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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----
For the quarterly period ended December 31, 2002.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-8788
DELTA NATURAL GAS COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
Incorporated in the State 61-0458329
of Kentucky (I.R.S. Employer Identification No.)
3617 LEXINGTON ROAD, WINCHESTER, KENTUCKY 40391
(Address of Principal Executive Offices) (Zip Code)
859-744-6171
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES X . NO .
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES _______. NO X .
-------- ---
Common Shares, Par Value $1.00 Per Share
2,551,337 Shares Outstanding as of December 31, 2002.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
December 31, December 31, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
OPERATING REVENUES $ 15,501,819 $ 12,580,389 $ 22,655,101 $ 19,839,281 $ 58,745,599 $ 66,946,131
---------------- ------------- ---------------- --------------- --------------- ---------------
OPERATING EXPENSES
Purchased gas $ 9,136,048 $ 6,789,266 $ 12,762,298 $ 10,436,552 $ 32,482,970 $ 40,617,488
Operation and maintenance 2,681,083 2,266,491 5,125,721 4,549,158 10,262,310 9,928,922
Depreciation and depletion 1,060,963 1,037,276 2,103,465 2,014,587 4,169,822 3,915,763
Taxes other than income taxes 357,682 264,974 722,508 612,697 1,464,724 1,342,314
Income tax expense (benefit) 415,100 342,000 (141,443) (133,400) 2,241,457 2,294,150
---------------- ------------- ---------------- --------------- --------------- ---------------
Total operating expenses $ 13,650,876 $ 10,700,007 $ 20,572,549 $ 17,479,594 $ 50,621,283 $ 58,098,637
---------------- ------------- ---------------- --------------- --------------- ---------------
OPERATING INCOME $ 1,850,943 $ 1,880,382 $ 2,082,552 2,359,687 $ 8,124,316 $ 8,847,494
OTHER INCOME AND DEDUCTIONS, NET 11,420 7,185 22,693 12,736 26,976 23,754
INTEREST CHARGES 1,169,598 1,295,816 2,315,357 2,558,997 4,538,117 5,131,750
---------------- ------------- ---------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ 692,765 $ 591,751 $ (210,112) $ (186,574) $ 3,613,175 $ 3,739,498
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE
(NOTE 3) - - (88,370) - (88,370) -
---------------- ------------- ---------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 692,765 $ 591,751 $ (298,482) $ (186,574) $ 3,524,805 $ 3,739,498
================ ============= ================ =============== =============== ===============
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended Twelve Months Ended
December 31, December 31, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE $ .27 $ .24 $ (.09) $ (.07) $ 1.42 $ 1.50
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE - - (.03) - (.03) -
-------------- ------------- --------------- -------------- ----------------- -------------
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE $ .27 $ .24 $ (.12) $ (.07) $ 1.39 $ 1.50
============== ============= =============== ============== ================= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(BASIC AND DILUTED) 2,546,886 2,510,710 2,541,975 2,506,205 2,531,974 2,496,255
DIVIDENDS DECLARED PER
COMMON SHARE $ .295 $ .29 $ .59 $ .58 $ 1.17 $ 1.15
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS December 31, 2002 June 30, 2002 December 31, 2001
----------------- ------------- -----------------
GAS UTILITY PLANT $ 159,950,436 $ 156,305,063 $ 152,631,278
Less-Accumulated provision
for depreciation (50,476,406) (49,142,976) (47,252,928)
-------------------- ------------------
-------------------
Net gas plant $ 109,474,030 $ 107,162,087 $ 105,378,350
------------------- -------------------- ------------------
CURRENT ASSETS
Cash and cash equivalents $ 419,110 $ 225,236 $ 954,560
Accounts receivable - net 4,818,559 2,884,025 2,730,761
Gas in storage 7,381,120 5,216,772 8,141,071
Deferred gas costs 6,706,204 4,076,059 7,064,205
Materials and supplies 462,736 523,756 373,237
Prepayments 192,222 388,794 184,334
------------------- -------------------- ------------------
Total current assets $ 19,979,951 $ 13,314,642 $ 19,448,168
------------------- -------------------- ------------------
OTHER ASSETS
Cash surrender value of
officers' life insurance $ 344,687 $ 344,687 $ 354,891
Note receivable from officer 146,000 158,000 116,000
Prepaid pension benefit cost 1,924,344 2,325,944 2,071,618
Unamortized debt expense and other 4,584,740 4,643,165 3,260,583
------------------- -------------------- ------------------
Total other assets $ 6,999,771 $ 7,471,796 $ 5,803,092
------------------- -------------------- ------------------
Total assets $ 136,453,752 $ 127,948,525 $ 130,629,610
=================== ==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders' equity $ 32,835,349 $ 34,182,277 $ 31,512,318
Long-term debt 48,161,000 48,600,000 48,830,000
------------------- -------------------- ------------------
Total capitalization $ 80,996,349 $ 82,782,277 $ 80,342,318
------------------- -------------------- ------------------
CURRENT LIABILITIES
Notes payable $ 29,037,841 $ 19,355,000 $ 27,755,000
Current portion of long-term debt 1,750,000 1,750,000 1,750,000
Accounts payable 4,773,183 4,077,983 3,539,356
Accrued taxes (97,857) 673,873 776
Refunds due customers 49,442 73,973 103,406
Customers' deposits 566,968 440,568 551,687
Accrued interest on debt 1,174,729 1,162,956 1,235,706
Accrued vacation 558,066 558,066 538,595
Other accrued liabilities 441,337 503,178 350,858
------------------- -------------------- ------------------
Total current liabilities $ 38,253,709 $ 28,595,597 $ 35,825,384
------------------- -------------------- ------------------
DEFERRED CREDITS AND OTHER
Deferred income taxes $ 14,589,173 $ 14,078,273 $ 13,330,057
Investment tax credits 384,600 404,600 427,200
Regulatory liability 536,275 562,025 605,275
Additional minimum pension liability 1,461,440 1,461,440 -
Advances for construction and other 232,206 64,313 99,376
------------------- -------------------- ------------------
Total deferred credits and other $ 17,203,694 $ 16,570,651 $ 14,461,908
------------------- -------------------- ------------------
Total liabilities and
shareholders' equity $ 136,453,752 $ 127,948,525 $ 130,629,610
=================== ==================== ==================
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (298,482) $ (186,574) $ 3,524,805 $ 3,739,498
Adjustments to reconcile net
income (loss) to net cash
from operating activities
Cumulative effect of a
change in accounting
principle 88,370 -- 88,370 --
Depreciation, depletion
and amortization 2,183,099 2,111,265 4,330,036 4,116,477
Deferred income taxes and
investment tax credits 465,150 428,550 1,147,516 2,361,371
Other, net 310,230 288,706 617,419 627,540
(Increase) in other assets (6,047,973) (2,779,403) (931,616) (629,471)
Increase(decrease) in other
liabilities 25,408 (2,561,934) 1,160,558 (4,512,254)
----------------- -------------------------------------------------
Net cash provided by (used in)
operating activities
$ (3,274,198) (2,699,390) $ 9,937,088 $ 5,703,161
----------------- -------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures $ (4,727,323) $ (5,264,483) $ (8,884,605) $ (9,238,616)
----------------- -------------------------------------------------
Net cash used in
investing activities $ (4,727,323) $ (5,264,483) $ (8,884,605) $ (9,238,616)
----------------- -------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends on common stock $ (1,500,181) $ (1,453,922) $ (2,962,681) $ (2,871,129)
Issuance of common stock, net 451,735 398,254 760,907 706,177
Repayment of long-term debt (439,000) (1,145,000) (669,000) (1,365,000)
Issuance of notes payable 50,660,202 21,730,000 65,820,201 54,130,000
Repayment of notes payable (40,977,361) (10,775,000) (64,537,360) (47,120,000)
----------------- -------------------------------------------------
Net cash provided by
(used in) financing
activities $ 8,195,395 $ 8,754,332 $ (1,587,933) $ 3,480,048
----------------- -------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 193,874 $ 790,459 $ (535,450) $ (55,407)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 225,236 164,101 954,560 1,009,967
----------------- -------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 419,110 $ 954,560 $ 419,110 $ 954,560
================= =================================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,223,004 $ 2,128,894 $ 4,437,934 $ 5,133,658
Income taxes (net of refunds) $ 271,271 $ 47,700 $ 1,354,137 $ 145,712
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Delta Natural Gas Company, Inc. has three wholly-owned subsidiaries. Delta
Resources, Inc. buys gas and resells it to industrial or other large use
customers on Delta's system. Delgasco, Inc. buys gas and resells it to
Delta Resources and to customers not on Delta's system. Enpro, Inc. owns
and operates production properties and undeveloped acreage. All of our
subsidiaries are included in the consolidated financial statements.
