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, 1996
[ ] 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:
Common Shares, $1 par value American Stock Exchange, Inc.
____________________________ _____________________________
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
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 68
<PAGE>
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (ss.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL
NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. ( X )
THE AGGREGATE MARKET VALUE OF THE VOTING SHARES HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 1, 1997 IS $58,692,293.
AS OF MARCH 1, 1997, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S $1.00
PAR VALUE COMMON SHARES WAS 7,049,150 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this 10-K.
________________________________________________________________________________
Exhibit Index at Page........................................................ 49
________________________________________________________________________________
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<PAGE>
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 1994 through 1996 are set forth as
follows:
1996 1995 1994
---- ---- ----
Gas sales and transportation (1)
Industrial and off-system $ 2,909,491 $ 2,324,188 $ 8,369,981
Residential 15,801,616 13,736,465 15,111,291
Commercial 5,993,482 5,302,480 5,894,331
Transportation 4,437,351 6,124,990 5,146,050
----------- ----------- -----------
Subtotal 29,141,940 27,488,123 34,521,653
Oil and gas sales (2) 31,930,384 20,630,712 27,201,139
----------- ----------- -----------
Total operating revenues $61,072,324 $48,118,835 $61,722,792
=========== =========== ===========
Income from continuing operations before provision for federal income taxes
during the periods 1994 through 1996 are set forth below:
1996 1995 1994
---- ---- ----
Gas sales and transportation (1) $ 4,440,988 $ 4,498,225 $ 4,235,949
Oil and gas sales (2) 1,621,698 792,409 1,162,595
----------- ----------- -----------
Total $ 6,062,686 $ 5,290,634 $ 5,398,544
=========== =========== ===========
(1) Includes National Gas and Producers Gas.
(2) Includes NGO Development.
Gas throughput for the periods 1994 through 1996 is set forth on Page 14.
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<PAGE>
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 1996, approximately 65 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 1996, and is expected to become more 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 our industrial customers have alternate fuel
capability.
In addition to its industrial sales and transportation services, National
Gas supplies gas to 25,103 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 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).
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<PAGE>
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, National's access to local Ohio production through a
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, 1996, National Gas has paid approximately
$1,765,000 to its interstate pipeline suppliers for transition costs.
Approximately $1,231,000 remains to be paid over the next seven years and,
accordingly, has been accrued at December 31, 1996. National Gas has 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.
A summary of the contracts between National Gas and its interstate
suppliers follows:
<TABLE>
Maximum Daily
Supplier Rate Schedule Contracted Date Termination Date Quantity Dth
- -------------------- ----------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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<PAGE>
During 1996, National Gas transported 54 percent of its total gas purchased
for resale or transportation from the four interstate pipeline companies
detailed above. National Gas acquired the remaining 46 percent of its supply
requirements from independent 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 1996, approximately 2,026,000 Mcf were injected
into underground storage and approximately 1,949,000 Mcf were withdrawn.
In 1996, National Gas connected 765 new residential and commercial
customers. In addition, National Gas continued to evaluate the local Ohio gas
gathering system in an effort to assure an adequate supply of gas, as well as
maintain it's cost efficiency for all of its current and prospective customers.
Capital expenditures for National Gas during 1996 were approximately
$4,816,000 which included normal system expansion and replacement, storage field
enhancements and the construction of a natural gas processing facility. Capital
expenditures in 1997 are expected to be approximately $4,300,000 to support
existing operations and the replacement of selected current facilities and
lines.
National Gas is subject to the jurisdiction of the PUCO with respect to
certain rates, accounts, service, issuance of securities, safety and certain
other matters. In the event of certain declared national or state emergencies,
National Gas' gas supplies may also be subject to further regulation by federal
and state agencies and officials.
Although there were no sales to individual customers in excess of 10
percent of operating revenues during the period 1994 through 1996, one customer
comprised 17 percent of total system throughput in 1996. However, National Gas
is dependent upon several industrial customers for a significant portion of its
throughput. Approximately 29 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 with other natural gas utilities, fuel oil, propane, and electric
utilities for these end users is intense.
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 industrial throughput is relatively constant, gas sold
to residential and commercial customers for heating purposes reflects variations
in weather conditions.
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<PAGE>
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 ownership's
ranging from 100 percent to three percent in 608 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 1994 and then decreased in 1995, but was
back up in 1996 due to larger volumes of throughput. NGO Development is in
competition for new customers with many other gas producing and marketing
companies, as well as local distribution companies. A marketing office has been
established in the Cleveland area thus allowing NGO Development to access
potential customers in the northeastern region of Ohio.
In 1996, the oil and gas sales segment increased its capital expenditures
to $639,000 covering the purchase, development and/or completion of various
interests in oil and gas wells and for additions to its gas gathering
facilities.
In 1997 NGO Development expects to incur capital expenditures for oil and
gas operations totaling approximately $1,400,000.
================================================================================
At December 31, 1996, the Company's operating subsidiaries had 135
full-time active employees.
For financial information regarding industry segments, see Note 9 of the
notes to consolidated financial statements.
================================================================================
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<PAGE>
<TABLE>
EXECUTIVE OFFICERS OF REGISTRANT
Birth Family Office Held as of
Name Date Age Relationship December 31, 1996
_________________________________________________________________________________________________
<S> <C> <C> <C> <C>
William H. Sullivan, Jr. 10/21/38 58 None Chairman of the Board
Patrick J. McGonagle 07/08/54 42 None President and Chief
Executive Officer
Todd P. Ware 08/22/65 31 None Vice President and
Chief Financial Officer
John B. Denison 02/14/40 56 None Vice President
and Secretary
Karl R. Bletzacker 03/24/56 40 None Vice President
</TABLE>
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. Todd P. Ware was elected to
the position of Vice President and Chief Financial Officer on July 1, 1996.
Previously, Mr. Ware had joined National's subsidiary, NGO Development Corp. in
August of 1993 and served as Accounting Manager. John B. Denison, a 25-year
employee, was elected to the position of Vice President and Secretary on May 18,
1978. Karl R. Bletzacker was elected to the position of Vice President on
November 21, 1996. Previously, Mr. Bletzacker had joined National Gas & Oil
Corporation a subsidiary of the company in January of 1992, as the Manager of
Gas Acquisition and Marketing.
-8-
<PAGE>
Item 2 - PROPERTIES
National Gas owns and operates a system consisting of approximately 1,318
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 five gathering
compressor stations consisting of 1,705 brake horsepower. Four 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 5,775,000
Mcf, and consist of 48 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 and operates a natural gas processing and
liquids extraction facility located on 4.57 acres held in fee. This facility has
a capacity of 6 mmcf per day and includes an 800 brake horsepower compressor,
processing skid, and two liquids storage tanks.
