<PAGE> 1
PROSPECTUS
DELTA NATURAL GAS COMPANY, INC.
350,000 SHARES OF COMMON STOCK
DELTA $15,000,000 8.3% DEBENTURES DUE 2026
The Common Stock of Delta Natural Gas Company, Inc. (``Delta'' or the
``Company'') is traded on the NASDAQ National Market System (``NASDAQ/NMS'')
under the trading symbol ``DGAS''. On June 17, 1996, the last reported sale
price of the Common Stock on the NASDAQ/NMS was $15.75 per share.
The 8.3% Debentures due 2026 (the ``Debentures'') will be issued in the
form of one global security (the ``Global Security'') registered in the name of
the nominee of The Depository Trust Company (the ``Depository''), and such
nominee will be the sole holder of the Debentures. An owner of an interest in
the Debentures (``Beneficial Owner'') will not be entitled to the delivery of a
definitive security except in limited circumstances. A Beneficial Owner's
interest in the Global Security will be recorded on and transfers will be
effected only through records maintained by the Depository and its
participants. See ``Description of Debentures''.
Interest on the Debentures is payable semi-annually on February 1 and
August 1 of each year, commencing on February 1, 1997. At the option of any
deceased Beneficial Owner's Representative (as defined below), interests in the
Debentures are redeemable at 100% of their principal amount, plus accrued
interest, at any time, subject to the maximum principal amounts of $25,000 per
deceased Beneficial Owner and $500,000 in the aggregate for all deceased
Beneficial Owners during the initial period ending August 1, 1997 and during
each twelve-month period thereafter, within 60 days after presentment to the
Depository of a satisfactory request for redemption by a deceased Beneficial
Owner's Representative. Otherwise, neither the Company nor a Beneficial Owner
can require redemption of the Debentures until August 1, 2001, although the
Company may, but is not required to, redeem interests in the Debentures
tendered in excess of the above limitations. On or after August 1, 2001,
however, interests in the Debentures will be redeemable, in whole or in part,
at the option of the Company at declining premiums. The Debentures will be
unsecured obligations of the Company payable out of the Company's general
operating funds, and no mandatory sinking fund will exist to provide for the
repayment of the indebtedness represented by the Debentures. See ``Description
of Debentures''.
There is no market for the Debentures, and no assurance can be given that
one will develop.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
==================================================================================================================
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS<F1> COMPANY<F2>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................................... $ 16.00 $ 0.72 $ 15.28
Total Common Stock<F3>............................ $ 5,600,000 $252,000 $ 5,348,000
- ------------------------------------------------------------------------------------------------------------------
Per Debenture....................................... 100% 4.0% 96.0%
Total Debentures.................................. $15,000,000 $600,000 $14,400,000
- ------------------------------------------------------------------------------------------------------------------
Total Offering.................................. $20,600,000 $852,000 $19,748,000
==================================================================================================================
<FN>
<F1> The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See ``Underwriting''.
<F2> Before deduction of expenses payable by the Company estimated at $75,000.
<F3> The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 50,000 additional shares, on the same terms and
conditions, to cover over-allotments, if any. If such option is exercised
in full, the Total Common Stock Price to Public, Underwriting Discount and
Commissions and Proceeds to Company will be $6,400,000, $288,000
and $6,112,000, respectively, and the Total Offering Price to Public,
Underwriting Discount and Commissions and Proceeds to Company will be
$21,400,000, $888,000 and $20,512,000, respectively. See
``Underwriting''.
</TABLE>
----------------------------------
The shares of Common Stock and the Debentures are offered by the
Underwriters, subject to prior sale, when, as and if issued to and accepted by
the Underwriters, subject to their right to reject any order in whole or in
part and subject to certain other conditions. It is expected that the
certificates for the shares of Common Stock will be available for delivery on
or about July 19, 1996. The Debentures will bear interest from the date
of delivery of the Global Security to the Underwriters, which is expected to be
on or about July 19, 1996.
EDWARD D. JONES & CO.
J.J.B. HILLIARD, W.L. LYONS, INC.
THE OHIO COMPANY
THE DATE OF THIS PROSPECTUS IS JULY 15, 1996.
<PAGE> 2
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
``Commission'') a Registration Statement on Form S-2 with respect to the
securities offered hereby (herein, together with all amendments and exhibits,
referred to as the ``Registration Statement'') under the Securities Act of
1933, as amended (the ``Act''). This Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
are omitted in accordance with the Rules and Regulations of the Commission. For
further information pertaining to these securities and the Company, reference
is made to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the ``Exchange Act''), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy and information statements, and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: New York
Regional Office, 75 Park Place, New York, New York 10007; and Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have heretofore been filed by the Company
with the Commission pursuant to the Exchange Act, are incorporated by reference
into this Prospectus and shall be deemed to be a part hereof as of their
respective dates:
1. The annual report of the Company on Form 10-K for the fiscal year ended
June 30, 1995.
2. The quarterly reports of the Company on Form 10-Q for the fiscal
quarters ended September 30, 1995, December 31, 1995 and March 31, 1996.
Any statement contained in a document incorporated by reference herein or
deemed to be incorporated by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which is deemed to be
incorporated herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or
oral request of any such person, a copy of any or all documents incorporated by
reference into this Prospectus (without exhibits other than exhibits
specifically incorporated by reference into such documents). Requests should be
directed to: John F. Hall, Vice President - Finance, Secretary and Treasurer,
Delta Natural Gas Company, Inc., 3617 Lexington Road, Winchester, Kentucky
40391, telephone number (606) 744-6171, Fax number (606) 744-6552.
--------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OR THE DEBENTURES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
IN CONNECTION WITH THIS OFFERING THE UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE ``UNDERWRITING''.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (and notes thereto) contained
elsewhere in this Prospectus and in the documents incorporated herein by
reference. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option granted to the Underwriters by the
Company is not exercised.
THE COMPANY
Delta Natural Gas Company, Inc. (``Delta'' or the ``Company''), a regulated
public utility organized in 1949, is engaged in the distribution and
transmission of natural gas to approximately 36,000 residential, commercial and
industrial customers in central and southeastern Kentucky. The Company also
owns and operates underground storage facilities and certain oil and gas
production properties and transports gas for others.
The Company plans to continue its efforts to increase its retail customer
base through continued expansion within its existing service areas and will
continue to consider acquisitions of other gas systems. The Company also
anticipates continuing activity in the gas storage, production and
transportation areas and plans to pursue and increase these activities whenever
practicable.
<TABLE>
THE OFFERING
<S> <C>
COMMON STOCK
Common Stock Offered................... 350,000 shares
Common Stock to be Outstanding
After Offering....................... 2,249,360<F1>
NASDAQ/NMS Symbol...................... DGAS
Latest 52-Week Range of Sales Prices
(through June 17, 1996).............. $18 1/4 to $15 1/2
Annualized Dividend Rate............... $1.12 per share<F2>
DEBENTURES
Debentures Offered..................... $15,000,000 in aggregate principal amount
Maturity............................... August 1, 2026
Interest............................... 8.3% payable, semi-annually on each February 1 and August 1,
commencing February 1, 1997
Beneficial Owner's Redemption
Privilege............................ At the option of any deceased Beneficial Owner's Representative,
interests in the Debentures are redeemable at 100% of their
principal amount, plus accrued interest, subject to the maximum
principal amounts of $25,000 per deceased Beneficial Owner and
$500,000 in the aggregate for all deceased Beneficial Owners
during the initial period ending August 1, 1997 and during each
twelve-month period thereafter. See ``Description of
Debentures--Limited Right of Redemption Upon Death of Beneficial
Owner''.
