<PAGE> 1
================================================================================
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, 1997
[ ] 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 (740) 344-2102
----------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Shares, $1 par value American Stock Exchange, Inc.
- --------------------------- -----------------------------
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> 2
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, 1998 IS $64,933,043.
AS OF MARCH 1, 1998, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S $1.00
PAR VALUE COMMON SHARES WAS 7,156,913 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this 10-K.
- --------------------------------------------------------------------------------
Exhibit Index at Page 49
- --------------------------------------------------------------------------------
2
<PAGE> 3
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. Producers Gas Sales, Inc.
(Producers Gas) is a service company for the marketing of natural gas directly
to end-use customers.
On March 25, 1998, the Company announced that it had created a
new subsidiary, National Propane Corporation. The subsidiary will offer propane
(an alternative energy source) to the residential, commercial and agricultural
customers not presently on the utility pipeline system.
Total annual revenues during the periods 1995 through 1997 are
set forth as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gas sales and transportation (1)
Industrial and off-system $ 4,443,119 $ 2,909,491 $ 2,324,188
Residential 16,851,608 15,801,616 13,736,465
Commercial 5,710,561 5,993,482 5,302,480
Transportation 5,615,650 4,437,351 6,124,990
----------- ----------- -----------
Subtotal 32,620,938 29,141,940 27,488,123
Oil and gas sales (2) 37,120,693 31,930,384 20,630,712
----------- ----------- -----------
Total operating revenues $69,741,631 $61,072,324 $48,118,835
=========== =========== ===========
</TABLE>
Operating income during the periods 1995 through 1997 is set
forth below.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Gas sales and transportation (1) $4,740,701 $4,322,025 $4,428,305
Oil and gas sales (2) 1,076,117 1,722,523 792,409
---------- ---------- ----------
Total $5,816,818 $6,044,548 $5,220,714
========== ========== ==========
</TABLE>
(1) Includes National Gas and Producers Gas.
(2) Includes NGO Development.
Gas throughput for the periods 1995 through 1997 is set forth on Page 14.
3
<PAGE> 4
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 1997, approximately 68 percent of National Gas' throughput
within its service territory was to industrial customers to whom National Gas is
providing sales or transportation service. These industrial customers are
engaged primarily in the manufacturing of aluminum products, ceramic products,
fiberglass and steel, 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 1997, 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 approximately 25,800 residential and
commercial customers in the Ohio cities of Newark, Heath, Caldwell, Buckeye
Lake, Pataskala 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 in 1993
with the Ohio cities or villages of Batesville, Buckeye Lake, Caldwell,
Crooksville, Dexter City, Glenford, Granville, Gratiot, Hanover, Heath, Hebron,
Macksburg, Newark, Pataskala, 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).
4
<PAGE> 5
Columbia Gas of Ohio (Columbia), a large distribution company
headquartered in Columbus, Ohio, also sells gas in Newark, Caldwell, Pataskala
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.
Either National Gas or Columbia, or both could serve a majority of the
industrial customers.
National Gas and Columbia are in competition with each other
and the same electric company, American Electric 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.
During the winter of 1996-1997, Columbia gas tested a pilot
program for residential and commercial open access. The program enabled a
limited number of gas marketers to operate on their system in the Toledo, Ohio
area. Upon successful completion of the program, Columbia Gas announced that it
would be extending this program throughout the state. During the winter of
1997-98, East Ohio Gas, a large distribution company headquartered in Cleveland,
also initiated a customer choice program. At the present time, National Gas has
no plans of offering a customer choice program, however, in the future the
Company may choose to render a similar program.
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). All of National Gas' interstate pipeline suppliers have
restructured 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, 1997, National Gas has
paid approximately $2,103,000 to its interstate pipeline suppliers for
transition costs. Approximately $1,088,000 remains to be paid over the next six
years and, accordingly, has been accrued. 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 that have been paid and allocated to the rate-regulated
customers have been collected.
5
<PAGE> 6
A summary of the contracts between National Gas and its
interstate suppliers follows:
<TABLE>
<CAPTION>
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 GSS 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 1997, National Gas transported 62 percent of its total
gas purchased for resale or transportation from the four interstate pipeline
companies detailed above. National Gas acquired the remaining 38 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 fiscal year 1997, approximately
2,055,000 Mcf was injected into underground storage and approximately 2,125,000
Mcf were withdrawn.
In 1997, National Gas connected 940 new residential and
commercial customers which represents a 23 percent increase from 1996. 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. During 1997,
National Gas abandoned 73 miles of uneconomic gathering systems.
Capital expenditures for National Gas during 1997 were
approximately $5,613,000, which included normal system expansion and
replacements, as well as storage field enhancements. Capital expenditures in
1998 are expected to be approximately $3,700,000 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 1995 through 1997, one
customer comprised 16 percent of total system throughput in 1997. However,
National Gas is dependent upon several industrial customers for a significant
portion of its throughput. Approximately 30 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.
6
<PAGE> 7
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.
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 633 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 decreased in 1995, but was back up in
1996 and continued to increase in 1997 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 was established in the Cleveland area in 1996, thus allowing NGO
Development to access potential customers in the northeastern region of Ohio.
In 1997, capital expenditures were approximately $756,000
covering the purchase, development and/or completion of various interests in oil
and gas wells and for additions to its gas gathering facilities. In 1998, NGO
Development expects to incur capital expenditures for oil and gas operations
totaling approximately $894,000.
================================================================================
At December 31, 1997, the Company's operating subsidiaries had
131 full-time active employees.
For financial information regarding industry segments, see
Note 9 of the notes to consolidated financial statements.
================================================================================
7
<PAGE> 8
EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
Family Office Held as of
Name Birthdate Age Relationship December 31, 1997
- ---- --------- --- ------------------- -----------------
<S> <C> <C> <C> <C>
William H. Sullivan, Jr. 10/21/38 59 None Chairman of the Board
Patrick J. McGonagle 07/08/54 43 None President and Chief
Executive Officer
Todd P. Ware 08/22/65 32 None Vice President, Chief
Financial Officer and
Secretary
Karl R. Bletzacker 03/24/56 42 None Vice President
Patrick D. McGonagle 10/09/67 30 None Controller
</TABLE>
All executive officers except Mr. Bletzacker hold similar
positions with National Gas, NGO Development and Producers Gas.
William H. Sullivan was elected as Chairman of the Board in
May 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 in February 1993. Previously, Mr. McGonagle held the position of Vice
President and General Counsel since May 1988. Todd P. Ware was elected to the
position of Vice President and Chief Financial Officer in July 1996. Previously,
Mr. Ware had joined National's subsidiary, NGO Development Corp. in August 1993
and served as Accounting Manager. In July 1997 after twenty-five years of
dedicated service Mr. John B. Denison retired as Vice President and Secretary.
