DELTA NATURAL GAS CO INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 1998.

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 11, 1998, Delta Natural Gas Company, Inc. had outstanding
2,382,084 shares of common stock $1 Par Value, and the aggregate market value
of the voting stock held by non-affiliates was approximately $40,495,428.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive proxy statement to be filed with the Commission
not later than 120 days after June 30, 1998, 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 Financial Data 10

Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12

Item 7a. Quantitative and Qualitative
Disclosures About Market Risk 16

Item 8. Financial Statements and
Supplementary Data 17

Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 17

PART III
Item 10. Directors and Executive Officers
of the Registrant 17

Item 11. Executive Compensation 17

Item 12. Security Ownership of Certain
Beneficial Owners and Management 17

Item 13. Certain Relationships and Related
Transactions 18

Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 19

Signatures 22

PART I

Item 1. Business

General

Delta Natural Gas Company, Inc. ("Delta" or "the Company"), a regulated public
utility, was organized in 1949. Delta established its first retail gas
distribution system in 1951, which provided service to 300 customers in
Owingsville and Frenchburg, Kentucky. As a result of acquisitions and
expansions of its customer base within its existing service areas, Delta
provides retail gas distribution service to 38,000 customers in central
and southeastern Kentucky and, additionally, provides transportation service
to industrial customers and interconnected pipelines located in the area.

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 through facilities located in 20
predominantly rural counties in central and southeastern Kentucky. The
economy of Delta's service area is based principally on light industry,
farming and coal mining. 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 6,600,
6,300, 3,800 and 3,500 customers, respectively.

The 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 which
are on-system transportation customers. As a result of this growth, Delta's
total average customer count increased by 2.6% in 1998.

Currently, over 99% of Delta's customers are residential and commercial.
Delta's remaining, light industrial customers purchased 6% of the total
volume of gas sold by Delta at retail during 1998.

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 1998 were 4,112,000 Mcf, generating $33,435,000 in
revenues, as compared to 4,299,000 Mcf and $33,561,000 in revenues for
1997. Heating degree days billed during 1998 were 93.5% of normal as
compared with 103.5% in 1997. Sales volumes decreased by 187,000 Mcf, or
4.4%, in 1998 as compared to 1997.

Delta's transportation of natural gas during 1998 generated revenues of
$4,360,000 as compared with $3,596,000 during 1997. Of the total
transportation in 1998, $3,877,000 (3,467,000 Mcf) and $483,000
(1,489,000 Mcf) were earned for transportation for on-system and
off-system customers, respectively. Of the total transportation for 1997,
$3,214,000 (2,863,000 Mcf) and $382,000 (1,205,000 Mcf) were earned for
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 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 was
expanded by Delta during 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. During 1998, the TranEx pipeline was connected to
Delta's system in the Richmond area. It also interconnects with a pipeline
of Columbia Gulf Transmission Company ("Columbia Gulf") in Madison County as
well as Delta's transmission pipeline system in Clay County. Delta is
utilizing the pipeline to deliver natural gas for injection into the
Company's Canada Mountain storage field as well as for system supply and
transportation.

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.

Delta's interstate gas supply is transported and/or stored by Tennessee Gas
Pipeline Company ("Tennessee"), Columbia Gas Transmission Corporation
("Columbia"), Columbia Gulf and Texas Eastern Transmission Corporation.
Delta acquires its interstate gas supply from gas marketers.

Delta's agreements with Tennessee extend until 2000 and thereafter continue
on a year-to-year basis until terminated by either party. Tennessee is
obligated under the agreements to transport up to 17,600 Mcf per day for
Delta. Delta acquires its gas for transportation by Tennessee under an
agreement with a gas marketer. During 1998, Delta purchased 1,290,000 Mcf
from the gas marketer under an agreement that extends through April, 1999.
The Company expects to extend the terms of these agreements.

Delta's agreements 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 agreement. Columbia and Columbia Gulf are
obligated under the agreements to transport up to 12,000 Mcf per day and
4,000 Mcf per day, respectively, for Delta. Delta acquires its gas for
transportation by Columbia and Columbia Gulf under agreements with a gas
marketer. During 1998, Delta purchased a total of 704,000 Mcf from the
gas marketer under agreements that extend through April, 2000.

Delta has an agreement with The Wiser Oil Company ("Wiser") to purchase
natural gas from Wiser through October, 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 9,900 Mcf per
day to Delta through October 31, 1998, and 8,910 Mcf per day on and
after November 1, 1998. Delta purchased 956,000 Mcf from Wiser during 1998.

Delta has agreements 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 4,200,000 Mcf. Delta purchased a total of
225,000 Mcf from those properties during 1998. Enpro also produces oil
from certain of these leases, but oil production has not been
significant.

Delta purchases gas under agreements with various other marketers and
entucky producers. The combined volumes of gas purchased from these
sources during 1998 were 1,062,000 Mcf.

