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. As of January 1, 1995 Coshocton Energy Corporation (Coshocton Energy) was merged with it's parent, NGO Development. Producers Gas Sales, Inc. (Producers Gas) is a service company for the marketing of natural gas directly to end-use customers.
Total annual revenues during the periods 1993 through 1995 are set forth as follows: 1995 1994 1993 ---- ---- ---- Gas Sales & Transportation (1) Industrial and Off-system ............. $ 2,324,188 $ 8,369,981 $ 6,271,697 Residential .............. 13,736,465 15,111,291 13,035,406 Commercial ............... 5,302,480 5,894,331 5,066,273 Transportation ........... 6,124,990 5,146,050 4,241,745 ----------- ----------- ----------- Subtotal ............... 27,488,123 34,521,653 28,615,121 Oil & Gas Sales (2) ............ 20,630,712 27,201,139 18,067,652 ----------- ----------- ----------- Total Operating Revenues ....... $48,118,835 $61,722,792 $46,682,773 =========== =========== ===========
Income from continuing operations before provision for federal income taxes during the periods 1993 through 1995 are set forth below:
1995 1994 1993 ---- ---- ----
Gas Sales & Transportation(1) .. $4,498,225 $4,235,949 $2,922,721 Oil & Gas Sales (2) ............ 792,409 1,162,595 452,534 ---------- ---------- ---------- Total .......................... $5,290,634 $5,398,544 $3,375,255 ========== ========== ========== _________________ (1) Includes National Gas and Producers Gas. (2) Includes NGO Development.
Gas throughput for the periods 1993 through 1995 is set forth on Page 15.
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 1995, approximately 69 percent of National Gas' throughput within its service territory was to industrial customers to which National Gas is providing sales or transportation service. These industrial customers are engaged primarily in the manufacture of ceramic products, steel and aluminum products and fiberglass, 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 1995, and is expected to remain 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 the industrial customers have alternate fuel capability.
In addition to its industrial sales and transportation services, National Gas supplies gas to approximately 24,500 residential and commercial customers in the Ohio cities of Newark, Heath, Caldwell, Buckeye Lake 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 with the Ohio cities or villages of Batesville, Buckeye Lake, Caldwell, Crooksville, Dexter City, Glenford, Granville, Gratiot, Hanover, Heath, Hebron, Macksburg, Newark, 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).
Columbia Gas of Ohio (Columbia), a large distribution company headquartered in Columbus, Ohio, also sells gas in Newark, Caldwell 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. A majority of the industrial customers could be served by either National Gas or Columbia, or both.
National Gas and Columbia are in competition with each other and the same electric company, The Ohio 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, the Company's access to local Ohio production through an extensive 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.
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). During 1993, all of National Gas' interstate pipeline suppliers began the restructuring of 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, 1995, National Gas has paid approximately $1,444,000 to its interstate pipeline suppliers for transition costs. Approximately $1,357,000 remains to be paid over the next eight years and, accordingly, has been accrued at December 31, 1995. 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 which have been paid and allocated to the rate-regulated customers have been collected while collections from the transportation customers began in 1995.
A summary of the contracts between National Gas and its interstate suppliers follows:
Maximum Rate Contract Termination Daily Quantity Supplier Schedule Date Date Dth ____________________________________________________________________________
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 SS-II 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
During 1995, National Gas transported 50 percent of its total gas purchased for resale or transportation from the four interstate pipeline companies detailed above. National Gas acquired the remaining 50 percent of its supply requirements from independent Ohio producers. During 1994 and 1995, purchases of Ohio gas began to increase due to increased development of the Rose Run formation by 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 1995, approximately 1,910,000 Mcf were injected into underground storage and approximately 2,300,000 Mcf were withdrawn.
In 1995, National Gas connected approximately 700 new residential and commercial customers. In addition, National Gas continued to expand the local Ohio gas gathering system in an effort to assure an adequate supply of gas for all of its current and prospective customers.
Capital expenditures for National Gas during 1995 were approximately $4,490,000 which included normal system expansion and replacement, the construction of a pipeline to transport gas to American Electric Power Company's electric generating plant in Conesville, Ohio, storage field enhancements and the construction of a natural gas processing facility. Capital expenditures in 1996 are expected to be approximately $4,200,000 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 1993 through 1995, one customer comprised 14 percent of total system throughput in 1995. However, National Gas is dependent upon several industrial customers for a significant portion of its throughput. Approximately 25 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 for these end users is intense with other natural gas utilities, fuel oil, propane, and electric utilities.
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 the industrial throughput is relatively constant, the 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 ownerships ranging from 100 percent to 5 percent in 618 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 expanded in 1993 and 1994, but was slightly lower in 1995 due to increased competition in this business segment. NGO Development is in competition with many other gas producing and marketing companies, as well as local distribution companies, for new customers.
In 1995, the oil and gas sales segment scaled down its capital expenditures due to market conditions to $372,000 covering the purchase, development and/or completion of various interests in oil and gas wells and for additions to its gas gathering facilities.
In 1996 NGO Development expects to incur capital expenditures for oil and gas operations totaling approximately $725,000.
******************************************************************************** At December 31, 1995, the Company's operating subsidiaries had 130 full-time active employees.
For financial information regarding industry segments, see Note 9 of the notes to consolidated financial statements. ********************************************************************************
EXECUTIVE OFFICERS OF REGISTRANT
Birth Family Office Held as of Name Date Age Relationship December 31,1995 ________________________________________________________________________________
William H.Sullivan,Jr. 10/21/38 57 None Chairman of the Board
Patrick J. McGonagle 07/08/54 41 None President and Chief Executive Officer
Lawrence P. Haren 08/03/54 41 None Executive Vice President, Treasurer and Chief Financial Officer
John B. Denison 02/14/40 55 None Vice President and Secretary
All of the executive officers listed were elected to their respective offices in the Company on May 18, 1995. All executive officers hold similar positions with National Gas, NGO Development and Producers Gas.
William H. Sullivan was elected as Chairman of the Board on May 18, 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 on February 19, 1993. Previously, Mr. McGonagle held the position of Vice President and General Counsel since May 19, 1988. Lawrence P. Haren was elected to the position of Executive Vice President, Treasurer and Chief Financial Officer on February 19, 1993. Previously, Mr. Haren held the position of Vice President, Treasurer and Chief Financial Officer since January 1, 1988. Mr. Haren's employment with the Company ceased on March 7, 1996. John B. Denison, a 24-year employee, was elected to the position of Vice President and Secretary on May 18, 1978.
Item 2
Item 2 - PROPERTIES
National Gas owns and operates a system consisting of approximately 1,347 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 seven gathering compressor stations and one distribution (main line boost) compressor station consisting of 2,242 brake horsepower. Five of these compressor stations are situated on lands totaling 19.77 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 5,300,000 Mcf, and consist of 44 wells and six compressors, totaling 2,650 brake horsepower. The majority of the subsurface rights are held by lease with 955.39 acres held in fee.