National Gas owns warehouses, 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. As is typical in the
industry, National Gas provides for an ongoing maintenance and replacement
program.
The oil and gas properties consist of 608 gross and 333 net producing wells
as of December 31, 1996. Nearly all wells are combination wells producing both
oil and gas. Additionally, NGO Development has leasehold acreage at December 31,
1996, as follows:
Gross Net
_____________________
Developed acreage 51,577 41,777
Undeveloped acreage 42,200 35,570
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 1994 through
1996:
1996 1995 1994
---- ---- ----
Average sales price per Mcf $ 3.22 $ 2.96 $ 3.34
Average sales price per barrel $20.10 $16.66 $15.81
Average production cost per equivalent Mcf $ 0.35 $ 0.31 $ 0.45
Average daily production of gas (Mcf) 2,633 2,902 3,023
Average daily production of oil (barrels) 100 110 130
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<PAGE>
NGO Development participated in the drilling of wells as follows:
Exploratory Wells Developmental Wells
------------------------------------- ----------------------------------
Completed Dry Total Completed Dry Total
--------- --- ----- --------- --- -----
1996 8 8 16 1 0 1
1995 6 4 10 9 1 10
1994 12 7 19 10 2 12
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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<PAGE>
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:
Sales Prices
---------------------------------
1996 High Low
-------------------------------------- --------------- -----------------
First quarter 10 9 1/8
Second quarter 10 1/4 8 7/16
Third quarter 10 1/4 9 1/16
October through November 23 10 1/8 8 7/8
November 27 through December 31 9 1/2 8 11/16
after 3% stock dividend
Sales 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 22 through December 31
after 3% stock dividend 10 1/4 9 1/2
At February 28, 1997, there were 1,561 equity shareholders of record of the
Company's $1.00 par value common shares. Of the total shares outstanding,
approximately 95,400, or 1.4 percent, were held by the Company's employee
benefit plans. Dividends in the amount of $0.06 per share were paid quarterly
for all of 1995 and 1996. A three percent stock dividend was issued in December
1996.
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. There are no
restrictions on the payment of dividends.
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<PAGE>
<TABLE>
Item 6 - SELECTED FINANCIAL DATA
(In thousands, except for per share data)
1996 1995 1994 1993 1992
___________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Total operating revenue $61,072 $48,119 $61,723 $46,683 $ 38,298
Income from continuing operations $ 3,920 $ 3,230 $ 3,489 $ 2,072 $ 2,612
Discontinued operations $ -- $ -- $ -- $ -- $ (364)
Cumulative effect of accounting changes $ -- $ -- $ -- $ -- $ (235)
Net income $ 3,920 $ 3,230 $ 3,489 $ 2,072 $ 2,013
Income from continuing $ 0.56 $ 0.47 $ 0.51 $ 0.30 $ 0.38
operations - per share(1)
Discontinued operations - per share(1) $ -- $ -- $ -- $ -- $ (0.05)
Cumulative effect of accounting $ -- $ -- $ -- $ -- $ (0.04)
changes - per share(1)
Net income per share(1) $ 0.56 $ 0.47 $ 0.51 $ 0.30 $ 0.29
Total assets $92,400 $79,430 $80,620 $77,897 $ 69,195
Long-term obligations $ 9,281 $11,079 $12,956 $ 9,002 $ 6,905
Cash dividends per share(1) $ 0.23 $ 0.23 $ 0.23 $ 0.22 $ 0.22
(1) Based upon the average number of shares outstanding of 7,058,797 in 1996,
and 7,065,480 in the years 1995, 1994, 1993 and 1992. These shares were
adjusted for the three percent stock dividend in December 1996.
</TABLE>
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 $61,072,324 in 1996 increased 27 percent from 1995
consolidated revenue and consolidated revenue of $48,118,835 in 1995 decreased
22 percent from 1994 consolidated revenue. The increase in 1996 revenue over
1995 is primarily due to increased gas marketing activity and higher gas prices.
The decrease in revenue in 1995 is primarily attributed to lower gas volumes
sold and declining gas prices.
Purchase gas expense increased from 1996 to 1995 and decreased from 1995 to
1994 as a result of changes in gas sales activities. Interest expense has
increased each year since 1994 as a result of additional borrowings to maintain
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<PAGE>
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 $3,919,639 in 1996, an increase of $689,269 from
1995. The 21 percent increase was because of increased income in all business
segments, but primarily with the Oil and Gas sales segment. In 1995, net income
was down $259,000, or seven percent, from 1994 which was attributable to all
business segments.
Net income per common share in 1996 was $.56, as compared to net income per
common share in 1995 of $.47, and in 1994 of $.51. All per share amounts have
been restated to reflect the three percent stock dividend in December 1996.
Financial Information by Business Segment
The following tables compare operating revenues, operating income
before federal income taxes and gas throughput for the last three years.
Operating Revenues 1996 1995 1994
- ------------------ ---- ---- ----
Gas sales and transportation
Industrial and off-system $ 2,909,491 $ 2,324,188 $ 8,369,981
Residential 15,801,618 13,736,465 15,111,291
Commercial 5,993,482 5,302,480 5,894,331
Transportation 4,437,351 6,124,990 5,146,050
----------- ----------- -----------
Subtotal $29,141,942 $27,488,123 $34,521,653
Oil and gas sales 31,930,382 20,630,712 27,201,139
----------- -----------
===========
Total operating revenues $61,072,324 $48,118,835 $61,722,792
=========== =========== ===========
Operating Income Before Federal Income Taxes
1996 1995 1994
---- ---- ----
Gas sales and transportation $ 4,440,988 $ 4,498,225 $ 4,235,949
Oil and gas sales 1,621,698 792,409 1,162,595
----------- ----------- -----------
Total operating income before
federal income taxes $ 6,062,686 $ 5,290,634 $ 5,398,544
=========== =========== ===========
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<PAGE>
Gas Throughput (Mcf) 1996 1995 1994
- -------------------- ---- ---- ----
Gas sales:
Industrial 71,723 76,025 76,470
Residential 2,255,477 1,984,301 2,016,487
Commercial 942,572 845,353 866,696
Off-system 933,337 1,106,814 2,862,736
---------- ---------- ----------
Subtotal 4,203,109 4,012,493 5,822,389
Transportation 5,710,779 5,616,703 6,834,583
Oil and gas sales 11,184,301 9,489,180 10,626,768
---------- ---------- ----------
Total 21,098,189 19,118,376 23,283,740
========== ========== ==========
Gas Sales and Transportation
Operating revenues associated with this segment of the business increased
by 6 percent in 1996, primarily as a result of an increase in the volumes sold
to both residential and commercial customers, while industrial and off-system
customers demonstrated a decline. Changes in the level of over and under
recovery of gas costs affect residential and commercial customer operating
revenues because under the Gas Cost Recovery (GCR) mechanism established by the
PUCO, such over or under recovery of purchased gas costs is reflected in the
computation of future billings to customers. Amounts collected through the GCR
mechanism are subject to annual review by the PUCO. In 1995, reductions in
expected gas costs and refunds lowered operating revenues. In 1996, significant
increases in gas costs increased both revenues and amounts deferred for future
recovery. In 1997, the PUCO will complete a two year management audit of the
Company's gas procurement practices. The Company believes its gas procurement
practices have been prudent but are unable to predict the ultimate outcome of
the current PUCO management audit. Any amounts ultimately disallowed would
reduce earnings in the year a final order is issued and agreed to. The increase
in 1996 revenues from 1995 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 measure the effect of weather were 6,905, 6,742, and 6,477 for
1996, 1995 and 1994, respectively. The thirty year average is 6,163.