At that time Mr. Ware assumed the duties of Secretary. Karl R. Bletzacker was
elected to the position of Vice President in November 1996. Previously, Mr.
Bletzacker had joined National Gas & Oil Corporation, a subsidiary of the
Company, in January 1992, as the Manager of Gas Acquisition and Marketing.
Patrick D. McGonagle was elected to the position of Controller in May 1997.
Previously, Mr. McGonagle had joined National Gas & Oil Corporation, a
subsidiary of the Company, in July 1992, as Tax Manager.
8
<PAGE> 9
Item 2 - PROPERTIES
National Gas owns and operates a system consisting of 1,319
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 1,597 brake horsepower. Four of these
compressor stations are situated on lands totaling 19.27 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
6,373,000 Mcf, and consist of 53 wells and seven compressors, totaling 3,155
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. 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 also leases to an unrelated third party a
warehouse, office, and meter shop buildings that it owns in Zanesville, Ohio.
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 633 gross and 333 net
producing wells as of December 31, 1997. Nearly all wells are combination wells
producing both oil and gas. Additionally, NGO Development has leasehold acreage
at December 31, 1997, as follows:
Gross Net
----- ---
Developed acreage 92,892 90,781
Undeveloped acreage 19,664 18,684
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
1995 through 1997:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average sales price per Mcf $ 3.67 $ 3.22 $ 2.96
Average sales price per barrel $18.15 $20.10 $16.66
Average production cost per equivalent Mcf $ 0.47 $ 0.35 $ 0.31
Average daily production of gas (Mcf) 2,315 2,633 2,902
Average daily production of oil (barrels) 84 100 110
</TABLE>
9
<PAGE> 10
NGO Development participated in the drilling of wells as
follows:
<TABLE>
<CAPTION>
Exploratory Wells Developmental Wells
------------------------------------------------ -------------------------------------------
Completed Dry Total Completed Dry Total
--------- --- ----- --------- --- -----
<S> <C> <C> <C> <C> <C> <C>
1997 8 8 16 3 0 3
1996 8 8 16 1 0 1
1995 6 4 10 9 1 10
</TABLE>
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.
10
<PAGE> 11
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:
<TABLE>
<CAPTION>
Sales Prices
----------------------------------------
1997 High Low
- ----------------------------------- ----------------------------------------
<S> <C> <C>
First quarter 9-1/4 8-7/8
Second quarter 9-1/16 7-3/16
Third quarter 12 8-3/4
October 1 through November 28 13-3/4 10-7/8
November 29 through December 31 12-1/4 11-1/16
after 2 % stock dividend
</TABLE>
<TABLE>
<CAPTION>
Sales Prices
----------------------------------------
1996 High Low
- ----------------------------------- ----------------------------------------
<S> <C> <C>
First quarter 10 9-1/8
Second quarter 10-1/4 8-7/16
Third quarter 10-1/4 9-1/16
October 1 through November 27 10-1/8 8-7/8
November 28 through December 31 9-1/2 8-11/16
after 3 % stock dividend
</TABLE>
At March 1, 1998, there were 1,492 equity shareholders of
record of the Company's $1.00 par value common shares. Of the total shares
outstanding, approximately 100,302, 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 1996 and 1997.
A two percent stock dividend was issued in December 1997.
The Company's Board of Directors establishes dividend policy.
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.
11
<PAGE> 12
Item 6 - SELECTED FINANCIAL DATA
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total operating revenue $69,742 $61,072 $48,119 $61,723 $46,683
Income from continuing operations $ 3,512 $ 3,920 $ 3,230 $ 3,489 $ 2,072
Net income $ 3,512 $ 3,920 $ 3,230 $ 3,489 $ 2,072
Net income per share (1) $ 0.49 $ 0.54 $ 0.45 $ 0.48 $ 0.29
Total assets $97,122 $92,400 $79,430 $80,620 $77,897
Long-term obligations $11,040 $10,231 $11,079 $12,956 $ 9,002
Cash dividends per share (1) $ 0.24 $ 0.23 $ 0.23 $ 0.23 $ 0.22
</TABLE>
(1) Based upon the average number of shares outstanding of 7,167,996 in 1997,
7,198,560 in 1996, and 7,205,243 in the years 1995, 1994, and 1993. These shares
were adjusted for the two percent stock dividend in December 1997.
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 $69,741,631 in 1997 increased 14
percent from 1996, and consolidated revenue of $61,072,324 in 1996 increased 27
percent from 1995 consolidated revenue. The increase in 1997 revenue over 1996
is primarily due to higher gas prices and increased revenues on the gas
marketing segment. The increase in 1996 revenue over 1995 is primarily due to
increased gas marketing activity and higher gas prices.
Purchased gas expense increased from 1997 to 1996 and
increased from 1996 to 1995 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 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 that
originated in 1994 and was completed in 1995.
12
<PAGE> 13
Net income amounted to $3,511,746 in 1997, a decrease of
$407,893 from 1996. The 10 percent decrease was due to decreased income in all
business segments, but primarily with the Oil and Gas sales segment where the
gas marketing activity was down, gas prices were higher and interest expense
was higher. In 1996, net income was up $689,269, or 21 percent, from 1995 which
was attributable to all business segments, but primarily the Oil and Gas sales
segment.
Net income per common share in 1997 was $.49, as compared to
net income per common share in 1996 of $.54, and in 1995 of $.45. All per share
amounts have been restated to reflect the two percent stock dividend in December
1997.
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.
<TABLE>
<CAPTION>
Operating Revenues 1997 1996 1995
- ------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Gas sales and transportation
Industrial and off-system $ 4,443,119 $ 2,909,491 $ 2,324,188
Residential 16,851,608 15,801,618 13,736,465
Commercial 5,710,561 5,993,482 5,302,480
Transportation 5,615,650 4,437,351 6,124,990
----------- ----------- -----------
Subtotal $32,620,938 $29,141,942 $27,488,123
Oil and gas sales 37,120,693 31,930,382 20,630,712
----------- ----------- -----------
Total operating revenues $69,741,631 $61,072,324 $48,118,835
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Operating Income
- ---------------- 1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Gas sales and transportation $4,740,701 $4,322,025 $4,428,305
Oil and gas sales 1,076,117 1,722,523 792,409
---------- ---------- ----------
Total operating income before
federal income taxes $5,816,818 $6,044,548 $5,220,714
========== ========== ==========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Gas Throughput (Mcf) 1997 1996 1995
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Gas sales:
Industrial 61,962 71,723 76,025
Residential 2,102,265 2,255,477 1,984,301
Commercial 781,546 942,572 845,353
Off-system 1,180,167 933,337 1,106,814
---------- ---------- ----------
Subtotal 4,125,940 4,203,109 4,012,493
Transportation 5,875,431 5,710,779 5,616,703
Oil and gas sales 12,125,386 11,184,301 9,489,180
---------- ---------- ----------
Total 22,126,757 21,098,189 19,118,376
========== ========== ==========
</TABLE>
Gas Sales and Transportation
- ----------------------------
Operating revenues associated with this segment of the
business increased by 12 percent in 1997, primarily as a result of an increase
in the cost of gas for all customers, while the volume to all customers on the
whole demonstrated a slight increase. 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 1997, significant
increases in gas costs increased both revenues and amounts deferred for future
recovery.
