated nature of its major operating
segments.
21
<PAGE>
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
Management's Statement of Responsibility for
Financial Reporting and Accounting .................................... 26
Report of Independent Accountants ....................................... 27
Consolidated Statement of Income for each of the
Three Years in the period ended December 31, 1995 ..................... 28
Consolidated Balance Sheet at December 31, 1995
and 1994 ............................................................ 29-30
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1995 ..................... 31
Consolidated Statement of Common Shareholders' Equity
for each of the three years in the period ended
December 31, 1995 ..................................................... 32
Notes to Consolidated Financial Statements ............................ 33-51
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.
22
<PAGE>
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 23, 1996 (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, 1995. 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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements
Consolidated Statement of Income for each of the Three Years
in the period ended December 31, 1995
Consolidated Balance Sheet at December 31, 1995 and 1994
Consolidated Statement of Cash Flows for each of the Three Years
in the period ended December 31, 1995
Consolidated Statement of Common Shareholders' Equity for each of
the Three Years in the period ended December 31, 1995
Notes to Consolidated Financial Statements
(3) Exhibits
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
23
<PAGE>
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.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the
last quarter of the period covered by this report.
__________________________________
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 27, 1996 By: /s/ John B. Denison
-------------- --------------------------------
John B. Denison, Vice President,
Secretary and Acting Principal
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 27, 1996 By: /s/ William H. Sullivan, Jr.
-------------- -----------------------------------
William H. Sullivan, Jr.
Chairman of the Board and Director*
Date March 27, 1996 By: /s/ Patrick J. McGonagle
-------------- -----------------------------------
Patrick J. McGonagle, President and
Chief Executive Officer
Date March 27, 1996 By: /s/ John B. Denison
-------------- -----------------------------------
John B. Denison, Vice President and
Secretary and Acting Principal
Financial Officer
Date March 27, 1996 By: /s/ Alan A. Baker
-------------- ------------------------
Alan A. Baker, Director*
Date March 27, 1996 By: James H. Cameron
-------------- ---------------------------
James H. Cameron, Director*
24
<PAGE>
Date March 27, 1996 By: /s/ David C. Easley
-------------- -------------------------
David C. Easley, Director*
Date March 27, 1996 By: /s/ Edwin L. Heminger
-------------- ---------------------------
Edwin L. Heminger, Director*
Date March 27, 1996 By: /s/ Richard O. Johnson
-------------- -----------------------------
Richard O. Johnson, Director*
Date March 27, 1996 By: /s/ M. Howard Petricoff
-------------- ------------------------------
M. Howard Petricoff, Director*
Date March 27, 1996 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
25
<PAGE>
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 three
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
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of National Gas & Oil Company:
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 8 on Page 22 present fairly, in all material
respects, the financial position of National Gas & Oil Company and its
subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, 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.
PRICE WATERHOUSE LLP
Cleveland, Ohio
February 15, 1996
27
<PAGE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,
1995 1994 1993
OPERATING REVENUES:
Gas sales ....................... $21,363,133 $29,375,603 $24,373,376
Transportation .................. 6,124,990 5,146,050 4,241,745
Oil and gas sales ............... 20,630,712 27,201,139 18,067,652
----------- ----------- -----------
TOTAL OPERATING REVENUES .......... 48,118,835 61,722,792 46,682,773
----------- ----------- -----------
OPERATING EXPENSES:
Purchased gas - gas sales ....... 11,590,683 19,732,082 17,019,953
Purchased gas - oil and
gas sales ..................... 15,521,065 21,524,667 12,043,012
Operation and maintenance ....... 9,045,033 8,684,010 8,501,325
Depreciation, depletion and
amortization .................. 3,437,538 3,318,064 3,225,037
Taxes other than income ......... 3,303,802 3,124,163 2,796,101
----------- ----------- -----------
TOTAL OPERATING EXPENSES .......... 42,898,121 56,382,986 43,585,428
----------- ----------- -----------
OPERATING INCOME .................. 5,220,714 5,339,806 3,097,345
----------- ----------- -----------
Other income ...................... 186,753 376,771 343,124
Interest expense .................. 981,197 887,947 555,111
Federal income taxes .............. 1,195,900 1,339,189 813,722
----------- ----------- -----------
NET INCOME ........................ $ 3,230,370 $ 3,489,441 $ 2,071,636
=========== =========== ===========
Net income per share .............. $ 0.47 $ 0.51 $ 0.30
=========== =========== ===========
Average number of
shares outstanding .............. 6,860,589 6,860,589 6,860,589
=========== =========== ===========
Cash dividends per share .......... $ 0.23 $ 0.23 $ 0.22
=========== =========== ===========
The per share amounts and the average number of shares outstanding have
been restated to reflect the three percent stock dividend issued in December
1995.
The accompanying notes are an integral part of these statements.