Operating income before federal income taxes of the gas sales and
transportation segment decreased $57,237 in 1996 after increasing $262,276 in
1995. The decrease in 1996 was attributed to volume and margin changes, while
the increase in 1995 is primarily attributed to increased margins earned on the
residential/ commercial and transportation customer classes. The change in gross
margin for each on-system customer class of National Gas during 1996 was
affected by volume and price as follows:
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<PAGE>
Volume Price Total
------ ----- -----
Industrial ($ 6,606) $ 11,676 $ 5,070
Residential / Commercial $1,118,182 $ 377,881 $ 1,496,063
Transportation $ 108,590 ($ 801,845) ($ 693,255)
In order to protect transportation margins, the Company utilizes a hedging
program whereby gas futures and gas price swap contracts are purchased to hedge
against rising prices of gas which is allocated to fixed price transportation
customers. The Company has partially 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 decreased by 4,302 Mcf in 1996 after
remaining relatively flat in 1995. In 1996 and 1995, off-system throughput by
the gas sales segment declined. Residential and commercial throughput increased
approximately 13 percent in 1996 after having decreased by approximately two
percent in 1995. Transportation throughput increased by one percent in 1996
after decreasing 18 percent in 1995.
The increase in purchased gas expense of 12 percent in 1996 is primarily
the result of increased sales volume and an increase in the cost of gas. The
decrease in purchased gas expense of 41 percent in 1995 resulted primarily from
a decrease in sales volume and decrease in the cost of gas.
The Company utilizes its resources to take advantage of the seasonal nature
of natural gas pricing. Spot market purchasing is accomplished when possible,
and the Company's storage facilities are utilized not only to satisfy peak
demand, but to facilitate the seasonal nature of spot market purchasing.
Oil and Gas Sales
Operating revenues from the oil and gas sales segment in 1996 increased to
$31,930,382 due to the increased gas marketing activity and higher gas prices.
Gas marketing contributed approximately 74 percent of the total revenue for this
business segment in 1996.
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<PAGE>
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 1996 amounted to $1,621,698, an increase of $829,289 from income in
1995 of $792,409. Income in 1995 represented a $370,186 decrease from income in
1994 of $1,162,595. The increase in income in 1996 is primarily the result of
increased gas marketing activity, increased oil production, and higher gas
prices, while the decrease in 1995 is the result of decreased gas and oil
production and gas marketing activity. Gas marketing activity contributed
approximately 68 percent of the total income for this business segment in 1996.
The Company is subject to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
requires the Company to compare future cash flows from its oil and gas
properties to the carrying value of such properties. At December 31, 1996,
future cash flows (undiscounted and without interest) of $12.8 million exceeded
the carrying value by $0.9 million.
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 1996 because of increases in utility
property and in property tax rates. Gross receipts tax applicable to public
utilities is based on revenues, and accordingly, such taxes increased in 1996.
Overall, taxes other than income taxes increased $97,109 and $180,000 in 1996
and 1995, respectively.
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: ($000)
-16-
<PAGE>
<TABLE>
Sources & Uses of Cash
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provided by operating activities $ 2,273 $ 9,319 $ 7,167
Capital expenditures, net of salvage (5,235) (4,958) (8,398)
Net proceeds from (payments on) long-term debt (380) (1,877) 3,950
Net borrowings under short term bank loans 5,575 (1,700) (400)
Purchase of shares for treasury (111) 0 0
Common dividends (1,652) (1,606) (1,603)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents $ 470 ($ 822) $ 716
======= ======= =======
</TABLE>
Cash provided by operating activities consists of net income and noncash
items including depreciation, depletion, amortization and deferred income taxes.
Changes in working capital are also included in cash provided by operating
activities. In 1996, cash flows from operating activities declined because of a
$3.3 million increase in recoverable gas costs. In addition, short-term
borrowing increased because the Company entered into a new storage agreement.
The agreement required the Company to purchase 1 bcf of gas in the summer, which
is to be sold in the winter period ending March 31, 1997. In 1996, 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.
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.
Capital Expenditures
Capital expenditures by business segment for each of the three years are
presented in the following table: ($000)
1996 1995 1994
---- ---- ----
Gas sales and transportation $4,833 $4,490 $6,082
Oil and gas sales 639 372 2,509
------ ------ ------
$5,472 $4,862 $8,591
====== ====== ======
In 1996, the gas sales and transportation segment accounted for 97 percent
of the total capital expenditures. The funds were expended primarily for
expansion and upgrading of existing pipeline systems, the upgrading of storage
fields and the completion of a processing plant facility. The oil and gas sales
segment accounted for three 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.
-17-
<PAGE>
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.
The Company estimates that normal capital expenditures in 1997 will be
approximately $4.3 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. Annual principal
payments of $461,000 commence in March 1997 and will be funded from normal
operations.
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 $2.2 million outstanding against this credit line and $950,000
remained outstanding as of December 31, 1996.
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 $589,000 remained outstanding as of December 31, 1996.
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, 1996, $4,038,000 remained outstanding on this note.
As of December 31, 1996, 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. In
November 1996, the Board of Directors increased the upper limit on short-term
borrowings to $10 million. The terms of each borrowing under the lines of credit
are negotiated at the time the funds are requested. During 1996, the Company
utilized these credit lines and as of December 31, 1996, a short-term draw of
$6,925,000 remained outstanding.
-18-
<PAGE>
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 and oil futures contracts as
a means of hedging a portion of the market risk associated with fluctuations in
the market price of natural gas and crude oil. As of December 31, 1996, the
Company and its subsidiaries had $1,347,000 invested in 513 open contracts with
a contracted value of $13,188,000. The fair market value of these investments at
December 31, 1996, was $14,318,000. Gains or losses on these investments are
offset by increases or decreases in their cost thereby reducing the market risk
of fluctuating prices.
