<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 1997
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
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the close of the period covered by this report (applicable
only to corporate issuers).
$1.00 Par Value - Common Stock 7,017,150 shares
Page 1 of 14
<PAGE> 2
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------------------------
1997 1996
--------------------- --------------------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $ 2,020,504 $ 1,734,405
Transportation 1,168,741 827,194
Oil and gas sales 6,865,243 5,625,302
--------------------- --------------------
TOTAL OPERATING REVENUES 10,054,488 8,186,901
--------------------- --------------------
OPERATING EXPENSES:
Purchases gas - gas sales 625,171 741,279
Purchased gas - oil and gas sales 5,707,543 4,292,722
Operation and maintenance 2,304,916 2,243,676
Depreciation, depletion and amortization 916,479 911,156
Taxes other than income 756,064 670,199
--------------------- --------------------
TOTAL OPERATING EXPENSES 10,310,173 8,859,032
--------------------- --------------------
OPERATING INCOME (255,685) (672,131)
--------------------- --------------------
Other income 24,706 166,454
Interest expense 292,644 231,091
Federal income taxes (230,255) (300,890)
--------------------- --------------------
NET INCOME $ (293,368) $ (435,878)
===================== ====================
Net income per share ($0.04) ($0.06)
===================== ====================
Average number of shares outstanding 7,017,150 7,057,280
===================== ====================
Cash dividends per share $ 0.06 $ 0.06
===================== ====================
</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.
2
<PAGE> 3
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $ 18,431,214 $ 16,043,176
Transportation 3,695,233 3,321,238
Oil and gas sales 24,061,652 22,215,354
-------------------- --------------------
TOTAL OPERATING REVENUES 46,188,099 41,579,768
-------------------- --------------------
OPERATING EXPENSES:
Purchases gas - gas sales 10,390,364 7,663,627
Purchased gas - oil and gas sales 20,533,825 17,657,724
Operation and maintenance 6,817,555 6,581,862
Depreciation, depletion and amortization 2,749,437 2,734,282
Taxes other than income 2,769,980 2,557,806
-------------------- --------------------
TOTAL OPERATING EXPENSES 43,261,161 37,195,301
-------------------- --------------------
OPERATING INCOME 2,926,938 4,384,467
-------------------- --------------------
Other income 143,953 396,315
Interest expense 871,267 661,172
Federal income taxes 591,203 1,231,870
-------------------- --------------------
NET INCOME $ 1,608,421 $ 2,887,740
==================== ====================
Net income per share $ 0.23 $ 0.41
==================== ====================
Average number of shares outstanding 7,031,961 7,059,869
==================== ====================
Cash dividends per share $ 0.06 $ 0.06
==================== ====================
</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.
3
<PAGE> 4
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------ --------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $ 69,632,453 $ 65,635,251
Less-accumulated depreciation 24,241,875 22,668,342
------------------------ --------------------
45,390,578 42,966,909
Oil and gas properties, successful efforts 21,844,473 21,073,582
Less-accumulated depreciation, depletion
and amortization 9,273,075 8,247,143
------------------------ --------------------
12,571,398 12,826,439
Other, net 5,180,424 5,387,784
------------------------ --------------------
Total property, plant and equipment 63,142,400 61,181,132
CURRENT ASSETS:
Cash and cash equivalents 24,633 918,338
Short-term investments 754,289 1,347,413
Accounts receivable - net 9,806,699 16,113,827
Tax refund receivable 61,727 1,461,727
Gas in underground storage 5,170,120 3,533,919
Materials and supplies, at average cost 1,419,055 1,137,342
Prepaid taxes 1,158,630 2,919,668
Unrecovered gas cost 2,845,753 1,991,736
Prepaid insurance 2,167,801 284,713
Other 74,471 269,518
------------------------ --------------------
Total current assets 23,483,178 29,978,201
------------------------ --------------------
OTHER ASSETS:
Recoverable transition costs 821,092 705,428
Other 448,801 534,775
------------------------ --------------------
Total other assets 1,269,893 1,240,203
------------------------ --------------------
TOTAL ASSETS $ 87,895,471 $ 92,399,536
======================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------------- ---------------------
<S> <C> <C>
CAPITALIZATION:
Shareholder's equity --
Common stock, $1 par value, authorized $ 7,223,403 $ 7,223,403
14,000,000 shares, issued 7,223,403 and
7,018,512 shares, respectively
Paid in capital 33,138,432 33,138,432
Retained earnings 4,469,429 4,126,765
Treasury stock, 206,253 and