Intercompany balances and transactions have been eliminated.
(2) In our opinion, all adjustments necessary for a fair presentation of the
unaudited results of operations for the three, six and twelve months ended
December 31, 2002 and 2001, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results of
operations for the period ended December 31, 2002 are not necessarily
indicative of the results of operations to be expected for the full year.
The accompanying financial statements are unaudited and should be read in
conjunction with the financial statements, which are incorporated herein by
reference to our Annual Report on Form 10-K for the year ended June 30,
2002. Certain reclassifications have been made to prior-period amounts to
conform to the 2002 presentation.
(3) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, entitled Accounting for Asset
Retirement Obligations, and Delta adopted this statement effective July 1,
2002. Statement No. 143 addresses financial accounting for legal
obligations associated with the retirement of long-lived assets. Upon
adoption of this statement, we recorded $178,000 of asset retirement
obligations in the balance sheet primarily representing the current
estimated fair value of our obligation to plug oil and gas wells at the
time of abandonment. Of this amount, $47,000 was recorded as incremental
cost of the underlying property, plant and equipment. The cumulative effect
on earnings of adopting this new statement was a charge to earnings of
$88,000 (net of income taxes of $55,000), representing the cumulative
amounts of depreciation and changes in the asset retirement obligation due
to the passage of time for historical accounting periods. The adoption of
the new standard did not have a significant impact on income (loss) before
cumulative effect of a change in accounting principle for the three, six
and twelve months ended December 31, 2002. Pro forma net income and
earnings per share have not been presented for the three and six months
ended December 31, 2001 and for the twelve months ended December 31, 2002
and 2001 because the pro forma application of Statement No. 143 to prior
periods would result in pro forma net income and earnings per share not
materially different from the actual amounts reported for those periods in
the accompanying consolidated statements of income.
(4) In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, entitled Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses
accounting and reporting for the impairment or disposal of long-lived
assets. Statement No. 144 was effective July 1, 2002. The impact of
implementation on our financial position or results of operations was not
material.
(5) In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, entitled Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 addresses
financial reporting and accounting for costs associated with exit or
disposal activities. This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred and is effective for exit or disposal activities that
are initiated after December 31, 2002. We have not committed to any such
exit or disposal plan. Accordingly, this new statement will not presently
have any impact on us.
(6) Delta's note receivable from an officer on the accompanying balance sheet
relates to a $160,000 loan made to Glenn R. Jennings, our President & Chief
Executive Officer. The loan, secured by real estate owned by Mr. Jennings,
bears interest at 6%, which Mr. Jennings pays monthly. Delta forgives
$2,000 of the principal amount for each month of service Mr. Jennings
completes. The outstanding balance on this loan was $146,000 as of December
31, 2002. In the event Mr. Jennings terminates his employment with Delta
other than due to a change in control, or Mr. Jennings' employment is
terminated for cause or as a result of his disability or death, the loan
will become immediately due and payable.
(7) Our line of credit agreement and the indentures relating to all of our
publicly held debentures contain defined "events of default" which, among
other things, can make the obligation immediately due and payable. Of
these, we consider the following covenants to be most significant and for
the series of debt are most restrictive.
o Dividend payments cannot be made unless consolidated shareholders' equity
of the Company exceeds $21,500,000 (thus no retained earnings were
restricted); and
o We may not assume any additional mortgage indebtedness in excess of
$2,000,000 without effectively securing all debentures equally to such
additional indebtedness.
Furthermore, a default on the performance on any single obligation incurred
in connection with our borrowings simultaneously creates an event of
default with the line of credit and all of the debentures. We are not in
default on any of our line of credit or debenture agreements.
(8) In September 2002, our Board of Directors approved an amendment to our
Company's Defined Benefit Retirement Plan, effective November 1, 2002. The
plan amendment reduced the formula for benefits paid under the plan for
future service and restricted participants from taking lump-sum
distributions from the plan. Monthly pension expense is currently $26,000.
Prior to the amendment becoming effective, monthly pension expense was
$71,000.
(9) Delta and its subsidiaries are not parties to any legal proceedings that
are expected to have a materially adverse impact on our liquidity,
financial condition or results of operations.
(10) During July 2001, the Kentucky Public Service Commission required an
independent audit of the gas procurement activities of Delta and four other
gas distribution companies as part of its investigation of increases in
wholesale natural gas prices and their impacts on customers. The Kentucky
Public Service Commission indicated that Kentucky distributors had
generally developed sound planning and procurement procedures for meeting
their customers' natural gas requirements and that these procedures had
provided customers with a reliable supply of natural gas at reasonable
costs. The Kentucky Public Service Commission noted the events of the prior
year, including changes in natural gas wholesale markets, and required the
audits to evaluate distributors' gas planning and procurement strategies in
light of the recent more volatile wholesale markets, with a primary focus
on a balanced portfolio of gas supply that balances cost issues, price risk
and reliability. The consultants that were selected by the Kentucky Public
Service Commission issued their final report on November 15, 2002. The
report contains sixteen procedural and reporting-related recommendations in
the areas of gas supply planning, organization, staffing, controls, gas
supply management, gas transportation, gas balancing, response to
regulatory change and affiliate relations. The report also addresses
several general areas for the five gas distribution companies involved in
the audit, including Kentucky natural gas price issues, hedging, gas cost
recovery mechanisms, budget billing, uncollectible accounts and
forecasting. In January 2003, we responded to the consultants with our
comments on action plans they had drafted relating to the recommendations.
