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61
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________.
Commission file number 0-8788.
DELTA NATURAL GAS COMPANY, INC.__________
(Exact name of registrant as specified in its charter)
________KENTUCKY_______ ___________61-0458329_____________
(State of Incorporation) (IRS Employer Identification Number)
3617 Lexington Road, Winchester, Kentucky 40391___
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 606-744-6171.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
_______None________ __________None________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $1 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
As of August 17, 1997, Delta Natural Gas Company, Inc. had outstanding
2,342,351 shares of common stock $1 Par Value, and the aggregate market value of
the voting stock held by non-affiliates was approximately $42,162,318.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive proxy statement to be filed with the Commission
not later than 120 days after June 30, 1997, is incorporated by reference in
Part III of this Report.
TABLE OF CONTENTS
Page Number
PART I
Item 1. Business 1
General 1
Gas Operations and Supply 1
Regulatory Matters 4
Capital Expenditures 5
Employees 5
Consolidated Statistics 6
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6. Selected Consolidated Financial
Information 10
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
Item 8. Financial Statements and Supplementary
Data 15
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures 15
PART III
Item 10. Directors and Executive Officers of
the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain
Beneficial Owners and Management 15
Item 13. Certain Relationships and Related
Transactions 16
Part IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 17
Signatures 20
PART I
Item 1. Business
General
In 1951, Delta established its first retail gas distribution system, which
provided service to approximately 300 customers in Owingsville and Frenchburg,
Kentucky. As a result of acquisitions and expansions of its customer base
within its existing service areas, Delta currently provides retail gas
distribution service for approximately 36,000 customers in central and
southeastern Kentucky and, additionally, provides transportation service to
industrial customers and interconnected pipelines located in the area.
During 1995, Delta acquired leases for the storage of natural gas under
approximately 8,000 acres on Canada Mountain in Bell County, Kentucky and is
currently completing the development of the property as an underground natural
gas storage facility. This storage field allows Delta to purchase and store gas
during the non-heating months and withdraw and sell the gas during the peak
usage winter months.
Gas Operations and Supply
The Company purchases and produces gas for distribution to its retail
customers and also provides transportation service to industrial customers and
inter-connected pipelines with its facilities that are located in 20
predominantly rural counties in central and southeastern Kentucky. The economy
of Delta's service area is based principally on coal mining, farming and light
industry. The communities in Delta's service area typically contain populations
of less than 20,000. The four largest service areas are Nicholasville, Corbin,
Berea and Middlesboro, where Delta serves approximately 6,500, 6,300, 3,800 and
3,600 customers, respectively.
Several communities served by Delta continue to expand, resulting in growth
opportunities for the Company. Industrial parks have been developed in certain
areas and have resulted in new industrial customers, some of whom are on-system
transportation customers. As a result of this growth, Delta's total customer
count increased by 5.4% in 1997. Currently, over 99% of Delta's customers are
residential and commercial. Delta's remaining, light industrial customers
purchased approximately 6% of the total volume of gas sold by Delta at retail
during 1997.
The Company's revenues are affected by various factors, including rates
billed to customers, the cost of natural gas, economic conditions in the areas
that the Company serves, weather conditions and competition. Delta competes for
customers and sales with alternative sources of energy, including electricity,
coal, oil, propane and wood. The Company's marketing subsidiaries, which
purchase gas and resell it to various industrial customers and others, also
compete for their customers with producers and marketers of natural gas. Gas
costs, which the Company is generally able to pass through to customers, may
influence customers to conserve, or in the case of industrial customers, to use
alternative energy sources. Also, the potential bypass of Delta's system by
industrial customers and others is a competitive concern that Delta has
addressed and will continue to address as the need arises.
Delta's retail sales are seasonal and temperature-sensitive as the majority
of the gas sold by Delta is used for heating. This seasonality impacts Delta's
liquidity position and its management of its working capital requirements during
each twelve month period, and changes in the average temperature during the
winter months impacts its revenues year-to-year (see Management's Discussion and
Analysis of Financial Condition and Results of Operations).
Retail gas sales in 1997 were approximately 4,299,000 thousand cubic feet
("Mcf"), generating approximately $33,561,000 in revenues, as compared to
approximately 4,705,000 Mcf and approximately $27,811,000 in revenues for 1996.
The increase in operating revenues for 1997 was due primarily to increases in
the cost of gas purchased that were reflected in rates billed to customers
through Delta's gas cost recovery clause. Heating degree days billed during
1997 were approximately 103% of the thirty year average ("normal") as compared
with approximately 112% in 1996. Principally as a result of this warmer
weather, retail sales volumes decreased by approximately 406,000 Mcf, or 9%, in
1997 as compared to 1996.
Delta's transportation of natural gas in 1997 generated revenues of
approximately $3,596,000 as compared with approximately $3,331,000 during 1996.
Of the total from transportation in 1997, approximately $3,214,000 (2,863,000
Mcf) and $382,000 (1,205,000 Mcf) were earned from transportation for on-system
and off-system customers, respectively. Of the total from transportation in
1996, approximately $2,913,000 (2,570,000 Mcf) and $418,000 (1,134,000 Mcf) were
earned from transportation for on-system and off-system customers, respectively.
As an active participant in many areas of the natural gas industry, Delta
plans to continue its efforts to expand its gas distribution system. Delta
continues to consider acquisitions of other gas systems, some of which are
contiguous to its existing service areas, as well as expansion within its
existing service areas. During November, 1996, Delta acquired the City of North
Middletown gas system in Bourbon County, consisting of approximately 180
primarily residential customers. During July, 1997, Delta purchased the gas
system of Annville Gas & Transmission Corporation in Jackson County, which
serves several industrial and residential customers. This system will be
expanded during fiscal 1998 to provide gas service to customers in the City of
Annville.
The Company also anticipates continuing activity in gas production and
transportation and plans to pursue and increase these activities wherever
practicable. The Company will continue to consider the construction or
acquisition of additional transmission, storage and gathering facilities to
provide for increased transportation, enhanced supply and system flexibility.
During June, 1997, Delta acquired TranEx Corporation, which owns a 43 mile, 8
inch diameter steel pipeline that extends from Clay County to Madison County.
Delta has been operating this pipeline for several years and plans to continue
to utilize the pipeline to provide natural gas to its Canada Mountain storage
field as well as for Delta's system supply.
Some producers in Delta's service area can access certain pipeline delivery
systems other than Delta, which provides competition from others for
transportation of such gas. Delta will continue its efforts to purchase or
transport any natural gas available that is produced in reasonable proximity to
its facilities.
Delta receives its gas supply from a combination of interstate and Kentucky
sources. The Company intends to pursue an adequate gas supply to provide
service to existing and future customers. Delta will continue to maintain an
active gas supply management program that emphasizes long-term reliability and
the pursuit of cost effective sources of gas for its customers.
Delta's interstate gas supply is transported and/or stored by Tennessee Gas
Pipeline Company ("Tennessee"), Columbia Gas Transmission Corporation
("Columbia"), Columbia Gulf Transmission Company ("Columbia Gulf") and Texas
Eastern Transmission Corporation ("Texas Eastern"). Delta acquires its
interstate gas supply from gas marketers. Delta also acquires gas supply from
Kentucky producers and suppliers. There is a competitive national market for
natural gas supplies as supply and demand determine the availability and prices
of natural gas.
Delta's transportation and storage contracts with Tennessee extend until
2000 and thereafter continue on a year-to-year basis until terminated by either
party. Tennessee is obligated under the contracts to transport up to
approximately 17,600 Mcf per day for Delta. Delta acquires its gas for
transportation by Tennessee under a contract with a gas marketer. During 1997,
Delta purchased approximately 1,549,000 Mcf from the gas marketer under a
contract which extends through April, 1999.