165,123 shares respectively (1,978,437) (1,662,178)
---------------------- ---------------------
Total shareholders' equity 42,852,827 42,826,422
Long-term debt 8,688,243 10,231,385
---------------------- ---------------------
Total capitalization 51,541,070 53,057,807
---------------------- ---------------------
CURRENT LIABILITIES:
Current maturities of long-term debt 3,885,243 1,344,863
Short-term bank loans 8,000,000 6,925,000
Accounts payable 6,656,490 11,447,366
Accrued income and other taxes 2,730,610 5,178,706
LIFO inventory reserve 92,298 ---
Other 1,332,205 1,647,292
---------------------- ---------------------
Total current liabilities 22,696,846 26,543,227
---------------------- ---------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,309,298 8,262,483
Investment tax credits 912,891 986,304
Accrued transition costs 1,039,357 914,828
Health care and other 3,396,009 2,634,887
---------------------- ---------------------
Total deferred credits and other liabilities 13,657,555 12,798,502
---------------------- ---------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 87,895,471 $ 92,399,536
====================== =====================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
CASH FLOW FORM OPERATING ACTIVITIES:
Net income $ 1,608,421 $ 2,887,740
Reconciliation of net income to net cash provided by operating activities:
Depreciation, depletion and amortization 2,749,437 2,734,282
Deferred income taxes (972,827) 962,920
Other, net 18,121 (77,027)
Changes in assets and liabilities:
Short-term investments 593,123 (635,705)
Accounts receivable 6,307,128 3,810,933
Tax refund receivable 1,400,000 ---
Gas in underground storage (1,636,201) (1,861,999)
Materials and supplies (281,713) (185,520)
Deferred gas cost 91,751 (2,980,253)
Accounts payable (4,790,876) (755,920)
Prepaid and accrued taxes (2,618,239) (1,915,255)
Other, net 1,039,741 147,430
------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,507,866 2,131,626
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,840,186) (4,229,036)
Net (salvage) proceeds from retirements 19,275 45,276
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (4,820,911) (4,183,760)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury (316,260) (74,494)
Payments on long-term debt (1,123,643) (660,009)
Net borrowings under short-term bank loans 3,125,000 5,800,000
Dividends paid (1,265,757) (1,234,096)
------------------- -------------------
Net cash flow provided by (used in)
financing activities 419,340 3,831,401
------------------- -------------------
Net increase (decrease) in cash
and cash equivalents (893,705) 1,779,267
Cash and cash equivalents at beginning of year 918,339 448,250
------------------- -------------------
Cash and cash equivalents at end of period $ 24,634 $ 2,227,517
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
NATIONAL GAS & OIL COMPANY
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. The accompanying consolidated balance sheet, related statement of cash flows
and the comparative income statement have been prepared by National Gas & Oil
Company (the Company) without audit by independent accountants. In the opinion
of the Company, all adjustments necessary for a fair presentation of its
consolidated results of operation at September 30, 1997 and 1996 have been
included, and were normal recurring adjustments.
2. Gas in underground storage under the LIFO method is determined using calendar
year-end quantities and costs. LIFO inventory is estimated at interim periods.
At September 30, 1997, gas in underground storage increased 102,625 Mcf from
December 31, 1996, due to the seasonal nature of the Company's business which
involves injecting natural gas into underground storage in the summer and
withdrawing the gas in the winter during high demand periods. The reserve for
LIFO inventory of $92,298 is the difference between the cost assigned to these
volumes and the LIFO cost of these volumes.
3. Supplemental Disclosures of Cash Flow Information Cash paid during the
period for:
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Income taxes $967,729 $1,650,000
Interest $1,009,643 $488,042
</TABLE>
7
<PAGE> 8
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
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 & Oil
Corporation (National Gas) and Producers Gas Sales, Inc. (Producers) and the
sale of oil and gas produced and purchased by NGO Development Corporation (NGO
Development). The revenues of the holding company, National Gas & Oil Company,
and other income from all subsidiaries are included under other income.
Consolidated revenue of $10,054,000 in the third quarter of
1997 increased by 23 percent from third quarter 1996 consolidated revenue. The
change in revenue can be attributed to increased gas sales by National Gas due
to higher gas prices during the third quarter of 1997.