28
<PAGE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1995 1994
----------------------------
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties ..................... $62,444,717 $58,155,708
Less-Accumulated depreciation .............. 22,199,392 20,637,405
----------- -----------
40,245,325 37,518,303
Oil and gas properties,
successful efforts ....................... 21,218,605 21,543,577
Less-Accumulated depreciation,
depletion and amortization ............... 7,304,416 6,414,352
----------- -----------
13,914,189 15,129,225
Other, net ................................. 5,492,265 5,748,532
----------- -----------
Total property, plant and equipment .......... 59,651,779 58,396,060
CURRENT ASSETS:
Cash and cash equivalents .................. 448,250 1,271,186
Short-term investments ..................... 782,788 1,842,848
Accounts receivable, less allowance
for doubtful accounts of $199,455
and $139,222, respectively ............... 10,285,798 9,770,469
Gas in underground storage ................. 2,321,552 3,333,358
Materials and supplies, at
average cost ............................. 980,787 1,004,369
Prepaid taxes .............................. 2,896,527 2,533,423
Other ...................................... 504,340 636,329
----------- -----------
Total current assets ......................... 18,220,042 20,391,982
----------- -----------
OTHER ASSETS:
Recoverable transition costs ............... 818,059 930,320
Other ...................................... 740,422 901,178
----------- -----------
Total other assets ........................... 1,558,481 1,831,498
----------- -----------
TOTAL ASSETS ................................. $79,430,302 $80,619,540
=========== ===========
The accompanying notes are an integral part of these statements.
29
<PAGE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
December 31,
1995 1994
----------- --------
CAPITALIZATION:
Shareholders' equity--
Common stock, $1 par value,
authorized 14,000,000 shares,
issued 7,018,512 and 6,819,400
shares, respectively ................. $ 7,018,512 $ 6,819,400
Paid in capital ........................ 31,353,831 29,498,107
Retained earnings ...................... 3,848,185 4,278,964
Treasury stock, 157,923 shares,
at cost ............................. (1,550,509) (1,550,509)
------------ ------------
Total shareholders' equity ............... 40,670,019 39,045,962
Long-term debt ........................... 11,079,442 12,955,973
------------ ------------
Total capitalization ....................... 51,749,461 52,001,935
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt ..... 877,264 877,695
Short-term bank loans .................... 1,350,000 3,050,000
Accounts payable ......................... 5,491,004 4,498,197
Accrued income and other taxes ........... 3,990,295 3,988,887
Refundable gas costs ..................... 1,348,047 1,401,811
Other .................................... 1,947,816 1,662,503
------------ ------------
Total current liabilities .................. 15,004,426 15,479,093
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes ..................... 8,112,490 8,521,800
Investment tax credits ................... 1,084,188 1,182,072
Accrued transition costs ................. 1,035,895 1,177,621
Health care and other .................... 2,443,842 2,257,019
Total deferred credits and
other liabilities ........................ 12,676,415 13,138,512
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES ....... $ 79,430,302 $ 80,619,540
============ ============
The accompanying notes are an integral part of these statements.
30
<PAGE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
CASH FLOWS FROM OPERATING 1995 1994 1993
ACTIVITIES: ----------- ------------ -----------
Net income ...................... $ 3,230,370 $ 3,489,441 $ 2,071,636
Reconciliation of net income
to net cash provided by
operating activities:
Depreciation, depletion
and amortization ......... 3,682,364 3,455,254 3,388,408
Deferred income taxes ...... 39,772 (579,264) 354,974
Other, net ................. 61,824 (157,117) (9,831)
Change in assets and
liabilities:
Short-term investments ........ 1,060,060 (610,762) (1,232,086)
Accounts receivable ........... (575,562) 3,108,559 (4,592,692)
Gas in underground storage .... 1,011,806 (1,686,408) 93,272
Materials and supplies ........ 23,582 (76,684) 39,702
Deferred gas cost ............. 362,900 2,557,298 (2,537,611)
Accounts payable .............. 992,807 (4,210,477) 2,782,901
Prepaid and accrued taxes ..... (407,920) 1,482,497 (335,469)
Other, net .................... (163,428) 394,656 1,002,106
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............ 9,318,575 7,166,993 1,025,310
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures ............ (4,862,201) (8,590,657) (5,543,582)
Net (salvage) proceeds
from retirements .............. (96,035) 192,951 124,683
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES ...................... (4,958,236) (8,397,706) (5,418,899)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt .... -- 6,000,000 2,920,505
Payments of long-term debt ...... (1,876,962) (2,049,720) (804,112)
Net borrowings under
short-term bank loans ......... (1,700,000) (400,000) 1,250,000
Dividends paid .................. (1,606,313) (1,603,142) (1,534,770)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............ (5,183,275) 1,947,138 1,831,623
----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS .... (822,936) 716,425 (2,561,966)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ............... 1,271,186 554,761 3,116,727
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ..................... $ 448,250 $ 1,271,186 $ 554,761
=========== =========== ===========
The accompanying notes are an integral part of these statements.
31
<PAGE>
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,
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)
Net income ....... -- -- 3,230,370 --
Cash dividends on
common stock ... -- -- (1,606,313) --
3% stock dividend 199,112 1,855,724 (2,054,836) --
---------- ------------ ----------- -----------
BALANCE DECEMBER 31,
1995 $7,018,512 $ 31,353,831 $ 3,848,185 $(1,550,509)
========== ============ =========== ===========
The accompanying notes are an integral part of these statements.
32
<PAGE>
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) is an oil and gas production and marketing
company. 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. Coshocton Energy Corporation (Coshocton
Energy), formerly a wholly-owned oil and gas production subsidiary of NGO
Development, was merged into NGO Development as of January 1, 1995. Producers
Gas Sales, Inc. (Producers Gas) is a service company for the marketing of
natural gas directly to end- use customers.
Approximately 69 percent 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 percent of total system
throughput. Approximately 26 percent of the total throughput results from
serving five major industrial customers which operate in different industries.
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.
33
<PAGE>
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 percent. 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.
34
<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, 1995 and 1994. Fair market value
is based upon the NYMEX closing price.