National Gas owns workhouses, garages, offices, shops and various metering and regulating buildings in its operating area. These facilities are located on 35.42 acres and are owned in fee. 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 owns a warehouse, office, and meter shop buildings in Zanesville, Ohio, which are leased to an unrelated third party.
The Company's investment in its natural gas system is considered suitable to do all things necessary to bring gas to the consumer. National Gas, as is typical in the industry, provides for an ongoing maintenance and replacement program.
The oil and gas properties consist of 618 gross and 336 net producing wells as of December 31, 1995. Nearly all wells are combination wells producing both oil and gas. Additionally, NGO Development has leasehold acreage at December 31, 1995, as follows:
Gross Net -------- -------- Developed acreage ................. 64,993 52,897 Undeveloped acreage ............... 53,902 45,727
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 1993 through 1995:
1995 1994 1993 ---- ---- ---- Average sales price per Mcf ........... $ 2.96 $ 3.34 $ 3.03 Average sales price per barrel ........ $16.66 $15.81 $17.10 Average production cost per equivalent Mcf .......... $ 0.31 $ 0.45 $ 0.57 Average daily production of gas (Mcf) ............... 2,902 3,023 3,046 Average daily production of oil (barrels) ........... 110 130 94
In 1995, 1994 and 1993, NGO Development participated in the drilling of 6, 12 and 7 exploratory wells which were completed and 4, 7 and 5 dry holes, respectively. Also, NGO Development participated in the drilling of eight developmental wells which were completed in 1995. As of December 31, 1995 there were three exploratory wells and two developmental wells in the process of being drilled or completed.
Item 3
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
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5
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:
Sale Prices 1995 High Low - ------------------------------------- ------ ------ First Quarter ............................... 12 1/2 10 1/2 Second Quarter ............................. 12 - 9 7/8 Third Quarter .............................. 11 7/8 10 - October 1 through November 22 .............. 11 1/8 10 1/2 November 23 through December 31 after 3% stock dividend .................. 10 1/4 9 1/2
Sale Prices 1994 High Low - ------------------------------------- ------ ------ First Quarter .............................. 18 7/8 16 1/2 Second Quarter ............................ 18 5/8 15 5/8 Third Quarter ............................. 17 3/4 14 1/4 October 1 through December 19 ............. 17 1/2 15 1/8 December 20 through December 31 after three-for-two stock split ......... 12 1/2 10 1/4
At February 28, 1996, there were 1,642 equity shareholders of record of the Company's $1.00 par value common shares. Of the total shares outstanding, approximately 106,800, or 1.56 percent, were held by the Company's employee benefit plans. Dividends in the amount of $.09 per share were paid quarterly for all of 1994 and in the amount of $.06 per share per quarter in 1995 after the stock split. A three-for-two stock split was issued in December 1994, and a three percent stock dividend was issued in December 1995.
Dividend policy is established by the Company's Board of Directors. The Board's decision takes into consideration covenants included in loan agreements, results of operations and retained earnings of the Company. Presently, there are no restrictions on the payment of dividends, as the Company is not in default under the terms of its long-term bank loans.
Item 6
Item 6 - SELECTED FINANCIAL DATA (In Thousands, Except for Per Share Data)
1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Total operating revenues ............... $48,119 $61,723 $46,683 $ 38,298 $ 30,624
Income from continuing operations ............. $ 3,230 $ 3,489 $ 2,072 $ 2,612 $ 2,134
Discontinued operations ............. $ -- $ -- $ -- $ (364) $ (15)
Cumulative effect of accounting changes ................ $ -- $ -- $ -- $ (235) --
Net income ............... $ 3,230 $ 3,489 $ 2,072 $ 2,013 $ 2,119
Income from continuing operations - per share (1) .................... $ 0.47 $ 0.51 $ 0.30 $ 0.38 $ 0.31
Discontinued operations - per share (1) .................... $ -- $ -- $ -- $ (0.05) $ --
Cumulative effect of accounting changes - per share (1) .......... $ -- $ -- $ -- $ (0.04) --
Net income per share (1) .................... $ 0.47 $ 0.51 $ 0.30 $ 0.29 $ 0.31
Total assets ............. $79,430 $80,620 $77,897 $ 69,195 $ 66,189
Long-term obligations ............ $11,079 $12,956 $ 9,002 $ 6,905 $ 7,438
Cash divi- dends per share (1) .............. $ 0.23 $ 0.23 $ 0.22 $ 0.22 $ 0.22
(1) Based upon the average number of shares outstanding of 6,860,589 in 1995 and 1994, 6,834,881 in 1992, 6,834,668 for 1991. These shares were adjusted for the three percent stock dividend in December 1995.
Item 7
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 $48,119,000 in 1995 decreased 22 percent from 1994 consolidated revenue and consolidated revenue of $61,723,000 in 1994 increased 32 percent from 1993 consolidated revenue. The decrease in revenue in 1995 is primarily attributed to lower gas volumes sold and declining gas prices. The increase in 1994 revenue over 1993 is primarily due to off-system gas marketing activity.
Purchase gas expense decreased from 1995 to 1994 and increased from 1994 to 1993 as a result of changes in gas sales activities. Interest expense has increased each year since 1993 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.
Net income amounted to $3,230,000 in 1995, a decrease of $259,000 from 1994. The seven percent decrease was attributable to the oil and gas sales segment. In 1994, net income was up $1,418,000, or 68 percent, from 1993 because of increased income in all business segments.
Net income per common share in 1995 was $.47, as compared to net income per common share in 1994 of $.51, and in 1993 of $.30. All per share amounts have been restated to reflect the three percent stock dividend in December 1995.
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.
Operating Revenues 1995 1994 1993 - ------------------ ---- ---- ----
Gas Sales & Transportation: Industrial & Off-System ......... $ 2,324,188 $ 8,369,981 $ 6,271,697 Residential ..................... 13,736,465 15,111,291 13,035,406 Commercial ...................... 5,302,480 5,894,331 5,066,273 Transportation .................. 6,124,990 5,146,050 4,241,745
Subtotal ....................... 27,488,123 34,521,653 28,615,121 Oil & Gas Sales ................... 20,630,712 27,201,139 18,067,652 ----------- ----------- -----------
Total Operating Revenues .......... $48,118,835 $61,722,792 $46,682,773 =========== =========== ===========
Operating Income Before Federal Income Taxes
1995 1994 1993 ---- ---- ----
Gas Sales & Transportation ........ $ 4,498,225 $ 4,235,949 $ 2,922,721 Oil & Gas Sales ................... 792,409 1,162,595 452,534 ----------- ----------- ----------- Total Operating Income Before Federal Income Taxes ............ $ 5,290,634 $ 5,398,544 $ 3,375,255 =========== =========== ===========
Gas Throughput (Mcf) 1995 1994 1993 ---- ---- ---- Gas Sales: Industrial ...................... 76,025 76,470 104,346 Residential ..................... 1,984,301 2,016,487 1,926,279 Commercial ...................... 845,353 866,696 827,704 Off-System ...................... 1,237,315 2,889,748 3,371,665 ----------- ----------- ----------- Subtotal ...................... 4,142,994 5,849,401 6,229,994 Transportation .................... 5,552,184 6,807,571 6,447,650 Oil & gas sales ................... 9,489,180 10,626,768 5,535,765
Total ............................. 19,184,358 23,283,740 18,213,409 =========== =========== ===========
Gas Sales and Transportation
Operating revenues associated with this segment of the business decreased 20 percent in 1995, primarily as a result of a decrease in the volumes sold to each customer class which was only partially offset by rate increases to each customer class. Changes in the level of over or under recovery of gas costs and customer conservation contributed to the reduction in residential and commercial operating revenues in 1995. The increase in 1994 revenues from 1993 resulted primarily from an increase in the volumes sold. A portion of the Company's gas throughput is effected by weather. Annual degree days which
measure the effect of weather were 6,742, 6,477, and 6,472 for 1995, 1994 and 1993, respectively. The thirty year average is 6,162.