Dividends
The Company paid total cash dividends of $1,651,567, $1,606,313, and
$1,603,142 in 1996, 1995 and 1994 respectively. Additionally, the Company issued
a 3 percent stock dividend in 1996 and 1995, and a three-for-two stock split in
1994. Presently, there are no restrictions on the payment of dividends. 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 benefited 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 segment.
-19-
<PAGE>
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
________________________________________________________________________________
Management's Statement of Responsibility for
Financial Reporting and Accounting ................................ 24
Report of Independent Accountants ................................... 25
Consolidated Statement of Income for each of the
three years in the period ended December 31, 1996 ................. 26
Consolidated Balance Sheet at December 31, 1996
and 1995 ....................................................... 27-28
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1996 ................. 29
Consolidated Statement of Common Shareholders' Equity
for each of the three years in the period ended
December 31, 1996 ................................................. 30
Notes to Consolidated Financial Statements ....................... 31-48
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.
-20-
<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 22, 1997 (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, 1996. Neither the report on Executive Compensation nor the
performance graph included in the Company's definitive proxy statement shall be
deemed incorporated herein by reference.
PART IV
Item 14 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Exhibit Number Description
2 Stock Purchase Agreement dated September 12, 1991 by and between
National Gas & Oil Company and Stone Container Corporation.
3(a) Articles of Incorporation of National Gas & Oil Company
3(b) Code of Regulations of National Gas & Oil Company
10(a)* National Gas & Oil Company Salary Deferral Plan
10(b)* Amended and Restated National Gas & Oil Company Compensation Plan
for Outside Directors
10(c)* Summary of Salary Administration Plan
21 Subsidiaries of the Registrant
24 Powers of Attorney of Directors
27 Financial Data Schedule
99(a) Credit Agreement dated October 1, 1991 by and among National Gas
& Oil Company, Stone Resource and Energy Corporation and BancOhio
National Bank.
* Management contract or compensatory plan or arrangement.
-21-
<PAGE>
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, 1997 By: /s/ Todd P. Ware
________________________________
Todd P. Ware, Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date March 27, 1997 By: /s/ William H. Sullivan, Jr.
_____________________________________
William H. Sullivan, Jr.
Chairman of the Board and Director*
Date March 27, 1997 By: /s/ Patrick J. McGonagle
_____________________________________
Patrick J. McGonagle, President and
Chief Executive Officer
Date March 27, 1997 By: /s/ Todd P. Ware
_____________________________________
Todd P. Ware, Vice President and
Chief Financial Officer
Date March 27, 1997 By: /s/ Alan A. Baker
_____________________________________
Alan A. Baker, Director*
Date March 27, 1997 By: /s/ James H. Cameron
_____________________________________
James H. Cameron, Director*
Date March 27, 1997 By: /s/ David C. Easley
_____________________________________
David C. Easley, Director*
Date March 27, 1997 By: /s/ Richard O. Johnson
_____________________________________
Richard O. Johnson, Director*
Date March 27, 1997 By: /s/ M. Howard Petricoff
_____________________________________
M. Howard Petricoff, Director*
-22-
<PAGE>
Date March 27, 1997 By: /s/ Graham R. Robb
_____________________________________
Graham R. Robb, Director*
Date March 27, 1997 By: /s/ Thomas E. Stewart
_____________________________________
Thomas E. Stewart, Director*
* Executed pursuant to Power of Attorney attached to this report by John B.
Denison, Vice President and Secretary.
By: /s/ John B. Denison
_____________________________________
John B. Denison, Vice President and
Secretary
-23-
<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 four
non-employee Directors, meets periodically, and as necessary, with management
and Price Waterhouse LLP to review audit plans and the Company's accounting,
financial reporting and internal control practices and procedures. Price
Waterhouse LLP has full and free access to all levels of management. Management
has made available to Price Waterhouse LLP all the Company's financial records
and related data, as well as the minutes of shareholders' and directors'
meetings. Furthermore, management believes that all representations made to
Price Waterhouse LLP during its audit were valid and appropriate.
/s/ Patrick J. McGonagle
_____________________________________
Patrick J. McGonagle
President and Chief Executive Officer
/s/ Todd P. Ware
_____________________________________
Todd P. Ware
Vice President and Chief Financial Officer
-24-
<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 20 present fairly, in all material
respects, the financial position of National Gas & Oil Company and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, 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 19, 1997
-25-
<PAGE>
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,
------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OPERATING REVENUES:
Gas sales $24,704,591 $21,363,133 $29,375,603
Transportation 4,437,351 6,124,990 5,146,050
Oil and gas sales 31,930,382 20,630,712 27,201,139
----------- ----------- -----------
TOTAL OPERATING REVENUES 61,072,324 48,118,835 61,722,792
----------- ----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 13,019,865 11,590,683 19,732,082
Purchased gas - oil and gas sales 26,175,889 15,521,065 21,524,667
Operation and maintenance 8,878,355 9,045,033 8,684,010
Depreciation, depletion and amortization 3,552,756 3,437,538 3,318,064
Taxes other than income 3,400,911 3,303,802 3,124,163
----------- ----------- -----------
TOTAL OPERATING EXPENSES 55,027,776 42,898,121 56,382,986
----------- ----------- -----------
OPERATING INCOME 6,044,548 5,220,714 5,339,806
----------- ----------- -----------
Other income 598,100 186,753 376,771
Interest expense 995,589 981,197 887,947
Federal income taxes 1,727,420 1,195,900 1,339,189
----------- ----------- -----------
NET INCOME $ 3,919,639 $ 3,230,370 $ 3,489,441
=========== =========== ===========
Net income per share $ 0.56 $ 0.46 $ 0.49
=========== =========== ===========
Average number of shares outstanding 7,058,797 7,065,480 7,065,480
=========== =========== ===========
Cash dividends per share $ 0.23 $ 0.23 $ 0.23
=========== =========== ===========
</TABLE>
The per share amounts and the average number of shares outstanding have been
restated to reflect the three percent stock dividend issued in December 1996.
The accompanying notes are an integral part of these statements.