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 date with a decision to be made by an 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.
A portion of the Company's gas throughput is affected by
weather. Annual degree days, which measure the effect of weather, were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Actual 5,723 6,227 6,742
30 year average 6,161 6,163 6,162
% Colder(warmer) than average (7)% 1% 9%
% Colder(warmer) than prior year (8)% (8)% 4%
Rank in the last 30 years with 1 being the coldest 26 13 1
</TABLE>
The 30-year high of 6,742 was in 1995; the 30-year low of 5,392 was is 1973.
14
<PAGE> 15
The portion of gas throughput that is affected by weather will
also be impacted during the first quarter of 1998. The projected degree days for
the first quarter of 1998 is 2,257 compared to 2,639 for the same period of
1997, and the projected 30 year average of 3,021. This 25 percent reduction in
degree days from the average will have an adverse impact on first quarter 1998
earnings.
Depreciation expense decreased by approximately $1,190,000 in
1997 as a result of revisions to certain estimates regarding the depreciation of
cushion gas.
In 1997, the Company identified that approximately 500,000 mcf
of gas had migrated, primarily in prior years, from one storage field. The
Company took a charge of approximately $900,000 in 1997 to record the migration
loss. The Company has implemented plans to reduce the ongoing rate of migration
loss from this field.
Operating income of the gas sales and transportation segment
increased $418,676 in 1997 after decreasing $106,280 in 1996. The increase in
1997 is primarily attributed to increased margins earned on the
residential/commercial and transportation customer classes, while the decrease
in 1996 was attributed to volume and margin changes. The changes in gross margin
for each on-system customer class of National Gas during 1997 was affected by
volume and price as follows:
<TABLE>
<CAPTION>
Volume Price Total
--------- ---------- -----------
<S> <C> <C> <C>
Industrial ($ 10,994) $ 1,262 ($ 9,732)
Residential / Commercial ($938,849) $ 217,560 ($ 721,289)
Transportation $ 117,599 $ 921,550 $ 1,039,149
========= ========== ===========
Total ($832,244) $1,140,372 $ 308,128
========= ========== ===========
</TABLE>
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.
Gas sales to industrial customers decreased by 9,761 Mcf in
1997 after decreasing by 4,302 in 1996. In 1997 off-system throughput by the gas
sales segment increased after decreasing in 1996. Residential and commercial
throughput decreased approximately 10 percent in 1997 after having increased by
approximately 13 percent in 1996. Transportation throughput increased by three
percent in 1997 after increasing by one percent in 1996.
The increase in purchased gas expense of 28 percent in 1997
was primarily the result of the increase in the cost of gas and a slight
increase in sales volume. The increase in purchased gas expense of 12 percent in
1996 resulted primarily from the increase in sales volume and increase in the
cost of gas.
15
<PAGE> 16
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 1997
increased to $37,120,693 due to the increased gas marketing activity and higher
gas prices. Gas marketing contributed approximately 80 percent of the total
revenue for this business segment in 1997.
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
segments.
Operating income from the oil and gas sales segment in 1997
amounted to $1,076,117, a decrease of $646,406 from income in 1996 of
$1,722,523. Operating income in 1996 represented a $930,114 increase from income
in 1995 of $792,409. The decrease in operating income in 1997 is primarily the
result of decreased gas marketing activity, and higher gas prices, while the
increase in 1996 is the result of increased oil production, increased gas
marketing activity and higher gas prices. Gas marketing activity contributed
approximately 57 percent of the total income for this business segment in 1997.
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,
1997, future cash flows (undiscounted and without interest) of approximately
$12.2 million exceeded the carrying value by approximately $1.2 million. Changes
in projected future cash flows, caused by changing market prices which the
Company is unable to control, could cause the Company to have an impairment loss
in the future and such loss could be material because it would be determined
based on the discounted future flows not the gross undiscounted cash flows as
outlined above.
General
- -------
The five percent increase in operating and maintenance
expenses were mostly attributed to the gas sales and transportation segment. The
increase was due to additional expense in the extraction, gathering and storage
areas in order to improve or maintain existing structures. Additionally, legal
expense increased substantially due to the PUCO management performance audit.
Real estate and personal property taxes for the gas sales and
transportation segment increased in 1997 because of increases in utility
property and in property tax rates. Gross receipts
16
<PAGE> 17
tax applicable to public utilities is based on revenues, and accordingly, such
taxes increased in 1997. Overall, taxes other than income taxes increased
$230,819 and $97,109 in 1997 and 1996, respectively.
Propane Sales
- -------------
Management projects that the new subsidiary will obtain 250
new customers in the first year of operation. These additional revenues and
related capital expenditures will have no material effect on the consolidated
results in 1998.
Retirement Income Plan
- ----------------------
The fair value of the plan assets decreased approximately
$165,000 in 1997 as a result of benefits paid for two retirements during the
year.
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)
Sources & Uses of Cash
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Provided by operating activities $ 2,117 $ 2,273 $ 9,319
Capital expenditures, net of salvage (6,207) (5,235) (4,958)
Net proceeds from (payments on) long-term debt (1,274) (380) (1,877)
Net borrowings under short-term bank loans 6,850 5,575 (1,700)
Purchase of shares for treasury (316) (111) 0
Common dividends paid (1,692) (1,652) (1,606)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ($522) $ 470 ($822)
======= ======= =======
</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 1997, cash flows from operating activities declined
because of a $1.0 million increase in recoverable gas costs. In addition,
short-term borrowings remained at a high level due to storage agreements. The
agreement requires the Company to purchase 1 bcf of gas in the summer, which is
sold in the winter period
17
<PAGE> 18
ending March 31. In 1997, cash was utilized to maintain gas futures contracts
and due to the warmer than normal fourth quarter, cash flows from the
residential and commercial customers was less than anticipated.