Operating income before federal income taxes of the gas sales and transportation segment increased $262,000 in 1995 after increasing $1,313,000 in 1994. The increase in 1995 is primarily attributed to increased margins earned on the residential/ commercial and transportation customer classes, while the increase in 1994 was attributed to volume and margin increases. The change in gross margin for each on-system customer class of National Gas during 1995 was affected by volume and price as follows:
Volume Price Total --------- ----------- ---------- Industrial $ (133) $ (3,252) $ (3,385) Residential/ Commercial (143,923) 732,986 589,063 Transportation (722,269) 1,188,321 466,052
In order to protect transportation margins, the Company utilizes a hedging program whereby gas futures contracts are purchased to hedge against rising prices of gas which is allocated to fixed price transportation customers. The Company has reduced the risk it faced in a market of rising gas prices.
During the third quarter of 1993, the Company analyzed the need for base rate increases and decided to apply for rate increases with the cities and villages in National Gas' operating area to cover anticipated increases in operating expenses. Rate increases over a three-year period were successfully negotiated with all municipalities served by National Gas. The initial rate increases were effective December 1, 1993 with subsequent increases effective in 1994 and 1995. Industrial, transportation and off-system rates are subject to competitive pressures. There were no unusual changes in operating or maintenance expenditures during the three-year period.
Gas sales to industrial customers remained relatively flat in 1995 after decreasing by 28,000 Mcf in 1994. In 1995 and 1994, off-system throughput by the gas sales and transportation segment declined. Residential and commercial throughput decreased approximately two percent in 1995 after increasing approximately five percent in 1994. Transportation throughput decreased by 18 percent in 1995 after increasing six percent in 1994. The 1995 decrease in off-system and transportation throughput was caused by a decline in the number of customers.
The decrease in purchased gas expense of 41 percent in 1995 is primarily the result of decreased sales volume and a decrease in the cost of gas. The increase in purchased gas expense of 16 percent in 1994 resulted primarily from an increase in sales volume.
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 1995 decreased to $20,631,000 due to the decreased gas marketing activity of NGO Development and lower gas prices. Revenues in 1994 increased significantly over 1993 because of increased gas marketing activity. Gas marketing contributed approximately 66 percent of the total revenue for this business segment in 1995.
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 segment.
Operating income before federal income taxes from the oil and gas sales segment in 1995 amounted to $586,000, a decrease of $577,000 from income in 1994 of $1,163,000. Income in 1994 represented a $710,000 increase from 1993 income. The decrease in income in 1995 is primarily the result of decreased gas and oil production and lower gas prices, while the increase in 1994 is the result of increased oil production and gas marketing activity. Gas marketing activity contributed approximately 44 percent of the total income for this business segment in 1995.
General
The Company's depreciation, depletion and amortization expenses have increased over the three-year period primarily as a result of the increased level of capital invested. The provision for depreciation of utility property, plant and equipment, excluding transportation and construction equipment, is based on a composite rate of 3.12 percent. Depletion expense for the oil and gas sales segment remained relatively flat over the three-year period.
Real estate and personal property taxes for the gas sales and transportation segment increased in 1995 because of increases in utility property and in property tax rates. Gross receipts tax applicable to public utilities is based on revenues, and accordingly, such taxes decreased in 1995. Overall, taxes other than income taxes increased $180,000 and $328,000 in 1995 and 1994, respectively.
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:
Sources and (Uses) of Cash ($000)
1995 1994 1993 ---- ---- ----
Provided by Operating Activities ........... $ 9,319 $ 7,167 $ 1,025 Capital Expenditures, net of salvage ....... (4,958) (8,398) (5,419) Net Proceeds from long-term debt ........... (1,877) 3,950 2,117 Net Borrowings under short-term bank loans ............................... (1,700) (400) 1,250 Common Dividends ........................... (1,606) (1,603) (1,535) Net Increase (Decrease) in Cash & Cash Equivalents ................ $ (822) $ 716 $(2,562) ======= ======= =======
Cash provided by operating activities consists of net income and noncash items including depreciation, depletion, amortization and deferred income taxes. Additionally, changes in working capital are also included in cash provided by operating activities. In 1993, working capital changes had a substantial negative impact on cash provided by operating activities. Cash was utilized to purchase gas futures contracts and more cash was tied up in accounts receivable at year end reflecting the increase in revenues. Additionally, a substantial amount of purchased gas expense was deferred until it is included in rates and recovered from customers.
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)
1995 1994 1993 ---- ---- ----
Gas Sales & Transportation ............. $4,490 $6,082 $3,056 Oil & Gas Sales ........................ 372 2,509 2,488 ------ ------ ------ $4,862 $8,591 $5,544 ====== ====== ======
In 1995, the gas sales and transportation segment accounted for 92 percent of the total capital expenditures. The funds were expended primarily for expansion and upgrading of existing pipeline systems and completion of a new pipeline commenced in 1994 to provide gas service to an electric generating facility. The oil and gas sales segment accounted for eight 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.
Approximately $1 million and $2.5 million of the total capital expenditures in 1995 and 1994, respectively, were used for construction of a pipeline to the electric generating facility. Approximately $1 million of the total capital expenditures in 1993 were used for the acquisition of existing oil and gas producing properties and pipelines.
The Company estimates that normal capital expenditures in 1996 will be approximately $4.9 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. Part of the proceeds were used to fund capital projects in 1994 and 1995 with the balance to be used to fund future capital projects contemplated for 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.
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 1995, 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 1995, NGO Development had a maximum of $1.45 million outstanding against this credit line and $450,000 remained outstanding as of December 31, 1995.
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 $619,000 remained outstanding as of December 31, 1995.
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, 1995, $4,888,000 remained outstanding on this note.
As of December 31, 1995, the Company and its subsidiaries had short-term lines of credit with various banks aggregating in excess of $6 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 1995, the Company utilized these credit lines and as of December 31, 1995, a short-term draw of $1,350,000 remained outstanding.