December 31,
1995 1994
----------- -----------
Open contracts 307 308
Natural gas
purchases hedged .......... 3.07 MMBtu 3.08 MMBtu
Deposits with brokers ....... $ 782,788 $1,842,848
Contracted value ............ $5,607,980 $5,998,620
Fair market value ........... $6,297,310 $5,349,530
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: 1995 1994 1993
---- ---- ----
Income taxes ......... $ 1,750,000 $ 1,200,000 $ 650,000
Interest ............. $ 991,760 $ 747,736 $ 429,735
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 $3,508,000, and $4,954,000
higher than reported at December 31, 1995 and 1994, respectively. Gas stored
by Producers Gas as of December 31, 1995 and 1994, of $339,049, $1,503,140,
respectively, is valued using the average cost method.
35
<PAGE>
Revenues and Purchased Gas
National Gas records unbilled revenues for gas delivered but not yet
billed. As of December 31, 1995 and 1994, National Gas had unbilled revenues
of $1,645,147 and $1,296,841, 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.
New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). The statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company intends to adopt SFAS 121 on January 1, 1996. The
adoption will not have any impact on the Company's financial position or
results of operations.
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, 1995, National Gas has paid
$1,444,166 to its interstate pipeline suppliers for transition costs and
$1,356,568 remains to be paid over the next eight years and, accordingly, has
been accrued at December 31, 1995. National Gas has received authorization
36
<PAGE>
from the PUCO to recover 79 percent of these transition costs from its
rate-regulated customers through the GCR mechanism and 21 percent from its
transportation customers via a transition cost surcharge.
A summary of the contracts between National Gas and its interstate
suppliers in the post-636 environment follows.
Maximum
Rate Contract Termination Daily Quantity
Supplier Schedule Date Date Dth
- ----------------------------------------------------------------------------
Texas Eastern FT-1 11/10/95 10/31/12 15,275
Texas Eastern SS-I 11/01/89 10/31/99 3,380
CNG SS-II 04/12/90 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 1995, National Gas transported 50 percent of its total gas
purchased for resale or transportation from the four interstate pipeline
companies detailed above. National Gas acquired the remaining 50 percent of
its supply requirements from independent Ohio producers.
NOTE 3 - REGULATORY MATTERS
The Company has incurred various costs and received various credits which
have been reflected as regulatory assets and liabilities on the Company's
consolidated balance sheet. Accounting for such costs and credits as
regulatory assets and liabilities is in accordance with SFAS 71, "Accounting
for the Effect of Certain Types of Regulation" (SFAS 71). This statement sets
forth the application of generally accepted accounting principles for those
companies whose rates are established by or are subject to approval by an
independent third-party regulator. Under SFAS 71, companies defer costs and
credits on the balance sheet as regulatory assets and liabilities when
probable that those costs and credits will be allowed in the ratemaking
process in a period different from the period in which they would have been
reflected in income by an unregulated company. These deferred regulatory
assets and liabilities are then flowed through the income statement in the
period in which the same amounts are reflected in rates. The Company has
recorded the following regulatory assets and liabilities:
37
<PAGE>
December 31,
1995 1994
---------- --------
Regulatory Assets:
Recoverable future taxes ................... $ 216,686 $ 243,770
Postretirement benefit costs ............... 180,982 203,602
Order 636 transition costs ................. 1,071,390 1,297,392
----------- ----------
Total Regulatory Assets .................... 1,469,058 1,744,764
----------- ----------
Regulatory Liabilities:
Amounts payable to customers ............... 1,348,047 1,404,811
Taxes refundable to customers .............. 282,899 307,031
----------- ----------
Total Regulatory Liabilities ............... 1,630,946 1,711,842
----------- ----------
Net Regulatory Assets
(Liabilities) ............................ $ (161,888) $ 32,922
=========== ==========
NOTE 4 - FEDERAL INCOME TAXES
The Company follows 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.
Federal income tax expense was computed as follows:
1995 1994 1993
---------- --------- ------
Tax at statutory rates
applied to pre-tax book
income ......................... $ 1,504,932 $ 1,641,734 $ 981,022
Increase (decrease) in tax
caused by --
Depreciation, depletion
and basis differences ....... (266,642) (230,212) (104,015)
Investment credit
amortization ............... (80,528) (81,103) (79,954)
Other (net) .................. 38,138 8,770 16,669
----------- ----------- ---------
Federal income tax
expense .................... $ 1,195,900 $ 1,339,189 $ 813,722
=========== =========== =========
Effective income tax rate ........ 27.0% 27.7% 28.2%
=========== =========== =========
38
<PAGE>
1995 1994 1993
---------- ---------- -------
Taxes currently payable .......... $ 1,357,711 $ 2,067,818 $ 380,404
Deferred provision:
Intangible drilling
costs/depletion ............... (456,714) (260,308) (337,017)
Deferred gas cost .............. (136,658) (1,012,886) 460,788
Property timing differences .... 494,889 519,177 440,295
Property tax ................... -- (170,000) (170,000)
Note receivable write-off ...... -- -- 187,718
Alternative minimum tax
credit carryforward .......... -- 158,717 (158,717)
Deferred compensation .......... (8,157) 2,535 1,911
Other, net ..................... (55,171) 34,136 8,340
Federal income tax expense ....... $ 1,195,900 $ 1,339,189 $ 813,722
=========== =========== =========
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
December 31,
1995 1994
Percentage depletion ................... $ 132,135 $ 132,135
Vacation accrual ....................... 72,773 70,125
Inventory capitalization ............... 43,564 36,764
Reserve for accounts
and notes receivable ................. 67,815 47,336
Postretirement benefits
other than pension ................... 635,574 580,494
Investment tax credit .................. 464,810 506,288
Deferred gas ........................... 354,874 278,533
Other .................................. 151,681 140,716
----------- -----------
1,923,226 1,792,391
Valuation allowance .................... (155,351) (155,351)
----------- -----------
Total deferred
tax assets ........................... 1,767,875 1,637,040
----------- -----------
Prepaid taxes .......................... (308,218) (281,664)
Property ............................... (9,123,854) (9,503,338)
Other .................................. (117,237) (128,701)
----------- -----------
Total deferred
tax liabilities ...................... (9,549,309) (9,913,703)
----------- -----------
Net deferred taxes ..................... $(7,781,434) $(8,276,663)
=========== ===========
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.
