<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 MARCH 31, 1998
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 (740) 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 7,156,913 shares
Page 1 of 13
<PAGE> 2
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
For the three months ended
March 31,
---------------------------
1998 1997
----------- -----------
OPERATING REVENUES:
Gas sales $10,264,004 $12,326,409
Transportation 1,847,340 1,316,449
Oil and gas sales 11,781,873 9,959,937
----------- -----------
TOTAL OPERATING REVENUES 23,893,217 23,602,795
----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 6,371,225 7,742,750
Purchased gas - oil and gas sales 10,768,294 8,838,048
Operation and maintenance 2,220,843 2,228,701
Depreciation, depletion and amortization 923,244 916,479
Taxes other than income 1,144,791 1,174,366
----------- -----------
TOTAL OPERATING EXPENSES 21,428,397 20,900,344
----------- -----------
OPERATING INCOME 2,464,820 2,702,451
----------- -----------
Other income 48,064 126,345
Interest expense 374,747 323,884
Federal income taxes 674,590 799,447
----------- -----------
NET INCOME $ 1,463,547 $ 1,705,465
=========== ===========
Net income per share $ 0.20 $ 0.24
=========== ===========
Average number of shares outstanding 7,156,913 7,188,080
=========== ===========
Cash dividends per share $ 0.06 $ 0.06
=========== ===========
The per share amounts and the average number of shares outstanding have been
restated to reflect the two percent stock dividend issued in December 1997.
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
March 31, December 31,
1998 1997
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $70,271,323 $69,940,823
Less-accumulated depreciation 22,908,158 22,345,344
----------- -----------
47,363,165 47,595,479
Oil and gas properties, successful efforts 22,036,331 21,297,126
Less-accumulated depreciation, depletion
and amortization 9,082,954 8,793,454
----------- -----------
12,953,377 12,503,672
Other, net 5,023,460 5,123,982
----------- -----------
Total property, plant and equipment 65,340,002 65,223,133
CURRENT ASSETS:
Cash and cash equivalents 1,331,079 396,301
Short-term investments 674,739 2,451,049
Accounts receivable - net 15,986,817 17,728,315
Tax refund receivable -- 61,727
Gas in underground storage 531,950 2,660,177
Materials and supplies, at average cost 1,063,135 1,155,688
Prepaid taxes 2,400,153 3,077,047
Unrecovered gas cost 3,035,680 2,703,415
Other 225,026 637,462
----------- -----------
Total current assets 25,248,579 30,871,181
----------- -----------
OTHER ASSETS:
Recoverable transition costs 826,479 591,180
Other 416,138 436,333
----------- -----------
Total other assets 1,242,617 1,027,513
----------- -----------
TOTAL ASSETS $91,831,198 $97,121,827
=========== ===========
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
March 31, December 31,
1998 1997
----------- -----------
CAPITALIZATION:
Shareholders' equity --
Common stock, $1 par value, authorized $ 7,363,166 $ 7,363,166
14,000,000 shares, issued 7,363,166 and
7,363,166 shares, respectively
Paid in capital 34,283,091 34,283,091
Retained earnings 5,696,104 4,661,973
Treasury stock, 206,253 and
206,253 shares respectively (1,978,437) (1,978,437)
----------- -----------
Total shareholders' equity 45,363,924 44,329,793
Long-term debt 7,783,650 11,040,291
----------- -----------
Total capitalization 53,147,574 55,370,084
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt 3,436,771 1,311,535
Short-term bank loans 7,655,136 11,725,000
Accounts payable 6,291,482 8,151,179
Accrued income and other taxes 4,037,068 5,338,509
LIFO inventory reserve 1,063,726 --
Other 2,073,812 2,222,680
----------- -----------
Total current liabilities 24,557,995 28,748,903
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,810,969 8,803,252
Investment tax credits 863,949 888,420
Accrued transition costs 1,046,177 748,330
Health care and other 3,404,534 2,562,838
----------- -----------
Total deferred credits and other liabilities 14,125,629 13,002,840
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $91,831,198 $97,121,827
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE> 5
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
For the three months ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,463,547 $ 1,705,465
Reconciliation of net income to net cash provided by operating activities:
Depreciation, depletion and amortization 959,741 947,719
Deferred income taxes 186,244 (270,987)
Other, net (117,820) (148,583)
Changes in assets and liabilities:
Short-term investments 1,776,310 (489,608)
Accounts receivable 1,741,498 394,148
Tax refund receivable 61,727 1,400,000