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 futures contracts as a means of hedging a portion of the market risk associated with fluctuations in the market price of natural gas. As of December 31, 1995, the Company and its subsidiaries had $783,000 invested in 307 open contracts with a contracted value of $5,608,000. The fair market value of these investments at December 31, 1995, was $6,297,000. Gains or losses on these investments are offset by increases or decreases in gas cost thereby reducing the market risk of fluctuating gas prices.
Dividends
The Company paid total cash dividends of $1,606,000, $1,603,000 and $1,535,000 in 1995, 1994 and 1993 respectively. Additionally, the Company issued a 3 percent stock dividend in 1995, three-for-two stock split in 1994 and a 5 percent stock dividend in 1993. Presently, there are no restrictions on the payment of dividends, as the Company is not in default of the terms in its long-term loans. Dividend policy is established by the Company's Board of Directors. The Board's decision takes into consideration results of operations and retained earnings of the Company. There are currently no restrictions on the present ability to pay such dividends.
Effects of Inflation
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 benefitted 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 segments.
Item 8
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
Management's Statement of Responsibility for Financial Reporting and Accounting .................................... 26
Report of Independent Accountants ....................................... 27
Consolidated Statement of Income for each of the Three Years in the period ended December 31, 1995 ..................... 28
Consolidated Balance Sheet at December 31, 1995 and 1994 ............................................................ 29-30
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1995 ..................... 31
Consolidated Statement of Common Shareholders' Equity for each of the three years in the period ended December 31, 1995 ..................................................... 32
Notes to Consolidated Financial Statements ............................ 33-51
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
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.
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 23, 1996 (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, 1995. Neither the report on Executive Compensation nor the performance graph included in the Company's definitive proxy statement shall be deemed incorporated herein by reference.
PART IV
Item 14
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements
Consolidated Statement of Income for each of the Three Years in the period ended December 31, 1995
Consolidated Balance Sheet at December 31, 1995 and 1994
Consolidated Statement of Cash Flows for each of the Three Years in the period ended December 31, 1995
Consolidated Statement of Common Shareholders' Equity for each of the Three Years in the period ended December 31, 1995
Notes to Consolidated Financial Statements
(3) Exhibits
Exhibit Number Description - -------------------------------------------------------------------
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
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.
______________ * Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
__________________________________
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, 1996 By: /s/ John B. Denison -------------- -------------------------------- John B. Denison, Vice President, Secretary and Acting Principal Financial Officer
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, 1996 By: /s/ William H. Sullivan, Jr. -------------- ----------------------------------- William H. Sullivan, Jr. Chairman of the Board and Director*
Date March 27, 1996 By: /s/ Patrick J. McGonagle -------------- ----------------------------------- Patrick J. McGonagle, President and Chief Executive Officer
Date March 27, 1996 By: /s/ John B. Denison -------------- ----------------------------------- John B. Denison, Vice President and Secretary and Acting Principal Financial Officer
Date March 27, 1996 By: /s/ Alan A. Baker -------------- ------------------------ Alan A. Baker, Director*
Date March 27, 1996 By: James H. Cameron -------------- --------------------------- James H. Cameron, Director*
Date March 27, 1996 By: /s/ David C. Easley -------------- ------------------------- David C. Easley, Director*
Date March 27, 1996 By: /s/ Edwin L. Heminger -------------- --------------------------- Edwin L. Heminger, Director*
Date March 27, 1996 By: /s/ Richard O. Johnson -------------- ----------------------------- Richard O. Johnson, Director*
Date March 27, 1996 By: /s/ M. Howard Petricoff -------------- ------------------------------ M. Howard Petricoff, Director*
Date March 27, 1996 By: /s/ Graham R. Robb -------------- ------------------------- Graham R. Robb, Director*
______________________ * Executed pursuant to Power of Attorney attached to this report by John B. Denison, Vice President and Secretary.
/s/ John B. Denison ----------------------------------- John B. Denison, Vice President and Secretary
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.
Patrick J. McGonagle President and Chief Executive Officer
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 22 present fairly, in all material respects, the financial position of National Gas & Oil Company and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 15, 1996
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31, 1995 1994 1993 OPERATING REVENUES: Gas sales ....................... $21,363,133 $29,375,603 $24,373,376 Transportation .................. 6,124,990 5,146,050 4,241,745 Oil and gas sales ............... 20,630,712 27,201,139 18,067,652 ----------- ----------- ----------- TOTAL OPERATING REVENUES .......... 48,118,835 61,722,792 46,682,773 ----------- ----------- -----------
OPERATING EXPENSES: Purchased gas - gas sales ....... 11,590,683 19,732,082 17,019,953 Purchased gas - oil and gas sales ..................... 15,521,065 21,524,667 12,043,012 Operation and maintenance ....... 9,045,033 8,684,010 8,501,325 Depreciation, depletion and amortization .................. 3,437,538 3,318,064 3,225,037 Taxes other than income ......... 3,303,802 3,124,163 2,796,101 ----------- ----------- ----------- TOTAL OPERATING EXPENSES .......... 42,898,121 56,382,986 43,585,428 ----------- ----------- -----------
OPERATING INCOME .................. 5,220,714 5,339,806 3,097,345 ----------- ----------- -----------
Other income ...................... 186,753 376,771 343,124 Interest expense .................. 981,197 887,947 555,111 Federal income taxes .............. 1,195,900 1,339,189 813,722 ----------- ----------- -----------
NET INCOME ........................ $ 3,230,370 $ 3,489,441 $ 2,071,636 =========== =========== ===========
Net income per share .............. $ 0.47 $ 0.51 $ 0.30 =========== =========== =========== Average number of shares outstanding .............. 6,860,589 6,860,589 6,860,589 =========== =========== ===========
Cash dividends per share .......... $ 0.23 $ 0.23 $ 0.22 =========== =========== ===========
The per share amounts and the average number of shares outstanding have been restated to reflect the three percent stock dividend issued in December 1995.