Delta's transportation and storage contracts with Columbia and Columbia
Gulf extend until 2008 and thereafter continue on a year-to-year basis until
terminated by one of the parties to the particular contract. Columbia and
Columbia Gulf are obligated under the contracts to transport up to approximately
12,000 Mcf per day and approximately 4,000 Mcf per day, respectively, for
Delta. Delta acquires its gas for transportation by Columbia and Columbia Gulf
under contracts with a gas marketer. During 1997, Delta purchased a total of
approximately 794,000 Mcf from the gas marketer under contracts which extend
through April, 2000.
Delta has a contract with The Wiser Oil Company ("Wiser") to purchase
natural gas from Wiser through 1999. Delta and Wiser annually determine the
daily deliverability from Wiser, and Wiser is committed to deliver that volume.
Wiser currently is obligated to deliver 11,000 Mcf per day to Delta. This
obligation changes to 9,900 Mcf per day effective November 1, 1997. Delta
purchased approximately 1,941,000 Mcf from Wiser during 1997.
Delta purchases gas under agreements with various other marketers and
Kentucky producers, most of which are priced as short-term, or spot-market,
purchases. The combined volumes of gas purchased from these sources during 1997
were approximately 198,000 Mcf.
Delta has contracts with its wholly-owned subsidiary, Enpro, Inc. ("Enpro")
to purchase all the natural gas produced from Enpro's wells on certain leases in
Bell, Knox and Whitley Counties, Kentucky. These agreements remain in force so
long as gas is produced in commercial quantities from the wells on the leases.
Remaining proved, developed natural gas reserves are estimated at approximately
4,400,000 Mcf. Delta purchased a total of approximately 203,000 Mcf from those
properties during 1997. Enpro also produces oil from certain of these leases,
but oil production has not been significant.
Delta's wholly-owned subsidiaries, Delta Resources, Inc. ("Resources") and
Delgasco, Inc. ("Delgasco"), purchase gas from various marketers and Kentucky
producers, most of which is priced as short-term, or spot-market, purchases.
The gas is resold to industrial customers on Delta's system, to Delta for system
supply and to others. The combined volumes of gas purchased by Resources and
Delgasco from these sources during 1997 were approximately 3,285,000 Mcf.
Delta continues to seek additional new gas supplies from all available sources,
including those in the proximity of its facilities in southeastern Kentucky.
Also, Resources and Delgasco continue to pursue acquisitions of new gas supplies
from Kentucky producers and others.
Delta is completing the development of an underground natural gas storage
field on Canada Mountain in Bell County, Kentucky, with an estimated eventual
working capacity of 4,000,000 Mcf. This field is operational and was used to
help meet Delta's winter supply needs this past year. Delta plans to continue
to develop the capability of this storage field, including completion of 14
miles of 12 inch diameter steel pipeline. The new pipeline, planned to be in
operation by this fall, will enhance Delta's ability to withdraw gas from the
field and deliver it into Delta's system. This storage capability should permit
Delta to continue to purchase and store gas during the non-heating months, and
then withdraw and sell the gas during the peak usage months as Delta did this
past winter.
Delta will continue to maintain an active gas supply management program
that emphasizes long-term reliability and the pursuit of cost effective sources
of gas for its customers.
Regulatory Matters
Delta is subject to the regulatory authority of the Public Service
Commission of Kentucky ("PSC") with respect to various aspects of Delta's
business, including rates and service to retail and transportation customers.
On March 14, 1997, Delta filed a request for increased rates with the PSC.
This general rate case (Case No. 97-066) requested an annual revenue increase of
approximately $2,962,000, an increase of 7.7%. The test year for the case was
December 31, 1996. The increased rates were requested to become effective on
April 13, 1997. On April 3, 1997, the PSC issued an Order in the above case
suspending the implementation of the proposed rates until September 12, 1997, so
that the PSC could investigate and determine the reasonableness of the proposed
rates. A hearing has been scheduled for September 9, 1997, for the cross-
examination of witnesses.
On July 11, 1997, the PSC issued a staff report entitled "Natural Gas
Unbundling in Kentucky: Exploring the Next Step Toward Customer Choice". This
report represented the culmination of numerous discussions among the PSC and
various parties, including Delta, regarding issues related to the potential
unbundling, or separate pricing of supply and service components, of natural gas
service in Kentucky, including residential and small commercial customer choice.
The report also included observations on certain topics which need to be
addressed and resolved if further unbundling occurs in Kentucky, and it
addressed some of the options available to the PSC. The PSC held a public
meeting on August 22, 1997, on gas unbundling and customer choice for interested
parties to provide further input. Delta participated in that meeting and
intends to be an active participant in future discussions.
Delta's rates include a Gas Cost Recovery ("GCR") clause, which permits
changes in Delta's gas costs to be reflected in the rates charged to customers.
The GCR requires Delta to make quarterly filings with the PSC, but such
procedure does not require a general rate case. The PSC historically has
allowed Delta to recover storage costs in rates through the GCR mechanism or
general rate cases.
In addition to PSC regulation, Delta may obtain non-exclusive franchises
from the cities and communities in which it operates authorizing it to place its
facilities in the streets and public grounds. However, no utility may obtain a
franchise until it has obtained from the PSC a Certificate of Convenience and
Necessity authorizing it to bid on the franchise. Delta holds franchises in
four of the ten cities in which it maintains branch offices and in seven other
communities it serves. In the other cities or communities, either Delta's
franchises have expired, the communities do not have governmental organizations
authorized to grant franchises, or the local governments have not required, or
do not want to offer, a franchise. Delta attempts to acquire or reacquire
franchises whenever feasible.
Without a franchise, a local government could require Delta to cease its
occupation of the streets and public grounds or prohibit Delta from extending
its facilities into any new area of that city or community. To date, the
absence of a franchise has had no adverse effect on Delta's operations.
Capital Expenditures
Capital expenditures during 1997 were approximately $16.6 million and for
1998 are estimated to be approximately $10.4 million. These include planned
expenditures for development of underground natural gas storage, system
extensions, computer system upgrades and the replacement and improvement of
existing transmission, distribution, gathering and general facilities.
Employees
Delta employed a total of 181 full-time employees on June 30, 1997. Delta
considers its relationship with its employees to be satisfactory. Delta's
employees are not represented by unions or subject to any collective bargaining
agreements.
Consolidated Statistics
For the Years Ended June 30, 1997 1996 1995 1994 1993
Retail Customers Served,
End of Period
Residential .............. 31,380 29,840 29,029 27,939 27,293
Commercial ............... 4,761 4,453 4,287 4,242 4,093
Industrial ............... 74 75 72 76 75
Total ................. 36,215 34,368 33,388 32,257 31,461
Operating Revenues ($000)
Residential sales ........ 19,694 16,540 14,772 16,597 14,578
Commercial sales ......... 11,977 9,788 8,673 9,663 8,269
Industrial sales ......... 1,890 1,483 1,248 1,671 1,383
On-system transportation . 3,214 2,913 2,588 2,310 2,451
Off-system transportation. 382 418 461 623 836
Subsidiary sales ......... 4,904 5,297 3,959 3,755 3,532
Other .................... 108 137 143 228 172
Total ................. 42,169 36,576 31,844 34,847 31,221
System Throughput
(Million Cu. Ft.)
Residential sales ........ 2,464 2,741 2,173 2,511 2,341
Commercial sales ......... 1,557 1,673 1,328 1,506 1,368
Industrial sales ......... 278 291 223 316 281
Total retail sales .... 4,299 4,705 3,724 4,333 3,990
On-system transportation.. 2,863 2,570 2,390 2,186 2,248
Off-system transportation. 1,205 1,134 _1,452 1,997 2,668
Total ................. 8,367 8,409 7,566 8,516 8,906
Average Annual Consumption Per
End of Period Residential
Customer (Thousand Cu. Ft.). 79 92 75 90 86
Lexington, Kentucky Degree Days
Actual .................... 4,869 5,280 4,215 4,999 4,688
Percent of 30 year average
(4,726) ................. 103.0 111.7 89.2 105.8 99.2
For the Years Ended June 30, 1997 1996 1995 1994 1993
Average Revenue Per Mcf Sold
at Retail ($) ............. 7.81 5.91 6.63 6.44 6.07
Average Gas Cost Per Mcf Sold
at Retail ($) ............. 4.62 2.81 3.37 3.34 2.90
Item 2. Properties
Delta owns its corporate headquarters in Winchester. In addition, Delta
owns buildings used for branch operations in nine of the cities it serves and
rents an office in one city. Also, Delta owns a building in Laurel County used
for training as well as equipment and materials storage.
