<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 JUNE 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 7,027,950 shares
Page 1 of 14
<PAGE> 2
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
For the three months ended
June 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $ 4,084,301 $ 3,436,866
Transportation 1,210,043 853,520
Oil and gas sales 7,236,472 6,125,670
----------- -----------
TOTAL OPERATING REVENUES 12,530,816 10,416,056
----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 2,022,443 1,408,690
Purchased gas - oil and gas sales 5,988,140 4,465,466
Operation and maintenance 2,283,938 2,135,778
Depreciation, depletion and amortization 916,479 911,157
Taxes other than income 839,550 785,622
----------- -----------
TOTAL OPERATING EXPENSES 12,050,550 9,706,713
----------- -----------
OPERATING INCOME 480,266 709,343
----------- -----------
Other income (expense) (7,192) 121,633
Interest expense 254,739 195,262
Federal income taxes 22,011 156,521
----------- -----------
NET INCOME $ 196,324 $ 479,193
=========== ===========
Net income per share $ 0.03 $ 0.07
=========== ===========
Average number of shares outstanding 7,039,367 7,061,163
=========== ===========
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 six months ended
June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $16,410,710 $14,308,768
Transportation 2,526,492 2,494,045
Oil and gas sales 17,196,409 16,590,054
----------- -----------
TOTAL OPERATING REVENUES 36,133,611 33,392,867
----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 9,765,193 6,922,348
Purchased gas - oil and gas sales 14,826,282 13,365,002
Operation and maintenance 4,512,639 4,338,185
Depreciation, depletion and amortization 1,832,958 1,823,126
Taxes other than income 2,013,916 1,887,608
----------- -----------
TOTAL OPERATING EXPENSES 32,950,988 28,336,269
----------- -----------
OPERATING INCOME 3,182,623 5,056,598
----------- -----------
Other income 119,247 229,862
Interest expense 578,623 430,080
Federal income taxes 821,458 1,532,761
----------- -----------
NET INCOME $ 1,901,789 $ 3,323,619
=========== ===========
Net income per share $ 0.27 $ 0.47
=========== ===========
Average number of shares outstanding 7,039,367 7,061,163
=========== ===========
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>
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $68,352,694 $65,635,251
Less-accumulated depreciation 23,724,404 22,668,342
----------- -----------
44,628,290 42,966,909
Oil and gas properties, successful efforts 21,614,641 21,073,582
Less-accumulated depreciation, depletion
and amortization 8,899,059 8,247,143
----------- -----------
12,715,582 12,826,439
Other, net 5,224,077 5,387,784
----------- -----------
Total property, plant and equipment 62,567,949 61,181,132
CURRENT ASSETS:
Cash and cash equivalents 168,392 918,338
Short-term investments 333,423 1,347,413
Accounts receivable - net 9,494,682 16,113,827
Tax refund receivable 61,727 1,461,727
Gas in underground storage 2,782,832 3,533,919
Materials and supplies, at average cost 1,415,235 1,137,342
Prepaid taxes 1,838,448 2,919,668
Unrecovered gas cost 1,213,773 1,991,736
Prepaid insurance 1,429,820 284,713
Other 134,186 269,518
----------- -----------
Total current assets 18,872,518 29,978,201
----------- -----------
OTHER ASSETS:
Recoverable transition costs 782,537 705,428
Other 497,375 534,775
----------- -----------
Total other assets 1,279,912 1,240,203
----------- -----------
TOTAL ASSETS $82,720,379 $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>
June 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 5,183,826 4,126,765
Treasury stock, 195,453 and
165,123 shares respectively (1,880,993) (1,662,178)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 43,664,668 42,826,422
Long-term debt 8,908,255 10,231,385
----------- -----------
TOTAL CAPITALIZATION 52,572,923 53,057,807
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,384,484 1,344,863
Short-term bank loans 3,600,000 6,925,000
Accounts payable 6,780,089 11,447,366
Accrued income and other taxes 3,071,793 5,178,706
LIFO inventory reserve 131,838 --
Other 1,422,153 1,647,292
----------- -----------
TOTAL CURRENT LIABILITIES 17,390,357 26,543,227
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,294,105 8,262,483
Investment tax credits 937,362 986,304
Accrued transition costs 990,554 914,828
Health care and other 2,535,078 2,634,887
----------- -----------
TOTAL DEFFERED CREDITS AND OTHER LIABILITIES 12,757,099 12,798,502
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $82,720,379 $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 six months ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOW FORM OPERATING ACTIVITIES:
Net income $ 1,901,789 $ 3,323,619
Reconciliation of net income to net cash provided by operating activities:
Depreciation, depletion and amortization 1,832,958 1,823,126
Deferred income taxes (639,207) 518,922
Other, net 11,288 (75,505)
Changes in assets and liabilities:
Short-term investments 1,013,990 2,075,059
Accounts receivable 6,619,145 3,005,246
Tax refund receivable 1,400,000 --
Gas in underground storage 751,087 1,025,294
Materials and supplies (277,893) (163,568)
Deferred gas cost 777,963 (1,825,253)
Accounts payable (4,667,277) 43,732
Prepaid and accrued taxes (1,858,471) 923,287
Other, net 418,463 (1,892,991)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 7,283,835 8,780,968
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,311,860) (2,690,128)
Net (salvage) proceeds from retirements 20,683 48,466
----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (3,291,177) (2,641,662)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury (218,815) (65,168)
Proceeds from long-term debt -- --
Payments of long-term debt (902,891) (439,868)
Net borrowings under short-term bank loans (2,775,000) (1,800,000)
Dividends paid (845,898) (822,953)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,742,604) (3,127,989)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (749,946) 3,011,317
Cash and cash equivalents at beginning of period 918,338 448,250
----------- -----------
Cash and cash equivalents at end of period $ 168,392 $ 3,459,567
=========== ===========
</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 June 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 June 30, 1997, gas in underground storage decreased 146,391 Mcf from December
31, 1996, due to the seasonal nature of the Company's business. That nature is
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
$131,838 is the difference between the cost to replace this temporary reduction
and the LIFO cost assigned to these volumes.
3. Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
---- ----
<S> <C> <C>
Income taxes $850,000 $1,350,000
Interest $672,776 $724,877
</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 $12,531,000 in the second quarter of
1997 increased by 20 percent from second quarter 1996 consolidated revenue. The
change in revenue can be attributed to increased sales by all business segments
of the Company during the second quarter of 1997.
Net income in the second quarter of 1997 amounted to $196,000,
a decrease of $283,000 or 59 percent from the second quarter of 1996. The
decrease is directly associated with the gas marketing activities.
Net income per common share in the second quarter of 1997 was
$.03 as compared to $.07 in the second quarter of 1996.
Gas Sales and Transportation
- - ----------------------------
Operating revenues associated with this segment of the
business increased by $1,004,000 or 23 percent in the second quarter of 1997 as
compared to the second quarter of 1996. This increase is attributed to the
increased volume of gas sold in the transportation segment for the second
quarter.
Net income of the gas sales and transportation segment during
the second quarter increased $11,000 as compared to net income in the second
quarter 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 later this summer 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 second three months increased by 12 percent over the second
three months of 1996.
<TABLE>
<CAPTION>
Three months ended June 30,
Gas Throughput (Mcf) 1997 1996
-------------------- --------- ---------
<S> <C> <C>
Gas sales:
Industrial 12,058 10,469
Residential 407,314 414,442
Commercial 149,422 171,555
--------- ---------
Subtotal 568,794 596,466
Transportation 1,812,469 1,534,231
--------- ---------
Total 2,381,263 2,130,697
========= =========
</TABLE>
<TABLE>
<CAPTION>
Degree Days 1997 1996
----------- --------- ---------
<S> <C> <C>
1st Quarter 2,639 3,281
2nd Quarter 3,462 4,058
--------- ---------
Total 6,101 7,339
========= =========
</TABLE>
Operation and maintenance expenditures have increased 8
percent during the second quarter as compared to the second quarter of 1996
primarily due to increased maintenance costs.
Oil and Gas Sales
- - -----------------
Operating revenues from the oil and gas sales segment
increased $1,111,000 in the second quarter of 1997 as compared to the second
quarter of 1996. The increase is due to increased gas marketing sales by NGO
Development as a result of higher volumes sold. Operating expenses for this
business segment have increased by 27 percent primarily due to higher purchased
gas and maintenance expenses.