We believe that implementation of the recommendations will not result in a
significant impact on our financial position or results of operations.
(11) Our company has two segments: (i) a regulated natural gas distribution,
transmission and storage segment, and (ii) a non-regulated segment which
participates in related ventures, consisting of natural gas marketing and
production. The customer base and business activity for each segment is
similar; therefore, the segments have similar risks and rewards. The
regulated segment serves residential, commercial and industrial customers
in the single geographic area of central and southeastern Kentucky. The
non-regulated segment's customer base is similar to the large commercial
and industrial customers in the regulated segment. Virtually all of the
revenue recorded under both segments comes from the sale or transportation
of natural gas. Price risk for the regulated business is mitigated through
our Gas Cost Recovery clause approved quarterly by the Kentucky Public
Service Commission. Price risk for the non-regulated business is mitigated
by efforts to balance supply and demand.
External and intersegment revenues and net income (loss) by business
segment are as follows:
Three Six Twelve
Months Months Months
Ended Ended Ended
December December December
31, 2002 31, 2002 31, 2002
-------- --------- --------
($000)
Revenues
Regulated
External customers 10,259 13,726 42,065
Intersegment 898 1,607 3,117
------- -------- -------
Total regulated 11,157 15,333 45,182
Non-regulated
External customers 5,243 8,929 16,681
Intersegment - - -
----- ----- ------
Total non-regulated 5,243 8,929 16,681
Eliminations for
Intersegment (898) (1,607) (3,117)
Total 15,502 22,655 58,746
======= ======= ========
Net Income (Loss)
Regulated 384 (730) 2,619
Non-regulated 309 432 906
--- --- -----
Total net income (loss) 696 (298) 3,525
=== ==== ========
Three Six Twelve
Months Months Months
Ended Ended Ended
December December December
31, 2001 31, 2001 31, 2001
-------- --------- --------
($000)
Revenues
Regulated
External customers 8,496 12,031 46,227
Intersegment 817 1,540 3,141
--- ----- -----
Total regulated 9,313 13,571 49,368
----- ------ --------
Non-regulated
External customers 4,084 7,808 20,719
Intersegment 694 1,688 5,875
--- ----- --------
Total non-regulated 4,778 9,496 26,594
Eliminations for
Intersegment (1,511) (3,228) (9,016)
------ ------ --------
Total operating revenues 12,580 19,839 66,946
======= ======== =======
Net Income (Loss)
Regulated 379 (729) 2,388
Non-regulated 213 542 1,351
--- --- -----
Total net income (loss) 592 (187) 3,739
=== ==== =====
Effective January 1, 2002, the non-regulated segment discontinued the
practice of selling gas to the regulated segment. This led to a decline in
intersegment revenues for the three, six and twelve months ended December 31,
2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Because of the seasonal nature of our sales, we generate the smallest
proportion of cash from operations during the warmer months, when sales volumes
decrease considerably. Most of our construction activity takes place during
these warmer months. As a result, we meet our cash needs for operations and
construction during the warmer non-heating months partially through short-term
borrowings.
We made capital expenditures of $4,727,000 during the first six months of
fiscal 2003. We expect capital expenditures for fiscal 2003 to be $9.8 million.
We will make these capital expenditures for system extensions and for the
replacement and improvement of existing transmission, distribution, gathering
and general facilities.
We generate internally only a portion of the cash necessary for our capital
expenditure requirements. We finance the balance of our capital expenditure
requirements on an interim basis through a short-term line of bank credit. Our
current available line of bank credit is $40 million, of which $29,038,000 was
borrowed at December 31, 2002. On October 31, 2002, we replaced a line of credit
with Bank One, Kentucky, NA, with a new $40,000,000 line of credit with Branch
Banking and Trust Company. This new line of credit is on substantially the same
terms as the former line of credit and extends through October 31, 2003.
We periodically repay our short-term borrowings under our line of credit by
using the net proceeds from the sale of long-term debt and equity securities. On
October 30, 2002, we filed a Form S-2 Registration Statement with the Securities
and Exchange Commission to sell $20,000,000 of Debentures. We filed subsequent
amendments to the registration statement on December 13, 2002, January 9, 2002
and February 7, 2003. The registration statement became effective on February
10, 2003. We agreed on February 11, 2003 to an interest rate of 7% with the
underwriter, Edward D. Jones & Co., L.P. We plan to close the sale of the
Debentures, due in 2023, on February 18, 2003 and will receive approximately
$19,270,000 of net proceeds from the sale. Of this amount, $15,409,000 of the
net proceeds will be used to call our 8.30% debentures due 2026, and the
remaining $3,861,000 will be used to reduce our short-term notes payable. If
market conditions are favorable, we plan to make an equity offering later in
fiscal 2003.
Below, we summarize our primary cash flows during the six and twelve month
periods ending December 31, 2002 and 2001:
Six Months Ended December 31,
2002 2001
---- ----
Used in operating activities $ (3,274,198) $ (2,699,390)
Used in investing activities (4,727,323) (5,264,483)
Provided by financing activities 8,195,395 8,754,332
--------------- ----------------
Net increase in cash
and cash equivalents $ 193,874 $ 790,459
=============== ================
Twelve Months Ended December 31,
2002 2001
---- ----
Provided by operating activities $ 9,937,088 $ 5,703,161
Used in investing activities (8,884,605) (9,238,616)
Provided by (used in) financing
Activities (1,587,933) 3,480,048
----------------- -----------------
Net decrease in cash and
cash equivalents $ (535,450) $ (55,407)
================= =================
The net increase in cash and cash equivalents for the six months ended
December 31, 2002 was less than the net increase in cash and cash equivalents
for the six months ended December 31, 2001 due to a $575,000 increase in cash
used in operating activities and a $559,000 decrease in cash provided by
financing activities, offset by a $537,000 reduction in cash used in investing
activities. The increase in cash used in operating activities was largely due to
changes in accounts receivable, deferred recovery of gas costs, accounts payable
and gas in storage. The decrease in cash provided by financing activities is
primarily attributable to reduced borrowings from the short-term line of credit,
offset by a decrease in repayments of long-term debt. The decrease in cash used
in investing activities resulted from a decrease in capital expenditures.