The Company owns approximately 1,960 miles of natural gas gathering,
transmission, distribution and service lines. These lines range in size up to
eight inches in diameter. There are no significant encumbrances on these
assets.
Delta holds leases for the storage of natural gas under approximately 8,000
acres located on Canada Mountain in Bell County, Kentucky. This property is
being developed for the underground storage of natural gas and when complete is
estimated to have a working capacity of approximately 4,000,000 Mcf of gas.
Delta owns the rights to any oil and gas underlying approximately 3,500
acres in Bell County. Portions of these properties are used by Delta for the
storage of natural gas. The maximum capacity of the storage facilities is
approximately 550,000 Mcf. These properties otherwise are currently non-
producing, and Delta has not had reserve studies performed on the properties.
Enpro owns interests in certain oil and gas leases relating to
approximately 11,000 acres located in Bell, Knox and Whitley Counties. There
presently are 56 gas wells and 7 oil wells producing from these properties.
Enpro's remaining proved, developed natural gas reserves are estimated at
approximately 4,400,000 Mcf. Oil production from the property has not been
significant. Also, Enpro owns the oil and gas underlying approximately 11,500
additional acres in Bell, Clay and Knox Counties. These properties are
currently non-producing, and Enpro has not had reserve studies performed on the
properties.
During 1994, Enpro entered into an agreement with a producer relating to
approximately 14,000 acres of Enpro's undeveloped holdings. Under the terms of
the agreement, the producer is conducting exploration activities on the acreage.
Enpro reserved the option to participate in wells drilled. Enpro also retained
certain working and royalty interests in any production from future wells.
There are no significant encumbrances on the Company's assets.
Item 3. Legal Proceedings
Delta and its subsidiaries are not parties to any legal proceedings which
are expected to have a materially adverse impact on the financial condition or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Delta has paid cash dividends on its common stock each year since 1964.
While it is the intention of the Board of Directors to continue to declare
dividends on a quarterly basis, the frequency and amount of future dividends
will depend upon the Company's earnings, financial requirements and other
relevant factors, including limitations imposed by the indenture for the
Debentures. There were 2,407 record holders of Delta's common stock as of
August 1, 1997.
Delta's common stock is traded in the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System under the symbol
DGAS. The accompanying table reflects the high and low sales prices during each
quarter as reported by NASDAQ and the quarterly dividends declared per share.
Range of Stock Prices($) Dividends
Quarter High Low Per Share($)
Fiscal 1997
First 18 3/4 15 1/2 .285
Second 19 1/2 17 3/4 .285
Third 19 1/2 17 .285
Fourth 18 1/2 16 .285
Fiscal 1996
First 17 1/4 15 3/4 .28
Second 18 1/4 15 1/2 .28
Third 18 16 .28
Fourth 16 3/4 15 1/2 .28
During July, 1996, Delta distributed 6,456 shares of its common stock to
its employees under its Employee Stock Purchase Plan (see Note 3(c) of the
Notes to Consolidated Financial Statements). Delta received cash consideration
of $15.625 per share for one-half of those shares (3,228 shares), for a total
cash consideration of approximately $50,400; one-half of the shares (3,228
shares) were provided to the employees without cash consideration as a part of
Delta's compensation and benefits for its employees. The securities were sold
pursuant to the exemption from registration provided by Rule 147 under the
Securities Act of 1933. This exemption was relied upon in light of the facts
that Delta is incorporated and doing business in Kentucky, and all eligible
employees are residents of Kentucky.
On July 5, 1997, Delta provided a total of 1,000 shares of its common stock
to its directors (100 shares per director). Delta received no cash
consideration for the shares, which were provided to its directors as a part of
their compensation. This transaction may not involve a "sale" of securities
under the Securities Act of 1933, and in any event, the securities were sold
pursuant to the exemption from registration provided by Rule 147 under the
Securities Act of 1933. This exemption was relied upon in light of the facts
that Delta is incorporated and doing business in Kentucky, and all directors are
residents of Kentucky.
No underwriters were engaged in connections with any of the foregoing
transactions, and thus no underwriter discounts or commissions were paid in
connection with any of the foregoing.
Item 6. Selected Consolidated Financial Information
For the Years Ended June 1997 1996(a) 1995 1994(b) 1993
30,
Summary of Operations ($)
Operating
revenues ............ 42,169,185 36,576,055 31,844,339 34,846,941 31,221,410
Operating
income ............... 5,315,582 5,437,055 4,255,088 4,850,673 4,791,816
Net income ........... 1,724,265 2,661,349 1,917,735 2,671,001 2,620,664
Earnings per
common share ......... .75 1.41 1.04 1.50 1.60
Dividends
declared per
common share ......... 1.14 1.12 1.12 1.11 1.09
Average Number of
Common Shares
Outstanding .......... 2,294,134 1,886,629 1,850,986 1,775,068 1,635,945
Total Assets ($)...... 96,681,165 81,140,637 65,948,716 61,932,480 55,129,912
Capitalization ($)......
Common share-
holders' equity .. 29,474,569 23,628,323 22,511,513 22,164,791 17,501,045
Long-term debt .... 38,107,860 24,488,916 23,702,200 24,500,000 19,596,401
Notes payable re-
financed subsequent
to yearend - 18,075,000 - - -
Total
capitalization .... 67,582,429 66,192,239 46,213,713 46,664,791 37,097,446
Short-Term
Debt ($)(c)........ 12,852,600 1,084,800 6,732,700 3,205,000 7,729,000
For the Years Ended June 1997 1996(a) 1995 1994(b) 1993
30,
her Items ($)
Capital
expenditures ....... 16,648,994 13,373,416 8,122,838 7,374,747 6,289,508
Total plant ...... 116,829,158 98,795,623 84,944,969 77,882,135 71,187,860
_____________________
(a)During July, 1996, $15,000,000 of debentures and 400,000 shares of common
stock were sold, and the proceeds were used to repay short-term debt and for
general corporate purposes. The balance of the note payable at June 30, 1996
($18,075,000) is included in total capitalization as a result of the subsequent
refinancing.
(b) During October, 1993, $15,000,000 of debentures and 170,000 shares of
common stock were sold, and the proceeds were used to repay short-term debt and
to refinance certain long-term debt.
(c) Includes current portion of long-term debt.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
The Company's utility operations are subject to regulation by the PSC,
which approves rates that are intended to permit a specified rate of return on
investment. The Company's rate tariffs allow the cost of gas to be passed
through to customers (see Regulatory Matters).
Delta's business is temperature-sensitive. Accordingly, the Company's
operating results in any given period reflect, in addition to other factors, the
impact of weather, with colder temperatures resulting in increased sales. The
Company anticipates that this sensitivity to seasonal and weather conditions
will continue to be so reflected in the Company's operating results in future
periods.
Because of the seasonal nature of Delta's sales, the smallest proportion of
cash generated from operations is received during the warmer months when sales
volumes decrease considerably. Additionally, most construction activity takes
place during the non-heating season because of more favorable weather
conditions. Therefore, during the warmer, non-heating months, cash needs for
operations and construction are partially met through short-term borrowings.