<FN>
- --------
<F1> Excludes shares issued after June 15, 1996 pursuant to the Company's
Dividend Reinvestment Plan and Stock Purchase Plan (the ``Reinvestment
Plan'') and the Company's Employee Stock Purchase Plan. Pursuant to the
Company's Reinvestment Plan, the Company registered 200,000 shares of its
common stock, and as of March 31, 1996, there were 162,420 shares still
available for issue.
<F2> Based on the quarterly dividend of $.28 per share. See ``Price Range of
Common Stock and Dividends''.
3
<PAGE> 4
<S> <C>
Company's Redemption Privilege......... In whole or in part, upon not less than 30 days notice, on or after
August 1, 2001, at a premium declining from 105%, plus accrued
interest. See ``Description of Debentures--Redemption at the
Option of the Company''.
USE OF PROCEEDS........................ To reduce short-term notes payable and for working capital and
general corporate purposes.
</TABLE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
FOR THE TWELVE FOR THE FISCAL YEARS ENDED JUNE 30,
MONTHS ENDED --------------------------------------------
MARCH 31, 1996 1995 1994 1993
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME DATA:
Operating Revenues............................................. $ 34,380,315 $ 31,844,339 $ 34,846,941 $ 31,221,410
Operating Income............................................... 5,241,459 4,255,088 4,850,673 4,791,816
Net Income..................................................... 2,680,551 1,917,735 2,671,001 2,620,664
Earnings per Common Share...................................... 1.43 1.04 1.50 1.60
Dividends Declared per Common Share............................ 1.12 1.12 1.105 1.085
<CAPTION>
MARCH 31, 1996
-------------------------------------------------
ACTUAL AS ADJUSTED<F1>
---------------------- ----------------------
<S> <C> <C> <C> <C>
CAPITALIZATION:
Long-Term Debt (Including Current Portion).................. $ 26,039,850 52.1% $ 41,039,850 58.0%
Common Shareholders' Equity................................. 23,986,407 47.9 29,668,656 42.0
------------ ------ ------------ ------
Total Capitalization.................................... $ 50,026,257 100.0% $ 70,708,506 100.0%
============ ====== ============ ======
SHORT-TERM NOTES PAYABLE........................................ $ 15,460,000 $ --
============ ============
<CAPTION>
FOR THE TWELVE FOR THE FISCAL YEARS ENDED JUNE 30,
MONTHS ENDED MARCH -----------------------------------
31, 1996 1995 1994 1993
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES<F2>:
Actual......................................................... 2.62x 2.24x 2.89x 2.88x
Pro Forma<F1>.................................................. 2.12x
<FN>
- --------
<F1>Adjusted to reflect the sale of the Common Stock (at an assumed price of
$17 per share) and the issuance of the Debentures (at an assumed interest
rate of 8%) offered hereby and the application of the estimated net
proceeds of $20,007,250 therefrom. The estimated issuance expenses and the
underwriting discounts on the Debentures, a total of approximately
$675,000, are not reflected in the As Adjusted columns. See ``Use of
Proceeds and Capital Expenditures''.
<F2>The ratio of earnings to fixed charges represents the number of times that
fixed charges are covered by earnings. Earnings for the calculation
consists of net income before income taxes and fixed charges. Fixed charges
consist of interest expense and amortization of debt expense.
</TABLE>
4
<PAGE> 5
THE COMPANY
Delta is engaged primarily in the distribution, transmission and storage of
natural gas with its facilities which are located in 17 counties in central and
southeastern Kentucky. Delta serves approximately 36,000 residential,
commercial, industrial and transportation customers and makes transportation
deliveries to several interconnected pipelines.
Unless the context requires otherwise, references to Delta include Delta's
wholly-owned subsidiaries, Delta Resources, Inc. (``Resources''), Delgasco,
Inc. (``Delgasco''), Deltran, Inc. (``Deltran'') and Enpro, Inc. (``Enpro'').
Resources buys gas and resells it to industrial customers on Delta's system and
to Delta for system supply. Delgasco buys gas and resells it to Resources and
to customers not on Delta's system. Deltran operates an underground natural gas
storage field that it leases from Delta. Enpro owns and operates existing
production properties and undeveloped acreage. Delta and its subsidiaries are
under common executive management.
Delta was incorporated under Kentucky law in 1949. Its principal executive
offices are located at 3617 Lexington Road, Winchester, Kentucky 40391. Its
telephone number is (606) 744-6171, and its Fax number is (606) 744-6552.
SYSTEM MAP
[MAP]
APPEARING AT THIS POINT IS A MAP DISPLAYING DELTA'S SYSTEM. THE MAP IS AN
OUTLINE OF THE STATE OF KENTUCKY WITH SYMBOLS INDICATING THE LOCATION OF
DELTA'S CORPORATE OFFICE, BRANCH OFFICES, COMMUNITIES SERVED, STORAGE
FACILITIES AND TRANSMISSION LINES. THE MAP ALSO INDICATES THE LOCATION OF THE
MAJOR INTERSTATE SUPPLY LINES FROM WHICH DELTA RECEIVES A PORTION OF ITS
SUPPLY.
5
<PAGE> 6
SPECIAL FACTORS AFFECTING THE GAS UTILITY INDUSTRY
The natural gas industry is subject to numerous regulations and
uncertainties, many of which affect the Company in varying degrees. Industry
issues which have affected or may affect the Company from time to time include
the following: uncertainty in achieving an adequate return on invested capital
due to inflation; difficulty in obtaining rate increases from regulatory
authorities in adequate amounts and on a timely basis; attrition in earnings
produced by the combination of increasing expenses and the costs of new capital
which may exceed allowed rates of return; the availability of pipeline
transportation capacity necessary to secure supplies of gas; volatility in the
price of natural gas; competition with alternative sources of energy;
competition with other gas sources for industrial customers, including bypass
of the Company's facilities; increasing energy conservation by customers;
fluctuations in demand attributable to weather; new business and operational
requirements for gas supply resulting from changes in federal regulation of
interstate pipelines; increases in construction and operating costs;
environmental regulations; and uncertainty in the projected rate of growth of
customers' energy requirements.
USE OF PROCEEDS AND CAPITAL EXPENDITURES
The net proceeds to Delta from the sale of the Common Stock and Debentures,
estimated at $20,007,250 ($20,819,000 if the Underwriters' over-allotment
option is exercised in full), will be used to reduce short-term notes payable,
which at June 17, 1996 were $16,275,000. Proceeds remaining, if any, after
eliminating short-term notes payable will be used for working capital and
general corporate purposes.
The short-term notes payable were incurred pursuant to Delta's bank credit
line under a $20,000,000 revolving credit loan agreement that expires November
15, 1996 and bears interest based, at the option of the Company, on either the
daily prime rate or certain certificate of deposit rates, which interest rate
as of June 17, 1996 was 6.285%.
Delta's short-term notes payable were incurred to provide funds for general
operating expenses and capital expenditures. The capital expenditures were made
primarily for replacement and upgrading of existing facilities, system
extensions, and acquisition and development of an underground storage field.
Delta's capital expenditures were approximately $8,123,000, $7,375,000 and
$6,290,000 in fiscal years 1995, 1994 and 1993, respectively. Delta estimates
capital expenditures for fiscal 1996 at approximately $12,400,000. Capital
expenditures for fiscal 1997 are estimated at approximately $16,400,000 and
will be primarily used for continued development of underground storage, system
extensions, and the replacement and improvement of existing facilities.
Capital expenditures are financed through internally generated funds and
short-term borrowings. Such borrowings are replaced from time to time with
long-term debt and equity financings, the amount and types of which depend upon
the Company's capital needs and market conditions.
6
<PAGE> 7
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Delta has paid cash dividends on its Common Stock each year since 1964.