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS December 31, 1995 1994 ---------------------------- PROPERTY, PLANT AND EQUIPMENT: Gas utility properties ..................... $62,444,717 $58,155,708 Less-Accumulated depreciation .............. 22,199,392 20,637,405 ----------- ----------- 40,245,325 37,518,303 Oil and gas properties, successful efforts ....................... 21,218,605 21,543,577 Less-Accumulated depreciation, depletion and amortization ............... 7,304,416 6,414,352 ----------- ----------- 13,914,189 15,129,225
Other, net ................................. 5,492,265 5,748,532 ----------- -----------
Total property, plant and equipment .......... 59,651,779 58,396,060
CURRENT ASSETS: Cash and cash equivalents .................. 448,250 1,271,186 Short-term investments ..................... 782,788 1,842,848 Accounts receivable, less allowance for doubtful accounts of $199,455 and $139,222, respectively ............... 10,285,798 9,770,469 Gas in underground storage ................. 2,321,552 3,333,358 Materials and supplies, at average cost ............................. 980,787 1,004,369 Prepaid taxes .............................. 2,896,527 2,533,423 Other ...................................... 504,340 636,329 ----------- -----------
Total current assets ......................... 18,220,042 20,391,982 ----------- -----------
OTHER ASSETS:
Recoverable transition costs ............... 818,059 930,320 Other ...................................... 740,422 901,178 ----------- -----------
Total other assets ........................... 1,558,481 1,831,498 ----------- -----------
TOTAL ASSETS ................................. $79,430,302 $80,619,540 =========== ===========
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET CAPITALIZATION AND LIABILITIES
December 31, 1995 1994 ----------- -------- CAPITALIZATION: Shareholders' equity-- Common stock, $1 par value, authorized 14,000,000 shares, issued 7,018,512 and 6,819,400 shares, respectively ................. $ 7,018,512 $ 6,819,400 Paid in capital ........................ 31,353,831 29,498,107 Retained earnings ...................... 3,848,185 4,278,964 Treasury stock, 157,923 shares, at cost ............................. (1,550,509) (1,550,509) ------------ ------------
Total shareholders' equity ............... 40,670,019 39,045,962
Long-term debt ........................... 11,079,442 12,955,973 ------------ ------------
Total capitalization ....................... 51,749,461 52,001,935 ------------ ------------
CURRENT LIABILITIES: Current maturities of long-term debt ..... 877,264 877,695 Short-term bank loans .................... 1,350,000 3,050,000 Accounts payable ......................... 5,491,004 4,498,197 Accrued income and other taxes ........... 3,990,295 3,988,887 Refundable gas costs ..................... 1,348,047 1,401,811 Other .................................... 1,947,816 1,662,503 ------------ ------------
Total current liabilities .................. 15,004,426 15,479,093 ------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES: Federal income taxes ..................... 8,112,490 8,521,800 Investment tax credits ................... 1,084,188 1,182,072 Accrued transition costs ................. 1,035,895 1,177,621 Health care and other .................... 2,443,842 2,257,019
Total deferred credits and other liabilities ........................ 12,676,415 13,138,512 ------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES ....... $ 79,430,302 $ 80,619,540 ============ ============
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, CASH FLOWS FROM OPERATING 1995 1994 1993 ACTIVITIES: ----------- ------------ ----------- Net income ...................... $ 3,230,370 $ 3,489,441 $ 2,071,636 Reconciliation of net income to net cash provided by operating activities: Depreciation, depletion and amortization ......... 3,682,364 3,455,254 3,388,408 Deferred income taxes ...... 39,772 (579,264) 354,974 Other, net ................. 61,824 (157,117) (9,831)
Change in assets and liabilities: Short-term investments ........ 1,060,060 (610,762) (1,232,086) Accounts receivable ........... (575,562) 3,108,559 (4,592,692) Gas in underground storage .... 1,011,806 (1,686,408) 93,272 Materials and supplies ........ 23,582 (76,684) 39,702 Deferred gas cost ............. 362,900 2,557,298 (2,537,611) Accounts payable .............. 992,807 (4,210,477) 2,782,901 Prepaid and accrued taxes ..... (407,920) 1,482,497 (335,469) Other, net .................... (163,428) 394,656 1,002,106 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 9,318,575 7,166,993 1,025,310 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ............ (4,862,201) (8,590,657) (5,543,582) Net (salvage) proceeds from retirements .............. (96,035) 192,951 124,683 ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES ...................... (4,958,236) (8,397,706) (5,418,899) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt .... -- 6,000,000 2,920,505 Payments of long-term debt ...... (1,876,962) (2,049,720) (804,112) Net borrowings under short-term bank loans ......... (1,700,000) (400,000) 1,250,000 Dividends paid .................. (1,606,313) (1,603,142) (1,534,770) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............ (5,183,275) 1,947,138 1,831,623 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... (822,936) 716,425 (2,561,966)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 1,271,186 554,761 3,116,727 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 448,250 $ 1,271,186 $ 554,761 =========== =========== ===========
The accompanying notes are an integral part of these statements.
NATIONAL GAS & OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Common Stock $1 Paid in Retained Treasury Par Value Capital Earnings Stock
BALANCE DECEMBER 31, 1992 4,388,417 28,666,479 5,118,410 (1,550,509) Net income ....... -- -- 2,071,636 -- Cash dividends on common stock ... -- -- (1,534,770) -- 5% stock dividend 210,763 3,051,848 (3,262,611) -- ---------- ------------ ----------- -----------
BALANCE DECEMBER 31, 1993 4,599,180 31,718,327 2,392,665 (1,550,509) Net income ....... -- -- 3,489,441 -- Cash dividends on common stock ... -- -- (1,603,142) -- Three-for-two stock split .... 2,220,220 (2,220,220) -- -- ---------- ------------ ----------- -----------
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) ========== ============ =========== ===========
The accompanying notes are an integral part of these statements.
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. National Production Corporation (National Production), formerly a wholly-owned oil and gas production subsidiary of the Company, was merged into NGO Development as of July 1, 1993. 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 69 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 14 percent of total system throughput. Approximately 26 percent of the total throughput results from serving five major industrial customers which 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.
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.
Oil and Gas Properties
Oil and gas properties are accounted for using the successful-efforts method. Costs of acquiring nonproducing 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.
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 3 to 10 years.
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 3 to 15 years.
Short Term Investments
The Company purchases gas futures 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 gas sale is made, at which time gains and losses are recorded as a component of gas cost.
The Company had the following gas futures positions on the New York Mercantile Exchange (NYMEX) at December 31, 1995 and 1994. Fair market value is based upon the NYMEX closing price.
December 31, 1995 1994 ----------- ----------- Open contracts 307 308 Natural gas purchases hedged .......... 3.07 MMBtu 3.08 MMBtu Deposits with brokers ....... $ 782,788 $1,842,848 Contracted value ............ $5,607,980 $5,998,620 Fair market value ........... $6,297,310 $5,349,530
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: 1995 1994 1993 ---- ---- ----
Income taxes ......... $ 1,750,000 $ 1,200,000 $ 650,000 Interest ............. $ 991,760 $ 747,736 $ 429,735
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 $3,508,000, and $4,954,000 higher than reported at December 31, 1995 and 1994, respectively. Gas stored by Producers Gas as of December 31, 1995 and 1994, of $339,049, $1,503,140, 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, 1995 and 1994, National Gas had unbilled revenues of $1,645,147 and $1,296,841, 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 Pronouncement
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company intends to adopt SFAS 121 on January 1, 1996. The adoption will not have any impact on the Company's financial position or results of operations.
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. In 1993, all of National Gas' interstate pipeline suppliers began the restructuring of 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, 1995, National Gas has paid $1,444,166 to its interstate pipeline suppliers for transition costs and $1,356,568 remains to be paid over the next eight years and, accordingly, has been accrued at December 31, 1995. 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.