Capital expenditures for Delta for fiscal 1998 are expected to be
approximately $10.4 million. Delta generates internally only a portion of the
cash necessary for its capital expenditure requirements and finances the balance
of its capital expenditures on an interim basis through the use of its borrowing
capability under its short-term line of credit. The current available line of
credit is $20,000,000, of which approximately $10.9 million was borrowed at June
30, 1997. The line of credit, which is with Bank One, Kentucky, NA, expires
during November, 1997. These short-term borrowings are periodically repaid with
the net proceeds from the sale of long-term debt and equity securities, as was
done in July, 1996, when the net proceeds of approximately $20,400,000 from the
sale of $15,000,000 of debentures and 400,000 shares of common stock were used
to repay short-term notes payable and for working capital.
The primary cash flows during the last three years are summarized below:
1997 1996 1995
Provided by operating $ 6,209,226 $ 3,094,809 $ 6,943,183
activities
Used in investing
activities (16,648,994) (13,373,416) (8,122,838)
Provided by financing 10,768,558 10,294,461 1,158,887
activities
Net increase (decrease)
in cash and cash $ 328,790 $ 15,854 $ (20,768)
equivalents
Cash provided by operating activities consists of net income and noncash
items including depreciation, depletion, amortization and deferred income taxes.
Additionally, changes in working capital are also included in cash provided by
operating activities. The Company expects that internally generated cash,
coupled with seasonal short-term borrowings, will continue to be sufficient to
satisfy its operating and capital expenditure requirements.
Results of Operations
Operating Revenues The increase in operating revenues for 1997 of
approximately $5,593,000 was due primarily to increases in the cost of gas
purchased that were reflected in rates billed to customers through Delta's gas
cost recovery clause. This was partially offset by a decrease in retail sales
volumes of approximately 406,000 Mcf as a result of the warmer winter weather in
1997. Billed degree days were approximately 103% of normal degree days for
1997 as compared with approximately 112% for 1996. In addition, on-system
transportation volumes for 1997 increased approximately 293,000 Mcf, or 11.4%.
The increase in operating revenues for 1996 of approximately $4,732,000
was due primarily to an increase in retail sales volumes of approximately
980,000 Mcf as a result of the colder winter weather in 1996. Billed degree
days were approximately 112% of normal for 1996 as compared with approximately
89% for 1995. In addition, on-system transportation volumes for 1996 increased
approximately 180,000 Mcf, or 8%. These increases were partially offset by
decreases in the cost of gas purchased that were reflected in rates billed to
customers through Delta's gas cost recovery clause and by a decrease in off-
system transportation volumes of approximately 318,000 Mcf, or 22%, due
primarily to reduced deliveries from local producers.
Operating Expenses The increase in purchased gas expense for 1997 of
approximately $5,875,000 was due primarily to increases in the cost of gas
purchased for retail sales. The increase was partially offset by the decreased
gas purchases for retail sales resulting from the warmer winter weather in 1997.
The increase in purchased gas expense of approximately $1,893,000 for 1996
was due primarily to the increased gas purchases for retail sales resulting from
the colder winter weather during 1996. The increase was partially offset by
decreases in the cost of gas purchased for retail sales.
The increase in operation and maintenance expenses during 1996 of
approximately $640,000 was due primarily to increases in payroll and related
benefit costs.
The increases in depreciation expense during 1997 and 1996 of approximately
$424,000 and $327,000, respectively, were due primarily to additional
depreciable plant.
The increase in taxes other than income taxes during 1996 of approximately
$173,000 was primarily due to increased property taxes which resulted from
increased plant and property valuations, and to increased payroll taxes, which
resulted from increased wages.
Changes in income taxes during 1997 and 1996 of approximately $595,000 and
$517,000, respectively, were primarily due to changes in net income.
Interest Charges The increases in interest on long-term debt and amortization
of debt expense during 1997 of approximately $1,146,000 and $27,000,
respectively, were due primarily to the issuance of $15 million of 8.3%
Debentures during July, 1996. The decrease in other interest charges during
1997 of approximately $348,000 was due primarily to decreased average short-term
borrowings as short-term debt was repaid with the net proceeds from the sale of
long-term debt and equity securities during July, 1996.
The increase in other interest charges during 1996 of approximately
$448,000 was due primarily to increased average short-term borrowings and
increased average interest rates.
Earnings Per Common Share For the year ended June 30, 1997, earnings per
common share were diluted by the increased average common shares outstanding
that resulted from the additional 400,000 shares of common stock issued in July,
1996, as well as the common shares issued under Delta's dividend reinvestment
plan and shares issued to employees during the 1997 periods.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE PAGE
Management's Statement of Responsibility for Financial
Reporting and Accounting 22
Report of Independent Public Accountants 23
Consolidated Statements of Income for the years
ended June 30, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995 25
Consolidated Balance Sheets as of June 30, 1997 and 1996 27
Consolidated Statements of Changes in Shareholders'
Equity for the years ended June 30, 1997, 1996 and 1995 29
Consolidated Statements of Capitalization as of
June 30, 1997 and 1996 30
Notes to Consolidated Financial Statements 31
Schedule II - Valuation and Qualifying Accounts for the
years ended June 30, 1997, 1996 and 1995 39
Schedules other than those listed above are omitted because they are not
required, not applicable or the required information is shown in the financial
statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Registrant intends to file a definitive proxy statement with the Commission
pursuant to Regulation 14A (17 CFR 240.14a) not later than 120 days after the
close of the fiscal year. In accordance with General Instruction G(3) to Form
10-K, the information called for by Items 10, 11, 12 and 13 is incorporated
herein by reference to the definitive proxy statement. Neither the report on
Executive Compensation nor the performance graph included in the Company's
definitive proxy statement shall be deemed incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) - Financial Statements, Schedules and Exhibits
(1) - Financial Statements
See Index at Item 8
(2) - Financial Statement Schedules
See Index at Item 8
(3) - Exhibits
Exhibit No.
3(a) - Delta's Amended and Restated Articles of Incorporation
are incorporated herein by reference to Exhibit 3(a) to
Delta's Form 10-Q for the period ended March 31, 1990.
3(b) - Delta's By-Laws as amended August 21, 1996 are incor-
porated herein by reference to Exhibit 3(b) to Delta's
Form 10-K for the period ended June 30, 1996.
4(a) - The Indenture dated April 1, 1991 in respect of 9%
Debentures due April 30, 2011, is incorporated herein by
reference to Exhibit 4(e) to Delta's Form S-2 dated April 23,
1991.
4(b) - The Indenture dated September 1, 1993 in respect of
6 5/8% Debentures due October 1, 2023, is incorporated
herein by reference to Exhibit 4(e) to Delta's Form S-2
dated September 2, 1993.
4(c) - The Indenture dated July 1, 1996 in respect of 8.3%
Debentures due August 1, 2026, is incorporated
herein by reference to Exhibit 4(c) to Delta's Form S-2
dated June 21, 1996.
10(a) - Certain of Delta's material natural gas supply
contracts are incorporated herein by reference to
Exhibit 10 to Delta's Form 10 for the year ended June 30,
1978 and by reference to Exhibits C and D to Delta's
Form 10-K for the year ended June 30, 1980.
10(b) - Gas Purchase Contract between Delta and Wiser is
incorporated herein by reference to Exhibit 2(C) to
Delta's Form 8-K dated February 9, 1981.
10(c) - Assignment to Delta by Wiser of its Columbia
Service Agreement, including a copy of said Service
Agreement, is incorporated herein by reference to
Exhibit 2(D) to Delta's Form 8-K dated February 9, 1981.
10(d) - Contract between Tennessee and Delta for the sale of
gas by Tennessee to Delta (amends earlier contract for
Nicholasville and Wilmore Service Areas) is
incorporated herein by reference to
Exhibit 10(d) to Delta's Form 10-Q for the period ended
September 30, 1990.
10(e) - Contract between Tennessee and Delta for the sale of
gas by Tennessee to Delta (amends earlier contract for
Jeffersonville Service Area) is incorporated herein
by reference to Exhibit 10(e) to Delta's Form 10-Q
for the period ended September 30, 1990.
