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 March 31, 2003
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 registratant 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
2,558,635 Shares Outstanding as of March 31, 2003.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended Twelve Months Ended
------------------ ----------------- -------------------
March 31 March 31 March 31
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
OPERATING REVENUES $31,217,192 $ 25,158,025 $ 53,872,293 $44,937,745 $ 64,804,767 $ 59,713,843
---------------------------- -------------- -------------- -------------- --------------
OPERATING EXPENSES
Purchased gas $18,979,635 $ 14,213,053 $ 31,741,933 $24,590,044 $ 37,249,552 $ 34,008,239
Operation and maintenance 2,658,023 2,437,159 7,783,744 6,986,317 10,483,174 9,740,123
Depreciation and depletion 1,117,749 1,028,849 3,221,214 3,043,436 4,258,722 4,000,410
Taxes other than income taxes 398,240 379,180 1,120,748 991,877 1,483,784 1,366,920
Income tax expense 2,585,400 2,255,800 2,443,957 2,122,400 2,571,057 2,222,525
---------------------------- -------------- -------------- -------------- --------------
Total operating expenses $25,739,047 $ 20,314,041 $ 46,311,596 $37,734,074 $ 56,046,289 $ 51,338,217
---------------------------- -------------- -------------- -------------- --------------
OPERATING INCOME $ 5,478,145 $ 4,843,984 $ 7,560,697 $ 7,203,671 $ 8,758,478 $ 8,375,626
OTHER INCOME AND DEDUCTIONS, NET 9,120 5,986 31,813 18,722 30,109 20,261
INTEREST CHARGES 1,228,973 1,104,744 3,544,330 3,663,741 4,662,346 4,894,339
---------------------------- -------------- -------------- -------------- --------------
INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE $ 4,258,292 $ 3,745,226 $ 4,048,180 $ 3,558,652 $ 4,126,241 $ 3,501,548
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 3) - - (88,370) - (88,370) -
---------------------------- -------------- -------------- -------------- --------------
NET INCOME $ 4,258,292 $ 3,745,226 $ 3,959,810 $ 3,558,652 $ 4,037,871 $ 3,501,548
============================ ============== ============== ============== ==============
Three Months Ended Nine Months Ended Twelve Months Ended
------------------ ----------------- -------------------
March 31 March 31 March 31
-------- -------- --------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
BASIC AND DILUTED EARNINGS PER
COMMON SHARE BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE $ 1.66 $ 1.49 $ 1.59 $ 1.42 $ 1.62 $ 1.40
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - - (.03) - (.03) -
------------------------ ----------- --------------- ------------ ------------
BASIC AND DILUTED EARNINGS
PER COMMON SHARE $ 1.66 $ 1.49 $ 1.56 $ 1.42 $ 1.59 $ 1.40
======================== =========== =============== ============ =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (BASIC AND DILUTED) 2,553,889 2,518,326 2,545,801 2,510,084 2,540,714 2,505,141
DIVIDENDS DECLARED PER COMMON SHARE $ .295 $ .29 $ .885 $ .87 $ 1.175 $ 1.155
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS March 31, 2003 June 30, 2002 March 31, 2002
-------------- ------------- --------------
GAS UTILITY PLANT $ 160,821,810 $ 156,305,063 $ 153,747,213
Less-Accumulated provision
for depreciation (51,473,388) (49,142,976) (48,222,433)
---------------------- ----------------------
----------------------
Net gas plant $ 109,348,422 $ 107,162,087 $ 105,524,780
---------------------- ---------------------- ----------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,591,333 $ 225,236 $ 643,758
Accounts receivable - net 7,768,558 2,884,025 6,282,812
Gas in storage 1,806,639 5,216,772 2,062,880
Deferred gas costs 5,966,068 4,076,059 5,087,825
Materials and supplies 518,668 523,756 471,217
Prepayments 607,920 388,794 571,120
---------------------- ---------------------- ----------------------
Total current assets $ 18,259,186 $ 13,314,642 $ 15,119,612
---------------------- ---------------------- ----------------------
OTHER ASSETS
Cash surrender value of
officers' life insurance $ 344,687 $ 344,687 $ 354,891
Note receivable from officer 140,000 158,000 110,000
Prepaid pension benefit cost 2,726,456 2,325,944 2,432,834
Unamortized debt expense and other 5,805,280 4,643,165 3,196,986
---------------------- ---------------------- ----------------------