-26-
<PAGE>
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
-----------------------
1996 1995
------ ------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $65,635,251 $62,444,717
Less-accumulated depreciation 22,668,342 22,199,392
----------- -----------
42,966,909 40,245,325
Oil and gas properties, successful efforts 21,073,582 21,218,605
Less-accumulated depreciation, depletion
and amortization 8,247,143 7,304,416
----------- -----------
12,826,439 13,914,189
Other, net 5,387,784 5,492,265
----------- -----------
Total property, plant and equipment 61,181,132 59,651,779
CURRENT ASSETS:
Cash and cash equivalents 918,338 448,250
Short-term investments 1,347,413 782,788
Accounts receivable, less allowance for doubtful
accounts of $269,259 and $199,455, respectively 16,113,827 10,285,798
Tax refund receivable 1,461,727 --
Gas in underground storage 3,533,919 2,321,552
Materials and supplies, at average cost 1,137,342 980,787
Prepaid taxes 2,919,668 2,896,527
Unrecovered gas cost 1,991,736 --
Other 554,231 504,340
----------- -----------
Total current assets 29,978,201 18,220,042
----------- -----------
OTHER ASSETS:
Recoverable transition costs 705,428 818,059
Other 534,775 740,422
----------- -----------
Total other assets 1,240,203 1,558,481
----------- -----------
TOTAL ASSETS $92,399,536 $79,430,302
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
-27-
<PAGE>
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
December 31,
------------------------
1996 1995
------ ------
<S> <C> <C>
CAPITALIZATION:
Shareholder's equity --
Common stock, $1 par value, authorized $ 7,223,403 $ 7,018,512
14,000,000 shares, issued 7,223,403 and
7,018,512 shares, respectively
Paid in capital 33,138,432 31,353,831
Retained earnings 4,126,765 3,848,185
Treasury stock, 170,223 and
157,923 shares respectively (1,662,178) (1,550,509)
------------ ------------
Total shareholders' equity 42,826,422 40,670,019
Long-term debt 10,231,385 11,079,442
------------ ------------
Total capitalization 53,057,807 51,749,461
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt 1,344,863 877,264
Short-term bank loans 6,925,000 1,350,000
Accounts payable 11,447,366 5,491,004
Accrued income and other taxes 5,178,706 3,990,295
Refundable gas costs -- 1,348,047
Other 1,647,292 1,947,816
------------ ------------
Total current liabilities 26,543,227 15,004,426
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,262,483 8,112,490
Investment tax credits 986,304 1,084,188
Accrued transition costs 914,828 1,035,895
Health care and other 2,634,887 2,443,842
------------ ------------
Total deferred credits and other liabilities 12,798,502 12,676,415
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 92,399,536 $ 79,430,302
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
-28-
<PAGE>
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
-----------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOW FORM OPERATING ACTIVITIES:
Net income $ 3,919,639 $ 3,230,370 $ 3,489,441
Reconciliation of net income
to net cash provided by
operating activities:
Depreciation, depletion and amortization 3,705,375 3,682,364 3,455,254
Deferred income taxes 1,028,362 39,772 (579,264)
Other, net 69,804 61,824 (157,117)
Changes in assets and liabilities:
Short-term investments (564,625) 1,060,060 (610,762)
Accounts receivable (5,897,833) (575,562) 3,108,559
Gas in underground storage (1,212,367) 1,011,806 (1,686,408)
Materials and supplies (156,555) 23,582 (76,684)
Deferred gas cost (3,348,219) 362,900 2,557,298
Accounts payable 5,956,362 992,807 (4,210,477)
Prepaid and accrued taxes (394,341) (407,920) 1,482,497
Other, net (832,094) (163,428) 394,656
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,273,508 9,318,575 7,166,993
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,471,851) (4,862,201) (8,590,657)
Net (salvage) proceeds from retirements 237,125 (96,035) 192,951
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (5,234,726) (4,958,236) (8,397,706)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury (111,669) -- --
Proceeds from long-term debt -- -- 6,000,000
Payments of long-term debt (380,458) (1,876,962) (2,049,720)
Net borrowings under short-term bank loans 5,575,000 (1,700,000) (400,000)
Dividends paid (1,651,567) (1,606,313) (1,603,142)
----------- ----------- -----------
Net cash flow provided by (used in)
financing activities 3,431,306 (5,183,275) 1,947,138
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 470,088 (822,936) 716,425
Cash and cash equivalents
at beginning of year 448,250 1,271,186 554,761
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 918,338 $ 448,250 $ 1,271,186
=========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
-29-
<PAGE>
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER'S EQUITY
Common Stock Paid in Retained Treasury
$1 Par Value Capital Earnings Stock
_____________________________ ______________________________
<S> <C> <C> <C> <C> <C>
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)
Net income -- -- 3,919,639 --
Cash dividends on common stock -- -- (1,651,567) --
3% stock dividend 204,891 1,784,601 (1,989,492)
Purchase of shares for treasury -- -- -- (111,669)
---------- ------------ ----------- -----------
BALANCE DECEMBER 31, 1996 $7,223,403 $ 33,138,432 $ 4,126,765 $(1,662,178)
========== ============ =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
-30-
<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. 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 65 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 17 percent of total system throughput.
Approximately 29 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.
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.
-31-
<PAGE>
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
betterment's. 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 non-producing 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.
Short Term Investments
The Company purchases oil futures, gas futures and gas price swap contracts
in order to hedge against rising gas and oil prices for fixed price sales
contracts. Accordingly, the realized and unrealized gains and losses are
deferred until the physical sale is made, at which time gains and losses are
recorded as a component of cost.
-32-
<PAGE>
The Company had the following gas and oil futures positions on the New York
Mercantile Exchange (NYMEX) at December 31, 1996 and 1995. Fair market value is
based upon the NYMEX closing price.
December 31,
---------------------------------
1996 1995
------ ------
GAS
Open contracts 511 307
Natural gas purchases hedged 5.11 MMBtu 3.07 MMBtu
Deposits with brokers $ 1,358,507 $ 782,788
Contracted value $ 13,146,930 $5,607,980
Fair market value $ 14,267,240 $6,297,310
December 31,
---------------------------------
1996 1995
------ ------
OIL
Open contracts 2 --
Crude oil purchases hedged 2,000 bbl --
Deposits with brokers $ (11,095) $ --
Contracted value $ 41,450 $ --
Fair market value $ 51,160 $ --
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: 1996 1995 1994
---------- ---------- ----------
Income taxes $2,000,000 $1,750,000 $1,200,000
Interest $ 866,331 $ 991,760 $ 747,736
-33-
<PAGE>
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 $2,807,000 and $3,508,000 higher than
reported at December 31, 1996 and 1995, respectively. Gas stored by Producers
Gas as of December 31, 1996 and 1995, of $386,529, and $339,049, respectively,
is valued using the average cost method.
Revenues and Purchased Gas
National Gas records unbilled revenues for gas delivered but not yet
billed. As of December 31, 1996 and 1995, National Gas had unbilled revenues of
$1,519,385 and $1,645,147, 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 adopted SFAS 121 on January 1, 1996. The adoption had no 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.
-34-
<PAGE>
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, 1996, National Gas has paid $1,764,840 to
its interstate pipeline suppliers for transition costs and $1,231,109 remains to
be paid over the next seven years and, accordingly, has been accrued at December
31, 1996. National Gas has received authorization 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.