While it is the intention of the Board of Directors to continue to declare
dividends on a quarterly basis, the frequency and amount of future dividends
will depend upon the Company's earnings, financial requirements and other
relevant factors, including limitations imposed by the indenture for the
Debentures. See ``Description of Common Stock''. There were 2,283 record
holders of Delta's common stock as of June 1, 1996.
Delta's common stock is traded in the National Association of Securities
Dealers Automated Quotation (NASDAQ) National Market System. The accompanying
table reflects the high and low sales prices during each quarter as reported by
NASDAQ and the quarterly dividends declared per share.
<TABLE>
<CAPTION>
RANGE OF STOCK DIVIDENDS
PRICES ($) PER SHARE ($)
------------------------------ --------------
QUARTER HIGH LOW
- ------- -------------- --------------
<S> <C> <C> <C>
FISCAL 1994
First..................................................... 22 1/4 18 3/4 .275
Second.................................................... 23 1/2 21 .275
Third..................................................... 21 3/4 19 .275
Fourth.................................................... 20 1/2 17 1/4 .28
FISCAL 1995
First..................................................... 20 17 1/2 .28
Second.................................................... 18 15 3/4 .28
Third..................................................... 18 3/4 16 .28
Fourth.................................................... 18 1/2 16 3/4 .28
FISCAL 1996
First..................................................... 17 1/4 15 3/4 .28
Second.................................................... 18 1/4 15 1/2 .28
Third..................................................... 18 16 .28
Fourth (through June 17, 1996)............................ 17 1/4 15 3/4 .28
</TABLE>
7
<PAGE> 8
CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization and
short-term notes payable of the Company as of March 31, 1996 and as adjusted to
reflect the sale of the Common Stock and the issuance of the Debentures offered
hereby and the application of the estimated net proceeds of $20,007,250 as
described in ``Use of Proceeds and Capital Expenditures''. This table should be
read in conjunction with the Company's consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED<F1><F2>
---------------------- ----------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (INCLUDING CURRENT PORTION):
9% Debentures, due 2011................................... $10,000,000 $10,000,000
6 5/8% Debentures, due 2023............................... 14,092,000 14,092,000
8.3% Debentures, due 2026................................. -- 15,000,000
Other Long-Term Debt...................................... 1,947,850 1,947,850
----------- -----------
Total Long-Term debt.................................... $26,039,850 52.1% $41,039,850 58.0%
----------- -----------
COMMON SHAREHOLDERS' EQUITY:
Common shares, par value $1 per share
Authorized--6,000,000 shares
outstanding--1,894,951 shares; and as adjusted
2,244,951 shares.................................... $ 1,894,951 $ 2,244,951
Premium on common shares.................................. 20,439,323 26,039,322
Capital stock expense..................................... (1,604,792) (1,872,542)
Retained earnings......................................... 3,256,925 3,256,925
----------- -----------
Total common shareholders' equity......................... $23,986,407 47.9% $29,668,656 42.0%
----------- ----- ----------- -----
Total capitalization...................................... $50,026,257 100.0% $70,708,506 100.0%
=========== ===== =========== =====
SHORT-TERM NOTES PAYABLE...................................... $15,460,000 $ --
=========== ===========
<FN>
- --------
<F1> Assumes the Underwriter's over-allotment option is not exercised.
<F2> The estimated issuance expenses and the underwriting discounts on the
Debentures, a total of approximately $675,000, are not reflected in the As
Adjusted columns.
</TABLE>
8
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain selected consolidated financial
information of the Company and the ratio of earnings to fixed charges as of
March 31, 1996 and for the twelve months then ended and as of and for each of
the five years ended June 30, 1995. The selected consolidated financial
information is qualified by reference to the consolidated financial statements
and other information and data set forth elsewhere in the Prospectus.
<TABLE>
<CAPTION>
AS OF OR
FOR THE
TWELVE
MONTHS
ENDED AS OF OR FOR THE FISCAL YEARS ENDED JUNE 30,
MARCH 31, ----------------------------------------------------------------------
1996 1995 1994<Fa> 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS ($)
Operating revenues.................... 34,380,315 31,844,339 34,846,941 31,221,410 29,200,834 26,778,255
Operating income...................... 5,241,459 4,255,088 4,850,673 4,791,816 4,586,323 3,039,045
Net income............................ 2,680,551 1,917,735 2,671,001 2,620,664 2,453,813 1,162,582
Earnings per common
share............................... 1.43 1.04 1.50 1.60 1.52 0.73
Dividends declared per common share... 1.12 1.12 1.105 1.085 1.08 1.08
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING............................. 1,877,207 1,850,986 1,775,068 1,635,945 1,612,437 1,586,235
TOTAL ASSETS ($).......................... 80,268,969 65,948,716 61,932,480 55,129,912 50,478,014 47,816,330
CAPITALIZATION ($)
Common shareholders' equity........... 23,986,407 22,511,513 22,164,791 17,501,045 16,227,158 15,147,551
Long-Term debt........................ 24,976,650 23,702,200 24,500,000 19,596,401 20,187,826 21,473,431
---------- ---------- ---------- ---------- ---------- ----------
Total capitalization.................. 48,963,057 46,213,713 46,664,791 37,097,446 36,414,984 36,620,982
========== ========== ========== ========== ========== ==========
SHORT-TERM DEBT ($)<Fb>................... 16,523,200 6,732,700 3,205,000 7,729,000 4,029,000 2,616,000
OTHER ITEMS ($)
Capital expenditures.................. 11,327,477 8,122,838 7,374,747 6,289,508 5,074,483 5,213,319
Gross plant........................... 95,017,635 84,944,969 77,882,135 71,187,860 66,032,217 61,757,666
RATIO OF EARNINGS TO FIXED CHARGES<Fc>
Actual................................ 2.62x 2.24x 2.89x 2.88x 2.80x 1.88x
Pro Forma<Fd>......................... 2.12x
<FN>
- --------
<Fa> 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.
<Fb> Includes current portion of long-term debt.
<Fc> The ratio of earnings to fixed charges represents the number of times that
fixed charges are covered by earnings. Earnings for the calculation
consist of net income before income taxes and fixed charges. Fixed charges
consist of interest expense and amortization of debt expense.
<Fd> As adjusted to reflect the sale of the Common Stock (at an assumed
offering price of $17 per share) and the issuance of the Debentures (at an
assumed interest rate of 8%) offered hereby and the application of the net
proceeds therefrom.
</TABLE>
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR COMPLETE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY,
SEE PAGES F-1 THROUGH F-11.
OVERVIEW
The Company's utility operations are subject to regulation by the Public
Service Commission of Kentucky (``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 resulting in increased sales by
the Company. The Company anticipates that this sensitivity to seasonal and
weather conditions will continue to be 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 1996 are expected to be
approximately $12,400,000, of which approximately $9,000,000 was expended
during the nine months ended March 31, 1996. 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
$15,500,000 was borrowed at March 31, 1996. The line of credit, which is with
Bank One, Kentucky, NA, expires during November, 1996. 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 October, 1993, when the
net proceeds of approximately $17,800,000 from the sale of $15,000,000 of
debentures and 170,000 shares of Common Stock were used to repay short-term
debt and to refinance certain long-term debt.
The primary sources and uses of cash for the twelve months ended March 31,
1996 and the fiscal years ended June 30, 1995, 1994 and 1993 are summarized
below:
<TABLE>
<CAPTION>
TWELVE
MONTHS FISCAL YEARS ENDED
ENDED -------------------------------------------
MARCH 31, JUNE 30, JUNE 30, JUNE 30,
SOURCES (USES) 1996 1995 1994 1993
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provided by operating activities..................................... $ 2,476,619 $ 6,943,183 $ 6,172,019 $ 4,567,023
Used in investing activities......................................... (11,327,477) (8,122,838) (7,374,747) (6,289,508)
Provided by financing activities..................................... 8,781,920 1,158,887 1,144,396 1,761,798
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................. $ (68,938) $ (20,768) $ (58,332) $ 39,313
=========== =========== =========== ===========
</TABLE>
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, normal capital expenditure and dividend
requirements.