The net decrease in cash and cash equivalents for the twelve months ended
December 31, 2002 was greater than the net decrease in cash and cash equivalents
for the twelve months ended December 31, 2001 due to a $5,068,000 decrease in
cash provided by financing activities, offset by a $4,234,000 increase in cash
provided by operating activities and a $354,000 reduction in cash used in
investing activities. The decrease in cash provided by financing activities
resulted from $5,727,000 of reduced borrowings from the short-term line of
credit, offset by a decrease in repayments of long-term debt. The increase in
cash provided by operating activities is due primarily to changes in accounts
receivable, accounts payable, gas in storage, deferred gas costs and deferred
income taxes. The decrease in cash used in investing activities resulted from a
decrease in capital expenditures.
Cash provided by our operating activities consists of net income and
noncash items, including depreciation, depletion, amortization and deferred
income taxes. Cash provided by our operating activities also includes changes in
working capital in our cash generated by operating activities. We expect that
internally generated cash, coupled with short-term borrowings, will be
sufficient to satisfy our operating, normal capital expenditure and dividend
requirements for the foreseeable future.
RESULTS OF OPERATIONS
For meaningful analysis of our revenue and expense variations, the
variation amounts and percentages presented below for regulated and
non-regulated revenues and expenses include intersegment transactions. These
intersegment revenues and expenses, whose variations are also disclosed in the
following tables, are eliminated in the consolidated statements of income.
Operating Revenues
The following table sets forth certain variations in our revenues for the
three, six and twelve months ended December 31, 2002 with the same periods in
the preceding year:
Increase (Decrease)
2002 Compared to 2001
Three Six Twelve Months
Months Ended Months Ended Ended
December 31 December 31 December 31
-------------- ------------ -------------
($000)
Variations in regulated revenues
Gas rates (368) (748) (2,118)
Weather normalization adjustment (652) (652) 562
Sales volumes 2,703 2,904 (3,051)
On-system transportation 85 81 113
Off-system transportation 83 193 353
Other (7) (16) (45)
------ ------ ------
Total 1,844 1,762 (4,186)
------ ------ ------
Variations in non-regulated revenues
Gas rates 875 689 (4,082)
Sales volumes (414) (1,263) (5,834)
Other 3 7 2
------ ------ -------
Total 464 (567) (9,914)
------ ------ -------
Total variations in revenues 2,308 1,195 (14,100)
Variations in intersegment revenues 613 1,621 5,899
------ ------ -------
Variations in consolidated revenues 2,921 2,816 (8,201)
====== ====== =======
Increase (Decrease)
2002 Compared to 2001
Three Months Six Months Twelve Months
Ended Ended Ended
December 31 December 31 December 31
Percentage variations in
regulated volumes
Gas sales 35.6% 27.2% (6.9%)
On-system transportation 14.1% 11.1% 9.3%
Off-system transportation 27.7% 26.4% 18.3%
Percentage variations in non-
regulated gas sales volumes
(1.4%) (15.1%) (19.2%)
Heating degree days billed were 74%, 71% and 99% of thirty year average
temperatures for the three, six and twelve months ended December 31, 2002,
respectively, as compared with 48%, 47% and 99% for the similar periods of 2001.
A "heating degree day" is determined each day when the average of the high and
low temperature is one degree less than 65 degrees Fahrenheit.
The increases in operating revenues for the three and six months ended
December 31, 2002 of $2,921,000 and $2,816,000, respectively, were primarily due
to the 35.6% and 27.2% increases, respectively, in sales volumes in the
regulated business because of the significantly colder weather in 2002. The
decrease in operating revenue for the twelve months ended December 31, 2002 of
$8,201,000 is attributable to lower prices in both the regulated and
non-regulated segments and the 6.9% decline in regulated sales volumes.
Operating Expenses
The following table sets forth certain variations in our purchased gas
expense for the three, six, and twelve months ended December 31, 2002 compared
with the same periods in the preceding year:
Increase (Decrease)
2002 Compared to 2001
Three Months Six Twelve Months
Ended December 31 Months Ended Ended December 31
December 31
($000)
Variations in regulated gas expense
Gas rates 69 (135) (2,663)
Purchase volumes 1,397 1,407 (1,742)
------- ------- -------
Total 1,466 1,272 (4,405)
------- ------- -------
Variations in non-regulated
gas expense
Gas rates 253 340 (5,145)
Purchase volumes (66) (974) (4,460)
Transportation expenses 81 67 (24)
------- ------- -------
Total 268 (567) (9,629)
------- ------- -------
Total variations in gas expense 1,734 705 (14,034)
Variations in intersegment gas expense
613 1,621 5,899
------- ------- -------
Variations in consolidated
gas expense 2,347 2,326 (8,135)
======= ======= =======
The increases in purchased gas expense for the three and six months ended
December 31, 2002 of $2,347,000and $2,326,000, respectively, were primarily due
to the 35.6% and 27.2% increases, respectively, in sales volumes in the
regulated business because of the significantly colder weather in 2002. The
decrease in purchased gas expense for the twelve months ended December 31, 2002
of $8,135,000 is attributable to the 6.9% decline in regulated sales volumes and
the 19.2% decline in non-regulated sales volumes due to the discontinuance of
the non-regulated segment selling gas to the regulated segment effective January
1, 2002. In addition, gas rates decreased due to lower gas prices.
The increases in operation and maintenance expense of $415,000 and $577,000
for the three and six months ended December 31, 2002 were primarily due to an
increase in bad debt expense resulting from higher gas prices and colder winter
weather, and due to increased payroll and benefit costs.
The increases in taxes other than income taxes for the three, six and
twelve months ending December 31, 2002 of $93,000, $110,000 and $122,000,
respectively, were primarily due to increased property taxes.
The decreases in interest charges for the three, six and twelve months ended
December 31, 2002 of $126,000, $244,000 and $594,000, respectively, were
primarily due to decreased rates, partially offset by increased borrowings.
Basic and Diluted Earnings Per Common Share
For the three, six and twelve months ended December 31, 2002 and 2001, our
basic earnings per common share changed as a result of changes in net income and
an increase in the number of our common shares outstanding. We increased our
number of common shares outstanding as a result of shares issued through our
dividend reinvestment plan and employee stock purchase plan.
We have no potentially dilutive securities. As a result, our basic earnings
per common share and our diluted earnings per common share are the same.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, entitled Accounting for Asset Retirement
Obligations, and Delta adopted this statement effective July 1, 2002. Statement
No. 143 addresses financial accounting for legal obligations associated with the
retirement of long-lived assets. Upon adoption of this statement, we recorded
$178,000 of asset retirement obligations in the balance sheet primarily
representing the current estimated fair value of our obligation to plug oil and
gas wells at the time of abandonment. Of this amount, $47,000 was recorded as
incremental cost of the underlying property, plant and equipment. The cumulative
effect on earnings of adopting this new statement was a charge to earnings of
$88,000 (net of income taxes of $55,000), representing the cumulative amounts of
depreciation and changes in the asset retirement obligation due to the passage
of time for historical accounting periods. The adoption of the new standard did
not have a significant impact on income (loss) before cumulative effect of a
change in accounting principle for the three, six and twelve months ended
December 31, 2002. Pro forma net income and earnings per share have not been
presented for the three and six months ended December 31, 2001 and for the
twelve months ended December 31, 2002 and 2001 because the pro forma application
of Statement No. 143 to prior periods would result in pro forma net income and
earnings per share not materially different from the actual amounts reported for
those periods in the accompanying consolidated statements of income.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, entitled Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses
accounting and reporting for the impairment or disposal of long-lived assets.