<TABLE>
Maximum Daily
Supplier Rate Schedule Contracted Date Termination Date Quantity Dth
- -------------------- ----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
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
</TABLE>
During 1996, National Gas transported 54 percent of its total gas purchased
for resale or transportation from the four interstate pipeline companies
detailed above. National Gas acquired the remaining 46 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:
-35-
<PAGE>
December 31,
1996 1995
------ ------
Regulatory assets:
Recoverable future taxes $ 189,602 $ 216,686
Postretirement benefit costs 158,362 180,982
Order 636 transition costs 972,278 1,071,390
Recoverable gas costs 1,991,736 --
---------- -----------
Total regulatory assets 3,311,978 1,469,058
Regulatory liabilities:
Amounts payable to customers -- 1,348,047
Taxes refundable to customers 258,767 282,899
---------- -----------
Total regulatory liabilities 258,767 1,630,946
Net regulatory assets (liabilities) $3,053,211 $ (161,888)
========== ===========
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:
<TABLE>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rates
applied to pre-tax book income $ 1,920,000 $ 1,504,932 $ 1,641,734
Increase (decrease) in tax caused by --
Depreciation, depletion and basis differences (145,345) (266,642) (230,212)
Investment credit amortization (80,528) (80,528) (81,103)
Other (net) 33,293 38,138 8,770
----------- ----------- -----------
Federal income tax expense $ 1,727,420 $ 1,195,900 $ 1,339,189
=========== =========== ===========
Effective income tax rate 30.6% 27.0% 27.7%
=========== =========== ===========
</TABLE>
-36-
<PAGE>
<TABLE>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Taxes currently payable $ 478,742 $ 1,357,711 $ 2,067,818
Deferred provision:
Intangible drilling costs/depletion (140,097) (456,714) (260,308)
Deferred gas cost 1,065,151 (136,658) (1,012,886)
Property timing differences 433,610 494,889 519,177
Property tax -- -- (170,000)
Alternative minimum tax credit carryforward -- -- 158,717
Deferred compensation 13,970 (8,157) 2,535
Other, net (123,956) (55,171) 34,136
----------- -----------
Federal income tax expense $ 1,727,420 $ 1,195,900 $ 1,339,189
=========== =========== ===========
</TABLE>
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
December 31,
1996 1995
---------- ----------
Percentage depletion $ -- $ 132,135
Vacation accrual 79,997 72,773
Inventory capitalization 36,863 43,564
Reserve for accounts and notes receivable 91,548 67,815
Postretirement benefits other than pension 720,854 635,574
Investment tax credits 423,359 464,810
Deferred gas -- 354,874
Other 164,244 151,681
------------ -----------
1,516,865 1,923,226
Valuation allowance -- (155,351)
------------ -----------
Total deferred tax assets 1,516,865 1,767,875
------------ -----------
Prepaid taxes (275,287) (308,218)
Property (9,337,481) (9,123,854)
Deferred gas (643,824) --
Other (111,537) (117,237)
------------ -----------
Total deferred tax liabilities (10,368,129) (9,549,309)
------------ -----------
Net deferred taxes $ (8,851,264) $(7,781,434)
============ ===========
-37-
<PAGE>
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.
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.
The funded status of the retirement plan and the amount recognized in the
Company's Consolidated Balance Sheet were as follows:
<TABLE>
September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
Plan assets at fair value
(principally unallocated insurance contracts) $ 2,618,099 $ 2,459,153
=========== ===========
Actuarial present value of benefit obligations:
Vested benefits 1,498,968 1,490,265
Nonvested benefits 36,529 42,175
----------- -----------
Accumulated benefit obligation 1,535,497 1,532,440
Additional amounts related to
projected salary increases 625,861 998,040
=========== ===========
Total projected benefit obligation 2,161,358 2,530,480
=========== ===========
Plan assets in excess (deficit) of projected
benefit obligation 456,741 (71,327)
Amounts necessary to reconcile excess
(deficit) assets to prepaid pension cost
included in the Consolidated Balance Sheet:
Unamortized net asset (276,099) (299,107)
Unrecognized prior service cost 285,824 317,792
Unrecognized net loss (gain) (521,388) 87,196
----------- -----------
Prepaid (liability) included in other $ (54,922) $ 34,554
=========== ===========
</TABLE>
-38-
<PAGE>
Net pension cost for the Retirement Plan includes the following:
<TABLE>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Benefits earned during the year (service cost) $ 152,382 $ 171,730 $ 209,894
Interest accrued on projected benefit 164,773 170,648 275,337
obligation
Actual return on plan assets (244,129) (236,144) (318,080)
Net amortization and deferral 16,450 8,960 (106,765)
--------- --------- ---------
Net periodic pension cost $ 89,476 $ 115,194 $ 60,386
========= ========= =========
</TABLE>
The Company's assumptions used during the years 1995, 1994 and 1993 in
determining net periodic pension cost and pension liability are as follows:
1996 1995 1994
------ ------ ------
Discount rate 8.25% 7.50% 8.00%
Return on plan assets 10.00% 10.00% 10.00%
Estimated increase in future compensation 5.00% 5.00% 5.00%
In 1996, the Company changed its discount rate assumption from 7.5 percent
to 8.25 percent. This resulted in a decrease in the projected benefit obligation
of $368,404.
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.
-39-
<PAGE>
The components of net periodic postretirement benefit expense were as
follows:
1996 1995
------ ------
Service cost $ 58,389 $ 49,051
Interest cost on accumulated postretirement
benefit obligation 161,447 157,407
-------- --------
Net periodic postretirement benefit expense 219,836 206,458
Deferral of benefits earned to be
collected in future rates 22,620 22,620
-------- --------
Net periodic postretirement benefit expense $242,456 $229,078
======== ========
The amount recognized in the Company's Consolidated Balance Sheet was as
follows:
September 30,
1996 1995
------ ------
Retirees $ 1,319,927 $ 1,314,102
Active employees 980,550 883,795
----------- -----------
Accumulated post-retirement
health care benefits 2,300,477 2,197,897
Unrecognized net loss (80,211) (148,622)
----------- -----------
Accrued postretirement health
care benefits $ 2,220,266 $ 2,049,275
=========== ===========
The Company's assumptions used during the years 1996, 1995 and 1994 in
determining net periodic postretirement benefit expense and the liability for
postretirement health care benefits are as follows:
1996 1995 1994
---------------- --------------- --------------
Discount rate 8.25% 7.50% 8.00%
Health care trend rate 9.00% 10.00% 10.00%
gradually gradually gradually
decreasing decreasing decreasing
to 5.0% in to 5.0% in to 5.0% in
2001 2001 2001
-40-
<PAGE>
As of September 30, 1996 the discount rate was changed from 7.5 percent to
8.25 percent, which resulted in an decrease in the liability for postretirement
benefits of $243,044.