10(f) - Contract between Tennessee and Delta for the sale
of gas by Tennessee to Delta (amends earlier contract
for Salt Lick Service Area) is incorporated herein
by reference to Exhibit 10(f) to Delta's Form 10-Q for
the period ended September 30, 1990.
10(g) - Contract between Tennessee and Delta for the sale of
gas by Tennessee to Delta (amends earlier contract for
Berea Service Area) is incorporated herein by reference
to Exhibit 10(g) to Delta's Form 10-Q for the period
ended September 30, 1990.
10(h) - Service Agreements between Columbia and Delta for
the sale of gas by Columbia to Delta (amends earlier
service agreements for Cumberland, Stanton and Owingsville
service areas) are incorporated herein by reference to
Exhibit 10(h) to Delta's Form 10-Q for the period ended
September 30, 1990.
10(i) - Amendment to Gas Purchase Contract between Delta and
Wiser is incorporated herein by reference to Exhibit
10(c) to Delta's Form 10-Q for the period ended
December 31, 1988.
10(j) - Second amendment to Gas Purchase Contract between
Delta and Wiser is incorporated herein by reference to
Exhibit 10(j) to Delta's Form 10-K for the period ended
June 30, 1994.
10(k) - Employment agreement between Delta and Alan L.
Heath, an officer, is incorporated herein by reference to
Exhibit 10(k) to Delta's Form 10-Q for the period ended
December 31, 1985.
10(l) - Employment agreements between Delta and two officers,
those being John F. Hall and Robert C. Hazelrigg, are
incorporated herein by reference to Exhibit 10(m) to
Delta's Form 10-Q for the period ended December 31, 1988.
10(m) - Employment agreement dated May 31, 1995 between
Delta and Glenn R. Jennings, an officer, is incorporated
herein by reference to Exhibit 10(m) to Delta's Form
10-K for the period ended June 30, 1995.
10(n) - Employment agreement dated June 19, 1995 between
Delta and Johnny L. Caudill, an officer, is incorporated
herein by reference to Exhibit 10(n) to Delta's Form 10K
for the period ended June 30, 1995.
12 - Computation of the Consolidated Ratio of Earnings
to Fixed Charges.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
(b) Reports on 8-K.
On April 8, 1997, the Registrant filed a report on Form 8-K disclosing a
filing with the Kentucky Public Service Commission (PSC) of a general rate case
on March 14, 1997 and a subsequent Order from the PSC on April 3, 1997
suspending the implementation of the proposed rates until September 12, 1997.
The requested rates would generate approximately $2,962,000 of additional annual
revenues to Delta.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf, by the undersigned, thereunto duly authorized, on the
11th day of September, 1997.
DELTA NATURAL GAS COMPANY, INC.
By /s/Glenn R. Jennings
Glenn R. Jennings, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(i) Principal Executive Officer:
/s/ Glenn R. Jennings President, Chief Executive September 11, 1997
(Glenn R. Jennings) Officer and Director
(ii) Principal Financial Officer and Principal Accounting Officer:
/s/ John F. Hall Vice President - Finance, September 11, 1997
(John F. Hall) Secretary and Treasurer
(iii) A Majority of the Board of Directors:
/s/ H. D. Peet Chairman of the Board September 11, 1997
(H. D. Peet)
/s/ Donald R. Crowe Director September 11, 1997
(Donald R. Crowe)
/s/ Jane Hylton Green Director September 11, 1997
(Jane Hylton Green)
/s/ Billy Joe Hall Director September 11, 1997
(Billy Joe Hall)
/s/ John D. Harrison Director September 11, 1997
(John D. Harrison)
/s/ Virgil E. Scott Director September 11, 1997
(Virgil E. Scott)
/s/ Henry C. Thompson Director September 11, 1997
(Henry C. Thompson)
/s/ Arthur E. Walker, Jr. Director September 11, 1997
(Arthur E. Walker, Jr.)
Management's Statement of Responsibility for Financial Reporting and Accounting
Management is responsible for the preparation, presentation and integrity
of the financial statements and other financial information in this report. In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The Company maintains a system of accounting and internal controls which
management believes provides reasonable assurance that the accounting records
are reliable for purposes of preparing financial statements and that the assets
are properly accounted for and protected.
The Board of Directors pursues its oversight role for these financial
statements through its Audit Committee which consists of three outside
directors. The Audit Committee meets periodically with management to review the
work and monitor the discharge of their responsibilities. The Audit Committee
also meets periodically with the Company's internal auditor as well as Arthur
Andersen LLP, the independent auditors, who have full and free access to the
Audit Committee, with or without management present, to discuss internal
accounting control, auditing and financial reporting matters.
Glenn R. Jennings John F. Hall
President & Chief Executive Officer Vice President - Finance,
Secretary & Treasurer
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Delta Natural Gas Company, Inc.:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of DELTA NATURAL GAS COMPANY, INC. (a Kentucky corporation)
and subsidiary companies as of June 30, 1997 and 1996, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period ended June 30, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Delta Natural Gas Company,
Inc. and subsidiary companies as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Louisville, Kentucky
August 15, 1997
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of
Income
For the Years Ended June 30, 1997 1996 1995
Operating Revenues ............ $ 42,169,185 $36,576,055 $31,844,339
Operating Expenses
Purchased gas .............. $ 23,265,222 $17,389,755 $15,497,156
Operation and maintenance
(Note 1) ................. 8,631,635 8,642,511 8,002,797
Depreciation and depletion
(Note 1) ................. 2,935,257 2,510,952 2,183,558
Taxes other than income
taxes .................... 1,056,689 1,036,282 863,340
Income taxes (Note 2) ...... 964,800 1,559,500 1,042,400
Total operating expenses. $ 36,853,603 $31,139,000 $27,589,251
Operating Income .............. $ 5,315,582 $ 5,437,055 $ 4,255,088
Other Income and Deductions, 40,874 32,503 50,582
Net
Income Before Interest Charges. $ 5,356,456 $ 5,469,558 $ 4,305,670
Interest Charges
Interest on long-term debt.. $ 2,997,393 $ 1,851,768 $ 1,879,442
Other interest ............. 519,432 867,641 419,693
Amortization of debt expense 115,366 88,800 88,800
Total interest charges .. $ 3,632,191 $ 2,808,209 $ 2,387,935
Net Income $ 1,724,265 $ 2,661,349 $ 1,917,735
Weighted Average Number of
Common Shares Outstanding ... 2,294,134 1,886,629 1,850,986
Earnings Per Common Share ..... $ .75 $ 1.41 $ 1.04
Dividends Declared Per Common
Share ....................... $ 1.14 $ 1.12 $ 1.12
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash
Flows
For the Years Ended June 30, 1997 1996 1995
Cash Flows From Operating
Activities
Net income .................... $ 1,724,265 $ 2,661,349 $ 1,917,735
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation, depletion and
amortization ............. 3,049,229 2,663,475 2,272,358
Deferred income taxes and
investment tax credits ... 485,400 1,762,500 (77,000)
Other - net ................ 666,798 484,474 602,180
(Increase) decrease in assets:
Accounts receivable ........ (318,178) (860,255) (118,237)
Gas in storage ............. (782,007) 63,546 (138,138)
Advance (deferred) recovery
of gas cost ............. 495,751 (3,788,143) 2,583,128
Materials and supplies ..... (120,969) (124,697) 173,319
Prepayments ................ (346,532) 53,702 (105,903)
Other assets ............... (541,669) (31,723) (71,087)
Increase (decrease) in
liabilities:
Accounts payable ........... (439,721) 871,207 (178,609)
Refunds due customers ...... 554,520 (456,283) 83,572
Accrued taxes .............. 1,038,761 (270,394) (72,210)