Statement No. 144 was effective July 1, 2002. The impact of implementation on
our financial position or results of operations was not material.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, entitled Accounting for Costs Associated
with Exit or Disposal Activities. Statement No. 146 addresses financial
reporting and accounting for costs associated with exit or disposal activities.
This statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and is effective
for exit or disposal activities that are initiated after December 31, 2002. We
have not committed to any such exit or disposal plan. Accordingly, this new
statement will not presently have any impact on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We purchase our gas supply through a combination of spot market gas
purchases and forward gas purchases. The price of spot market gas is based on
the market price at the time of delivery. The price we pay for our natural gas
supply acquired under our forward gas purchase contracts, however, is fixed
months prior to the delivery of the gas. Additionally, we inject some of our gas
purchases into gas storage facilities in the non-heating months and withdraw
this gas from storage for delivery to customers during the heating season. We
have minimal price risk resulting from these forward gas purchase and storage
arrangements, because we are permitted to pass these gas costs on to our
regulated customers through the gas cost recovery rate mechanism.
As part of our non-regulated transportation activities we sometimes
contract with our transportation customers to acquire gas that we will transport
to these customers. At the time we make a sales commitment to one of these
customers, we attempt to cover this position immediately with gas purchase
commitments matched to the terms of the related sales contract. By immediately
covering our obligation under the contracts with our transportation customers,
we are able to minimize our price volatility risk.
None of our gas contracts are accounted for using the fair value method of
accounting. While some of our gas purchase contracts meet the definition of a
derivative, we have designated these contracts as "normal purchases" under
Statement No. 133 entitled Accounting for Derivatives Instruments and Hedging
Activities.
We are exposed to risk resulting from changes in interest rates on our
variable rate notes payable. The interest rate on our current short-term line of
credit with Branch Banking and Trust Company is benchmarked to the monthly
London Interbank Offered Rate. Based on the amount of our outstanding short-term
line of credit on December 31, 2002, a one percent (one hundred basis point)
increase (decrease) in our average interest rates would result in a decrease
(increase) in our annual pre-tax net income of $290,000.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the information we
must disclose in reports that we file with or submit to the Securities and
Exchange Commission. Glenn R. Jennings, our President and Chief Executive
Officer, and John F. Hall, our Vice President-Finance, Secretary and
Treasurer, reviewed and participated in this evaluation. Based on this
evaluation, Mr. Jennings and Mr. Hall concluded that, as of the date of
their evaluation, our disclosure controls were effective.
(b) Internal Controls. Since the date of the evaluation described above, there
have not been any significant changes in our internal accounting controls
or in other factors that could significantly affect those controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Delta and its subsidiaries are not parties to any legal proceedings that
are expected to have a materially adverse impact on our liquidity, financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Registrant held its annual meeting of shareholders on November 21, 2002.
(b) Glenn R. Jennings, Lewis N. Melton and Arthur E. Walker, Jr. were elected
to Delta's Board of Directors for three-year terms expiring in 2005. Jane
Hylton Green, Harrison D. Peet and Michael R. Whitley will continue to
serve on Delta's Board of Directors until the election in 2003. Donald R.
Crowe, Lanny D. Greer and Billy Joe Hall will continue to serve on Delta's
Board of Directors until the election in 2004.
(c) The total shares voted in the election of Directors were 2,307,776. There
were no broker non-votes. The shares voted for each Nominee were:
Glenn R. Jennings For 2,263,064 Withheld 44,712
Lewis N. Melton For 2,271,677 Withheld 36,099
Arthur E. Walker, Jr. For 2,270,972 Withheld 36,804
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3(a) Delta's By-Laws as amended November 21, 2002.
99.1 Certificate of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
99.2 Certificate of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
(b) Reports on Form 8-K. On November 22, 2002 the Company filed a form 8-K
reporting that at a meeting held November 21, 2002 the Board of Directors
amended Delta's By-Laws to provide for ten directors, one more than
previously authorized. Michael J. Kistner was appointed to fill the vacancy
thus created. The By-Laws were also amended at that meeting to eliminate
cumulative voting for directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA NATURAL GAS COMPANY, INC.
(Registrant)
/s/Glenn R. Jennings
DATE: February 13, 2003 Glenn R. Jennings
President and Chief Executive Officer
(Duly Authorized Officer)
/s/John F. Hall
John F. Hall
Vice President - Finance, Secretary
and Treasurer
(Principal Financial Officer)
/s/John B. Brown
John B. Brown
Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Glenn R. Jennings, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Natural Gas
Company, Inc., the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/Glenn R. Jennings
Glenn R. Jennings
President & Chief Executive Officer
Date: February 13, 2003
CERTIFICATIONS
I, John F. Hall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Natural Gas
Company, Inc., the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/John F. Hall
John F. Hall
Vice President - Finance,
Secretary & Treasurer
Date: February 13, 2003
EXHIBIT 3(A)
AMENDED AND RESTATED
(on November 21, 2002) BY-LAWS OF
DELTA NATURAL GAS COMPANY, INC.
ARTICLE I
Offices and Registered Agent
1.1 Principal Office. The principal office of the Corporation shall be
located at 3617 Lexington Road, Winchester, Kentucky 40391. The Corporation may
have such other offices, either within or without the Commonwealth of Kentucky,
as the business of the Corporation may require from time to time.
1.2 Registered Office. The registered office of the Corporation shall be at
3617 Lexington Road, Winchester, Kentucky 40391. The address of the registered
office may be changed from time to time by the Board of Directors.
1.3. Registered Agent. The registered agent for the Corporation shall be
the Secretary of the Corporation.
ARTICLE II
Shareholders
2.1 Annual Meetings. The annual meeting of the shareholders shall be held
at the principal office of the Corporation on the third Thursday in November of
each year, at such time as the President may designate. The Board of Directors
of the Corporation, by resolution, may for any year change the place, date and
time for any annual meeting from that established by the first sentence of this
Section 2.1 of ARTICLE II. The purpose of such annual meetings shall be the
election of directors and such other business as may properly come before it. If
the election of directors shall not be held on the day designated for the annual
meeting, or at any adjournment thereof, the Board of Directors shall cause the
election to be held at a special meeting of the shareholders as soon thereafter
as may be practicable.