Total other assets $ 9,016,423 $ 7,471,796 $ 6,094,711
---------------------- ---------------------- ----------------------
Total assets $ 136,624,031 $ 127,948,525 $ 126,739,103
====================== ====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders' equity $ 36,499,634 $ 34,182,277 $ 34,675,158
Long-term debt 53,408,000 48,600,000 48,752,000
---------------------- ---------------------- ----------------------
Total capitalization $ 89,907,634 $ 82,782,277 $ 83,427,158
---------------------- ---------------------- ----------------------
CURRENT LIABILITIES
Notes payable $ 16,995,293 $ 19,355,000 $ 19,405,000
Current portion of long-term debt 1,650,000 1,750,000 1,750,000
Accounts payable 5,254,877 4,077,983 2,351,909
Accrued taxes 2,573,926 673,873 2,254,511
Customers' deposits 554,322 440,568 541,554
Accrued interest on debt 1,448,864 1,162,956 1,542,144
Accrued vacation 558,066 558,066 538,595
Other liabilities 480,178 577,151 472,699
---------------------- ---------------------- ----------------------
Total current liabilities $ 29,515,526 $ 28,595,597 $ 28,856,412
---------------------- ---------------------- ----------------------
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 529,900 562,025 598,900
Additional minimum pension liability 1,461,440 1,461,440 -
Advances for construction and other 235,758 64,313 99,376
---------------------- ---------------------- ----------------------
Total deferred credits and other $ 17,200,871 $ 16,570,651 $ 14,455,533
---------------------- ---------------------- ----------------------
Total liabilities and
shareholders' equity $ 136,624,031 $ 127,948,525 $ 126,739,103
====================== ====================== ======================
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Twelve Months Ended
March 31 March 31
2003 2002 2003 2002
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 3,959,810 $ 3,558,652 $ 4,037,871 $ 3,501,548
Adjustments to reconcile net
income to net cash from
operating activities
Cumulative effect of a
change in accounting
principle 88,370 - 88,370 -
Depreciation, depletion
and amortization 3,355,418 3,180,405 4,433,215 4,189,498
Deferred income taxes and
investment tax credits 458,775 422,175 1,147,516 2,361,371
Other, net 488,779 438,967 645,706 623,387
(Increase) decrease in other
assets (3,821,281) 906,442 (2,390,768) 2,192,496
Increase (decrease) in other
liabilities 3,433,325 (1,180,906) 3,187,447 (1,758,097)
----------------------- --------------------------------------------------------------------
Net cash provided by
operating activities $ 7,963,196 $ 7,325,735 $ 11,149,357 $ 11,110,203
----------------------- --------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures $ (5,921,106) $ (6,590,024) $ (8,752,847) $ (9,607,385)
----------------------- --------------------------------------------------------------------
Net cash used in
investing activities $ (5,921,106) $ (6,590,024) $ (8,752,847) $ (9,607,385)
----------------------- --------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends on common stock $ (2,253,431) $ (2,184,198) $ (2,985,652) $ (2,893,964)
Issuance of common stock, net 610,978 546,144 772,257 702,020
Issuance of long-term debt 20,000,000 - 20,000,000 -
Long-term debt issuance expense (789,593) - (789,593) -
Repayment of long-term debt (15,884,240) (1,223,000) (16,036,240) (1,306,000)
Issuance of notes payable 74,961,068 27,440,000 84,411,068 39,895,000
Repayment of notes payable (77,320,775) (24,835,000) (86,820,775) (38,465,000)
----------------------- --------------------------------------------------------------------
Net cash provided by (used
in) financing activities $ (675,993) $ (256,054) $ (1,448,935) $ (2,067,944)
----------------------- --------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 1,366,097 $ 479,657 $ 947,575 $ (565,126)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 225,236 164,101 643,758 1,208,884
----------------------- --------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,591,333 $ 643,758 $ 1,591,333 $ 643,758
======================= ====================================================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 3,122,958 $ 3,179,137 $ 4,579,872 $ 4,922,326
Income taxes (net of refunds) $ 279,308 $ 140,166 $ 1,269,708 $ 140,166
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, nine and twelve months ended