Net income of the oil and gas sales segment during the second
quarter of 1997 decreased $280,000 as compared to net income with the second
quarter of 1996.
9
<PAGE> 10
General
- - -------
The second quarter 1997 increase in interest expense as
compared to the second quarter 1996 is the result of increased short-term
borrowing by National Gas and NGO Development.
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 six month
period ending June 30, are summarized in the following condensed cash flow
statement:
<TABLE>
<CAPTION>
Sources & Uses of Cash
1997 1996
----------- -----------
<S> <C> <C>
Provided by operating activities $ 7,283,835 $ 8,780,968
Capital expenditures, net of salvage (3,291,177) (2,641,662)
Net borrowings under short term bank loans (3,677,891) (2,239,868)
Purchase of shares for treasury (218,815) (65,168)
Common dividends (845,898) (822,953)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (749,946) $ 3,011,317
=========== ===========
</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 second quarter of 1997 the gas sales and transportation
segment accounted for 82 percent of the total capital expenditures. The funds
were expended primarily for expansion and
10
<PAGE> 11
upgrading of existing pipeline systems. The oil and gas sales segment accounted
for 18 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 estimates that normal capital expenditures in 1997 to support existing
operations will be approximately $4,300,000. 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 June 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 6.4375% to
8.50%. During the second quarter, the Company utilized these credit lines and as
of June 30, 1997, $3,600,000 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. Management expects to renew this line of credit in due course.
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 June 30, 1997, NGO had loans of $1,500,000 outstanding.
Dividends
- - ---------
The Company paid cash dividends of $845,898 and $822,953
during the six months ended June 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.
The 1997 Annual Meeting of Shareholders was held on May 22, 1997, at
Newark, Ohio. There were 6,254,987 shares (91.2%) represented at the
meeting. The following persons were elected as Directors for a term
of three years: James H. Cameron (6,223,013), M. Howard Petricoff
(6,019,815) and William H. Sullivan (6,220,993).
The shareholders further voted in favor of a motion to ratify the
appointment of Price Waterhouse LLP to audit the financial statements
of the Company and its subsidiaries for the year ending December 31,
1997. There were 6,191,208 (90.3%) votes cast in favor, 33,510 (0.5%)
against and 28,111 (0.4%) abstaining.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
12
<PAGE> 13
FORM 10-Q
QUARTER ENDED
JUNE 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: August 12, 1997 /s/ Patrick J. McGonagle
-------------------------------
Patrick J. McGonagle
President and Chief Executive Officer
Date: August 12, 1997 /s/ Todd P. Ware
-------------------------------
Todd P. Ware
Vice President and Chief Financial
Officer
13
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000355313
<NAME> NATIONAL GAS & OIL COMPANY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 44,628,290
<OTHER-PROPERTY-AND-INVEST> 17,939,659
<TOTAL-CURRENT-ASSETS> 18,872,518
<TOTAL-DEFERRED-CHARGES> 1,279,912
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 82,720,329
<COMMON> 7,223,403
<CAPITAL-SURPLUS-PAID-IN> 31,257,439
<RETAINED-EARNINGS> 5,183,826
<TOTAL-COMMON-STOCKHOLDERS-EQ> 43,664,668
0
0
<LONG-TERM-DEBT-NET> 8,908,255
<SHORT-TERM-NOTES> 3,600,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,384,484
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 24,162,972
<TOT-CAPITALIZATION-AND-LIAB> 82,720,379
<GROSS-OPERATING-REVENUE> 36,133,611
<INCOME-TAX-EXPENSE> 821,458
<OTHER-OPERATING-EXPENSES> 32,950,988
<TOTAL-OPERATING-EXPENSES> 33,772,446
<OPERATING-INCOME-LOSS> 2,361,165
<OTHER-INCOME-NET> 119,247
<INCOME-BEFORE-INTEREST-EXPEN> 2,480,412
<TOTAL-INTEREST-EXPENSE> 578,623
<NET-INCOME> 1,901,789
0
<EARNINGS-AVAILABLE-FOR-COMM> 1,901,789
<COMMON-STOCK-DIVIDENDS> 845,898
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 7,283,835
<EPS-PRIMARY> $0.27
<EPS-DILUTED> $0.27
</TABLE>