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)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Gas sales and transportation $5,613 $4,833 $4,490
Oil and gas sales 756 639 372
------ ------ ------
$6,369 $5,472 $4,862
====== ====== ======
</TABLE>
In 1997, the gas sales and transportation segment accounted
for 88 percent of the total capital expenditures. The funds were expended
primarily for expansion and upgrading of existing pipeline systems, and the
upgrading of storage fields. The oil and gas sales segment accounted for 12
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.
The Company estimates that normal capital expenditures in 1998
will be approximately $3.7 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. The proceeds
were used to fund capital projects in 1994, 1995 and 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 commenced in March 1997 and are
funded from normal operations.
18
<PAGE> 19
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 1997, 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 1997,
NGO Development utilized this credit line and $3,000,000 remained outstanding as
of December 31, 1997.
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 $558,000 remained outstanding as of December 31, 1997.
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, 1997, $3,188,000 remained outstanding on this note.
As of December 31, 1997, the Company and its subsidiaries had
short-term lines of credit with various banks aggregating in excess of $10
million, 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. During 1997, the Company utilized these
credit lines and as of December 31, 1997, a short-term draw of $11,725,000
remained outstanding.
During December 1997, it was necessary to exceed the upper
limit of short-term borrowings due to the unseasonably warm winter. The warm
weather had caused a delay in normal cash inflows from residential and
commercial customers. Management used the additional credit lines for working
capital needs through the first quarter of 1998. By March 1, 1998, the
short-term borrowings were less than the upper limit imposed by the Board of
Directors.
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, 1997, the Company and its subsidiaries had approximately $2,451,000 invested
in 227 open contracts with a contracted value of approximately $13,817,000. The
fair market value of these investments at December 31, 1997, was approximately
$13,592,000. Gains or losses on these investments are offset by increases or
decreases in their cost thereby reducing the market risk of fluctuating prices.
19
<PAGE> 20
Dividends
- ---------
The Company paid total cash dividends of $1,692,116,
$1,651,567, and $1,606,313 in 1997, 1996 and 1995 respectively. Additionally,
the Company issued a two percent stock dividend in 1997 and a three percent
stock dividend in 1996 and 1995. Presently, there are no restrictions on the
payment of dividends. 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.
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.
Year 2000
- ---------
The Company is working with a software developer in designing
a utility-based software package, which will among other things be compliant
with the year 2000. Management currently does not anticipate a business
interruption or adverse impact relating to the year 2000 issue.
20
<PAGE> 21
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
----------------------------- ----
Management's Statement of Responsibility for
Financial Reporting and Accounting 25
Report of Independent Accountants 26
Consolidated Statement of Income for each of the
three years in the period ended December 31, 1997 27
Consolidated Balance Sheet at December 31, 1997
and 1996 28-29
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1997 30
Consolidated Statement of Common Shareholders' Equity
for each of the three years in the period ended
December 31, 1997 31
Notes to Consolidated Financial Statements 32-48
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.
21
<PAGE> 22
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 21, 1998 (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, 1997. The report on Executive Compensation which
is 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
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- ----------------------------------------------------------------------
<S> <C>
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
3(c) Preferred Share Purchase Rights Agreement
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.
</TABLE>
* Management contract or compensatory plan or arrangement.
22
<PAGE> 23
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, 1998 By: /s/ TODD P. WARE
-------------- ----------------
Todd P. Ware, Vice President, Chief
Financial Officer and Secretary
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, 1998 By: /s/ WILLIAM H. SULLIVAN, JR.
-------------- -----------------------------------
William H. Sullivan, Jr.
Chairman of the Board and Director*
Date March 27, 1998 By: /s/ PATRICK J. MCGONAGLE
-------------- -----------------------------------
Patrick J. McGonagle, President and
Chief Executive Officer
Date March 27, 1998 By: /s/ ALAN A. BAKER
-------------- -----------------------------------
Alan A. Baker, Director*
Date March 27, 1998 By: /s/ JAMES H. CAMERON
-------------- -----------------------------------
James H. Cameron, Director*
Date March 27, 1998 By: /s/ DAVID C. EASLEY
-------------- -----------------------------------
David C. Easley, Director*
Date March 27, 1998 By: /s/ RICHARD O. JOHNSON
-------------- -----------------------------------
Richard O. Johnson, Director*
Date March 27, 1998 By: /s/ M. HOWARD PETRICOFF
-------------- -----------------------------------
M. Howard Petricoff, Director*
23
<PAGE> 24
Date March 27, 1998 By: /s/ GRAHAM R. ROBB
-------------- -----------------------------------
Graham R. Robb, Director*
Date March 27, 1998 By: /s/ THOMAS E. STEWART
-------------- -----------------------------------
Thomas E. Stewart, Director*
* Executed pursuant to Power of Attorney attached to this report by Todd P.
Ware, Vice President, Chief Financial Officer and Secretary.
By: /s/ TODD P. WARE
-----------------------------------
Todd P. Ware, Vice President, Chief
Financial Officer and Secretary
24
<PAGE> 25
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
three 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, Chief Financial Officer
And Secretary
25
<PAGE> 26
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, 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 13, 1998
26
<PAGE> 27
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Gas sales $27,005,288 $24,704,591 $21,363,133
Transportation 5,615,650 4,437,351 6,124,990
Oil and gas sales 37,120,693 31,930,382 20,630,712
----------- ----------- -----------
TOTAL OPERATING REVENUES 69,741,631 61,072,324 48,118,835
----------- ----------- -----------
OPERATING EXPENSES:
Purchased gas - gas sales 16,660,208 13,019,865 11,590,683
Purchased gas - oil and gas sales 32,129,918 26,175,889 15,521,065
Operation and maintenance 9,339,134 8,878,355 9,045,033
Depreciation, depletion and amortization 2,163,823 3,552,756 3,437,538
Taxes other than income 3,631,730 3,400,911 3,303,802
----------- ----------- -----------
TOTAL OPERATING EXPENSES 63,924,813 55,027,776 42,898,121
----------- ----------- -----------
OPERATING INCOME 5,816,818 6,044,548 5,220,714
----------- ----------- -----------
Other income 213,512 598,100 186,753
Interest expense 1,260,867 995,589 981,197
Federal income taxes 1,257,717 1,727,420 1,195,900
----------- ----------- -----------
NET INCOME $ 3,511,746 $ 3,919,639 $ 3,230,370
=========== =========== ===========
Net income per share $ 0.49 $ 0.54 $ 0.45
=========== =========== ===========
Average number of shares outstanding 7,167,996 7,198,560 7,205,243
=========== =========== ===========
Cash dividends per share $ 0.24 $ 0.23 $ 0.23
=========== =========== ===========
</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.