Gas in underground storage 3,555,807 1,993,587
Materials and supplies 92,553 (23,667)
Deferred gas cost 494,093 843,151
Accounts payable (1,859,697) (5,847,165)
Prepaid and accrued taxes (227,711) 738,103
Other, net (111,365) (175,181)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,014,927 1,066,982
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,449,281) (1,211,438)
Net (salvage) proceeds from retirements 1,317 (7,122)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,447,964) (1,218,560)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury -- (86,011)
Proceeds from long-term debt -- --
Payments on long-term debt (682,904) (682,272)
Net proceeds from/(payments on) short-term bank loans (4,519,864) 725,000
Dividends paid (429,415) (422,949)
----------- -----------
Net cash flow provided by (used in)
financing activities (5,632,183) (466,232)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 934,780 (617,810)
Cash and cash equivalents at beginning of year 396,301 918,339
----------- -----------
Cash and cash equivalents at end of year $ 1,331,081 $ 300,529
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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 March 31, 1998 and 1997 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 March 31, 1998, gas in underground storage decreased 540,773 Mcf from
December 31, 1997, 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 $1,063,726 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:
Three months ended March 31,
1998 1997
---- ----
Income taxes $ 0 $ 0
Interest $454,000 $489,000
6
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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 $23,893,000 in the first quarter of
1998 remained relatively the same as the consolidated revenue in the first
quarter 1997. Due to warmer weather along with higher gas prices, our revenues
remained about the same as the first quarter of 1997.
Net income in the first quarter of 1998 amounted to
$1,464,000, a decrease of $242,000 or 14 percent from the first quarter of 1997.
The decrease is attributed to lower throughput to the residential and commercial
gas sales customers as a result of warmer weather.
Net income per common share in the first quarter of 1998 was
$.20 as compared to $.24 in the first quarter of 1997.
Gas Sales and Transportation
- ----------------------------
Operating revenues associated with this segment of the
business decreased by $1,532,000 or 11 percent in the first quarter of 1998 as
compared to the first quarter of 1997 due to a decrease in volume of gas sold in
the gas sales segment as a result of the warmer weather.
Net income of the gas sales and transportation segment during
the first quarter decreased $155,000 as compared to net income in the first
quarter of 1997.
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. In
1998, the PUCO will finalize a two year management audit for the period
September 1994 through August 1996 of the Company's gas procurement practices.
In 1997, the staff of the PUCO issued an initial report suggesting that National
Gas refund approximately two million dollars to its customers. The Company
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 determine the facts will be held at a later
7
<PAGE> 8
date with a decision to be made by a Administrative Law Judge, subject to
further appeal to the Ohio Supreme Court. At this time, management cannot
determine the ultimate outcome of these proceedings. Any amounts ultimately
disallowed may reduce earnings in the year a final order is issued and agreed
upon.
Volumes of gas sold and transported to various customer
classes for the first three months decreased nine percent over the first three
months of 1996.
Three months ended March 31,
Gas Throughput (Mcf) 1998 1997
- -------------------- --------- ---------
Gas sales:
Industrial 17,768 33,290
Residential 912,469 1,028,373
Commercial 308,814 384,006
--------- ---------
Subtotal 1,239,051 1,445,669
Transportation 2,360,109 2,198,253
--------- ---------
Total 3,599,160 3,643,922
========= =========
Operation and maintenance expenditures have remained constant
during the first quarter of 1998 as compared to the first quarter of 1997.
Oil and Gas Sales
- -----------------
Operating revenues from the oil and gas sales segment
increased $1,822,000 in the first quarter of 1998 as compared to the first
quarter of 1997. The increase is due to increased gas marketing sales by NGO
Development as a result of the change in market activity. Operating expenses for
this business segment have increased by 19 percent primarily due to higher
purchased gas expense and interest charges.