2.2 Special Meetings. Special meetings of the shareholders may be called by
the President, a majority of the members of the Board of Directors or the
holders of at least thirty-three and one-third percent (33 1/3%) of all the
votes entitled to be cast on any issue proposed to be considered at the proposed
special meeting, provided, however, that such call by such holders shall be
subject to all requirements of Kentucky law.
2.3 Place of Special Meetings. The President or the Board of Directors may
designate any place within or without the Commonwealth of Kentucky as the place
for any special meeting. If no designation is properly made, or if a special
meeting be otherwise called, the place of meeting shall be at the registered
office of the Corporation in the Commonwealth of Kentucky.
2.4 Notice of Annual or Special Meeting. Written or printed notice stating
the place, day and hour of the annual or special meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than ten (10) days nor more than sixty (60) days before
the date of the meeting, either personally or by mail, by or at the direction of
the President, the Secretary or the officer or persons calling the meeting, to
each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
in a sealed envelope addressed to the shareholder at his or her address as it
appears on the stock transfer books of the Corporation, with postage thereon
prepaid.
2.5 Fixing of a Record Date. The Board of Directors may fix a record date
in order to determine the shareholders entitled to receive dividends or
distributions, to notice of a shareholders' meeting, to demand a special
meeting, to vote or to take any other action or receive any allotment of rights.
A record date fixed by the Board of Directors shall not be more than seventy
(70) days before the meeting or action requiring a determination of
shareholders. In the event no record date is fixed by the Board of Directors,
the record date shall be determined pursuant to Kentucky law.
2.6 Quorum and Voting Requirements. Unless the Corporation's Articles of
Incorporation or Kentucky law requires otherwise, a majority of the votes
entitled to be cast on the matter by the voting group shall constitute a quorum
for action on any matter. If a quorum exists, action on a matter (other than the
election of directors) by a voting group shall be approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing the
action, unless the Corporation's Articles of Incorporation or Kentucky law
requires a greater number of affirmative votes.
2.7 Proxies. -------
(a) A shareholder may vote his or her shares in person or by proxy.
(b) A shareholder may appoint a proxy to vote or otherwise act for him or
her by signing an appointment form, either personally or by his or her attorney
in fact. A telegram or cablegram appearing to have been transmitted by the
proper person, or a photographic, photostatic or equivalent reproduction of a
writing appointing a proxy shall be deemed to be a sufficient signed appointment
form.
(c) An appointment of a proxy shall be effective when the appointment form
is received by the secretary or other officer or agent authorized to tabulate
votes. An appointment shall be valid for eleven (11) months unless a longer
period is expressly provided in the appointment form.
(d) An appointment of a proxy shall be revocable by the shareholder unless
the appointment form conspicuously stated that it is irrevocable and the
appointment is coupled with an interest.
2.8 Voting of Shares. Subject to the provisions of Section 2.9 hereof, each
outstanding share of common stock authorized by the Corporation's Articles of
Incorporation to have voting power shall be entitled to one vote upon each
matter submitted to a vote at a meeting of shareholders. The voting rights, if
any, of classes of shares other than voting common stock shall be as set forth
in the Corporation's Articles of Incorporation or by appropriate legal action of
the Board of Directors.
2.9 Informal Action by Shareholders. Any action required to be taken, or
which may be taken, at a meeting of the shareholders may be taken without a
meeting if a consent in writing setting forth the action so taken shall be
signed by all of the shareholders entitled to vote with respect to the subject
matter thereof.
ARTICLE III
Directors
3.1 General Powers. All corporate powers shall be exercised by or under the
authority of and the business affairs of -------------- the Corporation managed
under the direction of the Board of Directors.
3.2 Number, Tenure and Qualifications. The number of directors of the
Corporation shall be ten (10). The Board of Directors shall be divided into
three (3) classes, with each class as nearly equal as possible. Each director
shall hold office for the term for which he or she is elected or until his or
her successor has been elected and qualified, whichever period is longer.
3.3 Removal and Resignations. At a meeting of shareholders called expressly
for that purpose, any director may be removed for cause by a vote of the holders
of a majority of the shares then entitled to vote at an election of directors.
Removal without cause may occur only as set forth in the Articles of
Incorporation. Notwithstanding the provisions of this Section, no director may
be removed, with or without cause, if the number of votes sufficient to elect
him or her under cumulative voting is voted against his or her removal. Any
member of the Board of Directors may resign from the Board of Directors at any
time by giving written notice to the President or Secretary of the Corporation,
or to any other person or entity specified by Kentucky law, and unless otherwise
specified in such notice, resignation shall be effective upon delivery of such
notice and shall not require, acceptance to make it effective.
3.4 Regular Meetings. A regular, annual meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting of
shareholders. The Board of Directors may provide by resolution the time and
place, either within or without the Commonwealth of Kentucky, for the holding of
up to 12 additional regular meetings in the following twelve (12) month period
without other notice than such resolution.
3.5 Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the President or any two directors. All special
meetings of the Board of Directors shall be held at the principal office of the
Corporation or such other place as may be specified in the notice of the
meeting.
3.6 Notice. Notice of any special meeting shall be given at least twelve
(12) hours prior thereto by written notice delivered personally or mailed to
each director at his or her business address or by telephone to each director
personally. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail in a sealed envelope so addressed, postage
prepaid. Any director may waive in writing notice of any meeting. The attendance
of a director at any meeting shall constitute a waiver of notice of such
meeting, unless the director at the beginning of the meeting (or promptly upon
his or her arrival) objects to holding the meeting or transacting business at
the meeting and does not thereafter vote for or assent to action taken at the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
3.7. Quorum. A majority of the number of directors fixed by, or determined
in accordance with, Section 3.2 hereof shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors.
3.8 Manner of Acting. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors,
unless otherwise required by the Articles of Incorporation.
3.9 Vacancies. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of a majority of the remaining directors though
less than a quorum of the Board of Directors. A director elected to fill a
vacancy shall be elected for the unexpired term of his or her predecessor in
office. Any directorship to be filled by reason of an increase in the number of
directors may be filled by the Board of Directors for a term of office
continuing until the next election of directors by the shareholders.
3.10 Compensation. Each director shall be compensated in accordance with
compensation guidelines established by the Board of Directors. No such payment
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation there for.
3.11 Action by Written Consent. Any action required or permitted to be
taken by the Board of Directors at a meeting may be taken without a meeting, if
a consent in writing setting forth the action so taken shall be signed by all of
the directors.
3.12 Chairman and Vice-Chairman of the Board. The Board of Directors may
appoint one of its members Chairman of the Board of Directors. The Board of
Directors may also appoint one of its members as Vice-Chairman of the Board of
Directors, and such individual shall serve in the absence of the Chairman and
perform such additional duties as may be assigned to him or her by the Board of
Directors.
ARTICLE IV
Officers
4.1 Classes. The officers of the Corporation shall be a President, one or
more Vice-Presidents, a Secretary, a Treasurer, each of whom shall be elected by
the Board of Directors. Such other officers and assistant officers as may be
deemed necessary may be elected or appointed by the Board of Directors.
