<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, 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 14
<PAGE> 2
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<CAPTION>
For the three months ended
June 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $ 3,023,521 $ 4,084,301
Transportation 1,179,439 1,210,043
Oil and gas sales 9,502,127 7,236,472
Propane sales 5,053 --
----------- -----------
TOTAL OPERATING REVENUES 13,710,140 12,530,816
----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 1,472,391 2,022,443
Purchased gas - oil and gas sales 8,353,257 5,988,140
Purchases gas - propane sales 4,938 --
Operation and maintenance 2,174,813 2,283,938
Depreciation, depletion and amortization 927,403 916,479
Taxes other than income 1,004,734 839,550
----------- -----------
TOTAL OPERATING EXPENSES 13,937,536 12,050,550
----------- -----------
OPERATING INCOME (227,396) 480,266
----------- -----------
Other income (expense) 69,854 (7,192)
Interest expense 317,940 254,739
Federal income taxes (214,040) 22,011
----------- -----------
NET INCOME $ (261,442) $ 196,324
=========== ===========
Net income per share $ (0.04) $ 0.03
=========== ===========
Average number of shares outstanding 7,156,913 7,039,367
=========== ===========
</TABLE>
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
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<CAPTION>
For the six months ended
June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Gas sales $13,287,525 $16,410,710
Transportation 3,026,779 2,526,492
Oil and gas sales 21,284,000 17,196,409
Propane sales 5,053 --
----------- -----------
TOTAL OPERATING REVENUES 37,603,357 36,133,611
----------- -----------
OPERATING EXPENSES:
Purchases gas - gas sales 7,843,616 9,765,193
Purchased gas - oil and gas sales 19,121,645 14,826,282
Purchases gas - propane sales 4,938 --
Operation and maintenance 4,395,656 4,512,639
Depreciation, depletion and amortization 1,850,647 1,832,958
Taxes other than income 2,149,525 2,013,916
----------- -----------
TOTAL OPERATING EXPENSES 35,366,027 32,950,988
----------- -----------
OPERATING INCOME 2,237,330 3,182,623
----------- -----------
Other income 118,012 119,247
Interest expense 692,687 578,623
Federal income taxes 460,550 821,458
----------- -----------
NET INCOME $ 1,202,105 $ 1,901,789
=========== ===========
Net income per share $ 0.17 $ 0.27
=========== ===========
Average number of shares outstanding 7,156,913 7,039,367
=========== ===========
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 two percent stock dividend issued in December 1997.
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $71,623,213 $69,940,823
Less-accumulated depreciation 23,469,603 22,345,344
----------- -----------
48,153,610 47,595,479
Oil and gas properties, successful efforts 22,230,634 21,297,126
Less-accumulated depreciation, depletion
and amortization 9,385,145 8,793,454
----------- -----------
12,845,489 12,503,672
Other, net 5,105,040 5,123,982
----------- -----------
Total property, plant and equipment 66,104,139 65,223,133
CURRENT ASSETS:
Cash and cash equivalents 361,634 396,301
Short-term investments 1,685,119 2,451,049
Accounts receivable - net 9,906,850 17,728,315
Tax refund receivable -- 61,727
Gas in underground storage 9,744,208 2,660,177
Materials and supplies, at average cost 1,140,821 1,155,688
Prepaid taxes 1,879,056 3,077,047
Unrecovered gas cost 3,724,689 2,703,415
Other 409,770 637,462
----------- -----------
Total current assets 28,852,147 30,871,181
----------- -----------
OTHER ASSETS:
Recoverable transition costs 668,290 591,180
Other 397,612 436,333
----------- -----------
Total other assets 1,065,902 1,027,513
----------- -----------
TOTAL ASSETS $96,022,188 $97,121,827
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
CAPITALIZATION:
Shareholder's 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 5,006,247 4,661,973
Treasury stock, 206,253 shares (1,978,437) (1,978,437)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 44,674,067 44,329,793
Long-term debt 10,108,703 11,040,291
----------- -----------
TOTAL CAPITALIZATION 54,782,770 55,370,084
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt 1,349,116 1,311,535
Short-term bank loans 12,396,525 11,725,000
Accounts payable 7,730,987 8,151,179
Accrued income and other taxes 2,262,637 5,338,509
LIFO inventory reserve 432,156 --
Other 3,627,185 2,222,680
----------- -----------
TOTAL CURRENT LIABILITIES 27,798,606 28,748,903
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,818,671 8,803,252
Investment tax credits 839,478 888,420
Accrued transition costs 845,937 748,330
Health care and other 2,936,726 2,562,838
----------- -----------
TOTAL DEFFERED CREDITS AND OTHER LIABILITIES 13,440,812 13,002,840
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $96,022,188 $97,121,827
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