39
<PAGE>
NOTE 5 - 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 pre-tax 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,
1995 1994
Plan assets at fair value ------ ------
(principally unallocated
insurance contracts) ....................... $ 2,459,153 $ 2,356,649
----------- -----------
Actuarial present value of
benefit obligations:
Vested benefits .......................... 1,490,265 1,254,515
Nonvested benefits ....................... 42,175 24,172
----------- -----------
Accumulated benefit obligation ............... 1,532,440 1,278,687
Additional amounts related to
projected salary increases ................. 998,040 809,745
----------- -----------
Total projected benefit obligation ........... 2,530,480 2,088,432
----------- -----------
Plan assets in excess (deficit)
of projected benefit obligation ............ (71,327) 268,217
Amounts necessary to reconcile excess
(deficit) assets to prepaid pension
cost included in the Consolidated
Balance Sheet:
Unamortized net asset .................... (299,107) (322,115)
Unrecognized prior service cost .......... 317,792 349,760
Unrecognized net loss (gain) ............. 87,196 (188,182)
Prepaid pension cost included
in other assets ............................ $ 34,554 $ 107,680
=========== ===========
40
<PAGE>
Net pension cost for the Retirement Plan includes the following:
1995 1994 1993
-----------------------------------------------
Benefits earned during the year
(service cost) .................. $ 171,730 $ 209,894 $ 260,109
Interest accrued on projected
benefit obligation .............. 170,648 275,337 261,677
Actual return on plan assets ...... (236,144) (318,080) (387,779)
Net amortization and deferral ..... 8,960 (106,765) (31,786)
Net periodic pension cost ......... $ 115,194 $ 60,386 $ 102,221
========= ========= =========
The Company's assumptions used during the years 1995, 1994 and
1993 in determining net periodic pension cost and pension liability are as
follows:
1995 1994 1993
------ ------ -----
Discount rate ............... 7.50% 8.00% 7.00%
Return on plan assets ....... 10.00% 10.00% 10.00%
Estimated increase in
future compensation ....... 5.00% 5.00% 6.00%
In 1995, the Company changed its discount rate assumption from 8.0
percent to 7.5 percent. This resulted in an increase in the projected benefit
obligation of $285,170. An increase in the discount rate assumption and the
decrease of the estimated increase in future compensation in 1994 resulted in
decreases to the projected benefit obligation of $449,696 and $126,979,
respectively.
In addition to the Retirement Income Plan, the Company provides health
care benefits to all eligible active employees and to all retired employees.
These benefits are provided through a partially self-funded and partially
insured program to which employees contribute a percentage of the cost.
The Company follows Statement of Financial Accounting Standard No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106). SFAS No. 106 requires the accrual method of accounting for
postretirement health care benefits based on actuarial determined costs to be
recognized over the service life of the employees.
In late 1993, National Gas negotiated new base rates with the
municipalities that it serves. The rates in effect during 1995 include
recovery of a portion of the accumulated postretirement benefit obligation
(APBO) over a 10 year period. At December 31, 1995 approximately $181,000
remained to be collected.
41
<PAGE>
The components of net periodic postretirement benefit expense were as
follows:
1995 1994
---------- -------
Service cost ......................... $ 49,051 $ 61,421
Interest cost on
accumulated post-
retirement benefit
obligation ......................... 157,407 145,532
----------- -----------
Net periodic post-
retirement benefit
expense ............................ 206,458 206,953
Deferral of benefits
earned to be col-
lected in future
rates .............................. 22,620 22,620
----------- -----------
Net periodic post-
retirement benefit
expense ............................ $ 229,078 $ 229,573
=========== ===========
The amount recognized in the Company's Consolidated Balance Sheet was as
follows:
September 30,
1995 1994
----------- -----------
Retirees ............................. $ 1,314,102 $ 1,242,859
Active employees ..................... 883,795 774,712
----------- -----------
Accumulated post-
retirement health
care benefits ...................... 2,197,897 2,017,571
Unrecognized net loss ................ (148,622) (122,852)
Accrued postretirement
health care benefits ............... $ 2,049,275 $ 1,894,719
=========== ===========
The Company's assumptions used during the years 1995, 1994 and 1993 in
determining net periodic postretirement benefit expense and the liability for
postretirement health care benefits are as follows:
1995 1994 1993
---- ---- ----
Discount rate 7.50% 8.00% 7.00%
Health care
Trend rate 10.00% 11.00% 12.25%
gradually gradually gradually
decreasing decreasing decreasing
to 5.0% in to 5.0% in to 5.5% in
2001 2001 2004
42
<PAGE>
As of September 30, 1995, the discount rate was changed from 8.0 percent
to 7.5 percent, which resulted in an increase in the liability for
postretirement benefits of $142,965.