Net loss in the third quarter of 1997 amounted to $293,000, as
compared to a loss of $436,000 for the third quarter of 1996. The positive
change is attributed to higher throughput to the residential and commercial gas
sales customers for the quarter.
Net income per common share for the first nine months of 1997
was $.23 as compared to $.41 in the first nine months of 1996. Net loss per
common share in the third quarter 1997 was $.04 as compared to a net loss of
$.06 for the third quarter of 1996.
Gas Sales and Transportation
- - ----------------------------
Operating revenues associated with this segment of the
business increased by 14% for the first nine months of 1997 as compared to 1996
and 24% in the third quarter of 1997 as compared to the third quarter of 1996.
This is due to an increase in the price of gas sold as a result of a higher gas
cost, as well as an increase in the volume of gas sold in the gas sales segment.
Net income of the gas sales and transportation segment during
the first nine months of 1997 decreased $579,000 as compared to net income in
the first nine months of 1996.
The gas sales and transportation segment is regulated by the
Public Utilities Commission of Ohio (PUCO). Every two years, the segment is
audited to ensure compliance with the applicable PUCO tariffs and rules. The
staff of the PUCO has issued an initial report suggesting that a National Gas
refund of approximately two million dollars is owed its customers. National Gas
believes no refunds are due. National Gas and the PUCO staff are presently
working together to resolve the issues raised by the report. If these issues are
not resolved, a hearing to
8
<PAGE> 9
determine the facts will be held at a later date with a decision to be made by
the PUCO, subject to further appeal to the Ohio Supreme Court. At this time,
management cannot determine the ultimate outcome of these proceedings;
therefore, no accrual for potential refunds has been recorded.
Volumes of gas sold and transported to various customer
classes for the third quarter increased 18 percent over the third quarter of
1996.
<TABLE>
<CAPTION>
Three months ended September 30,
Gas Throughput (Mcf) 1997 1996
-------------------- ------------------- -----------------
<S> <C> <C>
Gas sales:
Industrial 1,973 8,275
Residential 130,273 116,754
Commercial 52,587 52,125
------------------- -----------------
Subtotal 184,833 177,154
Transportation 1,777,335 1,491,803
------------------- -----------------
Total 1,962,168 1,668,957
=================== =================
</TABLE>
Operation and maintenance expenditures have increased seven
percent during the third quarter as compared to the third quarter of 1996
primarily due to increased maintenance costs.
Oil and Gas Sales
- - -----------------
Operating revenues from the oil and gas sales segment
increased $1,240,000 in the third quarter of 1997 as compared to the third
quarter of 1996. The increase is due to increased gas sales as a result of
increased purchased gas expense. Purchased gas expense increased $1,415,000 in
the third quarter of 1997 as compared to the third quarter 1996. Operating
expenses for this business segment have increased by less than one percent.
Net income for the period decreased $627,000 primarily due to
lower margins from gas marketing activity.
General
- - -------
The third quarter 1997 increase in interest expense as
compared to the third quarter 1996 is the result of increased short-term
borrowing by National Gas and NGO Development.
9
<PAGE> 10
Federal Income Taxes
- - --------------------
The change in federal income tax expense for the quarter
reflects the changes in taxable income for the consolidated companies.
CAPITAL RESOURCES AND LIQUIDITY
- - -------------------------------
Capital Resources
- - -----------------
The primary sources and uses of cash during the nine month
period ending September 30, are summarized in the following condensed cash flow
statement:
Sources & Uses of Cash
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
<S> <C> <C>
Provided by operating activities $ 3,507,866 $ 2,131,626
Capital expenditures, net of salvage (4,820,911) (4,183,760)
Net borrowings under short term bank loans 2,001,357 5,139,991
Purchase of shares for treasury (316,260) (74,494)
Common dividends (1,265,757) (1,234,096)
----------------------- ---------------------
Net increase (decrease) in cash and cash equivalents $ (893,705) $ 1,779,267
======================= =====================
</TABLE>
Cash provided by operating activities consists of net income
and noncash items including depreciation, depletion, amortization and deferred
income taxes. Additionally, changes in working capital are also included in cash
provided by operating activities. The Company expects that internally generated
cash and cash reserves, coupled with seasonal short-term borrowings, will
continue to be sufficient to satisfy the operating, normal capital expenditure
and dividend requirements of the Company's existing operations in the near
future.