March 31, 2003 and 2002, respectively, are included. All such adjustments
are accruals of a normal and recurring nature. The results of operations
for the period ended March 31, 2003 are not necessarily indicative of the
results of operations to be expected for the full fiscal 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 2003 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 before
cumulative effect of a change in accounting principle for the three, nine
and twelve months ended March 31, 2003. Pro forma net income and earnings
per share have not been presented for the three, nine and twelve months
ended March 31, 2002 and for the twelve months ended March 31, 2003 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 and 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 Jennings,
bears interest at 6%, which Jennings pays monthly. Delta forgives $2,000 of
the principal amount for each month of service Jennings completes. The
outstanding balance on this loan was $140,000 as of March 31, 2003. In the
event Jennings terminates his employment with Delta other than due to a
change in control, or 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) On February 18, 2003, we completed the sale of the aggregate principal
amount of $20,000,000 of 7.00% Debentures due 2023. We used the net
proceeds to repay short-term debt and to redeem our 8.30% Debentures
outstanding in the aggregate principal amount of $14,806,000. Loss on
extinguishment of debt of $1,127,000 was deferred and is being amortized
over the term of the related debt consistent with regulatory treatment.
(10) 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.
(11) 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 impact 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
applicable to us 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.
(12) 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 regulated segment serves residential, commercial and
industrial customers in the single geographic area of central and
southeastern Kentucky. 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. Therefore, the segments have similar risks and rewards.
External and intersegment revenues and net income by business segment are
as follows:
Three Nine Twelve
Months Months Months
Ended Ended Ended
March 31, March 31, March 31,
2003 2003 2003
($000)
Revenues
Regulated
External customers 24,910 38,636 46,211
Intersegment 834 2,441 3,118
Total regulated 25,744 41,077 49,329
------ ------ ------
Non-regulated
External customers 6,307 15,236 18,594
Intersegment - - -
______ ________ ______
Total non-regulated 6,307 15,236 18,594
Eliminations for
Intersegment (834) (2,441) (3,118)
------ ------ ------
Total operating revenues 31,217 53,872 64,805
====== ====== ======
Net Income
Regulated 3,311 2,581 2,417
Non-regulated 947 1,379 1,621
--- ----- -----
4,258 3,960 4,038
====== ===== =====
Three Nine Twelve
Months Months Months
Ended Ended Ended
March 31, March 31, March 31,
2002 2002 2002
($000)
Revenues
Regulated
External customers 20,766 32,797 42,248
Intersegment 832 2,372 3,097
------ ----- -----
Total regulated 21,598 35,169 45,345
------ ------ ------
Non-regulated
External customers 4,392 12,141 17,466
Intersegment - 1,691 2,671
Total non-regulated ----- ----- -----
4,392 13,832 20,137
Eliminations for
Intersegment (832) (4,063) (5,768)
------ ------ ------
Total operating revenues 25,158 44,938 59,714
====== ====== ======
Net Income
Regulated 3,512 2,784 2,429
External customers 233 775 1,073
----- ------ ------
Total net income 3,745 3,559 3,502
===== ===== =====
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, nine and twelve months ended March 31,
2003.
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 $5,921,106 during the first nine months of
fiscal 2003. We expect capital expenditures for fiscal 2003 to be approximately
$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 on an interim basis through a short-term line of bank
credit. Our current available line of bank credit is $40 million, of which
$16,995,293 was borrowed at March 31, 2003. 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. In
March 2003, we used the net proceeds of $19,270,000 from our $20,000,000 sale of
7% Debentures to redeem $14,806,000 aggregate principal amount of our 8.3%
Debentures due 2026, and to pay down a portion of our short-term notes payable.