As of September 30, 1994, the discount rate was changed from 7.0 percent
to 8.0 percent and the health care trend rate was changed to gradually
decrease from 11.0 percent in 1995 to 5.0 percent 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 $352,000 at
September 30, 1995 and net periodic postretirement benefit expense in 1996
would increase by approximately $42,000.
NOTE 6 - LONG-TERM DEBT
The long-term debt outstanding was as follows:
December 31,
1995 1994 1993
------------ ------------ -----------
Senior notes, 6.63% interest
rate, due 2009 ............. $ 6,000,000 $ 6,000,000 $ --
Promissory note,
variable interest rate,
due 2001 ................... 4,887,500 5,737,500 6,658,333
Mortgage note,
variable interest rate,
due 2008 ................... 619,206 646,168 675,055
Revolving note,
variable interest rate,
due 1997 ................... 450,000 1,450,000 2,550,000
------------ ------------ -----------
Total debt ................... 11,956,706 13,833,668 9,883,388
Less-current maturities ...... (877,264) (877,695) (881,041)
------------ ------------ -----------
Long-term debt ............... $ 11,079,442 $ 12,955,973 $ 9,002,347
============ ============ ===========
On March 15, 1994, National Gas issued $6 million of Senior Unsecured
Notes (Senior Notes) to an accredited investor. The proceeds of the Notes have
been utilized to construct a pipeline and related facilities to transport gas
43
<PAGE>
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 percent 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 percent 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 monthly principal installments of $70,833 plus accrued interest
with the final installment to be due on October 1, 2001 in an amount equal to
the unpaid principal. The variable interest rate on the note at December 31,
1995 was 7.01 percent which represented the London Interbank Offer Rate
(LIBOR) plus 1.25 percent per annum as of November 6, 1995 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 percent 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, 1995, the prime rate was 8.50 percent. 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. During 1995, the Company extended the term of this instrument for
an additional year. The committed credit line is unsecured and may be utilized
by any of the subsidiaries, except National Gas. As of December 31, 1995, NGO
Development Corporation had borrowed $450,000 at an interest rate of 6.875
percent.
Annual maturities of long-term debt are as follows:
1996 ................. $ 877,264
1997 ................. 1,791,213
1998 ................. 1,343,836
1999 ................. 1,346,691
2000 ................. 1,349,798
Thereafter ................. 5,247,904
TOTAL ................ $11,956,706
===========
44
<PAGE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and maturities, the fair value of the Senior Notes is
approximately $5,840,000. The fair value amount is not intended to reflect
principal amounts that the Company will ultimately be required to pay.
NOTE 7 - 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, 1995, National Gas had two draws totaling $1,350,000 on
one of these credit lines for working capital requirements at interest rates
of 6.875 percent and 6.863 percent. National Gas expects to repay these notes
in 1996.
NOTE 8 - 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.
During 1995, the Company increased the authorized number of common shares
from 7,000,000 to 14,000,000. The average common shares outstanding and
earnings and cash dividends per common share presented on the accompanying
income statement include retroactive recognition of 199,112 shares issued in
December 1995 as a result of a three percent stock dividend.
The Company issued 2,220,220 shares in December 1994 as a result of 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.
In January 1996, the Board of Directors authorized the repurchase of up
to 250,000 shares of common stock at a maximum repurchase price of $9.33 per
share. As of February 15, 1996, 1000 additional shares had been repurchased as
treasury stock at a cost of $9.25 per share.
45
<PAGE>
In February 1996, the Company adopted a Shareholder Rights Plan designed
to protect shareholders from attempts to acquire control of the Company at an
inadequate price. The plan provides for the distribution of one Preferred
Stock Purchase Right as a dividend for each outstanding common share. Each
right entitles shareholders to buy one five-hundredth of a share of a new
series of preferred shares for $34.00. Each one five-hundredth of a preferred
share is intended to be the practical economic equivalent of a common share.
The rights may be exercised only if a person or group acquires 15 percent or
more of the Company's common shares. The Company may redeem the rights at
$0.01 (one cent) each at any time before a buyer acquires 15 percent of the
Company's common shares, and thereafter under certain circumstances.
Under certain circumstances, including the acquisition of 15 percent of
the Company's stock, all rights holders except the acquirer may purchase the
Company's stock having a value of twice the exercise price of the rights. If
the Company is acquired in a merger after the acquisition of 15 percent of its
stock, rights holders may purchase the acquirer's shares at a similar
discount.
The dividend distribution will be payable to shareholders of record on
March 1, 1996. The rights expire on March 1, 2006.