Net income for the period decreased $57,000 primarily due to
lower margins from gas marketing activity.
General
- -------
The first quarter 1998 increase in interest expense as
compared to the first quarter 1997 is the result of increased short-term
borrowing by National Gas and NGO Development.
8
<PAGE> 9
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 three month
period ending March 31, are summarized in the following condensed cash flow
statement:
<TABLE>
Sources & Uses of Cash
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Provided by operating activities $ 8,014,927 $ 1,066,982
Capital expenditures, net of salvage (1,447,964) (1,218,560)
Net proceeds from (payments on) long-term debt (682,904) (682,272)
Net proceeds from/(payments on) short-term bank loans (4,519,864) 725,000
Purchase of shares for treasury -- (86,011)
Common dividends (429,415) (422,949)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ 934,780 $ (617,810)
=========== ===========
</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 first quarter of 1998 the gas sales and transportation
segment accounted for 48 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 52 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 1998 to support existing
operations will be approximately
9
<PAGE> 10
$3,700,000. 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 March 31, 1998, 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 6.594% to
8.500%. During the first quarter, the Company utilized these credit lines and as
of March 31, 1998, $7,655,00 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 1998.
Additionally, the Company and all of its subsidiaries, except
National Gas, have a $3 million revolving line of credit, which expires in
February 1999. This committed credit line is unsecured and may be utilized by
any of the subsidiaries, except National Gas. NGO Development had $3,000,000
outstanding at December 31, 1997. As of March 31, 1998, NGO had loans of
$2,550,000 outstanding.
In March 1994, National Gas issued $6 million of Senior
Unsecured Notes in a private placement to an accredited investor. The proceeds
were utilized by National Gas to fund various capital projects in 1994, 1995 and
1996. The notes bear a fixed interest rate of 6.63%, have a maturity of 15 years
and an average life of nine years. The notes are guaranteed by the Company.
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.
Dividends
- ---------
The Company paid cash dividends of $429,949 and $422,949
during the three months ended March 31, 1998 and 1997, 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. The Company's Board of
Directors establishes dividend policy. 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.
10
<PAGE> 11
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
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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
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FORM 10-Q
QUARTER ENDED
MARCH 31, 1998
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: May 13, 1998 /s/ Todd P. Ware
------------------------------------------
Todd P. Ware
Vice President and Chief Financial Officer
Date: May 13, 1998 /s/ Patrick D. McGonagle
------------------------------------------
Patrick D. McGonagle
Controller
13
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 47,363,165
<OTHER-PROPERTY-AND-INVEST> 17,976,837
<TOTAL-CURRENT-ASSETS> 25,248,579
<TOTAL-DEFERRED-CHARGES> 1,242,617
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 91,831,198
<COMMON> 7,363,166
<CAPITAL-SURPLUS-PAID-IN> 32,304,654
<RETAINED-EARNINGS> 5,696,104
<TOTAL-COMMON-STOCKHOLDERS-EQ> 45,363,924
0
0
<LONG-TERM-DEBT-NET> 7,783,650
<SHORT-TERM-NOTES> 7,655,136
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,436,771
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 27,591,717
<TOT-CAPITALIZATION-AND-LIAB> 91,831,198
<GROSS-OPERATING-REVENUE> 23,893,217
<INCOME-TAX-EXPENSE> 674,590
<OTHER-OPERATING-EXPENSES> 21,428,397
<TOTAL-OPERATING-EXPENSES> 22,102,987
<OPERATING-INCOME-LOSS> 1,790,230
<OTHER-INCOME-NET> 48,064
<INCOME-BEFORE-INTEREST-EXPEN> 1,838,294
<TOTAL-INTEREST-EXPENSE> 374,747
<NET-INCOME> 1,463,547
0
<EARNINGS-AVAILABLE-FOR-COMM> 1,463,547
<COMMON-STOCK-DIVIDENDS> 429,415
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 8,014,927
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