27
<PAGE> 28
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Gas utility properties $69,940,823 $65,635,251
Less-accumulated depreciation 22,345,344 22,668,342
----------- -----------
47,595,479 42,966,909
Oil and gas properties, successful efforts 21,297,126 21,097,582
Less-accumulated depreciation, depletion
and amortization 8,793,454 8,271,143
----------- -----------
12,503,672 12,826,439
Other, net 5,123,982 5,387,784
----------- -----------
Total property, plant and equipment 65,223,133 61,181,132
CURRENT ASSETS:
Cash and cash equivalents 396,301 918,338
Short-term investments 2,451,049 1,347,413
Accounts receivable, less allowance for doubtful
accounts of $240,237 and $269,259, respectively 17,728,315 16,113,827
Tax refund receivable 61,727 1,461,727
Gas in underground storage 2,660,177 3,533,919
Materials and supplies, at average cost 1,155,688 1,137,342
Prepaid taxes 3,077,047 2,919,668
Unrecovered gas cost 2,703,415 1,991,736
Other 637,462 554,231
----------- -----------
Total current assets 30,871,181 29,978,201
----------- -----------
OTHER ASSETS:
Recoverable transition costs 591,180 705,428
Other 436,333 534,775
----------- -----------
Total other assets 1,027,513 1,240,203
----------- -----------
TOTAL ASSETS $97,121,827 $92,399,536
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 29
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CAPITALIZATION:
Shareholders' equity --
Common stock, $1 par value, authorized
14,000,000 shares, issued 7,363,166 and
7,223,403 shares, respectively $ 7,363,166 $ 7,223,403
------------ ------------
Paid in capital 34,283,091 33,138,432
Retained earnings 4,661,973 4,126,765
Treasury stock, 206,253 and
170,223 shares respectively (1,978,437) (1,662,178)
------------ ------------
Total shareholders' equity 44,329,793 42,826,422
Long-term debt 11,040,291 10,231,385
------------ ------------
Total capitalization 55,370,084 53,057,807
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt 1,311,535 1,344,863
Short-term bank loans 11,725,000 6,925,000
Accounts payable 8,151,179 11,447,366
Accrued income and other taxes 5,338,509 5,178,706
Other 2,222,680 1,647,292
------------ ------------
Total current liabilities 28,748,903 26,543,227
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Federal income taxes 8,803,252 8,262,483
Investment tax credits 888,420 986,304
Accrued transition costs 748,330 914,828
Health care and other 2,562,838 2,634,887
------------ ------------
Total deferred credits and other liabilities 13,002,840 12,798,502
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 97,121,827 $ 92,399,536
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 30
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,511,746 $ 3,919,639 $ 3,230,370
Reconciliation of net income to net cash provided by
operating activities:
Depreciation, depletion and amortization 2,163,823 3,705,375 3,682,364
Deferred income taxes 613,879 1,028,362 39,772
Other, net -- 69,804 61,824
Changes in assets and liabilities:
Short-term investments (1,103,636) (564,625) 1,060,060
Accounts receivable (1,614,488) (5,897,833) (575,562)
Tax refund receivable 1,400,000 -- --
Gas in underground storage 873,742 (1,212,367) 1,011,806
Materials and supplies (18,346) (156,555) 23,582
Deferred gas cost (763,929) (3,348,219) 362,900
Accounts payable (3,296,187) 5,956,362 992,807
Prepaid and accrued taxes (95,460) (394,341) (407,920)
Other, net 445,440 (832,094) (163,428)
----------- ----------- -----------
Net cash provided by operating activities 2,116,584 2,273,508 9,318,575
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,368,620) (5,471,851) (4,862,201)
Net (salvage) proceeds from retirements 162,796 237,125 (96,035)
----------- ----------- -----------
Net cash used in investing activities (6,205,824) (5,234,726) (4,958,236)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury (316,259) (111,669) --
Payments of long-term debt (1,274,422) (380,458) (1,876,962)
Net borrowings under short-term bank loans 6,850,000 5,575,000 (1,700,000)
Dividends paid (1,692,116) (1,651,567) (1,606,313)
----------- ----------- -----------
Net cash flow provided by (used in)
financing activities 3,567,203 3,431,306 (5,183,275)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (522,037) 470,088 (822,936)
Cash and cash equivalents
at beginning of year 918,338 448,250 1,271,186
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 396,301 $ 918,338 $ 448,250
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
-----------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Paid in Retained Treasury
$1 Par Value Capital Earnings Stock
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
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)
Net income -- -- 3,511,746 --
Cash dividends on common stock -- -- (1,692,116) --
2% stock dividend 139,763 1,144,659 (1,284,422)
Purchase of shares for treasury -- -- -- (316,260)
---------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1997 $7,363,166 $34,283,091 $ 4,661,973 $(1,978,438)
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
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 68 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 16 percent of total
system throughput. Approximately 30 percent of the total throughput resulted
from serving five major industrial customers that 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.
Certain reclassifications have been made for comparative
purposes.
32
<PAGE> 33
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 betterments. 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. The Company uses an undiscounted cash flow
method to review the recoverability of the carrying value of the assets.
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. The Company uses an undiscounted
cash flow method to review the recoverability of the carrying value of the
assets.
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 three to 10 years.
Effective January 1, 1997, the Company revised certain
estimates regarding the depreciation of cushion gas.
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 three to 15 years.
Short-Term Investments
- ----------------------
The Company purchases gas futures and basis swap contracts in
order to hedge against rising gas 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.
33
<PAGE> 34
The Company had the following gas and oil futures positions on
the New York Mercantile Exchange (NYMEX) at December 31, 1997 and 1996. Fair
market value is based upon the NYMEX closing price.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
GAS
Open contracts 227 511
Natural gas purchases hedged 2.27 MMBtu 5.11 MMBtu
Deposits with brokers $ 2,451,049 $ 1,358,507
Contracted value $13,817,140 $13,146,930
Fair market value $13,592,380 $14,267,240
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
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
</TABLE>
The Company had 460 open basis swaps at December 31, 1997.
These swaps are used to hedge the basis differential, defined as the location
value of natural gas between the NYMEX gas price (at Henry Hub) and the
Appalachian Index in the region the Company conducts its business.
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: 1997 1996 1995
---- ---- ----
Income taxes $ 968,000 $2,000,000 $1,750,000
Interest $1,252,000 $ 866,000 $ 992,000
34
<PAGE> 35
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 $2,708,000 and $2,807,000
higher than reported at December 31, 1997 and 1996, respectively. Gas stored by
Producers Gas as of December 31, 1997 and 1996, of $1,516,374, and $1,696,801,
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, 1997 and 1996, National Gas had unbilled
revenues of $1,895,415 and $1,519,385, 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 Pronouncements
- -----------------------------
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128). The Statement
establishes standards for computing and presenting earnings per share. This
Statement did not have an impact on the earnings per share computation as
historically computed by the Company.