Delta's wholly-owned subsidiaries, Delta Resources, Inc. ("Resources") and
Delgasco, Inc. ("Delgasco") purchase gas under agreements with various
marketers and Kentucky producers. 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 1998 were 3,652,000 Mcf.

Delta has completed the development of an underground natural gas storage
field, with an estimated working capacity of 4,000,000 Mcf. This field
has been used to provide a portion of Delta's winter supply needs
since 1996. This storage capability permits Delta to purchase and store
gas during the non-heating months, and then withdraw and sell the gas
during the peak usage months.

Although there are competitors for the acquisition of gas supplies, 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 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. The
company monitors the need to file a general rate case as a way to adjust its
sales prices. Delta currently has no general rate cases filed with the PSC.

Effective November 30, 1997, Delta received approval from the PSC for an
annual revenue increase of $1,670,000. This resulted from a general
rate case that Delta had filed with the PSC during March, 1997. Effective
May 1, 1998, Delta received approval from the PSC for an additional annual
revenue increase of $117,000 in this rate case, resulting from a
rehearing of certain tax-related items.

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 is allowing
Delta through its GCR clause to recover its costs in connection with its
recently developed storage facilities on Canada Mountain.

During 1997, the PSC established a proceeding to investigate affiliate
transactions. Delta is a party to this proceeding, and has responded to a
PSC data request relating to Delta's subsidiaries. Delta cannot currently
predict the outcome of this proceeding or the impact on Delta's rates, if any.

The PSC convened proceedings during 1997 with various regulated utilities and
other interested parties to discuss the potential unbundling of natural
gas rates and services in Kentucky. On July 1, 1998 the PSC concluded
the proceedings without requiring further unbundling at this time of prices
and service options for residential and small commercial customers. Delta
participated actively in those meetings and plans to continue to provide
comments in future discussions concerning regulatory and legislative issues
relating to unbundling.

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 and communities served by the Company, 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 1998 were $11.2 million and for 1999 are
estimated to be $6.8 million. The Company expects a reduced level of
capital expenditures in 1999 due to the substantial completion of the
underground natural gas storage field project in 1998. The Company is
planning for expenditures for 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, 1998. 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,
1998 1997 1996 1995 1994

Retail Customers Served,
End of Period
Residential ..............31,596 31,380 29,840 29,029 27,939
Commercial ............... 4,753 4,761 4,453 4,287 4,242
Industrial ............... 70 74 75 72 76

Total .................36,419 36,215 34,368 33,388 32,257

Operating Revenues ($000)

Residential sales ........19,969 19,694 16,540 14,772 16,597
Commercial sales .........11,890 11,977 9,788 8,673 9,663
Industrial sales ......... 1,576 1,890 1,483 1,248 1,671
On-system transportation . 3,877 3,214 2,913 2,588 2,310
Off-system transportation. 483 382 418 461 623
Subsidiary sales ......... 6,335 4,904 5,297 3,959 3,755
Other .................... 128 108 137 143 228

Total .................44,258 42,169 36,576 31,844 34,847

System Throughput
(Million Cu. Ft.)

Residential sales ........ 2,377 2,464 2,741 2,173 2,511
Commercial sales ......... 1,504 1,557 1,673 1,328 1,506
Industrial sales ......... 231 278 291 223 316

Total retail sales .... 4,112 4,299 4,705 3,724 4,333

On-system transportation.. 3,467 2,863 2,570 2,390 2,186

Off-system transportation. 1,489 1,205 1,134 1,452 1,997

Total ................. 9,068 8,367 8,409 7,566 8,516

Average Annual Consumption Per
End of Period Residential
Customer (Thousand Cu. Ft.). 75 79 92 75 90

Lexington, Kentucky Degree Days
Actual ....................4,397 4,867 5,280 4,215 4,999
Percent of 30 year average
(4,701) ................. 93.5 103.5 112.3 89.7 106.3

For the Years Ended June 30, 1998 1997 1996 1995 1994

Average Revenue Per Mcf Sold
at Retail ($) ............. 8.13 7.81 5.91 6.63 6.44

Average Gas Cost Per Mcf Sold
at Retail ($) ............. 4.60 4.62 2.81 3.37 3.34

Item 2. Properties

Delta owns its corporate headquarters in Winchester, Kentucky. In addition,
Delta owns buildings used for branch operations in nine of the cities it
serves and rents an office building in one other city. Also, Delta owns a
building in Laurel County used for training as well as equipment and materials
storage.

The Company owns 2,043 miles of natural gas gathering, transmission,
distribution and service lines. These lines range in size up to twelve
inches in diameter. There are no significant encumbrances on these assets.

Delta holds leases for the storage of natural gas under 8,000 acres located
in Bell County, Kentucky. This property was developed for the underground
storage of natural gas and has an estimated capacity to store 4,000,000
Mcf of gas.