4.2 Election and Term of Office. The officers of the Corporation shall be
elected by the Board of Directors at each regular, annual meeting of the Board
of Directors. If the election of officers shall not be held at any such meeting,
such election shall be held as soon thereafter as is convenient. Vacancies may
be filled or new offices created and filled at any meeting of the Board of
Directors. Each officer shall hold office until his or her successor shall have
been duly elected and shall have qualified or until his or her death or until he
or she shall resign or shall have been removed in the manner hereinafter
provided.
4.3 Removal and Resignations. Any officer or agent elected or appointed by
the Board of Directors may be removed by the Board of Directors, with or without
cause, whenever, in its judgment, the best interests of the Corporation would be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights. Any officer of the
corporation may resign at any time by delivering notice to the President or
Secretary of the Corporation, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. An
officer's resignation shall not affect the Corporation's contract rights, if
any, with the officer.
4.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or otherwise may be
filled by the Board of Directors for the unexpired portion of the term.
4.5 President. The President shall be the chief executive officer of the
corporation. If no chairman or vice-chairman has been appointed or, in the
absence of both, he or she shall preside at all meetings of the shareholders and
of the Board of Directors. He or she may sign certificates for shares of the
Corporation, any deeds, mortgages, bonds, contracts or other instruments which
the Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these By-Laws to some other officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed. The President,
in general, shall perform all duties incident to the office of President and
chief executive officer and such other duties as may be prescribed by the Board
of Directors from time to time. Unless otherwise ordered by the Board of
Directors, the President shall have full power and authority on behalf of the
Corporation to attend, act and vote at any meetings of shareholders of any
corporation in which the Corporation may hold stock, and at any such meeting,
shall hold and may exercise all rights incident to the ownership of such stock
which the Corporation, as owner, might have had and exercised if present. The
Board of Directors may confer like powers on any other person or persons.
4.6 Vice-President. In the absence of the President, or in the event of his
or her inability or refusal to act, the Vice Presidents in order designated at
the time of their election or otherwise by the Board of Directors shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to the restrictions upon the President. Any Vice-President may
sign, with the Secretary or an assistant secretary, certificates for shares of
the corporation and shall perform such other duties as from time to time may be
assigned by the President or by the Board of Directors.
4.7 Treasurer. The Treasurer shall be the chief financial officer of the
Corporation. He or she shall have charge and custody of and be responsible for
all funds and securities of the Corporation, receive and give receipts for
monies due and payable to the Corporation from any source whatsoever, deposit
all such monies in the name of the Corporation in such banks, trust companies
and other depositories as shall be selected in accordance with the Provisions of
Article V of these By-Laws and, in general, perform all the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the President or the Board of Directors. If required
by the Board of Directors, the Treasurer shall give a bond for the faithful
discharge of his or her duties in such sum and with such surety or sureties as
the Board of Directors shall determine.
4.8 Secretary. The Secretary shall (a) prepare and keep the minutes of the
shareholders' meetings and of the Board of Directors' meetings in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these By-Laws or as required by law; (c) be
custodian of the corporate records and of the seal, if any, of the Corporation;
(d) keep a register of the Post Office address of each shareholder; (e) sign
with the President or Vice-President certificates for shares of stock of the
Corporation; (f) have general charge of the stock transfer books of the
Corporation; (g) have responsibility for authenticating records of the
Corporation; and, (h) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President or by the Board of Directors.
4.9 Compensation. The compensation of the officers of the Corporation shall
be fixed from time to time by the Board of Directors, and no officer shall
be prevented from receiving such compensation by reason of the fact that he or
she is also a director
of the Corporation.
ARTICLE V
Contracts, Loans, Checks
and Deposits
5.1 Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract and execute and deliver
any instruments in the name of and on behalf of the Corporation. Such authority
may be general or confined to specific instances.
5.2 Loans. No loans shall be contracted or evidence of indebtedness issued
on behalf of the Corporation unless authorized by the President or by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
5.3 Deposits, Checks, Drafts, Etc. All funds of the Corporation not
otherwise employed shall be deposited, from time to time, to the credit of the
Corporation in such banks, trust companies and other depositories selected by
the Board of Directors or any two of the President, a Vice President or
Treasurer. All checks, drafts, electronic fund transfers, wire transfers or
other orders for the payment of money, notes or other evidences of indebtedness
issued in the name of the Corporation shall be signed or otherwise authorized by
such officer or officers, employee or employees, or agent or agents of the
Corporation and in such manner as shall, from time to time, be determined by
resolution of the Board of Directors or any two of the President, a Vice
President or Treasurer.
ARTICLE VI
Certificates for Shares and
Their Transfer
6.1 Certificates for Shares. Certificates representing shares of the
Corporation shall be in such form as may be determined by the Board of Directors
and by the laws of the Commonwealth of Kentucky. Such certificates shall be
signed by the President or a Vice-President and by the Secretary or an assistant
secretary, and may be sealed with the seal of the Corporation, or a facsimile
thereof. The signature of such officers upon such certificates may be facsimiles
if the certificate is manually signed on behalf of a transfer agent or registrar
for the Corporation. All certificates for shares shall be consecutively
numbered. The name of the person owning the shares represented thereby, with the
number of shares and date of issue, shall be entered on the books of the
Corporation. All certificates surrendered to the Corporation for transfer shall
be cancelled, and no new certificates shall be issued until the former
certificates for a like number of shares shall have been surrendered and
cancelled, except that, in case of a lost, destroyed or mutilated certificate, a
new one may be issued therefor upon such terms and indemnity to the Corporation
as the Secretary may prescribe.
6.2 Transfer of Shares. Transfer of shares of the Corporation shall be made
only on the books of the Corporation by the registered holder thereof, or by his
or her legal representative who shall furnish proper evidence of authority to
transfer, or by his or her attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the Corporation, and on surrender
for cancellation of the certificate for such shares. The person in whose name
shares stand on the books of the Corporation shall be deemed the owner thereof
for all purposes as regards the Corporation.
ARTICLE VII
INDEMNIFICATION
7.1 Definitions. As used in this Article VII: -----------
(a) "Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, and
whether formal or informal;
(b) "Party" includes a person who was, is or is threatened to be made a
named defendant or respondent in a
Proceeding;
(c) "Expenses" include attorneys fees;
(d) "Officer" means any person serving as Chairman of the Board of
Directors, President, Vice-President, Treasurer, Secretary or Assistant
Secretary of the Corporation;
(e) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation, is or was
serving at the request of the Corporation as a Director, Officer, Partner,
Trustee, Employee or Agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise. A
Director shall be considered serving an employee benefit plan at the request of
the Corporation if his or her duties to the Corporation also impose duties on,
or otherwise involve services by, him or her to the plan or to participants in
or beneficiaries of the plan. "Director" includes, unless the context requires
otherwise, the estate or personal representative of a director.