<TABLE>
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<CAPTION>
For the six months ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FORM OPERATING ACTIVITIES:
Net income $ 1,202,105 $ 1,901,789
Reconciliation of net income to net cash provided by operating activities:
Depreciation, depletion and amortization 1,850,647 1,832,958
Deferred income taxes 15,419 (639,207)
Other, net 22,391 11,288
Changes in assets and liabilities:
Short-term investments 765,930 1,013,990
Accounts receivable 7,821,465 6,619,145
Tax refund receivable 61,727 1,400,000
Gas in underground storage (6,651,875) 751,087
Materials and supplies 14,867 (277,893)
Deferred gas cost (1,021,274) 777,963
Accounts payable (420,192) (4,667,277)
Prepaid and accrued taxes (1,877,881) (1,858,471)
Other, net 2,080,304 418,463
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 3,863,633 7,283,835
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,820,913) (3,311,860)
Net (salvage) proceeds from retirements 2,926 20,683
----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (2,817,987) (3,291,177)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury -- (218,815)
Payments of long-term debt (894,007) (902,891)
Net proceeds from/(payment on) short-term bank loans 671,525 (2,775,000)
Dividends paid (857,831) (845,898)
----------- -----------
Net cash provided by (used in)
financing activities (1,080,313) (4,742,604)
----------- -----------
Net increase (decrease) in cash
and cash equivalents (34,667) (749,946)
Cash and cash equivalents at beginning of period 396,301 918,338
----------- -----------
Cash and cash equivalents at end of period $ 361,634 $ 168,392
=========== ===========
</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, 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 June 30, 1998, gas in underground storage decreased 192,173 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
$432,156 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:
Six months ended June 30,
1998 1997
---- ----
Income taxes $550,000 $850,000
Interest $647,474 $672,776
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 $13,710,000 in the second quarter of
1998 increased by nine percent from second quarter 1997 consolidated revenue.
The change in revenue can be attributed to increased sales by the oil and gas
segment of the Company during the second quarter of 1998.
Net loss in the second quarter of 1998 amounted to $261,000, a
decrease of $457,000 or 233 percent from the second quarter of 1997. The
decrease is directly associated with the gas sales activities.
Gas Sales and Transportation
- ----------------------------
Operating revenues associated with this segment of the
business decreased by $1,056,000 or 26 percent in the second quarter of 1998 as
compared to the second quarter of 1997. This decrease is attributed to the
decreased volume of gas sold in both the gas sales and transportation segments
for the second quarter.
Net income of the gas sales and transportation segment during
the second quarter decreased $397,000 as compared to net income in the second
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
8
<PAGE> 9
date with a decision to be made by a Administrative Law Judge and the PUCO,
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 second three months decreased by 10 percent over the second
three months of 1997.
Three months ended June 30,
Gas Throughput (Mcf) 1998 1997
-------------------- --------- ---------
Gas sales:
Industrial 8,893 12,058
Residential 317,796 407,314
Commercial 105,687 149,422
--------- ---------
Subtotal 432,376 568,794
Transportation 1,720,570 1,812,469
--------- ---------
Total 2,152,946 2,381,263
========= =========
Degree Days 1998 1997
----------- --------- ---------
1st Quarter 2,225 2,639
2nd Quarter 465 823
--------- ---------
Total 2,690 3,462
========= =========
Degree days of 2,690 for the first six months of 1998 have
decreased 22 percent from the respective period in 1997. This degree day figure
is 28 percent below the 30 year average of 3,740 and 18 percent warmer than the
next warmest year of 3,293 in 1973.
Operation and maintenance expenditures have decreased five
percent during the second quarter as compared to the second quarter of 1997
primarily due to decreased maintenance costs.
Oil and Gas Sales
- -----------------
Operating revenues from the oil and gas sales segment
increased $2,266,000 in the second quarter of 1998 as compared to the second
quarter of 1997. The increase is due to a 32 percent increase in gas marketing
sales by NGO Development as a result of higher volumes sold. Operating expenses
for this business segment have increased by 33 percent primarily due to higher
purchased gas.
9
<PAGE> 10
Net income of the oil and gas sales segment during the second
quarter of 1998 decreased $35,000 as compared to net income with the second
quarter of 1997.