46
<PAGE>
NOTE 9 - FINANCIAL INFORMATION BY BUSINESS SEGMENT
1995 1994 1993
-----------------------------------------
Revenues:
Gas sales ....................... $21,363,133 $29,375,603 $24,373,376
Transportation .................. 6,124,990 5,146,050 4,241,745
----------- ----------- -----------
Subtotal ...................... 27,488,123 34,521,653 28,615,121
Oil and gas production .......... 20,630,712 27,201,139 18,067,652
Total ......................... $48,118,835 $61,722,792 $46,682,773
=========== =========== ===========
Income before provision
for federal income taxes:
Gas sales and transpor-
tation ........................ $ 4,498,225 $ 4,235,949 $ 2,922,721
Oil and gas production .......... 792,409 1,162,595 452,534
----------- ----------- -----------
Total ......................... $ 5,290,634 $ 5,398,544 $ 3,375,255
=========== =========== ===========
Depreciation, depletion
and amortization:
Gas sales and transpor-
tation ........................ $ 1,781,919 $ 1,643,738 $ 1,570,769
Oil and gas production .......... 1,655,619 1,674,326 1,654,268
----------- ----------- -----------
Total ......................... $ 3,437,538 $ 3,318,064 $ 3,225,037
=========== =========== ===========
Capital expenditures:
Gas sales and transpor-
tation and other .............. $ 4,489,771 $ 6,081,623 $ 3,055,855
Oil and gas production .......... 372,430 2,509,034 2,487,727
----------- ----------- -----------
Total ......................... $ 4,862,201 $ 8,590,657 $ 5,543,582
=========== =========== ===========
Identifiable assets:
Gas sales and transpor-
tation ........................ $54,968,627 $54,327,226 $51,168,979
Oil and gas production .......... 23,305,124 25,090,920 25,436,422
Non-operating ................... 1,156,551 1,201,394 1,291,767
----------- ----------- -----------
Total ......................... $79,430,302 $80,619,540 $77,897,168
=========== =========== ===========
47
<PAGE>
NOTE 10 - QUARTERLY INFORMATION (UNAUDITED)
The following represents the quarterly results for 1995 and 1994, which
are unaudited. The first three quarters of 1995 and all of 1994 earnings per
common share amounts have been restated to reflect the three percent stock
dividend issued in December 1995.
Income (Loss)
Before Net Earnings
Quarter Operating Federal Income Per
Ended Revenues Income Tax (Loss) Share
- --------------------------------------------------------------------------------
03/31/95 .......... $18,031,424 $ 3,211,408 $ 2,163,490 $ 0.32
06/30/95 .......... 9,404,685 275,736 225,946 0.03
09/30/95 .......... 6,848,925 (934,829) (468,606) (0.07)
12/31/95 .......... 13,833,801 1,873,955 1,309,540 0.19
03/31/94 .......... $24,711,066 $ 3,030,987 $ 2,041,355 $ 0.30
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
NOTE 11 - 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,
1995 1994
Unproved oil and gas properties .......... $ 757,462 $ 1,050,638
Proved oil and gas properties ............ 20,461,143 20,492,939
------------ ------------
Total property costs ............... 21,218,605 21,543,577
Accumulated depreciation,
depletion and amortization ......... (7,304,416) (6,414,352)
------------ ------------
Net capitalized costs .............. $ 13,914,189 $ 15,129,225
============ ============
Costs incurred relating to oil and gas property acquisition and
exploration activities were as follows:
1995 1994 1993
---- ---- ----
Acquisition of properties ........ $335,512 $ 797,383 $1,017,502
Exploration costs ................ $794,595 $1,092,115 $ 644,645
Development costs ................ $446,072 $ 486,212 $ 350,070
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:
48
<PAGE>
1995 1994 1993
---- ---- ----
Operating revenues .......... $3,450,560 $3,716,554 $3,435,136
Production costs ............ 400,710 619,619 750,487
Exploration costs ........... 612,297 555,069 644,645
Depreciation, depletion
and amortization .......... 1,292,722 1,325,551 1,316,092
---------- ---------- ----------
Operating income ............ 1,144,831 1,216,315 723,912
Income tax expense .......... 202,243 286,479 135,004
---------- ---------- ----------
Net income ................... $ 942,588 $ 929,836 $ 588,908
========== ========== ==========
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, 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
Revision of previous estimates ............ (6,361) (750,646)
Extensions and discoveries ................ 5,069 200,369
Production ................................ (40,256) (1,059,043)
-------- -----------
Balance at December 31, 1995 ................ 207,862 6,807,026
======== ===========
49
<PAGE>
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, 1995, 1994 and 1993.
The standardized measure of discounted net cash flows relating to proved
developed oil and gas reserves are as follows:
1995 1994 1993
---- ---- ----
Future cash flows ........... $ 21,261,629 $ 26,229,302 $ 27,655,313
Future production costs ..... (7,163,056) (8,090,928) (8,714,573)
Future net cash flows
before income taxes ....... 14,098,573 18,138,374 18,940,740
Ten percent discount
factor ..................... (5,298,071) (6,601,884) (7,717,107)
------------ ------------ ------------
Standardized measure
before income taxes ....... 8,800,502 11,536,490 11,223,633
Future income tax
expense ................. (1,554,169) (2,623,460) (2,030,325)
------------ ------------ ------------
Standardized measure
after income taxes ........ $ 7,246,333 $ 8,913,030 $ 9,193,308
============ ============ ============
50
<PAGE>
The change in the standardized measure of discounted future net cash
flows related to the proved oil and gas reserves at December 31, 1995, 1994
and 1993 is as follows.
December 31,
1995 1994 1993
------ ------ -----
Beginning of year ........... $ 8,913,030 $ 9,193,308 $ 9,812,036
Sales, net of
production costs ......... (3,049,850) (3,096,935) (2,684,649)
Net changes in
prices and pro-
duction costs ........... (31,628) 464,574 (800,172)
Net change due to
revisions in
quantity estimates ...... (785,768) 190,202 (1,067,000)
Extensions and
discoveries ............. 230,013 412,350 638,789
Purchase of reserves ...... -- 75,301 755,004
Net change in income
taxes ................... 1,069,292 (593,135) 617,609
Accretion of discount ..... 891,303 919,331 981,204
Other ..................... 9,941 1,348,034 940,487
----------- ----------- -----------
End of year ................. $ 7,246,333 $ 8,913,030 $ 9,193,308
=========== =========== ===========
51
<PAGE>
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 1-8223 Page 56-63
of National Gas & Oil
Company
3(b) Code of Regulations of 2-72682 Incorporated
National Gas & Oil by reference
Company 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 64-72
27 Financial Data Schedule Page 73
52
<PAGE>
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.