Maximum Rate Contract Termination Daily Quantity Supplier Schedule Date Date Dth - ---------------------------------------------------------------------------- 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 SS-II 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
During 1995, National Gas transported 50 percent of its total gas purchased for resale or transportation from the four interstate pipeline companies detailed above. National Gas acquired the remaining 50 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 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:
December 31, 1995 1994 ---------- -------- Regulatory Assets:
Recoverable future taxes ................... $ 216,686 $ 243,770 Postretirement benefit costs ............... 180,982 203,602 Order 636 transition costs ................. 1,071,390 1,297,392 ----------- ----------
Total Regulatory Assets .................... 1,469,058 1,744,764 ----------- ----------
Regulatory Liabilities:
Amounts payable to customers ............... 1,348,047 1,404,811 Taxes refundable to customers .............. 282,899 307,031 ----------- ----------
Total Regulatory Liabilities ............... 1,630,946 1,711,842 ----------- ----------
Net Regulatory Assets (Liabilities) ............................ $ (161,888) $ 32,922 =========== ==========
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:
1995 1994 1993 ---------- --------- ------ Tax at statutory rates applied to pre-tax book income ......................... $ 1,504,932 $ 1,641,734 $ 981,022 Increase (decrease) in tax caused by -- Depreciation, depletion and basis differences ....... (266,642) (230,212) (104,015) Investment credit amortization ............... (80,528) (81,103) (79,954) Other (net) .................. 38,138 8,770 16,669 ----------- ----------- ---------
Federal income tax expense .................... $ 1,195,900 $ 1,339,189 $ 813,722 =========== =========== ========= Effective income tax rate ........ 27.0% 27.7% 28.2% =========== =========== =========
1995 1994 1993 ---------- ---------- -------
Taxes currently payable .......... $ 1,357,711 $ 2,067,818 $ 380,404 Deferred provision: Intangible drilling costs/depletion ............... (456,714) (260,308) (337,017) Deferred gas cost .............. (136,658) (1,012,886) 460,788 Property timing differences .... 494,889 519,177 440,295 Property tax ................... -- (170,000) (170,000) Note receivable write-off ...... -- -- 187,718 Alternative minimum tax credit carryforward .......... -- 158,717 (158,717) Deferred compensation .......... (8,157) 2,535 1,911 Other, net ..................... (55,171) 34,136 8,340
Federal income tax expense ....... $ 1,195,900 $ 1,339,189 $ 813,722 =========== =========== =========
Temporary differences which give rise to deferred tax assets and liabilities are as follows: December 31, 1995 1994
Percentage depletion ................... $ 132,135 $ 132,135 Vacation accrual ....................... 72,773 70,125 Inventory capitalization ............... 43,564 36,764 Reserve for accounts and notes receivable ................. 67,815 47,336 Postretirement benefits other than pension ................... 635,574 580,494 Investment tax credit .................. 464,810 506,288 Deferred gas ........................... 354,874 278,533 Other .................................. 151,681 140,716 ----------- ----------- 1,923,226 1,792,391 Valuation allowance .................... (155,351) (155,351) ----------- -----------
Total deferred tax assets ........................... 1,767,875 1,637,040 ----------- -----------
Prepaid taxes .......................... (308,218) (281,664) Property ............................... (9,123,854) (9,503,338) Other .................................. (117,237) (128,701) ----------- -----------
Total deferred tax liabilities ...................... (9,549,309) (9,913,703) ----------- -----------
Net deferred taxes ..................... $(7,781,434) $(8,276,663) =========== ===========
The Tax Reform Act of 1986 repealed investment tax credits for all property placed in service after December 31, 1985. Prior to 1986, investment tax credits were deferred and are presently being amortized over the lives of the applicable property additions.
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.
In September 1994, the Plan purchased annuities for all retirees and all former employees who were vested in the Plan. The purchase of these annuities was treated as a partial plan settlement which resulted in a pre-tax gain of $123,702. The purchase of the annuities was made with Plan assets and resulted in a decrease in the projected benefit obligation of $1,766,276.
The funded status of the retirement plan and the amount recognized in the Company's Consolidated Balance Sheet were as follows:
September 30, 1995 1994 Plan assets at fair value ------ ------ (principally unallocated insurance contracts) ....................... $ 2,459,153 $ 2,356,649 ----------- ----------- Actuarial present value of benefit obligations: Vested benefits .......................... 1,490,265 1,254,515 Nonvested benefits ....................... 42,175 24,172 ----------- ----------- Accumulated benefit obligation ............... 1,532,440 1,278,687 Additional amounts related to projected salary increases ................. 998,040 809,745 ----------- ----------- Total projected benefit obligation ........... 2,530,480 2,088,432 ----------- -----------
Plan assets in excess (deficit) of projected benefit obligation ............ (71,327) 268,217
Amounts necessary to reconcile excess (deficit) assets to prepaid pension cost included in the Consolidated Balance Sheet: Unamortized net asset .................... (299,107) (322,115) Unrecognized prior service cost .......... 317,792 349,760 Unrecognized net loss (gain) ............. 87,196 (188,182) Prepaid pension cost included in other assets ............................ $ 34,554 $ 107,680 =========== ===========
Net pension cost for the Retirement Plan includes the following:
1995 1994 1993 ----------------------------------------------- Benefits earned during the year (service cost) .................. $ 171,730 $ 209,894 $ 260,109 Interest accrued on projected benefit obligation .............. 170,648 275,337 261,677 Actual return on plan assets ...... (236,144) (318,080) (387,779) Net amortization and deferral ..... 8,960 (106,765) (31,786)
Net periodic pension cost ......... $ 115,194 $ 60,386 $ 102,221 ========= ========= =========
The Company's assumptions used during the years 1995, 1994 and 1993 in determining net periodic pension cost and pension liability are as follows: 1995 1994 1993 ------ ------ ----- Discount rate ............... 7.50% 8.00% 7.00% Return on plan assets ....... 10.00% 10.00% 10.00% Estimated increase in future compensation ....... 5.00% 5.00% 6.00%
In 1995, the Company changed its discount rate assumption from 8.0 percent to 7.5 percent. This resulted in an increase in the projected benefit obligation of $285,170. An increase in the discount rate assumption and the decrease of the estimated increase in future compensation in 1994 resulted in decreases to the projected benefit obligation of $449,696 and $126,979, respectively.
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.
In late 1993, National Gas negotiated new base rates with the municipalities that it serves. The rates in effect during 1995 include recovery of a portion of the accumulated postretirement benefit obligation (APBO) over a 10 year period. At December 31, 1995 approximately $181,000 remained to be collected.