Delta owns the rights to any oil and gas underlying 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 550,000
Mcf. These properties otherwise are currently non-producing, and no
reserve studies have been undertaken on the properties.

Enpro owns interests in certain oil and gas leases relating to 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
4,200,000 Mcf. Oil production from the property has not been
significant. Also, Enpro owns the oil and gas underlying 11,500
additional acres in Bell, Clay and Knox Counties. These properties
are currently non-producing, and no reserve studies have been performed on
the properties.

Under the terms of an agreement with a producer relating to 14,000 acres
of Enpro's undeveloped holdings, the producer is conducting exploration
activities on the acreage. Enpro reserved the option to participate in wells
drilled and 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 1998.

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 2,410 record holders of Delta's
common stock as of August 1, 1998.

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 1998

First 18 1/4 16 3/4 .285
Second 19 1/2 17 3/4 .285
Third 19 1/4 16 5/8 .285
Fourth 18 16 3/4 .285

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

During July, 1997, Delta distributed 5,746 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 $17.60 per share for one-half of those shares (2,873 shares),
for a total cash consideration of approximately $50,600; one-half of the
shares (2,873 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. Similarly, in July, 1998, Delta distributed 6,298
shares of its common stock to its employees at $17.60 per share under
the same program.

Also, during July, 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 Financial Data

For the Years Ended June 30,
1998(a) 1997 1996(b) 1995 1994(c)

Summary of Operations ($)
Operating
revenues ........... 44,258,000 42,169,185 36,576,055 31,844,339 34,846,941

Operating
income ............. 6,731,859 5,315,582 5,437,055 4,255,088 4,850,673

Net income ......... 2,451,272 1,724,265 2,661,349 1,917,735 2,671,001

Earnings per
common share ....... 1.04 .75 1.41 1.04 1.50

Dividends
declared per
common share ....... 1.14 1.14 1.12 1.12 1.11

Average Number of
Common Shares
Outstanding .......... 2,359,598 2,294,134 1,886,629 1,850,986 1,775,068

Total Assets ($).....102,866,613 96,681,165 81,140,637 65,948,716 61,932,480

Capitalization ($).....

Common share-
holders' equity ....29,810,294 29,474,569 23,628,323 22,511,513 22,164,791

Long-term debt .....52,612,494 38,107,860 24,488,916 23,702,200 24,500,000

Notes payable re-
financed subsequent
to yearend - - 18,075,000 - -

Total
capitalization ...82,422,788 67,582,429 66,192,239 46,213,713 46,664,791

Short-Term
Debt ($)(d)....... 3,665,000 12,852,600 1,084,800 6,732,700 3,205,000

Other Items ($)
Capital
expenditures ... 11,193,613 16,648,994 13,373,416 8,122,838 7,374,747

Total plant .... 127,028,159 116,829,158 98,795,623 84,944,969 77,882,135

_____________________

(a) During March, 1998, $25,000,000 of debentures were sold, and the proceeds
were used to repay short-term debt and to redeem the Company's $10,000,000
of 9% debentures.

(b) 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.

(c) 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.

(d) Includes current portion of long-term debt.

Item 7.

Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

The Company's utility operations are subject to regulation by the PSC, which
plays a significant role in determining the Company's return on equity.
The PSC 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 Business - Regulatory Matters).

The Company'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 generally resulting
in increased sales by the Company. 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.

Liquidity and Capital Resources

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. During the warmer, non-heating months, therefore,
cash needs for operations and construction are partially met through short-
term borrowings.

Capital expenditures for Delta for fiscal 1999 are expected to be $6.8
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 $25,000,000, of which $1,875,000 was borrowed at June 30, 1998.
The line of credit, which is with Bank One, Kentucky, NA, requires renewal
during November, 1998. 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 March, 1998, when the net proceeds of
$24,100,000 from the sale of $25,000,000 of debentures were used to repay
short-term debt and to redeem the Company's 9% debentures, that would have
matured in 2011, in the amount of $10,000,000.

The primary cash flows during the last three years are summarized below:

1998 1997 1996

Provided by operating activities $ 8,922,037 $ 6,209,226 $ 3,094,809
Used in investing activities (11,193,613) (16,648,994) (13,373,416)
Provided by financing activities 1,909,689 10,768,558 10,294,461

Net increase (decrease) in cash
and cash equivalents $ (361,887) $ 328,790 $ 15,854

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 short-term borrowings, will be sufficient to
satisfy its operating, normal capital expenditure and dividend requirements.

Results of Operations

Operating Revenues

The increase in operating revenues of $2,089,000 for 1998 was due primarily
to the general rate increase effective November 30, 1997 and to the
increases in on-system and off-system transportation volumes of 604,000
Mcf, and 284,000 Mcf respectively. The increase in operating revenues includes
$200,000 of additional revenue caused by a non-recurring change. These
increases were partially offet by a decrease in retail sales volumes of
187,000 Mcf as a result of the warmer winter weather in 1998. Billed
degree days were 93.5% of normal degree days for 1998 as compared with 103.5%
for 1997.