10
<PAGE> 11
RESULTS OF OPERATIONS
OPERATING REVENUES
The increase in operating revenues for the twelve months ended March 31,
1996 of approximately $2,536,000 was due primarily to an increase in retail
sales volumes of approximately 662,000 thousand cubic feet ( Mcf) as a result
of the colder winter weather in 1996. Billed degree days were approximately
105% of the normal (thirty-year average) degree days for the twelve months
ended March 31, 1996 as compared with approximately 89% for fiscal 1995. In
addition, on-system transportation volumes for the twelve months ended March
31, 1996 increased approximately 116,000 Mcf. 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 266,000 Mcf due primarily
to reduced deliveries from local producers.
The decrease in operating revenues for fiscal 1995 of approximately
$3,003,000 was due primarily to a decrease in retail sales volumes of
approximately 609,000 Mcf as a result of the warmer winter weather in 1995
(approximately 89% of thirty year average weather compared to approximately
106% for 1994) and an approximate $162,000 (545,000 Mcf) decrease in off-system
transportation due to reduced deliveries from some local production. The
decrease was partially offset by an increase in on-system transportation of
approximately $278,000 due to a 204,000 Mcf increase in volumes transported and
by an increase in customers served of approximately 1,100, or 3.5%.
The increase in operating revenues for 1994 of approximately $3,626,000 was
due primarily to an increase in retail sales volumes of approximately 343,000
Mcf as a result of the colder winter weather in 1994 (approximately 106% of
thirty year average weather compared to approximately 99% for 1993) and an
increase in customers served of approximately 800, or 2.5%. The increase in
operating revenues was partially offset by an approximate $213,000 decrease in
transportation revenues for off-system customers resulting from decreased
volumes of approximately 671,000 Mcf due primarily to reduced volumes shipped
by others on a leased pipeline and due to certain producers who shipped gas
into markets that did not require the use of Delta's system.
OPERATING EXPENSES
The decrease in purchased gas expense of approximately $1,753,000 for
fiscal 1995 was due primarily to the decreased retail sales volumes.
The increase in purchased gas expense of approximately $3,016,000 for
fiscal 1994 was due primarily to increases in the cost of gas purchased for
retail sales and to an increase in retail sales volumes.
The decrease in operation and maintenance expenses during fiscal 1995 of
approximately $380,000 was due primarily to decreases in payroll and related
benefit costs.
The increases in depreciation expense during the twelve months ended March
31, 1996, fiscal 1995 and fiscal 1994 of approximately $199,000, $206,000 and
$145,000, respectively, were due primarily to additional depreciable plant.
The increases in taxes other than income taxes during the twelve months
ended March 31, 1996 and fiscal 1994 of approximately $107,000 and $78,000,
respectively, were primarily due to increased property taxes that resulted from
increased plant and to increased payroll taxes that resulted from increased
wages.
Changes in income taxes of approximately $461,000 and $467,000 for the
twelve months ended March 31, 1996 and fiscal 1995, respectively, were
primarily due to changes in net income. The Omnibus Budget Reconciliation Act
of 1993 did not result in additional income taxes for Delta. The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 109 ``Accounting
for Income Taxes'', effective on July 1, 1993, as required. SFAS No. 109 adopts
the liability method of accounting for income taxes, requiring deferred income
tax assets and liabilities to be computed using tax rates that will be in
effect when the book and tax temporary differences reverse. For regulated
companies, 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. As a result, the adoption
of SFAS No. 109 did not have a material impact on the results of operations or
financial position of the Company.
INTEREST CHARGES
The increases in other interest charges for the twelve months ended March
31, 1996 and fiscal 1995 of approximately $219,000 and $176,000, respectively,
were due primarily to increased average short-term borrowings and increased
average interest rates.
11
<PAGE> 12
BUSINESS
SUMMARY OF BUSINESS DEVELOPMENT
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, as well as 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.
Recently, Delta acquired leases for the storage of natural gas under
approximately 8,000 acres in Bell County, Kentucky and is currently developing
the property as an underground natural gas storage facility. This storage field
should permit Delta to purchase and store gas when prices are less expensive
and withdraw and sell the gas during the peak usage winter months.
DISTRIBUTION AND TRANSMISSION OF NATURAL GAS
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 17
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 Corbin, Nicholasville,
Middlesboro and Berea, where Delta serves approximately 6,300, 6,200, 3,800 and
3,800 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 2.5% for the twelve months ended March 31, 1996.
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 the twelve months ended
March 31, 1996.
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 customers with producers and marketers of natural gas. Gas costs,
which the Company is generally able to pass through to customers, may cause
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 for the twelve months ended March 31, 1996 were
approximately 4,386,000 Mcf, generating approximately $26,027,000 in revenues,
as compared to approximately 3,724,000 Mcf and approximately $24,693,000 in
revenues for fiscal 1995. Heating degree days billed during the twelve months
ended March 31, 1996 were approximately 105% of the thirty year average as
compared with approximately 89% in fiscal 1995. Principally as a result of this
colder weather, sales volumes increased by 662,000 Mcf, or 17.8%, for the
twelve months ended March 31, 1996 as compared to fiscal 1995.
Delta's transportation of natural gas during the twelve months ended March
31, 1996 generated revenues of approximately $3,243,000 as compared with
approximately $3,049,000 during fiscal 1995. Of the total transportation for
the twelve months ended March 31, 1996, approximately $2,830,000 (2,506,000
Mcf) and $413,000 (1,186,000 Mcf)
12
<PAGE> 13
were earned for transportation for on-system and off-system customers,
respectively. Of the total transportation for fiscal 1995, approximately
$2,588,000 (2,390,000 Mcf) and $461,000 (1,452,000 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. 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.
OPERATING STATISTICS
Set forth in the following table is information indicative of the general
development of Delta's business during the periods indicated.
<TABLE>
<CAPTION>
FOR THE
TWELVE
MONTHS
ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
MARCH 31, ---------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
RETAIL CUSTOMERS SERVED, END OF PERIOD
Residential................................... 31,018 29,029 27,939 27,293 26,488 25,698
Commercial.................................... 4,885 4,287 4,242 4,093 4,035 4,168
Industrial.................................... 73 72 76 75 66 71
--------- ------- ------- ------- ------- -------
Total..................................... 35,976 33,388 32,257 31,461 30,589 29,937
--------- ------- ------- ------- ------- -------
OPERATING REVENUES ($000)
Residential sales............................. 15,532 14,772 16,597 14,578 13,945 12,453
Commercial sales.............................. 9,163 8,673 9,663 8,269 7,651 6,294
Industrial sales.............................. 1,332 1,248 1,671 1,383 1,188 1,299
On-system transportation...................... 2,830 2,588 2,310 2,451 2,348 2,351
Off-system transportation..................... 413 461 623 836 1,342 1,377
Subsidiary sales.............................. 4,972 3,959 3,755 3,532 2,580 2,873
Other......................................... 138 143 228 172 147 131
--------- ------- ------- ------- ------- -------
Total..................................... 34,380 31,844 34,847 31,221 29,201 26,778
--------- ------- ------- ------- ------- -------
SYSTEM THROUGHPUT (MILLION CU. FT.)