If the health care trend rate would increase by one percent in each year,
the accumulated benefit obligation would increase by approximately $340,000 at
September 30, 1996 and net periodic postretirement benefit expense in 1997 would
increase by approximately $43,000.
NOTE 6 - LONG-TERM DEBT
The long-term debt outstanding was as follows:
<TABLE>
December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Senior notes, 6.63% interest rate,
due 2009 $ 6,000,000 $ 6,000,000 $ 6,000,000
Promissory note, variable interest
rate, due 2001 4,037,500 4,887,500 5,737,500
Mortgage note, variable interest rate,
due 2008 588,748 619,206 646,168
Revolving note, variable interest rate,
due 1998 950,000 450,000 1,450,000
------------ ------------ ------------
Total debt 11,576,248 11,956,706 13,833,668
Less-current maturities (1,344,863) (877,264) (877,695)
------------ ------------ ------------
Long-term debt $ 10,231,385 $ 11,079,442 $ 12,955,973
============ ============ ============
</TABLE>
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 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, 1996 was
6.7812 percent which represented the London Interbank Offer Rate (LIBOR) plus
1.25 percent per annum as of November 4, 1996 when the Company entered into a
four month contracted rate. The note agreement allows the Company to choose
-41-
<PAGE>
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.
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, 1996, the prime rate was 8.25 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 the years 1995 and 1996, the Company extended the term of this
instrument in each year, 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, 1996, NGO Development Corporation had borrowed $950,000 at an
interest rate of 6.75 percent.
For certain debt instruments, the Company is required to maintain various
working capital debt to equity and cash flow covenants. At December 31, 1996,
the Company was in compliance with or had received waivers for these covenants.
Annual maturities of long-term debt are as follows:
1997 1,344,863
1998 2,294,863
1999 1,344,863
2000 1,344,863
Thereafter 5,246,796
______________________________
TOTAL $11,576,248
==============================
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 $5,610,000. The fair value amount is not intended to reflect
principal amounts that the Company will ultimately be required to pay.
-42-
<PAGE>
NOTE 7 - NOTES PAYABLE
The Company has lines of credit with various banks in excess of
$10,000,000, 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, 1996, National Gas had four draws totaling $6,000,000 on
these credit lines for working capital requirements at interest rates ranging
between 6.531 percent and 6.750 percent, and one draw of $925,000 at 8.250
percent. National Gas expects to repay these notes in 1997.
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 204,891 shares issued in December
1996 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 December 31, 1996, 237,700 additional shares could be repurchased under
this authority. As of February 28, 1997, 16,330 shares had been repurchased as
treasury stock at an average cost of $9.05 per share.
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
-43-
<PAGE>
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 was paid to shareholders of record on March 1,
1996. The rights expire on March 1, 2006.
-44-
<PAGE>
NOTE 9 - FINANCIAL INFORMATION BY BUSINESS SEGMENT
<TABLE>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gas sales $24,704,590 $21,363,133 $29,375,603
Transportation 4,437,351 6,124,990 5,146,050
----------- ----------- -----------
Subtotal 29,141,941 27,488,123 34,521,653
Oil and gas production 31,930,383 20,630,712 27,201,139
----------- ----------- -----------
Total $61,072,324 $48,118,835 $61,722,792
=========== =========== ===========
Operating income before taxes:
Gas sales and transportation $ 4,440,988 $ 4,498,225 $ 4,235,949
Oil and gas production 1,621,698 792,409 1,162,595
----------- ----------- -----------
Total $ 6,062,686 $ 5,290,634 $ 5,398,544
=========== =========== ===========
Depreciation, depletion
and amortization:
Gas sales and transportation $ 2,052,196 $ 1,781,919 $ 1,643,738
Oil and gas production 1,500,560 1,655,619 1,674,326
----------- ----------- -----------
Total $ 3,552,756 $ 3,437,538 $ 3,318,064
=========== =========== ===========
Capital expenditures:
Gas sales and transportation $ 4,832,753 $ 4,489,771 $ 6,081,623
Oil and gas production 639,098 372,430 2,509,034
----------- ----------- -----------
Total $ 5,471,851 $ 4,862,201 $ 8,590,657
=========== =========== ===========
Identifiable assets:
Gas sales and transportation $64,792,547 $54,968,627 $54,327,226
Oil and gas production 26,418,802 23,305,124 25,090,920
Non-operating 1,188,187 1,156,551 1,201,394
----------- ----------- -----------
Total $92,399,536 $79,430,302 $80,619,540
=========== =========== ===========
</TABLE>
-45-
<PAGE>
NOTE 10 - QUARTERLY INFORMATION (UNAUDITED)
The following represents the quarterly results for 1996 and 1995, which are
unaudited. The first three quarters of 1996 and all of 1995 earnings per common
share amounts have been restated to reflect the three percent stock dividend
issued in December 1996.
Income(Loss)
Before
Quarter Ended Operating Federal Net Earnings
Revenues Income Tax Income(Loss) Per Share
------------- --------- ----------- ------------ ---------
03/31/96 $ 22,976,811 $ 4,220,665 $ 2,844,425 $ 0.41
06/30/96 10,416,056 635,714 479,193 0.07
09/30/96 8,186,901 (736,768) (435,878) (0.06)
12/31/96 19,492,556 1,527,448 1,031,899 0.14
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
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,
1996 1995
------------ ------------
Unproved oil and gas properties $ 813,165 $ 757,462
Unproved leaseholds 157,265 478,528
Proved oil and gas properties 20,103,152 19,982,615
------------ ------------
Total property costs 21,073,582 21,218,605
Accumulated depreciation,
depletion and amortization (8,247,143) (7,304,416)
------------ ------------
Net capitalized costs $ 12,826,439 $ 13,914,189
============ ============
Costs incurred relating to oil and gas property acquisition and exploration
activities were as follows:
1996 1995 1994
-------- -------- ----------
Acquisition of properties $ 99,303 $335,512 $ 797,383
Exploration costs $539,537 $794,595 $1,092,115
Development costs $389,070 $446,072 $ 486,212
-46-
<PAGE>
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:
<TABLE>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues $3,403,874 $3,450,560 $3,716,554
Production costs 416,108 400,710 619,619
Exploration costs 386,234 612,297 555,069
Depreciation, depletion and amortization 1,230,411 1,292,722 1,325,551
---------- ---------- ----------
Operating income 1,371,121 1,144,831 1,216,315
Income tax expense 299,581 202,243 286,479
---------- ---------- ----------
Net income $1,071,540 $ 942,588 $ 929,836
========== ========== ==========
</TABLE>
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, 1993 263,199 9,047,631
Revisions 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
Revisions 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
Revisions of previous estimates 16,360 (279,600)
Extensions and discoveries 5,548 77,437
Purchase of proved reserves 791 111,675
Production (36,835) (963,883)
-------- ----------
Balance at December 31, 1996 193,726 5,752,655
======== ==========
-47-
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
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, 1996, 1995 and 1994.