Other current liabilities .. 744,054 56,951 69,742
Advances for construction
and other ................ (476) 9,100 2,333
Net cash provided by
operating activities .. $ 6,209,226 $ 3,094,809 $ 6,943,183
Cash Flows From Investing
Activities
Capital expenditures .......... $(16,648,994) $(13,373,416) $(8,122,838)
Net cash used in
investing activities .... $(16,648,994) $(13,373,416) $(8,122,838)
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash
Flows (continued)
For the Years Ended June 30, 1997 1996 1995
Cash Flows From Financing
Activities (Note 6)
Dividends on common stock ..... $ $
(2,651,073) (2,113,414) $(2,073,374)
Issuance of common stock, net.. 6,773,054 568,875 502,361
Issuance of debentures, net.... 14,334,833 - -
Repayment of long-term debt ... (478,256) (561,000) (240,100)
Issuance of notes payable....... 30,975,000 25,955,000 19,495,000
Repayment of notes payable......(38,185,000) (13,555,000) (16,525,000)
Net cash provided by
financing activities $ 10,768,558 $ 10,294,461 $ 1,158,887
Net Increase (Decrease) in Cash and
Cash Equivalents ................... $ 328,790 $ 15,854 $ (20,768)
Cash and Cash Equivalents,
Beginning of Year .................. 151,633 135,779 156,547
Cash and Cash Equivalents,
End of Year ........................ $ 480,423 $ 151,633 $ 135,779
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 3,019,881 $ 2,491,091 $ 2,253,472
Income taxes (net of refunds) $ 432,163) $ 193,560 $ 1,264,942
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
As of June 30, 1997 1996
Assets
Gas Utility Plant, at cost ............. $116,829,158 $ 98,795,623
Less - Accumulated provision for
depreciation ....................... (31,734,976) (26,749,774)
Net gas plant $ 85,094,182 $ 72,045,849
Current Assets
Cash and cash equivalents ........... $ 480,423 $ 151,633
Accounts receivable, less accumulated
provisions for doubtful accounts of
$113,945 and $105,756 in 1997 and
1996, respectively ................ 2,414,632 2,096,454
Gas in storage, at average cost ..... 1,209,171 427,164
Deferred gas costs (Note 1) ......... 2,180,606 2,676,357
Materials and supplies, at first-in,
first-out cost .................... 773,108 652,139
Prepayments ......................... 716,076 369,544
Total current assets $ 7,774,016 $ 6,373,291
Other Assets
Cash surrender value of officers' life
insurance (face amount of $1,036,009). $ 321,339 $ 304,339
Note receivable from officer ......... 134,000 126,000
Unamortized debt expense and other
(Note 6) .......................... 3,357,628 2,291,158
Total other assets $ 3,812,967 $ 2,721,497
Total assets $ 96,681,165 $ 81,140,637
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (continued)
As of June 30, 1997 1996
Liabilities and Shareholders' Equity
Capitalization (See Consolidated
Statements
of Capitalization)
Common shareholders' equity .......... $29,474,569 $23,628,323
Long-term debt (Notes 6 and 7)........ 38,107,860 24,488,916
Notes payable refinanced subsequent to
yearend (Note 5).................... - 18,075,000
Total capitalization .............. $67,582,429 $66,192,239
Current Liabilities
Notes payable (Note 5) ............... $10,865,000 $ -
Current portion of long-term
debt (Notes 6 and 7)................ 1,987,600 1,084,800
Accounts payable ..................... 2,386,717 2,826,438
Accrued taxes ........................ 1,132,315 93,554
Refunds due customers ................ 577,874 23,354
Customers' deposits .................. 368,561 304,246
Accrued interest on debt ............. 1,033,220 637,596
Accrued vacation ..................... 516,032 485,847
Other accrued liabilities ............ 492,501 238,571
Total current liabilities $19,359,820 $ 5,694,406
Deferred Credits and Other
Deferred income taxes ................ $ 7,921,100 $ 7,318,500
Investment tax credits ............... 708,400 779,400
Regulatory liability (Note 2) ........ 892,100 938,300
Advances for construction and other .. 217,316 217,792
Total deferred credits and other $ 9,738,916 $ 9,253,992
Commitments and Contingencies (Note 8) ..
Total liabilities and
shareholders' equity $96,681,165 $81,140,637
............
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in
Shareholders' Equity
For the Years Ended June 30, 1997 1996 1995
Common Shares
Balance, beginning of year ......... $ 1,903,580 $ 1,868,734 $ 1,839,340
$1.00 par value of 438,643,
34,846 and 29,394
shares issued in 1997,
1996 and 1995, respectively -
Public issuance of common shares . 400,000 - -
Dividend reinvestment and stock
purchase plan ................. 31,187 28,024 25,802
Employee stock purchase plan and
other ......................... 7,456 6,822 3,592
Balance, end of year ................ $ 2,342,223 $ 1,903,580 $ 1,868,734
Premium on Common Shares
Balance, beginning of year .......... $ 20,572,132 $20,022,643 $19,532,909
Premium on issuance of common shares-
Public issuance of common shares.. 6,000,000 - -
Dividend reinvestment and stock
purchase plan ................ 519,478 440,621 425,357
Employee stock purchase plan and
other ....................... 111,701 108,868 64,377
Balance, end of year ............... $ 27,203,311 $20,572,132 $20,022,643
Capital Stock Expense
Balance, beginning of year ......... $ (1,620,252) $(1,604,792) $(1,588,025)
Issuance of common shares (296,768) (15,460) (16,767)
Balance, end of year .............. $ (1,917,020) $(1,620,252) $(1,604,792)
Retained Earnings
Balance, beginning of year .......... $ 2,772,863 $ 2,224,928 $ 2,380,567
Net income ........................ 1,724,265 2,661,349 1,917,735
Cash dividends declared on common
shares - (See Consolidated
Statements of Income for rates) . (2,651,073) (2,113,414) (2,073,374)
Balance, end of year ................ $ 1,846,055 $ 2,772,863 $ ,224,928
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Capitalization
As of June 30, 1997 1996
Common Shareholders' Equity
Common shares, par value $1.00 per share
(Notes 3 and 4)
Authorized - 6,000,000 shares
Issued and outstanding -
2,342,223 and 1,903,580 shares in
1997 and 1996, respectively ........... $ 2,342,223 $ 1,903,580
Premium on common shares .................. 27,203,311 20,572,132
Capital stock expense ..................... (1,917,020) (1,620,252)
Retained earnings (Note 6) ................ 1,846,055 2,772,863
Total common shareholders' equity ...... $29,474,569 $23,628,323
Long-Term Debt (Notes 6 and 7)
Debentures, 8.3%, due 2026 ................ $15,000,000 $ -
Debentures, 6 5/8%, due 2023 .............. 13,505,000 14,000,000
Debentures, 9%, due 2011................... 10,000,000 10,000,000
Promissory note from acquisition of under-
ground storage, non-interest bearing,
due through 2001 (less unamortized
discount of $297,099 and $398,419 in 1,502,901 1,401,581
1997 and 1996, respectively)
Other 87,559 172,135
Total long-term debt ................. $40,095,460 $25,573,716
Less - Amounts due within one year,
included in current liabilities ....... (1,987,600) (1,084,800)
Net long-term debt ................... $38,107,860 $24,488,916
Notes Payable Refinanced Subsequent to
Yearend (Note 5) $ - $18,075,000
Total capitalization .............. $67,582,429 $66,192,239
The accompanying notes to consolidated financial statements are an
integral part of these statements.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation -- Delta Natural Gas Company, Inc. ("Delta"
or "the Company") has five wholly-owned subsidiaries. Delta Resources,
Inc. ("Resources") buys gas and resells it to industrial customers on
Delta's system and to Delta for system supply. Delgasco, Inc. buys gas and
resells it to Resources and to customers not on Delta's system. Deltran,
Inc. operates underground natural gas storage facilities that it leases
from Delta. Enpro, Inc. owns and operates production properties. TranEx
Corporation owns a 43 mile intrastate pipeline. All subsidiaries of Delta
are included in the consolidated financial statements. Intercompany
balances and transactions have been eliminated.