The components of net periodic postretirement benefit expense were as follows: 1995 1994 ---------- -------
Service cost ......................... $ 49,051 $ 61,421 Interest cost on accumulated post- retirement benefit obligation ......................... 157,407 145,532 ----------- ----------- Net periodic post- retirement benefit expense ............................ 206,458 206,953 Deferral of benefits earned to be col- lected in future rates .............................. 22,620 22,620 ----------- ----------- Net periodic post- retirement benefit expense ............................ $ 229,078 $ 229,573 =========== ===========
The amount recognized in the Company's Consolidated Balance Sheet was as follows: September 30, 1995 1994 ----------- -----------
Retirees ............................. $ 1,314,102 $ 1,242,859 Active employees ..................... 883,795 774,712 ----------- ----------- Accumulated post- retirement health care benefits ...................... 2,197,897 2,017,571 Unrecognized net loss ................ (148,622) (122,852)
Accrued postretirement health care benefits ............... $ 2,049,275 $ 1,894,719 =========== ===========
The Company's assumptions used during the years 1995, 1994 and 1993 in determining net periodic postretirement benefit expense and the liability for postretirement health care benefits are as follows:
1995 1994 1993 ---- ---- ----
Discount rate 7.50% 8.00% 7.00%
Health care Trend rate 10.00% 11.00% 12.25% gradually gradually gradually decreasing decreasing decreasing to 5.0% in to 5.0% in to 5.5% in 2001 2001 2004
As of September 30, 1995, the discount rate was changed from 8.0 percent to 7.5 percent, which resulted in an increase in the liability for postretirement benefits of $142,965.
As of September 30, 1994, the discount rate was changed from 7.0 percent to 8.0 percent and the health care trend rate was changed to gradually decrease from 11.0 percent in 1995 to 5.0 percent in 2001 and thereafter. These changes resulted in decreases in the liability for postretirement health care benefits of $270,300 and $143,500, respectively. Additionally, changes in the medical claims cost by retiree and retirement age assumptions resulted in a net increase in the liability for postretirement health care benefits of $305,200 as of September 30, 1994.
If the health care trend rate would increase by one percent in each year, the accumulated benefit obligation would increase by approximately $352,000 at September 30, 1995 and net periodic postretirement benefit expense in 1996 would increase by approximately $42,000.
NOTE 6 - LONG-TERM DEBT
The long-term debt outstanding was as follows:
December 31, 1995 1994 1993 ------------ ------------ ----------- Senior notes, 6.63% interest rate, due 2009 ............. $ 6,000,000 $ 6,000,000 $ --
Promissory note, variable interest rate, due 2001 ................... 4,887,500 5,737,500 6,658,333
Mortgage note, variable interest rate, due 2008 ................... 619,206 646,168 675,055
Revolving note, variable interest rate, due 1997 ................... 450,000 1,450,000 2,550,000 ------------ ------------ -----------
Total debt ................... 11,956,706 13,833,668 9,883,388 Less-current maturities ...... (877,264) (877,695) (881,041) ------------ ------------ -----------
Long-term debt ............... $ 11,079,442 $ 12,955,973 $ 9,002,347 ============ ============ ===========
On March 15, 1994, National Gas issued $6 million of Senior Unsecured Notes (Senior Notes) to an accredited investor. The proceeds of the Notes have been utilized to construct a pipeline and related facilities to transport gas
to an Ohio electric generating plant ($3.5 million) and to complete upgrades on National Gas' indigenous storage fields and other various projects ($2.5 million). The notes bear a fixed interest rate of 6.63 percent with interest payments due semi-annually. Annual principal payments of $461,539 commence on March 16, 1997 with the final payment due March 15, 2009. The notes carry a 100 percent guarantee of 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, 1995 was 7.01 percent which represented the London Interbank Offer Rate (LIBOR) plus 1.25 percent per annum as of November 6, 1995 when the Company entered into a six month contracted rate. The note agreement allows the Company to choose either 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. Additionally, the Company is required to maintain certain working capital, debt to equity and cash flow ratios. If the Company should default on any of the financial covenants or other terms of the agreement, the Company becomes subject to certain dividend restrictions.
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, 1995, the prime rate was 8.50 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 1995, 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. As of December 31, 1995, NGO Development Corporation had borrowed $450,000 at an interest rate of 6.875 percent.
Annual maturities of long-term debt are as follows:
1996 ................. $ 877,264 1997 ................. 1,791,213 1998 ................. 1,343,836 1999 ................. 1,346,691 2000 ................. 1,349,798 Thereafter ................. 5,247,904
TOTAL ................ $11,956,706 ===========
Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of the Senior Notes is approximately $5,840,000. 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 $6,000,000, 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, 1995, National Gas had two draws totaling $1,350,000 on one of these credit lines for working capital requirements at interest rates of 6.875 percent and 6.863 percent. National Gas expects to repay these notes in 1996.
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.
During 1995, the Company increased the authorized number of common shares from 7,000,000 to 14,000,000. The average common shares outstanding and earnings and cash dividends per common share presented on the accompanying income statement include retroactive recognition of 199,112 shares issued in December 1995 as a result of a three percent stock dividend.
The Company issued 2,220,220 shares in December 1994 as a result of a three-for-two stock split. The par value of the stock issued as a result of the stock split was transferred from Paid in Capital to Common Stock. Transfers from retained earnings to common stock and paid in capital for common stock dividends are based on estimated fair market value of the common stock and include cash paid in lieu of fractional shares.
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. As of February 15, 1996, 1000 additional shares had been repurchased as treasury stock at a cost of $9.25 per share.
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 will be payable to shareholders of record on March 1, 1996. The rights expire on March 1, 2006.
NOTE 9 - FINANCIAL INFORMATION BY BUSINESS SEGMENT
1995 1994 1993 ----------------------------------------- Revenues: Gas sales ....................... $21,363,133 $29,375,603 $24,373,376 Transportation .................. 6,124,990 5,146,050 4,241,745 ----------- ----------- ----------- Subtotal ...................... 27,488,123 34,521,653 28,615,121 Oil and gas production .......... 20,630,712 27,201,139 18,067,652
Total ......................... $48,118,835 $61,722,792 $46,682,773 =========== =========== ===========
Income before provision for federal income taxes: Gas sales and transpor- tation ........................ $ 4,498,225 $ 4,235,949 $ 2,922,721 Oil and gas production .......... 792,409 1,162,595 452,534 ----------- ----------- -----------
Total ......................... $ 5,290,634 $ 5,398,544 $ 3,375,255 =========== =========== ===========
Depreciation, depletion and amortization: Gas sales and transpor- tation ........................ $ 1,781,919 $ 1,643,738 $ 1,570,769 Oil and gas production .......... 1,655,619 1,674,326 1,654,268 ----------- ----------- -----------
Total ......................... $ 3,437,538 $ 3,318,064 $ 3,225,037 =========== =========== ===========
Capital expenditures: Gas sales and transpor- tation and other .............. $ 4,489,771 $ 6,081,623 $ 3,055,855 Oil and gas production .......... 372,430 2,509,034 2,487,727 ----------- ----------- -----------
Total ......................... $ 4,862,201 $ 8,590,657 $ 5,543,582 =========== =========== =========== Identifiable assets: Gas sales and transpor- tation ........................ $54,968,627 $54,327,226 $51,168,979 Oil and gas production .......... 23,305,124 25,090,920 25,436,422 Non-operating ................... 1,156,551 1,201,394 1,291,767 ----------- ----------- -----------
Total ......................... $79,430,302 $80,619,540 $77,897,168 =========== =========== ===========
NOTE 10 - QUARTERLY INFORMATION (UNAUDITED)
The following represents the quarterly results for 1995 and 1994, which are unaudited. The first three quarters of 1995 and all of 1994 earnings per common share amounts have been restated to reflect the three percent stock dividend issued in December 1995.