In May, 2003, we used the net proceeds of $12,310,000 from our sale of 600,000
shares of common stock to pay down our short-term notes payable.
Below, we summarize our primary cash flows during the nine and twelve month
periods ending March 31, 2003 and 2002:
Nine Months Ended March 31,
2003 2002
---- ----
Provided by operating activities $ 7,963,196 $ 7,325,735
Used in investing activities (5,921,106) (6,590,024)
Used in financing activities (675,993) (256,054)
---------------------- ---------------
Net increase in cash
and cash equivalents $ 1,366,097 $ 479,657
====================== ===============
The net increase in cash and cash equivalents for the nine months ended
March 31, 2003 was greater than the net increase in cash and cash equivalents
for the nine months ended March 31, 2002 due to an increase in cash provided by
operating activities and a decrease in cash used in investing activities offset
by an increase in cash used in financing activities. The increase in cash
provided by operating activities was due to changes in accounts receivable, gas
in storage and deferred recovery of gas cost. The decrease in cash used in
investing activities resulted from a decrease in capital expenditures. The
increase in cash used in financing activities resulted from increased repayment
of short-term debt, offset by increased long-term borrowings.
Twelve Months Ended March 31,
2003 2002
---- ----
Provided by operating activities $ 11,149,357 $ 11,110,203
Used in investing activities (8,752,847) (9,607,385)
Used in financing activities (1,448,935) (2,067,944)
------------------- --------------------
Net increase (decrease) in
Cash and cash equivalents $ 947,575 $ (565,126)
=================== ====================
For the twelve months ended March 31, 2003, we had a $948,000 net increase
in cash and cash equivalents compared to a $565,000 net decrease in cash and
cash equivalents for the year ended March 31, 2002. This variation resulted from
decreases in cash used in financing and investing activities and an increase in
cash provided by operating activities. The decrease in cash used in financing
activities resulted from increased long-term borrowings offset by decreased
short-term repayments. The decrease in cash used in investing activities
resulted from a decrease in capital expenditures. The increase in cash provided
by operating activities was due to changes in deferred income taxes, accounts
receivable, gas in storage, advance recovery of gas cost and accounts payable.
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
In the following table we set forth variations in revenues for the three,
nine and twelve months ended March 31, 2003 compared with the same periods in
the preceding year:
Increase (Decrease)
2003 Compared to 2002
------------------------------
Three Nine Twelve
Months Months Ended Months
Ended March 31 Ended
March 31 March 31
Increase (decrease) in our
regulated revenues
Gas rates 1,657 1,024 (697)
Weather normalization adjustment (1,231) (1,883) (1,812)
Sales volumes 3,668 6,457 6,134
On-system transportation 20 101 130
Off-system transportation 29 223 253
Other 3 (13) (24)
----- ---- ---
Total 4,146 5,909 3,984
-------- ----- -----
Increase (decrease) in our
non-regulated revenues
Gas rates 2,287 3,058 2,028
Sales volumes (367) (1,656) (3,571)
Other (5) 2 -
---- ----- -----
Total 1,915 1,404 (1,543)
----- ----- ------
Total increase in our revenues 6,061 7,313 2,441
Decrease (increase) in our
intersegment revenues (2) 1,622 2,650
---- ----- -----
Increase in our consolidated revenues 6,059 8,935 5,091
===== ===== =====
Increase (Decrease)
2003 Compared to 2002
Three Nine Twelve
Months Months Months
Ended Ended Ended
March 31
March 31 March 31 ------
-------- --------
Percentage increase in our regulated volumes
Gas sales 18.8% 21.4% 15.6%
On-system transportation 10.8% 11.0% 12.1%
Off-system transportation 18.7% 23.7% 14.3%
Percentage decrease in our non-regulated
gas sales volumes (8.4%) (13.0%) (17.6%)
Heating degree days billed were 121%, 100% and 109% of normal thirty year
average temperatures for the three, nine and twelve months ended March 31, 2003,
respectively, as compared with 101%, 78% and 87% for the similar periods of
2002. A "heating degree day" results from a day during which the average of the
high and low temperature is at least one degree less than 65 degrees Fahrenheit.