In June 1997, Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130) was issued. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
will adopt SFAS No. 130 in the year ending December 31, 1998. This statement
will not have a significant impact on the Company.
In June 1997, Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS
No. 131) was issued. This Statement requires that public business enterprises
report information about operating segments in annual financial statements using
the management approach. The Company will adopt SFAS No. 131 in the year ending
December 31, 1998. The Company has not yet determined what, if any, impact this
standard will have on its segment reporting.
35
<PAGE> 36
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. All of National Gas'
interstate pipeline suppliers have restructured 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, 1997, National Gas has
paid $2,103,163 to its interstate pipeline suppliers for transition costs, and
$1,088,161 remains to be paid over the next six years and, accordingly, has been
accrued at December 31, 1997. 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>
<CAPTION>
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 GSS 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 1997, National Gas transported 62 percent of its total
gas purchased for resale or transportation from the four interstate pipeline
companies detailed above. National Gas acquired the remaining 38 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
36
<PAGE> 37
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:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Regulatory assets:
Recoverable future taxes $ 166,982 $ 189,602
Postretirement benefit costs 131,278 158,362
Order 636 transition costs 859,348 972,278
Recoverable gas costs 2,703,415 1,991,736
---------- ----------
Total regulatory assets 3,861,023 3,311,978
Regulatory liabilities:
Amounts payable to customers 62,093 --
Taxes refundable to customers 234,635 258,767
---------- ----------
Total regulatory liabilities 296,728 258,767
Net regulatory position $3,564,295 $3,053,211
========== ==========
</TABLE>
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>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rates
applied to pre-tax book income $ 1,621,617 $ 1,920,000 $ 1,504,932
Increase (decrease) in tax caused by --
Depreciation, depletion and basis differences (186,620) (145,345) (266,642)
Investment credit amortization (80,528) (80,528) (80,528)
Other (net) (96,752) 33,293 38,138
----------- ----------- -----------
Federal income tax expense $ 1,257,717 $ 1,727,420 $ 1,195,900
=========== =========== ===========
Effective income tax rate 26.4% 30.6% 27.0%
=========== =========== ===========
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current tax provision $ 643,838 $ 478,742 $1,357,711
Deferred provision:
Intangible drilling costs/depletion (240,816) (140,097) (456,714)
Deferred gas cost 285,558 1,065,151 (136,658)
Property timing differences 798,509 433,610 494,889
Other, net (229,372) (109,986) (63,328)
---------- ---------- ----------
Federal income tax expense $1,257,717 $1,727,420 $1,195,900
========== ========== ==========
</TABLE>
Temporary differences, which give, rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Vacation accrual $ 79,980 $ 79,997
Inventory capitalization -- 36,863
Reserve for accounts and notes receivable 79,012 91,548
Delay rentals 78,161 --
General claims accrual 119,000 33,885
Postretirement benefits other than pension 793,442 720,854
Investment tax credits 381,825 423,359
Other 159,818 130,359
------------ ------------
Total deferred tax assets 1,691,238 1,516,865
Prepaid taxes (247,196) (275,287)
Depreciation of property (10,014,280) (9,337,481)
Deferred gas (919,161) (643,824)
Other (121,968) (111,537)
------------ ------------
Total deferred tax liabilities (11,302,605) (10,368,129)
------------ ------------
Net deferred taxes $ (9,611,367) $ (8,851,264)
============ ============
</TABLE>
38
<PAGE> 39
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>
<CAPTION>
September 30,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Plan assets at fair value
(principally unallocated insurance contracts) $ 2,454,519 $ 2,618,099
=========== ===========
Actuarial present value of benefit obligations:
Vested benefits 1,808,651 1,498,968
Nonvested benefits 38,191 36,529
----------- -----------
Accumulated benefit obligation 1,846,842 1,535,497
Additional amounts related to
projected salary increases 753,569 625,861
----------- -----------
Total projected benefit obligation 2,600,411 2,161,358
=========== ===========
Plan assets in excess (deficit) of projected
benefit obligation (145,892) 456,741
Amounts necessary to reconcile excess (deficit)
assets to prepaid pension cost included in
the Consolidated Balance Sheet:
Unamortized net asset (253,091) (276,099)
Unrecognized prior service cost 253,856 285,824
Unrecognized net loss (gain) 15,313 (521,388)
----------- -----------
Prepaid (liability) included in other $ (129,814) $ (54,922)
=========== ===========
</TABLE>
Net pension cost for the Retirement Plan includes the
following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year (service cost) $ 153,120 $ 152,382 $ 171,730
Interest accrued on projected benefit obligation 184,712 164,773 170,648
Actual return on plan assets (260,584) (244,129) (236,144)
Net amortization and deferral (2,356) 16,450 8,960
--------- --------- ---------
Net periodic pension cost $ 74,892 $ 89,476 $ 115,194
========= ========= =========
</TABLE>
39
<PAGE> 40
The Company's assumptions used during the years 1997, 1996 and
1995 in determining net periodic pension cost and pension liability are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate 7.50% 8.25% 7.50%
Return on plan assets 10.00% 10.00% 10.00%
Estimated increase in future compensation 4.50% 5.00% 5.00%
</TABLE>
In 1997, the Company changed its discount rate assumption from
8.25 percent to 7.5 percent. The Company also changed its estimated increase in
future compensation assumption from 5.00 percent in 1996 to 4.50 percent in
1997. These changes resulted in an increase in the projected benefit obligation
of approximately $341,000.
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.
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 53,446 $ 58,389 $ 49,051
Interest cost on accumulated postretirement
benefit obligation 185,064 161,447 157,407
-------- -------- --------
Net periodic postretirement benefit expense 238,510 219,836 206,458
Deferral of benefits earned to be
collected in future rates 22,620 22,620 22,620
-------- -------- --------
Net periodic postretirement benefit expense $261,130 $242,456 $229,078
======== ======== ========
</TABLE>
40
<PAGE> 41
The amount recognized in the Company's Consolidated Balance Sheet was
as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
----------- -----------
<S> <C> <C>
Retirees $ 1,532,117 $ 1,319,927
Active employees 1,276,095 980,550
----------- -----------
Accumulated postretirement
health care benefits 2,808,212 2,300,477
Unrecognized net loss (437,693) (80,211)
----------- -----------
Accrued postretirement health
care benefits $ 2,370,519 $ 2,220,266
=========== ===========
</TABLE>
The Company's assumptions used during the years 1997, 1996 and 1995 in
determining net periodic postretirement benefit expense and the liability for
postretirement health care benefits are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Discount rate 7.50% 8.25% 7.50%
Health care trend rate 8.00% 9.00% 10.00%
gradually gradually gradually
decreasing decreasing decreasing
to 5.0% in to 5.0% in to 5.0% in
2001 2001 2001
</TABLE>
As of September 30, 1997 the discount rate assumption was changed from
8.25 percent to 7.5 percent, which resulted in a increase in the liability for
postretirement benefits of approximately $264,000.