Residential sales............................. 2,560 2,173 2,511 2,341 2,202 2,049
Commercial sales.............................. 1,564 1,328 1,506 1,368 1,235 1,115
Industrial sales.............................. 262 223 316 281 229 248
--------- ------- ------- ------- ------- -------
Total retail sales........................ 4,386 3,724 4,333 3,990 3,666 3,412
On-system transportation...................... 2,506 2,390 2,186 2,248 2,061 1,993
Off-system transportation..................... 1,186 1,452 1,997 2,668 4,580 4,903
--------- ------- ------- ------- ------- -------
Total..................................... 8,078 7,566 8,516 8,906 10,307 10,308
--------- ------- ------- ------- ------- -------
AVERAGE ANNUAL CONSUMPTION PER END OF PERIOD
RESIDENTIAL CUSTOMER (THOUSAND CU. FT.)......... 83 75 90 86 83 80
LEXINGTON, KENTUCKY DEGREE DAYS
Actual........................................ 4,949 4,215 4,999 4,688 4,370 4,025
Percent of 30 year average (4,715)............ 105.0 89.4 106.0 99.4 92.7 85.4
AVERAGE REVENUE PER MCF SOLD AT RETAIL ($)........ 5.93 6.63 6.44 6.07 6.21 5.88
AVERAGE GAS COST PER MCF SOLD AT RETAIL ($)....... 2.78 3.37 3.34 2.90 3.01 3.42
</TABLE>
13
<PAGE> 14
GAS SUPPLY
Delta receives its gas supply from a combination of interstate and Kentucky
sources.
Delta's interstate gas supply is transported and stored by Tennessee Gas
Pipeline Company (``Tennessee'') and Columbia Gas Transmission Corporation
(``Columbia'') and is transported by Columbia Gulf Transmission Company
(``Columbia Gulf''). 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 approximately 17,600 Mcf per
day for Delta. Delta acquires its gas for transportation by Tennessee under an
agreement with a gas marketer, which agreement extends through April, 1997.
During the twelve months ended March 31, 1996, Delta purchased approximately
1,644,000 Mcf from the gas marketer, which natural gas was transported by
Tennessee.
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 approximately 12,000 Mcf per day. Delta
acquires its gas for transportation by Columbia and Columbia Gulf under an
agreement with a gas marketer, which agreement extends through April, 1997.
During the twelve months ended March 31, 1996, Delta purchased a total of
approximately 1,035,000 Mcf from the gas marketer, which natural gas was
transported by Columbia and Columbia Gulf.
Delta has an agreement 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. Delta
purchased approximately 1,440,000 Mcf from Wiser during the twelve months ended
March 31, 1996.
Delta has agreements with 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 4,700,000 Mcf. Delta
purchased a total of approximately 206,000 Mcf from those properties during the
twelve months ended March 31, 1996. Enpro also produces oil from certain of
these leases, but oil production has not been significant.
Delta receives gas under agreements with various other marketers, brokers
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 the
twelve months ended March 31, 1996 were approximately 461,000 Mcf.
Resources and Delgasco purchase gas under agreements with various
marketers, brokers 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 the twelve months ended March 31, 1996 were approximately 2,036,000 Mcf.
Delta is presently developing an underground natural gas storage field with
an approximate 4,000,000 Mcf capacity. See ``Business--Properties''. The
estimated completion date for these facilities is by the end of 1997, and it is
anticipated that this storage capability will permit Delta to purchase and
store gas when prices are less expensive and to withdraw and sell the gas
during the peak usage winter 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.
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 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.
14
<PAGE> 15
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 and has not yet determined whether it will file a general rate
case during 1996. Delta currently has no general rate cases filed with the PSC.
The history of Delta's general rate cases since 1985 is as follows:
<TABLE>
<CAPTION>
ANNUAL AUTHORIZED
REVENUE ANNUAL REVENUE INCREASE APPROVED TEST YEAR RETURN ON
DATE OF INCREASE --------------------------------- (12 MONTHS COMMON
APPLICATION REQUESTED DATE EFFECTIVE AMOUNT ENDED) EQUITY
------------------ ----------- ------------------ ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
May 31, 1985 $ 1,600,000 November 15, 1985 $ 452,000 March 31, 1985 15.0%
December 30, 1985 $ 77,000
January 28, 1986 $ 154,000
December 14, 1990 $ 2,937,000 May 23, 1991 $ 2,050,000 June 30, 1990 <Fa>
<FN>
- --------
<Fa> Delta requested a 14% return on common equity. The rate case was settled
with all intervenors and approved by the PSC. No specific return on common
equity was stated in the settlement.
</TABLE>
Delta currently has 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 six 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.
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 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 approximately 1,750 miles of natural gas gathering,
transmission, distribution and service lines. These lines range in size up to
eight inches in diameter.
Delta holds leases for the storage of natural gas under approximately 8,000
acres located in Bell County, Kentucky. This property is being developed for
the underground storage of natural gas and when complete is expected to have an
estimated 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 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
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 4,700,000 Mcf. Oil production from
15
<PAGE> 16
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 no reserve studies
have been performed on the properties.
During 1994, Enpro entered 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.
EMPLOYEES
On March 31, 1996, Delta had 171 full-time employees. 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.
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.
DESCRIPTION OF COMMON STOCK
Delta's Articles of Incorporation presently authorize the issuance of
6,000,000 shares of Common Stock, par value $1 per share. Common shareholders
are entitled to such dividends as may be declared from time to time by the
Board of Directors. The Indenture under which the Debentures offered hereby are
to be issued includes, among other things, a covenant whereby Delta agrees not
to pay dividends on its Common Stock unless Consolidated Tangible Net Worth
(consolidated shareholders' equity less intangible assets) of the Company
exceeds $18,000,000. See ``Description of Debentures--Restrictive Covenants''.
As of March 31, 1996, Delta's Consolidated Tangible Net Worth was $23,986,406.
All voting power resides in the Common Stock except (a) as otherwise
required by law and (b) subject to the power of the Board of Directors to grant
voting rights to any series of Preferred Stock, of which 312,500 shares are
authorized but none is issued and outstanding. Cumulative voting applies to the
election of the Board of Directors. The Board of Directors of the Company is
divided into three classes, with the classes serving staggered three-year terms
and with one class being elected at each annual meeting of the Company's
shareholders. Except with regard to the right to vote cumulatively for
Directors, the holders of Common Stock are entitled to cast one vote per share
on each matter presented to shareholders for vote.
The Company's Articles of Incorporation require an affirmative shareholder
vote of at least 80% of the outstanding shares entitled to vote to effect
certain mergers, consolidations, sales of assets, liquidations or issuances of
voting stock involving a holder of 10% or more of the Company's voting stock,
unless such transaction is approved by the Board of Directors before the other
party to the transaction becomes a 10% holder. Also, the Articles of
Incorporation provide that the number of Directors as fixed by the By-laws can
only be changed by at least such an 80% affirmative shareholder vote or an
affirmative vote of a majority of the Board of Directors. Additionally, a
Director can be removed without cause only with an affirmative shareholder vote
of 80% of the outstanding shares entitled to vote.
In the event of liquidation, the owners of the Common Stock are entitled to
share pro-rata in any distribution, after payment of all debts and obligations
of the Company. There are no pre-emptive rights, conversion rights, redemption
provisions or sinking fund provisions applicable to the Common Stock. The
issued and outstanding shares of Common Stock, including those offered hereby,
are and will be fully paid and nonassessable.
The Registrar and Transfer Agent for Delta's Common Stock is Fifth Third
Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263.