The increases in operating revenues for the three, nine and twelve months
ended March 31, 2003 of $6,059,000, $8,935,000 and $5,091,000, were primarily
due to the 18.8%, 21.4% and 15.6% increases, respectively, in sales volumes in
the regulated business because of the significantly colder weather in 2003, as
well as increased gas costs reflected in higher sales prices for the three and
nine month periods.
Operating Expenses
The following table sets forth certain variations in purchased gas expense
for the three, nine, and twelve months ended March 31, 2003 compared with the
same periods in the preceding year:
Increase (Decrease)
2003 Compared to 2002
Three Months Nine Twelve Months
Ended Months Ended Ended
March 31 March 31 March 31
-------- -------- --------
($000)
Increase (decrease) in our regulated
gas expense
Gas rates 1,978 991 (665)
Purchase volumes 2,090 4,348 4,123
------ ------ -----
Total 4,068 5,339 3,458
------ ------ -----
Increase (decrease) in our
non-regulated gas expense
Gas rates 978 1,490 (93)
Purchase volumes (279) (1,368) (2,794)
Transportation expenses 2 69 21
------ ------ --
Total 701 191 (2,866)
------ ------ ------
Total increase in gas expense 4,769 5,530 592
Decrease (increase)in our
intersegment gas expense
(2) 1,622 2,650
------ ------ -----
Increase in our consolidated
gas expense 4,767 7,152 3,242
====== ====== =====
The increase in purchased gas expense for the three, nine and twelve months
ended March 31, 2003 of $4,767,000, $7,152,000 and $3,242,000, were primarily
attributable to the 18.8%, 21.4% and 15.6% increases, respectively, in sales
volumes in the regulated business because of the significant colder weather in
fiscal year 2003. The increase in gas expense for the three months ended March
31, 2003 is also attributable to the 14.8% increase in gas prices compared to
March 31, 2002.
The increase in operation and maintenance expense of $797,000 for the nine
months ended March 31, 2003 was primarily due to an increase in bad debt expense
resulting from higher gas rates and colder winter weather, as well as an
increase in benefit costs.
The increase in taxes other than income taxes for the nine months ended
March 31, 2003 of $129,000 was primarily due to increased property taxes.
The increase in income taxes for the three, nine and twelve months ended
March 31, 2003 of $330,000, $322,000 and $349,000, respectively, is attributable
to the increase in net income before income tax. The increase in net income is
largely attributable to the increase in operating income, which increased 13%,
5% and 5%, respectively, for the three, nine and twelve months ended March 31,
2003.
The increase in interest charges for the three months ended March 31, 2003
of $124,000 is a result of higher effective interest rates and increased
borrowings. The higher effective interest rates resulted from replacing a
portion of our short-term notes payable, which bears interest determined at the
London Interbank Offered Rate plus 1% (one hundred basis points), with our newly
issued 7.00% Debentures. This increase was partially offset by refinancing our
8.30% Debentures with a portion of the 7.00% Debentures.
Basic and Diluted Earnings Per Common Share
For the three, nine and twelve months ended March 31, 2003 and 2002, 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 before
cumulative effect of a change in accounting principle for the three, nine and
twelve months ended March 31, 2003. Pro forma net income and earnings per share
have not been presented for the three, nine and twelve months ended March 31,
2002 and for the twelve months ended March 31, 2003 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 and 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
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 will transport to
these customers. At the time we make a sales commitment to 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 March 31, 2003, a one percent increase (decrease) in our
average interest rates would result in a decrease (increase) in our annual
pre-tax net income of $170,000.
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, Jennings and 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.
The detailed information required by Item 1 has been disclosed in previous
reports filed with the Commission and is unchanged from the information as
presented in Item 3 of Form 10-K for the period ending June 30, 2002.
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3(a) Registrant's Amended and Restated Articles of Incorporation.
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. No reports on Form 8-K have been filed by the
Registrant during the quarter for which this report is filed.
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: May 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: May 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: May 13, 2003
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 March 31, 2003 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
May 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 March 31, 2003 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
May 13, 2003