The increase in operating revenues of $5,593,000 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. This was
partially offset by a decrease in retail sales volumes of 406,000 Mcf as a
result of the warmer winter weather in 1997. Billed degree days were
103.5% of normal degree days for 1997 as compared with 112.3% for 1996. In
addition, on-system transportation volumes for 1997 increased 293,000 Mcf,
or 11.4%.

Operating Expenses

The decrease in purchased gas expense for 1998 of $766,000 was due primarily
to the decreased gas purchases for retail sales resulting from the warmer
winter weather in 1998.

The increase in purchased gas expense of $5,875,000 for 1997 was due
primarily to increases in the cost of gas purchased for retail sales. The
increase was partially offset by the decreased gas purchased for retail sales
resulting from the warmer winter weather in 1997.

The increases in depreciation expense during 1998 and 1997 of $510,000 and
$424,000, respectively, were due primarily to additional depreciable plant.

The increase in taxes other than income taxes during 1998 of $155,000 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 1998 and 1997 of $436,000 and $595,000,
respectively, were primarily due to changes in net income.

Interest Charges

The increase in interest on long-term debt during 1998 of $329,000 was due
primarily to the issuance of $25 million of 7.15% Debentures in March, 1998.
The increase in other interest during 1998 of $378,000 was due
primarily to increased average short-term debt borrowings.

The increases in interest on long-term debt and amortization of debt expense
during 1997 of $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 during 1997 of $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.

Earnings Per Common Share

For the years ended June 30, 1998 and 1997, basic earnings per common share
declined, as compared with previous periods, as a result of 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 periods. Other than Delta's outstanding common
shares, there are no potentially dilutive securities. Therefore, basic and
diluted earnings per common share are the same.

Factors That May Affect Future Results

Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other sections of this report (including the letter
To Our Shareholders) contain forward-looking statements that are not
statements of historical facts. These forward-looking statements are
identified by their language, which may in some cases include words such
as "estimates", "expects", "plans", "anticipates", "intends", "will continue",
"believes", and similar expressions. Such forward-looking statements may
concern (among other things) the impact of changes in the cost of gas,
projected capital expenditures, sources of cash to fund expenditures,
regulatory recovery mechanisms, regulatory matters, expansion of the
Delta's gas distribution system, acquisitions of gas customers and
systems, activity in gas production and transportation and acquisition
and management of gas supply.

Such statements are accordingly subject to important risks and uncertainties
that could cause the Company's actual results to differ materially from
those expressed in any such forward-looking statements. These uncertainties
include, but are not limited to the ongoing restructuring of the gas industry
and the outcome of the regulatory proceedings related to that restructuring,
changing regulatory environment generally, uncertainty as to the regulatory
allowance of recovery of changes in the cost of gas, uncertain demands for
capital expenditures, the availability of cash from various sources and
uncertainty as to regulatory approval of the full recovery of costs and
regulatory assets.

The "Year 2000" Issue

The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the
year 2000 could result in errors or system failures. The Company utilizes
a number of computer programs across its entire operation. The
Company has not completed its assessment, but currently believes that costs
of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it
could result in a material financial risk to the Company. The Company
intends to use its best efforts to resolve any significant year 2000
issues in a timely manner.

New Accounting Pronouncements

In 1997, Delta adopted 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". Adoption of SFAS No. 121 did not
have a material 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 adopted SFAS No. 128, "Earnings per Share", during the second quarter
of fiscal 1998. The adoption of this standard had no effect upon current
or prior period earnings per common share.

In June, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
effective for periods beginning after December 15, 1997. These statements
do not affect the accounting recognition or measurement of transactions,
but rather require expanded disclosures regarding financial
results. The Company will adopt these standards in 1999 as required by
the FASB.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk.

As discussed in "Gas Operations and Supply" under Item 1, the Company is a
party to long-term fixed-price gas purchase and transportation contracts.
Therefore, the prices the Company pays under these contracts differs
from the current market prices. However, the Company has minimal price risk
resulting from these contracts as these costs are passed through to
customers either through Delta's gas cost recovery mechanism or specific
contracts with customers. The Company currently is not a party to hedge
instruments or other agreements that represent financial derivatives.

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 24

Report of Independent Public Accountants 25

Consolidated Statements of Income for the years ended June 30, 1998,
1997 and 1996 26

Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996 27

Consolidated Balance Sheets as of June 30, 1998 and 1997 29

Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 1998, 1997 and 1996 31

Consolidated Statements of Capitalization as of June 30, 1998 and 1997 32

Notes to Consolidated Financial Statements 33

Schedule II - Valuation and Qualifying Accounts for the years ended
June 30, 1998, 1997 and 1996 41

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 incorporated
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 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(b) - 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.

4(c) - The Indenture dated March 1, 1998 in respect of 7.15%
Debentures due April 1, 2018, is incorporated herein by reference
to Exhibit 4(d) to Delta's Form S-2 dated March 11, 1998.