16
<PAGE> 17
DESCRIPTION OF DEBENTURES
GENERAL
The Debentures are to be issued under an Indenture dated as of July 1, 1996
(the ``Indenture''), by and between the Company and Fifth Third Bank,
Cincinnati, Ohio, as Trustee. A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
terms of the Debentures include those stated in the Indenture and those made a
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
``Trust Indenture Act'') as in effect on the date of the Indenture. Potential
investors are referred to the Indenture and the Trust Indenture Act for a
statement of such terms. The following statements relating to the Debentures
and certain provisions of the Indenture are summaries, do not purport to be
complete, and are subject to and are qualified in their entirety by reference
to the provisions of the Indenture. Unless otherwise stated, capitalized terms
defined in the Indenture have the same meanings when used herein.
The Company does not intend to list the Debentures on a national securities
exchange. There is presently no trading market for the Debentures, and there
can be no assurance that such a market will develop or, if developed, that it
will be maintained.
BOOK-ENTRY ONLY SYSTEM
The Debentures will be issued in the aggregate initial principal amount of
$15,000,000 and will be represented by one certificate (the ``Global
Security'') to be registered in the name of the nominee of The Depository Trust
Company (``DTC'') or any successor depository (the ``Depository''). The
Depository will maintain the Debentures in denominations of $1,000 and integral
multiples thereof through its book-entry facilities. In accordance with its
normal procedures, the Depository will record the interests of each Depository
participating firm (e.g., brokerage firm) (``Participant'') in the Debentures,
whether held for its own account or as a nominee for another person.
So long as the nominee of the Depository is the registered owner of the
Debentures, such nominee will be considered the sole owner or holder of the
Debentures for all purposes under the Indenture and any applicable laws, except
as noted below. A Beneficial Owner, as hereinafter defined, of interests in the
Debentures will not be entitled to receive a physical certificate representing
such ownership interest and will not be considered an owner or holder of the
Debentures under the Indenture, except as otherwise provided below. A
Beneficial Owner is the person who has the right to sell, transfer or otherwise
dispose of an interest in the Debentures and the right to receive the proceeds
therefrom, as well as interest, principal and premium (if any) payable in
respect thereof. A Beneficial Owner's interest in the Debentures will be
recorded, in integral multiples of $1,000, on the records of the Participant
that maintains such Beneficial Owner's account for such purpose. In turn, the
Participant's interest in such Debentures will be recorded, in integral
multiples of $1,000, on the records of the Depository. Therefore, the
Beneficial Owner must rely on the foregoing arrangements to evidence its
interest in the Debentures. Beneficial ownership of the Debentures may be
transferred only by compliance with the procedures of a Beneficial Owner's
Participant (e.g., brokerage firm) and the Depository.
All rights of ownership must be exercised through the Depository and the
book-entry system, except that a Beneficial Owner is entitled to exercise
directly its rights under Section 316(b) of the Trust Indenture Act with
respect to the payment of interest and principal on the Debentures. Notices
that are to be given to registered owners by the Company or the Trustee will be
given only to the Depository. It is expected that the Depository will forward
the notices to the Participants by its usual procedures, so that such
Participants may forward such notices to the Beneficial Owners. Neither the
Company nor the Trustee will have any responsibility or obligation to assure
that any notices are forwarded by the Depository to the Participants or by any
Participants to the Beneficial Owners.
DTC has advised the Company and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, and a ``clearing agency''
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities of Participants and facilitates the clearance and settlement
of securities transactions among Participants in such securities transactions
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of securities certificates.
Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks,
17
<PAGE> 18
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by DTC only through
Participants.
INTEREST AND PAYMENT
The Debentures will mature on August 1, 2026. The Debentures will bear
interest from the date of issuance at the rate per annum stated on the cover
page hereof, calculated on the basis of a 360-day year of twelve 30-day months,
payable semi-annually on February 1 and August 1 of each year, commencing
February 1, 1997 to the Persons in whose names the Debentures are registered at
the close of business on the 15th day of the month prior to such Interest
Payment Date. If any payment date would otherwise be a day that is a Legal
Holiday, the payment will be postponed to the next day that is not a Legal
Holiday, and no interest on such payment shall accrue for the period from and
after such otherwise scheduled payment date for the purposes of the payment to
be made on such next succeeding day.
So long as the nominee of the Depository is the registered owner of the
Debentures, payments of interest, principal and premium (if any) in respect of
the Debentures will be made to the Depository. The Depository will be
responsible for crediting the amount of such distributions to the accounts of
the Participants entitled thereto, in accordance with the Depository's normal
procedures. Each Participant will be responsible for disbursing such
distributions to the Beneficial Owners of the interests in Debentures that it
represents. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to, notices to, or payments
made on account of, beneficial ownership interests in the Debentures;
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests; the selection of any Beneficial Owner to receive payment
in the event of a partial redemption of the Global Security; or consents given
or other action taken on behalf of any Beneficial Owner.
REDEMPTION AT THE OPTION OF THE COMPANY
The Debentures will be redeemable at any time on or after August 1, 2001,
as a whole or in part, at the election of the Company, at a Redemption Price
equal to the percentage of the principal amount set forth below if redeemed
during the twelve-month period beginning August 1 of the year indicated:
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
YEAR PRICE % YEAR PRICE %
- ---- ----------- ---- -----------
<S> <C> <C> <C>
2001.................................... 105% 2004.................................... 102%
2002.................................... 104% 2005.................................... 101%
2003.................................... 103% 2006 to maturity........................ 100%
</TABLE>
In each case, interest accrued to the Redemption Date shall also be paid.
If less than all the Debentures are redeemed, the particular Debentures to be
redeemed will be selected by the Trustee by lot.
Notice of redemption will be mailed at least 30 days before the Redemption
Date to each holder of Debentures to be redeemed at the holder's registered
address. The Company has the right to rescind any notice of redemption at any
time at least five days prior to the Redemption Date.
On and after the Redemption Date, interest will cease to accrue on
Debentures or portions thereof called for redemption, unless the Company shall
default in the payment of the Redemption Price.
LIMITED RIGHT OF REDEMPTION UPON DEATH OF BENEFICIAL OWNER
Unless the Debentures have been declared due and payable prior to their
maturity by reason of an Event of Default, the Representative (as hereinafter
defined) of a deceased Beneficial Owner has the right to request redemption of
all or part of his interest at par, expressed in integral multiples of $1,000
principal amount, in the Debentures for payment prior to maturity, and the
Company will redeem the same subject to the limitations that the Company will
not be obligated to redeem during the period from the original issuance of the
Debentures through and including August 1, 1997 (the ``Initial Period''), and
during any twelve-month period which ends on and includes each August 1
thereafter (each such twelve-month period being hereinafter referred to as a
``Subsequent Period''), (i) any interest in the Debentures which exceeds an
aggregate principal amount of $25,000 or (ii) interests in the Debentures
18
<PAGE> 19
in an aggregate principal amount exceeding $500,000. A request for redemption
may be presented to the Trustee by the Representative of a deceased Beneficial
Owner at any time and in any principal amount. Representatives of deceased
Beneficial Owners must make arrangements with the Participant through whom such
interest is owned in order that timely presentation of redemption requests can
be made by the Participant and, in turn, by the Depository to the Trustee. If
the Company, although not obligated to do so, chooses to redeem interests of a
deceased Beneficial Owner in the Debentures in the Initial Period or in any
Subsequent Period in excess of the $25,000 limitation, such redemption, to the
extent that it exceeds the $25,000 limitation for any deceased Beneficial
Owner, shall not be included in the computation of the $500,000 aggregate
limitation for such Initial Period or such Subsequent Period, as the case may
be, or for any succeeding Subsequent Period.