If the health care trend rate would increase by one percent in each
year, the accumulated benefit obligation would increase by approximately
$435,000 at September 30, 1997 and net periodic postretirement benefit expense
in 1998 would increase by approximately $50,000.
41
<PAGE> 42
NOTE 6 - LONG-TERM DEBT
The long-term debt outstanding was as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Senior unsecured notes, 6.63% interest rate, due 2009 $ 5,538,461 $ 6,000,000
Promissory note, variable interest rate, due 2001 3,187,500 4,037,500
Mortgage note, variable interest rate, due 2008 558,289 588,748
Revolving note, variable interest rate, due 1998 3,067,576 950,000
------------ ------------
Total debt 12,351,826 11,576,248
Less-current maturities (1,311,535) (1,344,863)
------------ ------------
Long-term debt $ 11,040,291 $ 10,231,385
============ ============
</TABLE>
On March 15, 1994, National Gas issued $6 million of Senior
Unsecured Notes to an accredited investor. The notes bear a fixed interest rate
of 6.63 percent with interest payments due semi-annually. Annual principal
payments of $461,539 commenced on March 16, 1997 with the final payment due
March 15, 2009. The notes are guaranteed by 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, 1997 was 6.97 percent, which represented the London Interbank Offer
Rate (LIBOR), plus 1.25 percent per annum as of January 2, 1998 when the Company
entered into a three month contracted rate. The note agreement allows the
Company to choose 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, 1997, the prime rate was 8.5
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 1996 and 1997, the Company extended the
term of this instrument in each year, for an additional year.
42
<PAGE> 43
The committed credit line is unsecured and may be utilized by any of the
subsidiaries, except National Gas. As of December 31, 1997, NGO Development
Corporation had borrowed $3,000,000 at interest rates ranging from 6.97 to 7.22
percent.
For certain debt instruments, the Company is required to
maintain various working capital debt to equity and cash flow convenants. At
December 31, 1997, the Company was in compliance with or had received waivers
for these covenants.
Annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 1,311,535
1999 4,311,535
2000 1,311,535
2001 1,169,869
Thereafter 4,247,352
-----------
TOTAL $12,351,826
===========
</TABLE>
Based on the borrowing rates currently available to the
Company for loans with similar terms and maturities, the fair value of the
Senior Unsecured Notes is approximately $5,770,000. The fair value amount is not
intended to reflect principal amounts that the Company will ultimately be
required to pay.
NOTE 7 - NOTES PAYABLE
The Company has lines of credit with various banks in excess
of $10 million, 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, 1997, National Gas had four draws totaling
$10,450,000 on these credit lines for working capital requirements at interest
rates ranging between 6.72 percent and 6.94 percent, and one draw of $1,275,000
at 8.50 percent. National Gas expects to repay these notes in 1998.
43
<PAGE> 44
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.
The average common shares outstanding and earnings and cash
dividends per common share presented on the accompanying income statement
include retroactive recognition of 139,763 shares issued in December 1997 as a
result of a two percent stock dividend.
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. In August 1997, the Board of Directors voted to modify the
repurchase price from $9.33 per share to $8.00 per share on the remaining amount
under this authority. As of December 31, 1997, 43,747 additional shares could be
repurchased under this authority. As of March 1, 1998, 48,300 shares had been
repurchased as treasury stock at an average cost of $8.79 per share since
January 1996.
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 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> 45
NOTE 9 - FINANCIAL INFORMATION BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gas sales $27,005,288 $24,704,590 $21,363,133
Transportation 5,615,650 4,437,351 6,124,990
----------- ----------- -----------
Subtotal 32,620,938 29,141,941 27,488,123
Oil and gas production 37,120,693 31,930,383 20,630,712
----------- ----------- -----------
Total $69,741,631 $61,072,324 $48,118,835
=========== =========== ===========
Operating income:
Gas sales and transportation $ 4,740,701 $ 4,322,025 $ 4,428,305
Oil and gas production 1,076,117 1,722,523 792,409
----------- ----------- -----------
Total $ 5,816,818 $ 6,044,548 $ 5,220,714
=========== =========== ===========
Depreciation, depletion
and amortization:
Gas sales and transportation $ 864,692 $ 2,052,196 $ 1,781,919
Oil and gas production 1,299,131 1,500,560 1,655,619
----------- ----------- -----------
Total $ 2,163,823 $ 3,552,756 $ 3,437,538
=========== =========== ===========
Capital expenditures:
Gas sales and transportation $ 5,612,753 $ 4,832,753 $ 4,489,771
Oil and gas production 755,867 639,098 372,430
----------- ----------- -----------
Total $ 6,368,620 $ 5,471,851 $ 4,862,201
=========== =========== ===========
Identifiable assets:
Gas sales and transportation $70,037,287 $64,792,547 $54,968,627
Oil and gas production 26,116,992 26,418,802 23,305,124
Non-operating 967,547 1,188,187 1,156,551
----------- ----------- -----------
Total $97,121,826 $92,399,536 $79,430,302
=========== =========== ===========
</TABLE>
45
<PAGE> 46
NOTE 10 - QUARTERLY INFORMATION (UNAUDITED)
The following represents the quarterly results for 1997 and
1996, which are unaudited. The first three-quarters of 1997 and all of 1996
earnings per common share amounts have been restated to reflect the two percent
stock dividend issued in December 1997.