(b) Cash Equivalents -- For the purposes of the Consolidated Statements of
Cash Flows, all temporary cash investments with a maturity of three months
or less at the date of purchase are considered cash equivalents.
(c) Depreciation -- The Company determines its provision for depreciation
using the straight-line method and by the application of rates to various
classes of utility plant. The rates are based upon the estimated service
lives of the properties and were equivalent to composite rates of 3.0%,
2.9%, and 2.8% of average depreciable plant for 1997, 1996, and 1995,
respectively.
(d) Maintenance -- All expenditures for maintenance and repairs of units of
property are charged to the appropriate maintenance expense accounts. A
betterment or replacement of a unit of property is accounted for as an
addition and retirement of utility plant. At the time of such a
retirement, the accumulated provision for depreciation is charged with the
original cost of the property retired and also for the net cost of removal.
(e) Gas Cost Recovery -- Delta has a Gas Cost Recovery ("GCR") clause which
provides for a dollar-tracker that matches revenues and gas costs and
provides eventual dollar-for-dollar recovery of all gas costs incurred.
The Company expenses gas costs based on the amount of gas costs recovered
through revenue. Any differences between actual gas costs and those
estimated costs billed are deferred and reflected in the computation of
future billings to customers using the GCR mechanism.
(f) Revenue Recognition -- The Company records revenues as billed to its
customers on a monthly meter reading cycle. At the end of each month, gas
service which has been rendered from the latest date of each cycle meter
reading to the month-end is unbilled.
(g) Revenues and Customer Receivables -- The Company supplies natural gas
to approximately 36,000 customers in central and southeastern Kentucky.
Revenues and customer receivables arise primarily from sales of natural gas
to customers and from transportation services for others. Provisions for
doubtful accounts are recorded to reflect the expected net realizable value
of accounts receivable.
(h) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(i) New Accounting Pronouncements -- In March, 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective for fiscal
years beginning after December 15, 1995. The Company adopted the
provisions of SFAS No. 121 in the first quarter of fiscal 1997. The new
standard requires that long-lived assets and certain identified intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing such impairment reviews, companies are required to estimate the
sum of future cash flows from an asset and compare such amount to the
asset's carrying amount. Any excess of carrying amount over expected cash
flows will result in a possible write-down of an asset to its fair value.
Adoption of SFAS No. 121 did not have a material adverse impact on the
Company's financial position or results of operations.
For companies with June 30 fiscal yearends, SFAS No. 123, "Accounting
for Stock-Based Compensation" was required to be adopted as of June 30,
1997. This standard is currently inapplicable to Delta because the Company
has no stock based compensation arrangements.
Delta is required to adopt SFAS No. 128, "Earnings per Share", during
the second quarter of fiscal 1998. The Company does not expect the
adoption of this standard to have a material adverse impact on its
financial position or results of operations.
(2) Income Taxes
The Company provides for income taxes on temporary differences resulting
from the use of alternative methods of income and expense recognition for
financial and tax reporting purposes. The differences result primarily from the
use of accelerated tax depreciation methods for certain properties versus the
straight-line depreciation method for financial purposes, differences in
recognition of purchased gas cost recoveries and certain other accruals which
are not currently deductible for income tax purposes. Investment tax credits
were deferred for certain periods prior to fiscal 1987 and are being amortized
to income over the estimated useful lives of the applicable properties. The
Company utilizes the liability method for accounting for income taxes, which
requires that deferred income tax assets and liabilities are computed using tax
rates that will be in effect when the book and tax temporary differences
reverse. The change in tax rates applied to accumulated deferred income taxes
may not be immediately recognized in operating results because of ratemaking
treatment. A regulatory liability has been established to recognize the future
revenue requirement impact from these deferred taxes. The temporary differences
which gave rise to the net accumulated deferred income tax liability for the
periods are as follows:
1997 1996
Deferred Tax Liabilities
Accelerated depreciation $ 9,018,800 $8,091,500
Deferred gas cost 860,100 1,055,700
Accrued pension 433,000 252,900
Debt expense 384,900 399,200
Total $10,696,800 $9,799,300
Deferred Tax Assets
Alternative minimum tax credits $ 1,534,100 $ 1,305,600
Regulatory liabilities 339,400 370,000
Unbilled revenue 327,500 236,100
Investment tax credit 279,400
307,400
Other 295,300 261,700
Total $ 2,775,700 $ 2,480,800
Net accumulated deferred
income tax liability $ 7,921,100 $ 7,318,500
The components of the income tax provision are comprised of the following
for the years ended June 30:
1997 1996 1995
Components of Income Tax Expense:
Payable currently:
Federal $ 242,200 $ 52,100 $ 453,900
State (31,300) (255,100) 194,500
Total $ 210,900 $ (203,000) $ 648,400
Deferred 753,900 1,762,500 394,000
Income tax expense $ 964,800 $ 1,559,500 $ 1,042,400
Reconciliation of the statutory federal income tax rate to the effective
income tax rate is shown in the table below:
1997 1996 1995
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes net of federal 5.0 5.2 5.2
benefit
Amortization of investment tax credit (2.6) (1.7) (2.4)
Other differences - net - - (.9)
Effective income tax rate 36.4% 37.5% 35.9%
(3) Employee Benefit Plans
(a) Defined Benefit Retirement Plan - Delta has a trusteed,
noncontributory, defined benefit pension plan covering all eligible
employees. Retirement income is based on the number of years of service
and annual rates of compensation. The Company makes annual contributions
equal to the amounts necessary to fund the plan adequately. The funded
status of the pension plan at March 31, the plan year end, and the amounts
recognized in the Company's consolidated balance sheets at June 30 were as
follows:
1997 1996 1995
Plan assets at fair value $6,835,393 $6,058,458 $5,358,108
Actuarial present value of benefit
obligation:
Vested benefits $4,505,619 $2,789,736 $3,605,363
Non-vested benefits 11,025 9,346 21,742
Accumulated benefit $4,516,644 $2,799,082 $3,627,105
obligation
Additional amounts related
to projected salary 1,828,856 2,811,907 1,638,014
increases
Total projected benefit $6,345,500 $5,610,989 $5,265,119
obligation
Plan assets in excess of
projected benefit $ 489,893 $ 447,469 $ 92,989
obligation
Unrecognized net assets at
date of
initial application
being
amortized over 15 years (211,972) (254,365) (296,759)
Unrecognized net (gain) loss 125,777 (13,481) 286,557
Accrued pension asset $ 403,698 $ 179,623 $ 82,787
The assets of the plan consist primarily of common stocks, bonds and
certificates of deposit. Net pension costs for the years ended June 30
include the following:
1997 1996 1995
Service cost for benefits earned $ 405,386 $ 382,751 $ 432,546
during the year
Interest cost on projected 392,539 356,897 382,167
benefit obligation
Actual return on plan assets (407,965) (886,211) (623,972)
Net amortization and deferral (136,843) 444,044 185,660
Net periodic pension cost $ 253,117 $ 297,481 $ 376,401
The weighted average discount rates and the assumed rates of increase
in future compensation levels used in determining the actuarial present
values of the projected benefit obligation at June 30, 1997, 1996 and 1995
were 7.0% (discount rates), and 4% (rates of increase). The expected long-
term rates of return on plan assets were 8%.
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits",
and SFAS No. 112, "Employers' Accounting for Post-Employment Benefits", do
not affect the Company, as Delta does not provide benefits for post-
retirement or post-employment other than the pension plan for retired
employees.
(b) Employee Savings Plan - The Company has an Employee Savings Plan
("Savings Plan") under which eligible employees may elect to contribute any
whole percentage between 2% and 15% of their annual compensation. The
Company will match 50% of the employee's contribution up to a maximum
Company contribution of 2.5% of the employee's annual compensation. For
1997, 1996 and 1995, Delta's Savings Plan expense was approximately
$151,000, $111,000 and $112,000, respectively.