Subject to the $25,000 and the $500,000 limitations, the Company will upon
the death of any Beneficial Owner redeem the interest of the Beneficial Owner
in the Debentures within 60 days following receipt by the Trustee of a
Redemption Request, as hereinafter defined, from such Beneficial Owner's
personal representative, or surviving joint tenant(s), tenant(s) by the
entirety or tenant(s) in common, or other persons entitled to effect such a
Redemption Request (each, a ``Representative''). If Redemption Requests exceed
the aggregate principal amount of interests in Debentures required to be
redeemed during the Initial Period or any Subsequent Period, then such excess
Redemption Requests will be applied to successive Subsequent Periods,
regardless of the number of Subsequent Periods required to redeem such
interests.
A request for redemption of an interest in the Debentures may be made by
delivering a request to the Depository, in the case of a Participant which is
the Beneficial Owner of such interest, or to the Participant through whom the
Beneficial Owner owns such interest, in form satisfactory to the Participant,
together with evidence of the death of the Beneficial Owner and evidence of the
authority of the Representative satisfactory to the Participant and Trustee. A
Representative of a deceased Beneficial Owner may make the request for
redemption and shall submit such other evidence of the right to such redemption
as the Participant or Trustee shall require. The request shall specify the
principal amount of interest in the Debentures to be redeemed. A request for
redemption in form satisfactory to the Participant and accompanied by the
documents relevant to the request as above provided, together with a
certification by the Participant that it holds the interest on behalf of the
deceased Beneficial Owner with respect to whom the request for redemption is
being made (a ``Redemption Request''), shall be provided to the Depository by a
Participant, and the Depository will forward the request to the Trustee.
Redemption Requests shall be in form satisfactory to the Trustee.
The price to be paid by the Company for an interest in the Debentures to be
redeemed pursuant to a request on behalf of a deceased Beneficial Owner is one
hundred percent (100%) of the principal amount thereof plus accrued but unpaid
interest to the date of payment. Subject to arrangements with the Depository,
payment for interests in the Debentures which are to be redeemed shall be made
to the Depository upon presentation of Debentures to the Trustee for redemption
in the aggregate principal amount specified in the Redemption Requests
submitted to the Trustee by the Depository which are to be fulfilled in
connection with such payment. Any acquisition of Debentures by the Company or
its Subsidiaries other than by redemption at the option of any Representative
of a deceased Beneficial Owner shall not be included in the computation of
either the $25,000 or the $500,000 limitation for the Initial Period or for any
Subsequent Period.
Interests in the Debentures held in tenancy by the entirety, joint tenancy
or by tenants in common will be deemed to be held by a single Beneficial Owner
and the death of a tenant in common, tenant by the entirety or joint tenant
will be deemed the death of a Beneficial Owner. The death of a person who,
during such person's lifetime, was entitled to substantially all of the rights
of a Beneficial Owner of an interest in the Debentures will be deemed the death
of the Beneficial Owner, regardless of the recordation of such interest on the
records of the Participant, if such rights can be established to the
satisfaction of the Participant and the Trustee. Such interest shall be deemed
to exist in typical cases of nominee ownership, ownership under the Uniform
Gifts to Minors Act or the Uniform Transfers to Minors Act, community property
or other joint ownership arrangements between a husband and wife (including
individual retirement accounts or Keogh plans maintained solely by or for the
decedent or by or for the decedent and any spouse), and trust and certain other
arrangements where one person has substantially all of the rights of a
Beneficial Owner during such person's lifetime.
In the case of a Redemption Request which is presented on behalf of a
deceased Beneficial Owner and which has not been fulfilled at the time the
Company gives notice of its election to redeem the Debentures, the interests in
the
19
<PAGE> 20
Debentures which are the subject of such Redemption Request shall not be
eligible for redemption pursuant to the Company's option to redeem but shall
remain subject to fulfillment pursuant to such Redemption Request.
Subject to the provisions of the immediately preceding paragraph, any
Redemption Request may be withdrawn upon delivery of a written request for such
withdrawal given to the Trustee by the Depository prior to payment for
redemption of the interest in the Debentures by reason of the death of a
Beneficial Owner.
The Company is legally obligated to redeem Debentures and interests of
Beneficial Owners therein properly presented for redemption pursuant to a
Redemption Request in accordance with and subject to the terms, conditions and
limitations of the Indenture, as summarized above. The Company's redemption
obligation is not cumulative. Nothing in the Indenture prohibits the Company
from redeeming, in fulfillment of Redemption Requests made pursuant to the
Indenture, Debentures or interests therein of Beneficial Owners in excess of
the principal amount the Company is obligated to redeem, nor does anything in
the Indenture prohibit the Company from purchasing any Debentures or interests
therein in the open market. However, the Company may not use any Debentures
redeemed or purchased as described in the immediately preceding sentence as a
credit against its redemption obligation.
Because of the limitations of the Company's requirement to redeem, no
Beneficial Owner can have any assurance that its interest in the Debentures
will be paid prior to maturity.
SINKING FUND; NON-CONVERTIBILITY
The Debentures are not subject to a sinking fund and are not convertible.
DEBENTURES UNSECURED
The Debentures will be unsecured obligations and will rank on a parity with
all of the other unsecured and unsubordinated Indebtedness of the Company
outstanding from time to time. Subject only to the restrictive covenants
described below (see ``Restrictive Covenants''), the Indenture does not limit
the amount of Indebtedness which the Company or its Subsidiaries may incur.
RESTRICTIVE COVENANTS
The Company covenants in the Indenture that neither the Company nor any of
its Subsidiaries will create, issue, incur, guarantee or assume any Funded
Indebtedness which ranks prior to or on a parity with the Debentures in right
of payment, unless immediately thereafter, and after giving effect thereto and
to the application of the proceeds thereof, Consolidated Net Utility Fixed
Assets are at least equal to total outstanding Consolidated Funded
Indebtedness. Consolidated Net Utility Fixed Assets is defined in the Indenture
to include the net book value (determined in accordance with generally accepted
accounting principles) of all physical property of the Company and any
Subsidiary used or useful to the Company or such Subsidiary in the business of
furnishing or distributing, as a public utility, gas service. Funded
Indebtedness is defined in the Indenture as all Indebtedness other than Current
Indebtedness and would include the Debentures. Consolidated Funded Indebtedness
is defined to include Funded Indebtedness of the Company and Funded
Indebtedness of Consolidated Subsidiaries. At March 31, 1996, after giving
effect to the issuance of the Debentures and the Common Stock offered hereby,
and the application of the proceeds therefrom, Consolidated Net Utility Fixed
Assets would have exceeded Consolidated Funded Indebtedness by approximately
$27,900,000.
The Company also covenants that it will not declare or pay any dividends or
make any other distribution upon its Common Stock (other than dividends and
distributions payable only in shares of Common Stock) and will not directly or
indirectly apply any of the assets of the Company to the redemption,
retirement, purchase or other acquisition of any stock of the Company of any
class, except purchases or redemptions in compliance with any mandatory sinking
fund or purchase fund or redemption requirement in respect of any preferred
stock of the Company, whether now or hereafter authorized or issued, unless
after giving effect to such declaration, payment, distribution or application
of assets the Consolidated Tangible Net Worth of the Company shall be at least
equal to $18,000,000 as reflected on the Company's latest available balance
sheet. Consolidated Tangible Net Worth is defined in the Indenture as the
shareholders' equity of the Company, less intangible assets. At March 31, 1996,
after giving effect to the issuance of the Common Stock and the Debentures,
Consolidated Tangible Net Worth of the Company would have been approximately
$29,668,656.
20
<PAGE> 21
Subject to certain exceptions described in the Indenture (including Liens
to secure Indebtedness having an outstanding principal balance aggregating not
more than $3,000,000), the Company also covenants that it will not issue,
assume or guarantee any Indebtedness secured by a Lien (as defined in the
Indenture) on any property or asset at any time owned by it, without
effectively securing, prior to or concurrently with the issuance, assumption or
guarantee of any such Indebtedness, the Debentures equally and ratably (or, at
the Company's option, prior to) such Indebtedness.