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 (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 (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 (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 (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 (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 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 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.

No reports on Form 8-K were filed during the three months ended June 30, 1998.

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, 1998.

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, 1998
(Glenn R. Jennings) Officer and Director

(ii) Principal Financial Officer and Principal Accounting Officer:

/s/ John F. Hall Vice President - Finance, September 11, 1998
(John F. Hall) Secretary and Treasurer

(iii) A Majority of the Board of Directors:

/s/ H. D. Peet Chairman of the Board September 11, 1998
(H. D. Peet)

/s/ Donald R. Crowe Director September 11, 1998
(Donald R. Crowe)

/s/ Jane Hylton Green Directo September 11, 1998
(Jane Hylton Green)

/s/ Billy Joe Hall Director September 11, 1998
(Billy Joe Hall)

/s/ John D. Harrison Director September 11, 1998
(John D. Harrison)

/s/ Virgil E. Scott Director September 11, 1998
(Virgil E. Scott)

/s/ Henry C. Thompson Director September 11, 1998
(Henry C. Thompson)

/s/ Arthur E. Walker, Jr. Director September 11, 1998
(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.

/s/Glenn R. Jennings /s/John F. Hall

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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998, 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 17, 1998

Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Income

For the Years Ended June 30, 1998 1997 1996

Operating Revenues ............ $ 44,258,000 $ 42,169,185 $36,576,055

Operating Expenses
Purchased gas .............. $ 22,499,488 $ 23,265,222 $17,389,755
Operation and maintenance
(Note 1) ................. 8,968,213 8,631,635 8,642,511

Depreciation and depletion
(Note 1) ................. 3,445,382 2,935,257 2,510,952

Taxes other than income
taxes .................... 1,212,058 1,056,689 1,036,282

Income taxes (Note 2) ...... 1,401,000 964,800 1,559,500

Total operating expenses. $ 37,526,141 $ 36,853,603 $31,139,000

Operating Income .............. $ 6,731,859 $ 5,315,582 $ 5,437,055

Other Income and Deductions, Net 67,911 40,874 32,503

Income Before Interest Charges. $ 6,799,770 $ 5,356,456 $ 5,469,558

Interest Charges

Interest on long-term debt.. $ 3,326,681 $ 2,997,393 $ 1,851,768

Other interest ............. 897,265 519,432 867,641

Amortization of debt expense 124,552 115,366 88,800

Total interest charges .. $ 4,348,498 $ 3,632,191 $ 2,808,209

Net Income $ 2,451,272 $ 1,724,265 $ 2,661,349

Weighted Average Number of
Common Shares Outstanding ... 2,359,598 2,294,134 1,886,629

Basic and Diluted Earnings Per
Common Share. . . . . . . . . . $ 1.04 $ .75 $ 1.41

Dividends Declared Per Common
Share ....................... $ 1.14 $ 1.14 $ 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, 1998 1997 1996

Cash Flows From Operating Activities
Net income .................. $ 2,451,272 $ 1,724,265 $ 2,661,349

Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation, depletion and
amortization ............ 3,755,929 3,049,229 2,663,475
Deferred income taxes and
investment tax credits .. (29,400) 485,400 1,762,500
Other - net .................. 698,584 666,798 484,474

(Increase) decrease in assets:
Accounts receivable ......... (124,168) (318,178) (860,255)
Gas in storage .............. (840,829) (782,007) 63,546
Advance (deferred) recovery
of gas cost ............... 3,328,625 495,751 (3,788,143)
Materials and supplies ....... 252,746 (120,969) (124,697)
Prepayments .................. 70,648 (346,532) 53,702
Other assets ................. (55,440) (541,669) (31,723)

Increase (decrease) in
liabilities:
Accounts payable ............. (336,089) (439,721) 871,207
Refunds due customers ........ (460,751) 554,520 (456,283)
Accrued taxes ............... (46,549) 1,038,761 (270,394)
Other current liabilities .... 257,055 744,054 56,951
Advances for construction and
other ...................... 404 (476) 9,100

Net cash provided by
operating activities ... $ 8,922,037 $ 6,209,226 $ 3,094,809

Cash Flows From Investing Activities
Capital expenditures .......... $(11,193,613)$(16,648,994) $(13,373,416)

Net cash used in investing
activities ............ $(11,193,613) $(16,648,994) $(13,373,416)

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, 1998 1997 1996

Cash Flows From Financing
Activities (Note 6)

Dividends on common stock .......$ (2,690,233) $ (2,651,073) $ (2,113,414)
Issuance of common stock, net.... 574,686 6,773,054 568,875
Issuance of debentures, net...... 23,837,795 14,334,833 -
Repayment of long-term debt ..... (10,822,559) (478,256) (561,000)
Issuance of notes payable........ 26,200,000 30,975,000 25,955,000
Repayment of notes payable....... (35,190,000) (38,185,000) (13,555,000)