The standardized measure of discounted net cash flows relating to proved
developed oil and gas reserves are as follows:
<TABLE>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Future cash flows $ 19,702,430 $ 21,261,629 $ 26,229,302
Future production costs (6,934,901) (7,163,056) (8,090,928)
------------ ------------ ------------
Future net cash flows
before income taxes 12,767,529 14,098,573 18,138,374
Ten percent discount factor (4,668,996) (5,298,071) (6,601,884)
------------ ------------ ------------
Standardized measure
before income taxes 8,098,533 8,800,502 11,536,490
Future income tax expense (1,769,478) (1,554,169) (2,623,460)
------------ ------------ ------------
Standardized measure
after income taxes $ 6,329,055 $ 7,246,333 $ 8,913,030
============ ============ ============
</TABLE>
The change in the standardized measure of discounted future net cash flows
related to the proved oil and gas reserves at December 31, 1996, 1995 and 1994
is as follows.
<TABLE>
December 31,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Beginning of year $ 7,246,333 $ 8,913,030 $ 9,193,308
Sales, net of production costs (2,987,766) (3,049,850) (3,096,935)
Net changes in prices and production costs 615,883 (31,628) 464,574
Net change due to revisions in quantity estimates (174,004) (785,768) 190,202
Extensions and discoveries 107,165 230,013 412,350
Purchase of reserves 118,155 --- 75,301
Net change in income taxes (215,309) 1,069,292 (593,135)
Accretion of discount 724,633 891,303 919,331
Other 893,965 9,941 1,348,034
-------------- -------------- --------------
End of year $ 6,329,055 $ 7,246,333 $ 8,913,030
============== ============== ==============
</TABLE>
-48-
<PAGE>
<TABLE>
EXHIBIT INDEX
Reference
-------------------------------
Exhibit Commission
Number Description File No. Exhibit No.
- -------- ----------- -------- -----------
<S> <C> <C> <C>
2 Stock Purchase Agreement 1-8223 Incorporated by
dated September 12, 1991 reference from
by and between National Exhibit 2 of Form
Gas & Oil Company and 8-K filed on
Stone Container Corporation October 14, 1991.
3(a) Articles of Incorporation 1-8223 Page 52-58
of National Gas & Oil Company
3(b) Code of Regulations of 2-72682 Incorporated by
National Gas & Oil Company reference from
Exhibit 3(b) of
Form S-14 filed
on June 8, 1981.
3(c) Preferred Share Purchase Rights Incorporated by
Agreement, dated as of February reference from
16, 1996, by and between National Exhibit 4 of
Gas & Oil Company and National Form 8-K filed on
City Bank February 26, 1996.
10(a) National Gas & Oil 33-55390 Incorporated by
Company Salary Deferral Plan reference from
Exhibit 28(b)
of Form S-8
filed on
December 4, 1992.
10(b) Amended and Restated 33-55388 Incorporated by
National Gas & Oil reference from
Company Compensation Exhibit 28(c) of
Plan for Outside Directors Form S-8 filed on
December 4, 1992.
10(c) Summary of Salary Administration Plan Page 50
21 Subsidiaries of the Registrant Page 51
24 Powers of Attorney of Directors Page 59-67
27 Financial Data Schedule Page 68
99(a) Credit Agreement dated 1-8223 Incorporated by
October 1, 1991 by and among reference from
National Gas & Oil Company Exhibit 28 of Form
Stone Resource & Energy Corporation 8-K filed on
and BancOhio National Bank. October 14, 1991.
</TABLE>
-49-
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.
-50-
EXHIBIT 21
NATIONAL GAS & OIL COMPANY
SUBSIDIARIES OF THE REGISTRANT
State of Incorporation
----------------------
A. National Gas & Oil Corporation Ohio
B. NGO Development Corporation Ohio
C. Producers Gas Sales, Inc. Ohio
EXHIBIT 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.
-52-
<PAGE>
(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.
-53-
<PAGE>
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.
(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
-54-
<PAGE>
(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
-55-
<PAGE>
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
-56-
<PAGE>
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;
-57-
<PAGE>
(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;
(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.
-58-
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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/Alan A. Baker
____________________________
Alan A. Baker
-59-
<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/James H. Cameron
____________________________
James H. Cameron
-60-
<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/David C. Easley
____________________________
David C. Easley
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<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/Thomas E. Stewart
____________________________
Thomas E. Stewart
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<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/Richard O. Johnson
____________________________
Richard O. Johnson
-63-
<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, 1997, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/Patrick J. McGonagle
____________________________
Patrick J. McGonagle
-64-
<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/M. Howard Petricoff
____________________________
M. Howard Petricoff
-65-
<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/Graham R. Robb
____________________________
Graham R. Robb
-66-
<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, 1996, as amended, hereby constitutes and appoints Todd
P. Ware 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 20th day
of February 1997.
/s/William H. Sullivan, Jr.
____________________________
William H. Sullivan, Jr.
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 42,966,909
<OTHER-PROPERTY-AND-INVEST> 18,214,223
<TOTAL-CURRENT-ASSETS> 29,978,201
<TOTAL-DEFERRED-CHARGES> 1,240,203
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 92,399,536
<COMMON> 7,223,403
<CAPITAL-SURPLUS-PAID-IN> 31,476,254
<RETAINED-EARNINGS> 4,126,765
<TOTAL-COMMON-STOCKHOLDERS-EQ> 42,826,422
0
0
<LONG-TERM-DEBT-NET> 10,231,385
<SHORT-TERM-NOTES> 6,925,000
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0
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<GROSS-OPERATING-REVENUE> 61,072,324
<INCOME-TAX-EXPENSE> 1,727,420
<OTHER-OPERATING-EXPENSES> 55,027,776
<TOTAL-OPERATING-EXPENSES> 56,755,196
<OPERATING-INCOME-LOSS> 4,317,128
<OTHER-INCOME-NET> 598,100
<INCOME-BEFORE-INTEREST-EXPEN> 4,915,228
<TOTAL-INTEREST-EXPENSE> 995,589
<NET-INCOME> 3,919,639
0
<EARNINGS-AVAILABLE-FOR-COMM> 3,919,639
<COMMON-STOCK-DIVIDENDS> 1,651,567
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 2,273,508
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