(c) Employee Stock Purchase Plan - The Company has an Employee Stock
Purchase Plan ("Stock Plan") under which qualified permanent employees are
eligible to participate. Under the terms of the Stock Plan, such employees
can contribute on a monthly basis 1% of their annual salary level (as of
July 1 of each year) to be used to purchase Delta's common stock. The
Company issues Delta common stock, based upon the fiscal year
contributions, using an average of the last sale price of Delta's stock as
quoted in NASDAQ's National Market System at the close of business for the
last five business days in June and matches those shares so purchased.
Therefore, stock equivalent to approximately $101,000 was issued in July,
1997. The continuation and terms of the Stock Plan are subject to approval
by Delta's Board of Directors on an annual basis. Delta's Board has
continued the Stock Plan through June 30, 1998.
(4) Dividend Reinvestment and Stock Purchase Plan
The Company's Dividend Reinvestment and Stock Purchase Plan (Reinvestment
Plan) provides that shareholders of record can reinvest dividends and also make
limited additional investments of up to $50,000 per year in shares of common
stock of the Company. Shares purchased under the Reinvestment Plan are
authorized but unissued shares of common stock of the Company, and 31,187 shares
were issued in 1997. Delta reserved 200,000 shares under the Reinvestment Plan
in December, 1994, and as of June 30, 1997, there were 123,604 shares still
available for issuance.
(5) Notes Payable and Line of Credit
Substantially all of the cash balances of Delta are maintained to
compensate the respective banks for banking services and to obtain lines of
credit; however, no specific amounts have been designated as compensating
balances, and Delta has the right of withdrawal of such funds. At June 30, 1997
and June 30, 1996, the available line of credit was $20,000,000, of which
$10,865,000 and $18,075,000 had been borrowed at an interest rate of 6.785% and
6.285% for 1997 and 1996, respectively. The maximum amount borrowed during 1997
and 1996 was $10,865,000 and $18,075,000, respectively. The interest on this
line is, at the option of Delta, either at the daily prime rate or is based
upon certificate of deposit rates. The current line of credit expires on
November 15, 1997.
Short-term borrowings at June 30, 1996 were repaid in July, 1996, with the
net proceeds of approximately $20,400,000 from the sale of $15,000,000 of
debentures and 400,000 shares of common stock.
(6) Long-Term Debt
On July 19, 1996, Delta issued $15,000,000 of 8.3% Debentures that mature
in July, 2026. Redemption on behalf of deceased holders within 60 days of
notice of up to $25,000 per holder will be made annually, subject to an annual
aggregate limitation of $500,000. The 8.3% Debentures can be redeemed by the
Company beginning in August, 2001 at a 5% premium, such premium declining
ratably until it ceases in August, 2006. Restrictions under the indenture
agreement covering the 8.3% Debentures include, among other things, a
restriction whereby dividend payments cannot be made unless consolidated
shareholders' equity of the Company exceeds $18,000,000. No retained earnings
are restricted under the provisions of the indenture.
On October 18, 1993, Delta issued $15,000,000 of 6 5/8% Debentures that
mature in October, 2023. Each holder may require redemption of up to $25,000
annually, subject to an annual aggregate limitation of $500,000. Such
redemption will also be made on behalf of deceased holders within 60 days of
notice, subject to the annual aggregate $500,000 limitation. The 6 5/8%
Debentures can be redeemed by the Company beginning in October, 1998 at a 5%
premium, such premium declining ratably until it ceases in October, 2003.
On May 1, 1991, Delta issued $10,000,000 of 9% Debentures that mature in
April, 2011. Each holder may require redemption of up to $25,000 annually,
subject to an annual aggregate limitation of $500,000. Such redemption will
also be made on behalf of deceased holders within 60 days of notice, subject to
the annual aggregate $500,000 limitation. The 9% Debentures can be redeemed by
the Company at a 4% premium, such premium declining ratably until it ceases in
April, 2001. The Company may not assume any additional mortgage indebtedness in
excess of $1 million without effectively securing the 9% Debentures equally to
such additional indebtedness.
Debt issuance expenses are deferred and amortized over the terms of the
related debt. In addition, losses on extinguishment of debt are deferred and
amortized over the term of the related debt consistent with regulatory
treatment.
A non-interest bearing promissory note was issued by Delta on November 10,
1995 in the amount of $1,800,000, payable in installments of $400,000 in 1998,
$700,000 in 2000 and $700,000 in 2002. The note was issued when Delta purchased
leases and depleted gas wells to develop them for the underground storage of
natural gas. Delta secured the promissory note by escrow of 102,858 shares of
Delta's common stock. These shares will be issued to the holder of the
promissory note only in the event of default in payment by Delta.
This underground natural gas storage field located on Canada Mountain in
Bell County, Kentucky is now partially developed and will have an estimated
working capacity of 4,000,000 Mcf upon completion. Delta utilized this storage
field to help meet its winter supply needs this year. This storage capability
should permit Delta to continue to purchase and store gas during the non-heating
months, and then withdraw and sell the gas during the peak usage winter months.
Storage project capital expenditures are estimated at approximately $2.6 million
during fiscal 1998, which includes completion of a 14 mile, 12 inch diameter
steel pipeline to provide expanded capacity to deliver gas to Delta's system.
Delta is currently recovering a return on storage field investments through
rates.
Other long-term debt requires principal payments totaling approximately
$88,000 in 1998.
(7) Fair Values of Financial Instruments
The fair value of the Company's debentures is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The fair value of the Company's
debentures at June 30, 1997 is estimated to be $37,723,000. The carrying
amount in the accompanying consolidated financial statements is $38,505,000.
The carrying amount of the Company's other financial instruments including
cash equivalents, accounts receivable, notes receivable, accounts payable and
the non-interest bearing promissory note approximate their fair value.
(8) Commitments and Contingencies
The Company has entered into individual employment agreements with its five
officers. The agreements expire or may be terminated at various times. The
agreements provide for continuing monthly payments or lump sum payments and
continuation of certain benefits over varying periods in the event employment is
altered or terminated following certain changes in ownership of the Company.
(9) Rates
Reference is made to "Regulatory Matters" herein with respect to rate
matters.
(10) Quarterly Financial Data (Unaudited)
The quarterly data reflects, in the opinion of management, all normal
recurring adjustments necessary to present fairly the results for the interim
periods.
Earnings
Operating Net (Loss) per
Operating Income Income Common
Quarter Ended Revenues (Loss) (Loss) Share(a)
Fiscal 1997
September 30 $ 4,074,332 $ 36,149 $ (734,296) $(.33)
December 31 10,023,399 1,090,513 198,153 .09
March 31 18,651,406 3,034,844 2,050,318 .88
June 30 9,420,048 1,154,076 210,090 .09
Fiscal 1996
September 30 $ 3,774,849 $ (147,522) $ (760,662) $(.41)
December 31 8,406,787 1,331,803 649,089 .34
March 31 16,023,581 3,421,608 2,725,444 1.44
June 30 8,370,838 831,166 47,478 .03
______________________________________________________________
(a) Quarterly earnings per share may not equal annual earnings per share due to
changes in shares outstanding.
SCHEDULE II
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Column A Column B Column C Column D Column E
Additions
Balance Charged to Deductions
at Charged to Other Amounts Balance
Beginning Costs and Accounts- Charged Off at End
Description of Period Expenses Recoveries or Paid of Period
Deducted From the Asset to
Which it Applies - Allowance
for doubtful accounts for
the years ended:
June 30, 1997 $ 105,756 $ 220,000 $ 27,402 $ 239,213 $ 113,945
June 30, 1996 $ 81,608 $ 156,000 $ 13,344 $ 145,196 $ 105,756
June 30, 1995 $ 131,324 $ 140,800 $ 24,449 $ 214,965 $ 81,608