Net cash provided by
financing activities $ 1,909,689 $ 10,768,558 $ 10,294,461

Net Increase (Decrease) in Cash and
Cash Equivalents ...................$ (361,887) $ 328,790 $ 15,854

Cash and Cash Equivalents,
Beginning of Year .................. 480,423 151,633 135,779

Cash and Cash Equivalents,
End of Year ........................$ 118,536 $ 480,423 $ 151,633

Supplemental Disclosures of Cash
Flow Information

Cash paid during the year for:

Interest $ 4,291,005 $ 3,019,881 $ 2,491,091
Income taxes (net of refunds) $ 1,642,964 $ (432,163) $ 193,560

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, 1998 1997

Assets
Gas Utility Plant, at cost ...............$127,028,159 $116,829,158
Less - Accumulated provision for
depreciation ........................ (34,929,481) (31,734,976)

Net gas plant $ 92,098,678 $ 85,094,182

Current Assets
Cash and cash equivalents ............$ 118,536 $ 480,423
Accounts receivable, less accumulated
provisions for doubtful accounts of
$120,002 and $113,945 in 1998 and
1997, respectively .................. 2,538,800 2,414,632
Gas in storage, at average cost ....... 2,050,000 1,209,171
Deferred gas costs (Note 1) ........... - 2,180,606
Materials and supplies, at first-in,
first-out cost ...................... 520,362 773,108
Prepayments ........................... 241,731 312,379

Total current assets $ 5,469,429 $ 7,370,319

Other Assets
Cash surrender value of officers' life
insurance (face amount of $1,036,009). $ 339,215 $ 321,339
Note receivable from officer ........... 110,000 134,000
Unamortized debt expense and other
(Note 6) ............................ 4,849,291 3,761,325

Total other assets $ 5,298,506 $ 4,216,664

Total assets $102,866,613 $ 96,681,165

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, 1998 1997

Liabilities and Shareholders' Equity

Capitalization (See Consolidated Statements
of Capitalization)

Common shareholders' equity .......... $ 29,810,294 $29,474,569
Long-term debt (Notes 6 and 7)........ 52,612,494 38,107,860

Total capitalization .............. $ 82,422,788 $67,582,429

Current Liabilities
Notes payable (Note 5) ............... $ 1,875,000 $10,865,000
Current portion of long-term
debt (Notes 6 and 7)................ 1,790,000 1,987,600
Accounts payable ..................... 2,050,628 2,386,717
Accrued taxes ........................ 1,085,766 1,132,315
Refunds due customers ................ 117,123 577,874
Advance recovery of gas costs (Note 1) 1,148,019 -
Customers' deposits .................. 438,134 368,561
Accrued interest on debt ............. 1,215,265 1,033,220
Accrued vacation ..................... 528,952 516,032
Other accrued liabilities ............ 485,018 492,501

Total current liabilities $ 10,733,905 $19,359,820

Deferred Credits and Other
Deferred income taxes ................ $ 8,023,475 $ 7,921,100
Investment tax credits ............... 637,300 708,400
Regulatory liability (Note 2) ........ 831,425 892,100
Advances for construction and other .. 217,720 217,316

Total deferred credits and other $ 9,709,920 $ 9,738,916

Commitments and Contingencies (Note 8) . ________ __________

Total liabilities and
shareholders' equity ............ $102,866,613 $96,681,165

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, 1998 1997 1996

Common Shares

Balance, beginning of year ........$ 2,342,223 $ 1,903,580 $ 1,868,734
$1.00 par value of 32,870,
438,643 and 34,846
shares issued in 1998,
1997 and 1996, respectively:

Public issuance of common shares .. - 400,000 -
Dividend reinvestment and stock
purchase plan ................... 27,124 31,187 28,024
Employee stock purchase plan and
other ........................... 5,746 7,456 6,822

Balance, end of year ................ $ 2,375,093 $ 2,342,223 $ 1,903,580

Premium on Common Shares

Balance, beginning of year .......... $ 27,203,311 $ 20,572,132 $20,022,643
Premium on issuance of common shares:
Public issuance of common shares .. - 6,000,000 -
Dividend reinvestment and stock
purchase plan ................... 446,432 519,478 440,621
Employee stock purchase plan and
other ......................... 95,384 111,701 108,868

Balance, end of year ................$ 27,745,127 $27,203,311 $20,572,132

Capital Stock Expense

Balance, beginning of year ..........$ (1,917,020) $ (1,620,252) $(1,604,792)
Issuance of common shares - (296,768) (15,460)
Balance, end of year ................$ (1,917,020) $ (1,917,020) $(1,620,252)

Retained Earnings
Balance, beginning of year ..........$ 1,846,055 $ 2,772,863 $ 2,224,928
Net income ....................... 2,451,272 1,724,265 2,661,349
Cash dividends declared on common
shares (See Consolidated
Statements of Income for rates) .. (2,690,233) (2,651,073) (2,113,414)