53
EXHIBIT 3(a)
ARTICLES OF INCORPORATION
OF
NATIONAL GAS & OIL COMPANY
The undersigned desiring to form a corporation for profit under Chapter
1701 of the Ohio Revised Code, does hereby certify:
FIRST: The name of the corporation shall be NATIONAL GAS & OIL COMPANY.
SECOND: The place in Ohio where the principal office of the corporation
is to be located is the City of Newark, Licking County, Ohio.
THIRD: The purpose for which the corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The authorized number of shares of the corporation shall be
14,100,000 of which 14,000,000 shall be common shares, each a par value of
$1.00, and 100,000 shall be serial preferred shares, each without par value.
Except to the extent that the voting rights of the shares of any class are
increased, limited, or denied by an amendment to the Articles adopted by the
shareholders of the corporation, and except as provided in script issued in
lieu of a certificate for a fraction of a share, each outstanding share
regardless of class shall entitle the holder thereof to one vote on each
matter properly submitted to the shareholders for their vote, consent waiver,
release, or other action, subject to any provisions of the Ohio Revised Code
with respect to cumulative voting.
(This article FOURTH was adopted by shareholder ratification at the
Annual Meeting of Shareholders held on May 18, 1995).
FOURTH: SECTION A. Series A Preferred Shares. Of the 100,000 serial
preferred shares, without par value, of the Corporation, 28,000 shall
constitute a series of Preferred Shares and shall have, subject and in
addition to the other provisions of this Article Fourth, the following
relative rights, preferences and limitations:
1. Designation and Amount. The shares of such series are designated
"Series A Preferred Shares" with the rights, preferences, privileges and
restrictions specified herein (the "Series A Preferred Stock"). Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the corporation convertible into Series A
Preferred Stock.
2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $1.00 per share (the "Common Stock"), of the corporation, and of any
other junior stock, shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provision for
adjustment hereinafter set forth, 500 times the aggregate per share amount of
all cash dividends, and 500 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares
of Common Stock (by reclassification or otherwise) declared on the Common
Stock since the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Preferred Stock. In the event
the corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this subsection 2
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on
the Series A Preferred Stock shall nevertheless by payable on each subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Preferred Stock shall
have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the shareholders of
the corporation.
(B) Except as otherwise provided herein, in any other Certificate of
Amendment creating a series of Preferred Stock, or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
and any other capital stock of the corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
shareholders of the corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
4. Certain Restrictions.
<PAGE>
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in subsection 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock,
outstanding shall have been paid in full, the corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii)redeem or purchase or otherwise acquire for consideration shares of
any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
corporation may at any time redeem, purchase or otherwise acquire shares of
any such junior stock in exchange for shares of any stock of the corporation
ranking junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a purchase offer made
in writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall determine
in good faith will result in fair and equitable treatment among the respective
series or classes.
(B) The corporation shall not permit any subsidiary of the corporation to
purchase or otherwise acquire for consideration any shares of stock of the
corporation unless the corporation could, under paragraph (A) of this
subsection 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or
otherwise acquired by the corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in
the Restated Certificate of Incorporation, or in any other Certificate of
Determination of Preferences creating a series of Preferred Stock or any
similar stock or as otherwise required by law.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the corporation, no distribution shall be made
(1) to the holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Preferred
Stock unless, prior thereto, the holders of shares of Series A Preferred Stock
shall have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 500 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which
the holders of all such shares are entitled upon such liquidation, dissolution
or winding up. In the event the corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect
a subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares
of Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. Consolidation, Merger, etc. In case the corporation shall enter into
any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 500 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or
exchanged. In the event the corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
8. No Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
9. Rank. The Series A Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of
any other class of the corporation's Preferred Stock.
(This article FOURTH: SECTION A. was adopted by the Board of Directors on
February 16, 1996.)
FIFTH: The amount of stated capital with which the corporation will begin
business shall be $500.
SIXTH: The Directors of the corporation shall have the power to cause the
corporation from time to time and at any time to purchase, hold, sell,
transfer or otherwise deal with (A) shares of any class or series issued by
it, (B) any security or other obligation of the corporation which may confer
upon the holder thereof the right to convert the same into shares of any class
or series authorized by the Articles of the corporation, and (C) any security
or other obligation which may confer upon the holder thereof the right to
purchase shares of any class or series authorized by the Articles of the
corporation. The corporation shall have the right to repurchase, if and when
any shareholder desires to sell, or on the happening of any event is required
to sell, shares of any class or series issued by the corporation. The
authority granted in this Article Sixth of these Articles shall not limit the
plenary authority of the Directors to purchase, hold, sell, transfer or
otherwise deal with shares of any class or series, securities, or other
obligations issued by the corporation or authorized by its Articles.