<TABLE>
<CAPTION>
Income(Loss)
Operating Before Federal Net Earnings (Loss)
Quarter Ended Revenues Income Tax Income(Loss) Per Share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
03/31/97 $23,602,795 $2,504,912 $1,705,465 $ 0.24
06/30/97 $12,530,816 $ 218,335 $ 196,324 $ 0.03
09/30/97 $10,054,488 $ (523,623) $ (293,368) $(0.04)
12/31/97 $23,623,753 $2,569,840 $1,903,325 $ 0.27
03/31/96 $22,976,811 $4,220,665 $2,844,425 $ 0.40
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
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Unproved oil and gas properties $ 967,909 $ 837,165
Unproved leaseholds 474,413 157,265
Proved oil and gas properties 19,854,804 20,103,152
------------ ------------
Total property costs 21,297,126 21,097,582
Accumulated depreciation,
depletion and amortization (8,793,454) (8,271,143)
------------ ------------
Net capitalized costs $ 12,503,672 $ 12,826,439
============ ============
</TABLE>
Costs incurred relating to oil and gas property acquisition
and exploration activities were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Acquisition of properties $200,705 $ 99,303 $335,512
Exploration costs $536,596 $539,537 $794,595
Development costs $249,358 $389,070 $446,072
</TABLE>
46
<PAGE> 47
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>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues $2,936,326 $3,403,874 $3,450,560
Production costs 486,223 416,108 400,710
Exploration costs 346,969 386,234 612,297
Depreciation, depletion and amortization 936,569 1,230,411 1,292,722
---------- ---------- ----------
Operating income 1,166,565 1,371,121 1,144,831
Income tax expense 219,832 299,581 202,243
---------- ---------- ----------
Net income $ 946,733 $1,071,540 $ 942,588
========== ========== ==========
</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.
<TABLE>
<CAPTION>
Proved developed reserves Oil Gas
- ------------------------- ------- ---------
<S> <C> <C>
(Oil in barrels, natural gas in mcf)
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
Revisions of previous estimates 39,945 528,585
Extensions and discoveries 1,345 132,645
Purchase of proved reserves 1,486 163,670
Sale of proved reserves (1,221) (48,754)
Production (33,344) (835,217)
-------- ----------
Balance at December 31, 1997 201,937 5,693,584
======== ==========
</TABLE>
47
<PAGE> 48
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 percent
discount factor. The calculation also assumes the continuation of the existing
economic, operating, and contractual conditions at December 31, 1997, 1996 and
1995.
The standardized measure of discounted net cash flows relating
to proved developed oil and gas reserves are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 1996 1995
------------ ------------ ------------
Future cash flows $ 19,544,475 $ 19,702,430 $ 21,261,629
Future production costs (7,272,852) (6,934,901) (7,163,056)
------------ ------------ ------------
Future net cash flows
before income taxes 12,271,623 12,767,529 14,098,573
Ten percent discount factor (4,987,894) (4,668,996) (5,298,071)
------------ ------------ ------------
Standardized measure
before income taxes 7,283,729 8,098,533 8,800,502
Future income tax expense (1,372,574) (1,769,478) (1,554,169)
------------ ------------ ------------
Standardized measure
after income taxes $ 5,911,155 $ 6,329,055 $ 7,246,333
============ ============ ============
</TABLE>
The change in the standardized measure of discounted future
net cash flows related to the proved oil and gas reserves at December 31, 1997,
1996 and 1995 is as follows.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Beginning of year $ 6,329,055 $ 7,246,333 $ 8,913,030
Sales, net of production costs (2,450,104) (2,987,766) (3,049,850)
Net changes in prices and production costs (74,888) 615,883 (31,628)
Net change due to revisions in quantity estimates 949,449 (174,004) (785,768)
Extensions and discoveries 159,364 107,165 230,013
Purchase of reserves 171,132 118,155 --
Sale of reserves (55,819) -- --
Net change in income taxes 396,903 (215,309) 1,069,292
Accretion of discount 632,906 724,633 891,303
Other (146,843) 893,965 9,941
----------- ----------- -----------
End of year $ 5,911,155 $ 6,329,055 $ 7,246,333
=========== =========== ===========
</TABLE>
48
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
Reference
------------------------------------------------------
Exhibit
Number Description File No. Commission Exhibit No.
- ------- ----------- -------- ----------------------
<S> <C> <C> <C>
2 Stock Purchase Agreement dated September 12, 1991 by 1-8223 Incorporated by reference from
and between National Gas & Oil Company and Stone Exhibit 2 of Form 8-K filed on
Container Company October 14, 1991.
3(a) Articles of Incorporation of National Gas & Oil Company 1-8223 Pages 50-56
3(b) Code of Regulations of National Gas & Oil Company 2-72682 Incorporated by reference from
Exhibit 3(b) of Form S-14 filed
on June 8, 1991.
3(c) Preferred Share Purchase Rights Agreement, Incorporated by reference from
dated as of February 16, 1996 by and between Exhibit 4 of Form 8-K filed on
National Gas & Oil Company and National City Bank February 26, 1996.
10(a) National Gas & Oil Company Salary Deferral Plan 33-55390 Incorporated by reference from
Exhibit 28(b) of Form S-8 filed on
December 4, 1992.
10(b) Amended and Restated National Gas & Oil Company 33-55388 Incorporated by reference from
Compensation Plan for Outside Directors Exhibit 28(c) of Form S-8 filed on
December 4, 1992.
10(c) Summary of Salary Administration Plan Page 57
21 Subsidiaries of the Registrant Page 58
24 Powers of Attorney of Directors Pages 59-67
27 Financial Data Schedule Page 68
99(a) Credit Agreement dated October 1, 1991 by and among 1-8223 Incorporated by reference from
National Gas & Oil Company, Stone Resource & Energy Exhibit 28 of Form 8-K filed on
Corporation and BancOhio National Bank. October 14, 1991.
</TABLE>
49
<PAGE> 1
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.
50
<PAGE> 2
(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
51
<PAGE> 3
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.
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
52
<PAGE> 4
(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
53
<PAGE> 5
exchanged for or changed into other stock or securities, cash 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
54
<PAGE> 6
interested Directors or officers 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;
55
<PAGE> 7
(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.
56
<PAGE> 1
EXHIBIT 10(c)
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.
57
<PAGE> 1
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
58
<PAGE> 1
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 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 26th day of February 1998.
/s/ALAN A. BAKER
-----------------
Alan A. Baker
59
<PAGE> 2
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 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 26th day of February 1998.
/s/JAMES H. CAMERON
-------------------
James H. Cameron
60
<PAGE> 3
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 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 26th day of February 1998.
/s/DAVID C. EASLEY
------------------
David C. Easley
61
<PAGE> 4
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 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 26th day of February 1998.
/s/Thomas E. Stewart
---------------------
Thomas E. Stewart
62
<PAGE> 5
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 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 26th day of February 1998.
/s/Richard O. Johnson
---------------------
Richard O. Johnson
63
<PAGE> 6
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 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 26th day of February 1998.
/s/Patrick J. McGonagle
-----------------------
Patrick J. McGonagle
64
<PAGE> 7
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 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 26th day of February 1998.
/s/M. Howard Petricoff
----------------------
M. Howard Petricoff
65
<PAGE> 8
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 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 26th day of February 1998.
/s/Graham R. Robb
-----------------
Graham R. Robb
66
<PAGE> 9
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 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 26th day of February 1998.
/s/William H. Sullivan, Jr.
---------------------------
William H. Sullivan, Jr.
67
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