Balance, end of year ................$ 1,607,094 $ 1,846,055 $ 2,772,863

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, 1998 1997

Common Shareholders' Equity
Common shares, par value
$1.00 per share
(Notes 3 and 4)
Authorized 6,000,000 shares
Issued and outstanding 2,375,093 and
2,342,223 shares in 1998 and
1997, respectively ................ $ 2,375,093 $ 2,342,223
Premium on common shares ............. 27,745,127 27,203,311
Capital stock expense ................ (1,917,020) (1,917,020)
Retained earnings (Note 6) ........... 1,607,094 1,846,055

Total common shareholders' equity ..$29,810,294 $29,474,569

Long-Term Debt (Notes 6 and 7)

Debentures, 8.3%, due 2026 ............$15,000,000 $15,000,000
Debentures, 6 5/8%, due 2023 ......... 13,170,000 13,505,000
Debentures, 9%, due 2011.............. - 10,000,000
Debentures, 7.15%, due 2018 . . . . . 25,000,000 -
Promissory note from acquisition of
under-ground storage, non-
interest bearing,
due through 2001 (less unamortized
discount of $207,506 and $297,099 in
1998 and 1997, respectively) 1,192,494 1,502,901
Other 40,000 87,559

Total long-term debt ............. $54,402,494 $40,095,460

Less amounts due within one year,
Included in current liabilities ... (1,790,000) (1,987,600)

Net long-term debt ............... $52,612,494 $38,107,860

Total capitalization .......... $82,422,788 $67,582,429

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
3.1%, 3.0%, and 2.9% of average depreciable plant for 1998, 1997, and
1996, 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 has 38,000 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 -- Delta adopted 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" in the
first quarter of fiscal 1997. Adoption of SFAS No. 121 did not have a
material 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 adopted SFAS No. 128, "Earnings per Share", during the second
quarter of fiscal 1998. The adoption of this standard had no effect
upon current or prior period earnings per share.

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
effective for periods beginning after December 15, 1997. These statements
do not affect the accounting recognition or measurement of transactions,
but rather require expanded disclosures regarding financial results.
The Company will adopt these standards in 1999 as required by the FASB.

(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:

1998 1997

Deferred Tax Liabilities
Accelerated depreciation $ 9,933,400 $ 9,018,800
Deferred gas cost - 860,100
Accrued pension 568,900 433,000
Debt expense 487,400 384,900

Total $10,989,700 $10,696,800

Deferred Tax Assets

Alternative minimum tax credits $ 1,274,100 $ 1,534,100
Regulatory liabilities 486,245 339,400
Deferred gas cost/unbilled revenue 670,100 327,500
Investment tax credit 251,400 279,400
Other 284,380 295,300

Total $ 2,966,225 $ 2,775,700

Net accumulated deferred
income tax liability $ 8,023,475 $ 7,921,100

The components of the income tax provision are comprised of the following
for the years ended June 30:

1998 1997 1996

Components of Income Tax Expense:

Payable currently:
Federal $ 1,164,800 $ 242,200 $ 52,100
State 265,600 (31,300) (255,100)
Total $ 1,430,400 $ 210,900 $ (203,000)

Deferred (29,400) 753,900 1,762,500

Income tax expense $ 1,401,000 $ 964,800 $ 1,559,500

Reconciliation of the statutory federal income tax rate to the effective
income tax rate is shown in the table below:

1998 1997 1996

Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes net of federal
benefit 5.0 5.0 5.2
Amortization of investment tax
credit (1.8) (2.6) (1.7)
Other differences - net
(.2) - -

Effective income tax rate 37.0% 36.4% 37.5%

(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:

1998 1997 1996
Plan assets at fair value $8,637,638 $6,835,393 $6,058,458
Actuarial present value of benefit
Obligation:

Vested benefits $4,800,745 $4,505,619 $2,789,736
Non-vested benefits 19,934 11,025 9,346
Accumulated benefit obligation $4,820,679 $4,516,644 $2,799,082

Additional amounts related
to projected salary increases 1,924,590 1,828,856 2,811,907
Total projected benefit
obligation $6,745,269 $6,345,500 $5,610,989
Plan assets in excess of
projected benefit obligation $1,892,369 $ 489,893 $ 447,469

Unrecognized net assets at date of
Initial application being
Amortized over 15 years (169,577) (211,972) (254,365)
Unrecognized net (gain) loss (869,909) 125,777 (13,481)
Accrued pension asset $ 852,883 $ 403,698 $ 179,623

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:

1998 1997 1996

Service cost for benefits earned
during the year $ 445,288 $ 405,386 $ 382,751
Interest cost on projected
benefit obligation 443,955 392,539 356,897
Actual return on plan assets (1,584,403) (407,965) (886,211)
Net amortization and deferral 966,615 (136,843) 444,044
Net periodic pension cost $ 271,455 $ 253,117 $ 297,481

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, 1998, 1997
and 1996 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 1998, 1997 and 1996, Delta's Savings Plan expense was $156,000,
$151,000 and $111,000, 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 $111,000 was issued in July, 1998. 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, 1999.