SEVENTH: A Director or officer of the corporation shall not be
disqualified by his office from dealing or contracting with the corporation as
vendor, purchaser, employee, agent or otherwise. No contract or transaction
shall be void or voidable with respect to the corporation for the reason that
it is between the corporation and one or more of its Directors or officers, or
between the corporation and any other person in which one or more of its
Directors or officers are directors, trustees, or officers, or have a
financial or personal interest, or for the reason that one or more interested
Directors or officers participated in or voted at the meeting of the Directors
or a committee thereof which authorized such contract or transaction, if in
any such case (A) the material facts as to the relationship or interest of
such Director, officer or other person and as to the contract or transaction
are disclosed or are known to the Directors or the committee, or such members
thereof as shall be present at any meeting at which action upon any such
contract or transaction shall be taken, and the Directors or committee, in
good faith, reasonably justified by such facts, authorized the contract or
transaction by the affirmative vote of a majority of the disinterested
Directors, even though the disinterested Directors constitute less than a
quorum; or (B) the material facts as to the relationship or interest of such
Director, officer or other person and as to the contract or transaction are
disclosed or known to the shareholders entitled to vote thereon and the
contract or transaction is specifically approved at a meeting of the
shareholders held for such purpose by the affirmative vote of the holders of
shares entitling them to exercise a majority of the voting power of the
corporation held by persons not interested in the contract or transaction; or
(C) the contract or transaction is fair as to the corporation as of the time
it is authorized or approved by the Directors, a committee thereof, or the
shareholders. Common or interested Directors may be counted in determining the
presence of a quorum at any meeting of the Directors, or of a committee
thereof, which authorizes the contract or transaction.
EIGHTH: The Directors of the corporation may adopt an amendment to the
Articles in respect of any unissued or treasury shares of any class and
thereby fix or change: the divisions of such shares into series and the
designation and authorized number of shares of each series; the dividend rate;
the dates of payment of dividends and the dates from which they are
cumulative; liquidation price; redemption rights and price; sinking fund
requirements; conversion rights; and restrictions on the issuance of shares of
any class or series.
NINTH: No shareholder of the corporation shall have, as a matter of
right, the pre-emptive right to purchase or subscribe for shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities or
other obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such shares.
TENTH: Notwithstanding any provision of the Ohio Revised Code requiring
for any purpose the vote, consent, waiver or release of the holders of shares
of the corporation entitling them to exercise two-thirds or any other
proportion of the voting power of the corporation or of any class or classes
thereof, such action, unless expressly otherwise provided by statute, may be
taken by the vote, consent, waiver or release of the holders of the shares
entitling them to exercise not less than a majority of the voting power of the
corporation or of such class or classes; provided, however, that if any three
Directors of the corporation shall affirmatively vote against the approval of
any of the following matters, the affirmative vote of the holders of shares
entitling them to exercise not less than eighty percent of the voting power of
the corporation, or eighty percent of the voting power of any class or classes
of shares of the corporation which entitle the holders thereof to vote in
respect of any such matter as a class, shall be required to adopt:
(1) Proposed Amended Articles or an amendment to the Articles of the
corporation;
(2) Proposed new Regulations or an amendment of the Regulations of the
corporation;
(3) An agreement of merger of consolidation providing for the proposed
merger or consolidation of the corporation with or into one or more other
corporations and requiring shareholder approval;
(4) A proposed combination or majority share acquisition involving the
issuance of shares of the corporation and requiring shareholder approval;
(5) A proposal to sell, exchange, transfer, lease or otherwise dispose of
all, or substantially all, the assets, with or without the goodwill, of the
corporation; or
(6) A proposed dissolution of the corporation.
The written objection of a Director to any such matter submitted to the
Chairman of the Board, President or Secretary of the corporation not less than
three days before the meeting of shareholders at which any such matter is to
be considered shall be deemed the affirmative vote by such Director against
such matter.
ELEVENTH: In the event that any person proposes (a) an exchange or tender
offer for shares of the corporation, (b) a merger or consolidation of the
corporation, or (c) a purchase or acquisition of all or substantially all of
the assets of the corporation, the Directors of the corporation shall, in
evaluating what is in the best interests of the corporation, consider the
following:
(1) the fairness of the price or financial terms of the proposal;
(2) the effect upon employees, customers and suppliers of the corporation
and its subsidiaries;
<PAGE>
(3) the relationship of the proposal to the value of the corporation in a
transaction of a similar type resulting from voluntary negotiations; and
(4) such other factors, whether legal, economic, or social, as the
Directors determine to be relevant.
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
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, 1995, 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
16th day of February 1996.
/s/Alan A. Baker
____________________
Alan A. Baker
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/James H. Cameron
____________________
James H. Cameron
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/David C. Easley
____________________
David C. Easley
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/Edwin L. Heminger
_______________________
Edwin L. Heminger
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/Richard O. Johnson
_______________________
Richard O. Johnson
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/Patrick J. McGonagle
_________________________
Patrick J. McGonagle
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/M. Howard Petricoff
_________________________
M. Howard Petricoff
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/Graham R. Robb
____________________
Graham R. Robb
<PAGE>
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, 1995, 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
16th day of February 1996.
/s/William H. Sullivan, Jr.
______________________________
William H. Sullivan, Jr.
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 40,245,325
<OTHER-PROPERTY-AND-INVEST> 19,406,454
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<TOTAL-DEFERRED-CHARGES> 1,558,481
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0
0
<LONG-TERM-DEBT-NET> 11,079,442
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<OPERATING-INCOME-LOSS> 4,024,814
<OTHER-INCOME-NET> 186,753
<INCOME-BEFORE-INTEREST-EXPEN> 4,211,567
<TOTAL-INTEREST-EXPENSE> 981,197
<NET-INCOME> 3,230,370
0
<EARNINGS-AVAILABLE-FOR-COMM> 3,230,370
<COMMON-STOCK-DIVIDENDS> 1,606,313
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</TABLE>