Capital Expenditures
- - --------------------
In the third quarter of 1997 the gas sales and transportation
segment accounted for 83 percent of the total capital expenditures. The funds
were expended primarily for expansion and upgrading of existing pipeline
systems. The oil and gas sales segment accounted for 17 percent which was
primarily used for the development and/or completion of various interest in oil
and gas wells.
Capital expenditures vary significantly by quarter. The
Company has revised its estimate that normal capital expenditures in 1997 to
support existing operations will be
10
<PAGE> 11
approximately $5,000,000. The construction and drilling programs are continually
evaluated and actual expenditures may be more or less.
Financing and Liquidity
- - -----------------------
The Company continually assesses various alternatives for
expanding its business, including the acquisition of other business entities.
As of September 30, 1997, the Company and its subsidiaries had
short-term lines of credit with various banks aggregating in excess of
$10,000,000, the upper limit on short-term borrowing imposed by the Board of
Directors. The terms of each borrowing under the lines of credit are negotiated
at the time the funds are requested with interest rates ranging from 6.625% to
8.500%. During the third quarter, the Company utilized these credit lines and as
of September 30, 1997, $8,000,000 of short-term loans were outstanding. These
funds were used primarily by National Gas to satisfy seasonal working capital
requirements. The Company anticipates that it will utilize its credit lines for
additional funds during the third and fourth quarters of 1997.
Additionally, the Company and all of its subsidiaries, except
National Gas, have a $3 million revolving line of credit which expires in
February 1998. This committed credit line is unsecured and may be utilized by
any of the subsidiaries, except National Gas. NGO Development had $950,000
outstanding at December 31, 1996. As of September 30, 1997, NGO had loans of
$3,000,000 outstanding.
Dividends
- - ---------
The Company paid cash dividends of $1,265,757 and $1,234,096
during the nine months ended September 30, 1997 and 1996, respectively.
Presently, there are no restrictions on the payment of dividends, as long as the
Company is not in default of the terms in its long-term loans. Dividend policy
is established by the Company's Board of Directors. The Board's decision takes
into consideration results of operations and retained earnings of the Company.
There are currently no restrictions on the present ability to pay such
dividends.
Effects of Inflation
- - --------------------
All of the Company's long-term bank loans accrue interest at a
fluctuating rate equal to either the bank's prime rate or to a rate tied 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.
11
<PAGE> 12
NATIONAL GAS & OIL COMPANY
--------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Default upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
12
<PAGE> 13
FORM 10-Q
QUARTER ENDED
SEPTEMBER 30, 1997
------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL GAS & OIL COMPANY
--------------------------
(Registrant)
Date: November 10, 1997 /s/ Todd P. Ware
-------------------------------------------
Todd P. Ware
Vice President and Chief Financial Officer
Date: November 10, 1997 /s/ Patrick D. McGonagle
-------------------------------------------
Patrick D. McGonagle
Controller
13
<TABLE> <S> <C>
<ARTICLE> UT
<CIK>0000355313
<NAME> NATIONAL GAS & OIL COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 45,390,578
<OTHER-PROPERTY-AND-INVEST> 17,751,822
<TOTAL-CURRENT-ASSETS> 23,483,178
<TOTAL-DEFERRED-CHARGES> 1,269,893
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 87,895,471
<COMMON> 7,223,403
<CAPITAL-SURPLUS-PAID-IN> 31,159,995
<RETAINED-EARNINGS> 4,469,429
<TOTAL-COMMON-STOCKHOLDERS-EQ> 42,852,827
0
0
<LONG-TERM-DEBT-NET> 8,688,243
<SHORT-TERM-NOTES> 8,000,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,885,243
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 24,469,158
<TOT-CAPITALIZATION-AND-LIAB> 87,895,471
<GROSS-OPERATING-REVENUE> 46,188,099
<INCOME-TAX-EXPENSE> 591,203
<OTHER-OPERATING-EXPENSES> 43,261,161
<TOTAL-OPERATING-EXPENSES> 43,852,364
<OPERATING-INCOME-LOSS> 2,335,735
<OTHER-INCOME-NET> 143,953
<INCOME-BEFORE-INTEREST-EXPEN> 2,479,688
<TOTAL-INTEREST-EXPENSE> 871,267
<NET-INCOME> 1,608,421
0
<EARNINGS-AVAILABLE-FOR-COMM> 1,608,421
<COMMON-STOCK-DIVIDENDS> 1,265,757
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 3,507,866
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