(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 27,124,
31,187 and 28,024 shares were issued in 1998, 1997 and 1996, respectively.
Delta reserved 200,000 shares under the Reinvestment Plan in December, 1994,
and as of June 30, 1998, there were 96,480 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, 1998 and
June 30, 1997, the available line of credit was $25,000,000 and $20,000,000,
respectively, of which $1,875,000 and $10,865,000 had been borrowed at an
interest rate of 6.885% and 6.785% for 1998 and 1997, respectively. The
maximum amount borrowed during 1998 and 1997 was $20,160,000 and
$10,865,000, 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 must be renewed during November,
1998.

Short-term borrowings were repaid in March, 1998, with the net proceeds of
$24,100,000 from the sale of $25,000,000 of debentures. The net proceeds
were also used to redeem the Company's 9% Debentures that would have matured
in April, 2011. The redemption of this debt, the outstanding principal
amount of which was $10,000,000, was completed in April, 1998.

(6) Long-Term Debt

In March, 1998, Delta issued $25,000,000 of 7.15% Debentures that mature in
March, 2018. Redemption of up to $25,000 annually will be made on behalf
of deceased holders within 60 days of notice, subject to an annual
aggregate $750,000 limitation. The 7.15% Debentures can be redeemed by the
Company after April 1, 2003. Restrictions under the indenture agreement
covering the 7.15% Debentures include, among other things, a restriction
whereby dividend payments cannot be made unless consolidated shareholders'
equity of the Company exceeds $21,500,000. No retained earnings are
restricted under the provisions of the indenture.

In July, 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.

In October, 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. The Company may not assume any additional mortgage
indebtedness in excess of $2 million without effectively securing the 6 5/8%
Debentures equally to such additional indebtedness.

Debt issuance expenses are deferred and amortized over the terms of the
related debt. Call premium in 1998 of $300,000 and loss on extinguishment
of debt of $332,000 was deferred and is being amortized over the term of
the related debt consistent with regulatory treatment.

A non-interest bearing promissory note was issued by Delta in November, 1995
in the amount of $1,800,000, and remaining installments are due in the
amounts of $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. The promissory note installments are
secured by escrow of 80,000 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.

Other long-term debt requires principal payments of $40,000 in 1999 at which
time other long-term debt will be fully repaid.

(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, 1998 and 1997 was estimated to be $54,387,000
and $37,723,000, respectively. The carrying amount in the accompanying
consolidated financial statements as of June 30, 1998 and 1997 is $53,170,000
and $38,505,000, respectively.

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.

Basic and
Diluted
Earnings(Loss)
Quarter Operating Operating Net Income per Common
Ended Revenues Income(Loss) (Loss) Share(a)

Fiscal 1998

September 30 $ 5,215,272 $ 181,905 $ (813,982) $ (.35)
December 31 11,787,820 1,726,169 591,812 .25
March 31 18,305,458 3,442,234 2,366,329 1.00
June 30 8,949,450 1,381,551 307,113 .14

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

(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, 1998, 1997 AND 1996

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, 1998 $ 113,945 $ 369,870 $ 46,013 $ 409,827 $ 120,001
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

DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF THE CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES

1998 1997 1996 1995 1994

Earnings:

Net income. . . . .$2,451,272 $1,724,265 $2,661,349 $1,917,735 $2,671,001
Provisions for
income taxes . . 1,401,000 964,800 1,559,500 1,042,400 1,509,600
Fixed charges . . . 4,348,498 3,632,191 2,808,209 2,387,935 2,214,659

Total $8,200,770 $6,321,256 $7,029,058 $5,348,070 $6,395,260

Fixed Charges:

Interest on debt. .$4,223,946 $3,516,825 $2,719,409 $2,299,135 $2,123,255
Amortization of
debt expense. . 124,552 115,366 88,800 88,800 91,404

Total $4,348,498 $3,632,191 $2,808,209 $2,387,935 $2,214,659

Ratio of Earnings to
Fixed Charges 1.89x 1.74x 2.50x 2.24x 2.89x

EXHIBIT 21

Subsidiaries of the Registrant

Delgasco, Inc., Deltran, Inc., Enpro, Inc., Delta Resources, Inc. and
TranEx Corporation are wholly-owned subsidiaries of the Registrant, are
incorporated in the state of Kentucky and do business under their corporate
names.

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our report dated August 17, 1998, included in this Form 10-K, into the
Company's previously filed Registration Statement No. 33-56689, relating
to the Dividend Reinvestment and Stock Purchase Plan of the Company.

Arthur Andersen LLP

Louisville, Kentucky
September 11, 1998