General
- -------
The second quarter 1998 increase in interest expense as
compared to the second quarter 1997 is the result of increased short-term
borrowing by National Gas and NGO Development.
General taxes increased during the comparative periods
primarily due to an increase in real and personal property taxes on National
Gas.
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>
Sources & Uses of Cash
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Provided by operating activities $ 3,863,633 $ 7,283,835
Capital expenditures, net of salvage (2,817,987) (3,291,177)
Net borrowings under short term bank loans (222,482) (3,677,891)
Purchase of shares for treasury 0 (218,815)
Common dividends (857,831) (845,898)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (34,667) $ (749,946)
=========== ===========
</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.
10
<PAGE> 11
Capital Expenditures
- --------------------
In the second quarter of 1998 the gas sales and transportation
segment accounted for 72 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 19 percent which was
primarily used for the development and/or completion of various interest in oil
and gas wells. The propane segment accounted for a nine percent which was
primarily used for the start-up expenditures and the purchase of vehicles.
Capital expenditures vary significantly by quarter. The
Company estimates that normal capital expenditures in 1998 to support existing
operations will be approximately $4,000,000. 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 June 30, 1998, the Company and its subsidiaries had
short-term lines of credit with various banks. The upper limit on short-term
borrowing imposed by the Board of Directors is in the process of being increased
from $10,000,000 to $18,000,000. 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 8.50%. During the second quarter, the Company utilized
these credit lines and as of June 30, 1998, $11,500,000 of short-term loans were
outstanding. Additionally, there was a cash overdraft of $896,525. These funds
were used by National Gas and NGO Development 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 July
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, and at June 30, 1998.
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 $858,898 and $845,898
during the six months ended June 30, 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. Dividend
11
<PAGE> 12
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.
Year 2000
- ---------
The Company has recently replaced its financial and customer
information systems with new software packages, which are compliant with Year
2000 requirements. The Company is reviewing its remaining non-critical computer
applications. Certain hand-held customer meter reading devices will have to be
replaced by 2000, but this capital expenditure is not significant.
12
<PAGE> 13
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 21,
1998, at Newark, Ohio. There were 6,079,720 shares (84.9%)
represented at the meeting. The following persons were elected
as Directors for a term of three years: David C. Easley
(6,049,102), Patrick J. McGonagle (6,025,821) and Graham R.
Robb (6,042,459).
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, 1998. There were 6,056,347 (84.6%) votes
cast in favor, 7,421 (0.1%) against and 15,952 (0.2%)
abstaining.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
13
<PAGE> 14
FORM 10-Q
QUARTER ENDED
JUNE 30, 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: August 13, 1998 /s/ Todd P. Ware
------------------------------------------
Todd P. Ware
Vice President and Chief Financial Officer
Date: August 13, 1998 /s/ Patrick D. McGonagle
------------------------------------------
Patrick D. McGonagle
Controller
14
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000355313
<NAME> NATIONAL GAS & OIL COMPANY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 48,153,610
<OTHER-PROPERTY-AND-INVEST> 17,950,529
<TOTAL-CURRENT-ASSETS> 28,852,147
<TOTAL-DEFERRED-CHARGES> 1,065,902
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 96,022,188
<COMMON> 7,363,166
<CAPITAL-SURPLUS-PAID-IN> 32,304,654
<RETAINED-EARNINGS> 5,006,247
<TOTAL-COMMON-STOCKHOLDERS-EQ> 44,674,067
0
0
<LONG-TERM-DEBT-NET> 10,108,703
<SHORT-TERM-NOTES> 12,396,525
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,349,116
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 27,493,777
<TOT-CAPITALIZATION-AND-LIAB> 96,022,188
<GROSS-OPERATING-REVENUE> 37,603,357
<INCOME-TAX-EXPENSE> 460,550
<OTHER-OPERATING-EXPENSES> 35,366,027
<TOTAL-OPERATING-EXPENSES> 35,826,577
<OPERATING-INCOME-LOSS> 1,776,780
<OTHER-INCOME-NET> 118,012
<INCOME-BEFORE-INTEREST-EXPEN> 1,894,792
<TOTAL-INTEREST-EXPENSE> 692,687
<NET-INCOME> 1,202,105
0
<EARNINGS-AVAILABLE-FOR-COMM> 1,202,105
<COMMON-STOCK-DIVIDENDS> 857,831
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 3,863,633
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