Income (Loss) Before Net Earnings Quarter Operating Federal Income Per Ended Revenues Income Tax (Loss) Share - --------------------------------------------------------------------------------
03/31/95 .......... $18,031,424 $ 3,211,408 $ 2,163,490 $ 0.32 06/30/95 .......... 9,404,685 275,736 225,946 0.03 09/30/95 .......... 6,848,925 (934,829) (468,606) (0.07) 12/31/95 .......... 13,833,801 1,873,955 1,309,540 0.19
03/31/94 .......... $24,711,066 $ 3,030,987 $ 2,041,355 $ 0.30 06/30/94 .......... 12,543,002 600,049 436,804 0.06 09/30/94 .......... 10,424,906 (182,239) (76,031) (0.01) 12/31/94 .......... 14,043,818 1,379,840 1,087,313 0.16
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:
December 31, 1995 1994
Unproved oil and gas properties .......... $ 757,462 $ 1,050,638 Proved oil and gas properties ............ 20,461,143 20,492,939 ------------ ------------ Total property costs ............... 21,218,605 21,543,577 Accumulated depreciation, depletion and amortization ......... (7,304,416) (6,414,352) ------------ ------------ Net capitalized costs .............. $ 13,914,189 $ 15,129,225 ============ ============
Costs incurred relating to oil and gas property acquisition and exploration activities were as follows:
1995 1994 1993 ---- ---- ----
Acquisition of properties ........ $335,512 $ 797,383 $1,017,502 Exploration costs ................ $794,595 $1,092,115 $ 644,645 Development costs ................ $446,072 $ 486,212 $ 350,070
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:
1995 1994 1993 ---- ---- ----
Operating revenues .......... $3,450,560 $3,716,554 $3,435,136 Production costs ............ 400,710 619,619 750,487 Exploration costs ........... 612,297 555,069 644,645 Depreciation, depletion and amortization .......... 1,292,722 1,325,551 1,316,092 ---------- ---------- ---------- Operating income ............ 1,144,831 1,216,315 723,912 Income tax expense .......... 202,243 286,479 135,004 ---------- ---------- ---------- Net income ................... $ 942,588 $ 929,836 $ 588,908 ========== ========== ========== 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.
(Oil in barrels, natural gas in thousands of cubic feet)
Oil Gas ----------- ----------- Proved developed reserves
Balance at December 31, 1992 ................ 249,549 10,117,367 Revision of previous estimates ............ (3,875) (976,470) Extensions and discoveries ................ 10,137 526,693 Purchase of proved reserves ............... 42,745 491,876 Production ................................ (35,357) (1,111,835) -------- -----------
Balance at December 31, 1993 ................ 263,199 9,047,631 Revision of previous estimates ............ 16,569 28,468 Extensions and discoveries ................ 17,129 360,586 Purchase of proved reserves ............... -- 83,144 Production ................................ (47,487) (1,103,483) -------- -----------
Balance at December 31, 1994 ................ 249,410 8,416,346 Revision 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 ======== ===========
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
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% discount factor. The calculation also assumes the continuation of the existing economic, operating, and contractual conditions at December 31, 1995, 1994 and 1993.
The standardized measure of discounted net cash flows relating to proved developed oil and gas reserves are as follows:
1995 1994 1993 ---- ---- ----
Future cash flows ........... $ 21,261,629 $ 26,229,302 $ 27,655,313 Future production costs ..... (7,163,056) (8,090,928) (8,714,573) Future net cash flows before income taxes ....... 14,098,573 18,138,374 18,940,740 Ten percent discount factor ..................... (5,298,071) (6,601,884) (7,717,107) ------------ ------------ ------------ Standardized measure before income taxes ....... 8,800,502 11,536,490 11,223,633 Future income tax expense ................. (1,554,169) (2,623,460) (2,030,325) ------------ ------------ ------------ Standardized measure after income taxes ........ $ 7,246,333 $ 8,913,030 $ 9,193,308 ============ ============ ============
The change in the standardized measure of discounted future net cash flows related to the proved oil and gas reserves at December 31, 1995, 1994 and 1993 is as follows.
December 31, 1995 1994 1993 ------ ------ -----
Beginning of year ........... $ 8,913,030 $ 9,193,308 $ 9,812,036 Sales, net of production costs ......... (3,049,850) (3,096,935) (2,684,649) Net changes in prices and pro- duction costs ........... (31,628) 464,574 (800,172) Net change due to revisions in quantity estimates ...... (785,768) 190,202 (1,067,000) Extensions and discoveries ............. 230,013 412,350 638,789 Purchase of reserves ...... -- 75,301 755,004 Net change in income taxes ................... 1,069,292 (593,135) 617,609 Accretion of discount ..... 891,303 919,331 981,204 Other ..................... 9,941 1,348,034 940,487 ----------- ----------- ----------- End of year ................. $ 7,246,333 $ 8,913,030 $ 9,193,308 =========== =========== ===========
EXHIBIT INDEX Reference ____________________________________ Exhibit Commission Number Description File No. Exhibit No. _______________________________________________________________________________
2 Stock Purchase Agreement 1-8223 Incorporated dated September 12, 1991 by reference by and between National from Exhibit Gas & Oil Company and 2 of Form Stone Container 8-K filed on Corporation October 14, 1991.
3(a) Articles of Incorporation 1-8223 Page 56-63 of National Gas & Oil Company
3(b) Code of Regulations of 2-72682 Incorporated National Gas & Oil by reference Company from Exhibit 3(b) of Form S-14 filed on June 8, 1981.
10(a) National Gas & Oil 33-55390 Incorporated Company Salary by reference Deferral Plan from Exhibit 28(b) of Form S-8 filed on December 4, 1992.
10(b) Amended and Restated 33-55388 Incorporated National Gas & Oil by reference Company Compensation from Exhibit Plan for Outside 28(c) of Directors Form S-8 filed on December 4, 1992.
10(c) Summary of Salary Page 54 Administration Plan
21 Subsidiaries of the Registrant Page 55 24 Powers of Attorney of Directors Page 64-72
27 Financial Data Schedule Page 73
99(a) Credit Agreement dated 1-8223 Incorporated October 1, 1991 by and by reference among National Gas & from Exhibit Oil Company, Stone 28 of Form Resource and Energy 8-K filed on Corporation and October 14, BancOhio National 1991. Bank.