7.2 Indemnification by Corporation.
(a) The Corporation shall indemnify any Officer or Director who is made a
Party to any Proceeding by reason of the fact that such person is or was an
Officer or Director if:
(1) Such Officer or Director conducted himself or herself in good
faith; and
(2) Such Officer or Director reasonably believed:
(i) In the case of conduct in his or her official capacity with
the Corporation, that his or her conduct was in the best interest of
the Corporation; and
(ii) In all other cases, that his or her conduct was at least not
opposed to the best interest of the Corporation; and
(3) In the case of any criminal Proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful.
(b) A Director's conduct with respect to an employee benefit plan for a
purpose he or she reasonably believes to be in the interest of the participants
in and beneficiaries of the plan shall be conduct that satisfies the requirement
of Section 7.2 (a)(2)(ii) of these By-Laws.
(c) Indemnification shall be made against judgments, penalties, fines,
settlements and reasonable expenses, including legal expenses, actually incurred
by such Officer or Director in connection with a Proceeding, except that if the
Proceeding was by or in the right of the Corporation, indemnification shall be
made only against such reasonable expenses and shall not be made in respect of
any Proceeding in which the Officer or Director shall have been adjudged to be
liable to the Corporation. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, by itself, be determinative that the Officer or Director did not meet
the requisite standard of conduct set forth in this Section 7.2.
(d) (1) Reasonable expenses incurred by an Officer or Director as a Party
to a Proceeding with respect to which indemnity is to be provided under this
Section 7.2 shall be paid or reimbursed by the Corporation in advance of the
final disposition of such Proceeding provided:
(i) The Corporation receives (I) a written affirmation by the Officer
or Director of his or her good faith belief that he or she has met the
requisite standard of conduct set forth in this Section 7.2, and (II) the
Corporation receives a written undertaking by or on behalf of the Officer
or Director to repay such amount if it shall ultimately be determined that
he or she has not met such standard of conduct; and
(ii) The Corporation's Board of Directors (or other appropriate
decisionmaker for the Corporation) determines that the facts then known to
the Board of Directors (or decisionmaker) would not preclude
indemnification under Kentucky law.
(2) The undertaking required herein shall be an unlimited general
obligation of the Officer or Director but shall not require any security and
shall be accepted without reference to the financial ability of the Officer or
Director to make repayment.
(3) Determinations and authorizations of payments under this Section 7.2(d)
shall be made in the manner specified in Section 7.2(e) of these By-Laws.
(e) (1) The Corporation shall not indemnify an Officer or Director
under this Section 7.2 unless authorized in the specific case after a
determination has been made that indemnification of the Officer or Director
is permissible in the circumstances because he or she has met the standard
of conduct set forth in this Section 7.2.
(2) Such determination shall be made:
(i) By the Corporation's Board of Directors by majority vote of a
quorum consisting of directors not at the time Parties to the Proceeding;
(ii) If a quorum cannot be obtained under Section 7.2(e)(2)(i), by
majority vote of a committee duly designated by the Corporation's Board of
Directors (in which designation directors who are Parties may participate),
consisting solely of two (2) or more directors not at the time Parties to
the Proceeding; or
(iii) By special legal counsel:
(I) Selected by Corporation's Board of Directors or its committee
in the manner prescribed in Sections 7.2(e)(2)(i) and (ii); or
(II) If a quorum of the Board of Directors cannot be obtained
under Section 7.2(e)(2)(i) and a committee cannot be designated under
Section 7.2(e)(2)(ii), selected by a majority vote of the full Board
of Directors (in which selection directors who are Parties may
participate); or
(3) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under Section
7.2(e)(2)(iii) to select counsel.
7.3 Further Indemnification. Notwithstanding any limitation imposed by
Section 7.2 or elsewhere and in addition to the indemnification set forth in
Section 7.2, the Corporation, to the full extent permitted by law, may agree by
contract or otherwise to indemnify any Officer or Director and hold him or her
harmless against any judgments, penalties, fines, settlements and reasonable
expenses actually incurred or reasonably anticipated in connection with any
Proceeding in which any Officer or Director is a Party, provided the Officer or
Director was made a Party to such Proceeding by reason of the fact that he or
she is or was an Officer or Director of the Corporation or by reason of any
inaction, nondisclosure, action or statement made, taken or omitted by or on
behalf of the Officer or Director with respect to the Corporation or by or on
behalf of the Officer or Director in his or her capacity as an Officer or
Director.
7.4 Insurance. The Corporation may, in the discretion of the Board of
Directors, purchase and maintain or cause to be purchased and maintained
insurance on behalf of all Officers and Directors against any liability asserted
against them or incurred by them in their capacity or arising out of their
status as an Officer or Director, to the extent such insurance is reasonably
available. Such insurance shall provide such coverage for the Officers and
Directors as the Board of Directors may deem appropriate.
ARTICLE VIII
Miscellaneous
8.1 Amendments. The Board of Directors shall have the power and authority
to alter, amend or repeal By-Laws of the Corporation, subject always to the
power of the shareholders under Kentucky law to change or repeal such By-Laws.
8.2 Fiscal Year. The Board of Directors shall have the power to fix, and
from time to time change, the fiscal year of the Corporation. The fiscal year of
the Corporation shall begin on the first day of July and end on the thirtieth
day of June of each year.
8.3 Dividends. The Board of Directors may, from time to time, make
distributions to shareholders in the manner and upon the terms and conditions
provided by Kentucky law and its Articles of Incorporation.
8.4 Seal. The Board of Directors may adopt a corporate seal.
----
8.5 Waiver of Notice. Whenever any notice is required to be given or
delivered under the provisions of these By-Laws, or under the provisions of the
Corporation's Articles of Incorporation, or under the provisions of the
corporation laws of the Commonwealth of Kentucky, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time state, therein, shall be equivalent to the delivery or giving of such
notice.
8.6 Construction. Unless the context specifically requires otherwise, any
reference in these By-Laws to any gender shall include all other genders; any
reference to the singular shall include the plural; and any reference to the
plural shall include the singular.
THE ABOVE AMENDED AND RESTATED BY-LAWS OF THIS CORPORATION WERE ADOPTED
BY THE BOARD OF DIRECTORS AT A MEETING HELD NOVEMBER 21, 2002
--------------------------
JOHN F. HALL, SECRETARY
EXHIBIT 99.1
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Delta Natural Gas Company, Inc.
(the "Company") on Form 10-Q for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Glenn R. Jennings, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Glenn R. Jennings
Glenn R. Jennings
President & Chief Executive Officer
February 13, 2003
EXHIBIT 99.2
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Delta Natural Gas Company, Inc.
(the "Company") on Form 10-Q for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, John F. Hall, Vice-President - Finance, Secretary and Treasurer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/John F. Hall
John F. Hall
Vice-President - Finance,
Secretary & Treasurer
February 13, 2003