Except as described in the preceding three paragraphs, the Indenture does
not afford any protection to holders of Debentures solely on account of the
Company's involvement in highly leveraged transactions.
SUCCESSOR CORPORATION
The Company covenants in the Indenture that it will not consolidate with,
merge into or transfer or lease all or substantially all of its assets to
another corporation, unless immediately after such transaction no default will
exist, such corporation assumes all the obligations of the Company under the
Debentures and the Indenture, and certain other requirements are met.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The following constitute events of default under the Indenture: (a) default
in the payment of principal (or premium, if any) of the Debentures when due;
(b) default in the payment of any interest on the Debentures when due,
continued for 30 days; (c) default in the performance of any other agreement of
the Company in the Debentures or the Indenture, continued for 60 days after
written notice; (d) acceleration of certain indebtedness of the Company or its
Subsidiaries for borrowed money under the terms of any instrument under which
indebtedness of $100,000 or more is issued or secured; and (e) certain events
in bankruptcy, insolvency or reorganization.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default, give the holders of Debentures notice of all
continuing defaults (as defined) known to it; but, except in the case of a
default in the payment of the principal or premium, if any, or interest in
respect of any of the Debentures, the Trustee shall be protected in withholding
such notice if it in good faith determines that the withholding of such notice
is in the interest of such holders.
If any event of default shall occur and be continuing, the Trustee or the
holders of at least 25% in principal amount of outstanding Debentures may
declare the Debentures immediately due and payable. Any such acceleration may
be rescinded by the holders of a majority in principal amount of the Debentures
then outstanding, upon the conditions provided in the Indenture.
An existing default and its consequences may be waived by the holders of a
majority in principal amount of the Debentures, upon the conditions provided in
the Indenture, other than an uncured default in payment of principal, premium,
if any, or interest in respect of the Debentures, an uncured failure to make
any redemption payment or an uncured default with respect to a provision which
cannot be modified under the terms of the Indenture without the consent of each
holder affected.
The Indenture includes a covenant that the Company will file annually with
the Trustee, within 120 days after the end of each fiscal year, a statement
regarding compliance by the Company with the terms thereof and specifying any
defaults by the Company of which the signers may have knowledge.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture which materially affect the
rights of the holders of the Debentures may be made by the Company and the
Trustee only with the consent of the holders of not less than a majority in
principal amount of the Debentures then outstanding; provided that no such
modification or amendment may change the stated maturity of any Debenture, or
reduce the principal amount of or redemption premium, if any, or interest rate
on any Debenture or change the interest payment date or otherwise modify the
terms of payment of the principal of or redemption premium, if any, or interest
on the Debentures, or reduce the percentage required for any consent, waiver or
modification, or modify certain other provisions of the Indenture, without the
consent of each holder of any Debenture affected thereby.
21
<PAGE> 22
DISCHARGE OF THE INDENTURE
The Indenture will be discharged and canceled upon payment of all the
Debentures or upon deposit with the Trustee, within no more than one year prior
to the maturity or the redemption of all the Debentures, of funds or U.S.
Government Obligations sufficient to pay the principal of and premium, if any,
and interest on the Debentures.
TRUSTEE
The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during default to act with the required standard of care,
to be indemnified by the holders of Debentures before proceeding to exercise
any right or power under the Indenture at the request of the holders of
Debentures. The Indenture provides that the holders of a majority in principal
amount of the outstanding Debentures may direct the time, method and place of
conducting any proceeding and any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee.
Fifth Third Bank (``Fifth Third''), the Trustee and Debenture Registrar
under the Indenture, has its corporate trust office in Cincinnati, Ohio. Fifth
Third serves as Registrar, Transfer Agent and Dividend Disbursement Agent for
Delta's Common Stock as well as Agent for Delta's Dividend Reinvestment and
Stock Purchase Plan.
UNDERWRITING
The Underwriters named below (the ``Underwriters'') have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, the form of
which is filed as an exhibit to the Registration Statement, to purchase from
the Company the number of shares of Common Stock and the principal amounts of
Debentures set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRINCIPAL AMOUNT
UNDERWRITER OF COMMON STOCK OF DEBENTURES
----------- --------------- ----------------
<S> <C> <C>
Edward D. Jones & Co....................................... 117,000 $ 11,250,000
J.J.B. Hilliard, W.L. Lyons, Inc........................... 116,500 2,750,000
The Ohio Company........................................... 116,500 1,000,000
------- ------------
Total.................................................. 350,000 $ 15,000,000
======= ============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock and Debentures
are subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock and Debentures offered hereby if any are taken (other
than shares of Common Stock covered by the over-allotment option described
below).
The Underwriters have advised the Company that they propose to offer the
Common Stock and Debentures being purchased by them directly to the public at
the initial public offering prices set forth on the cover page of this
Prospectus and in part to certain securities dealers, which are members of
the National Association of Securities Dealers, Inc., at such prices less a
concession of $.44 per share. After the initial public offering, the public
offering prices and concessions may be changed by the Underwriters.
The offering of the Common Stock and Debentures is made for delivery when,
as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of Common
Stock or Debentures in whole or in part.
The Company has granted to the Underwriters an option for 30 days to
purchase (at the Common Stock Price to Public less the Underwriting Discount
and Commissions shown on the cover page of this Prospectus) up to 50,000
additional shares of Common Stock. The Underwriters may exercise such option
only to cover over-allotments of shares of Common Stock made in connection with
the sale of the shares offered hereby.
In connection with the offering made hereby, certain Underwriters and
selling group members (if any), or their respective affiliates who are
qualifying registered market makers on the NASDAQ system, may engage in passive
22
<PAGE> 23
market making transactions in the Common Stock on the NASDAQ system in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934 during
the two business day period before commencement of offers or sales of
Common Stock. The passive market making transactions must comply with
applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the
highest independent bid for the security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
The Company has agreed to indemnify the Underwriters and persons who
control the Underwriters against certain liabilities that may be incurred in
connection with the offering contemplated hereby, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
EXPERTS
The audited consolidated financial statements and schedules of the Company
included or incorporated by reference in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports. Reference is made to said reports, which include an
explanatory paragraph with respect to the change in method of accounting for
income taxes in 1993 as discussed in Note 1 to the consolidated financial
statements.
LEGAL OPINIONS
The validity of the Debentures and the Common Stock will be passed upon for
the Company by its special counsel, Stoll, Keenon & Park, LLP, Lexington,
Kentucky, and certain matters will be passed upon for the Underwriters by
Armstrong, Teasdale, Schlafly & Davis, St. Louis, Missouri.
Attorneys in the firm of Stoll, Keenon & Park, LLP who have participated in
the firm's representation of Delta and members of such attorneys' immediate
families own collectively 5,698 shares of Delta's Common Stock.
23
<PAGE> 24
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Income for the Twelve Months Ended March 31, 1996
(unaudited) and the Fiscal Years Ended June 30, 1995, 1994 and 1993 (audited)....... F-3
Consolidated Statements of Cash Flows for the Twelve Months Ended March 31, 1996
(unaudited) and the Fiscal Years Ended June 30, 1995, 1994 and 1993 (audited)....... F-4
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and June 30, 1995 and
1994 (audited)...................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Twelve Months Ended
March 31, 1996 (unaudited) and the Fiscal Years Ended June 30, 1995, 1994 and 1993
(audited)........................................................................... F-6
Consolidated Statements of Capitalization as of March 31, 1996 (unaudited) and June
30, 1995 and 1994 (audited)......................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 25
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, 1995 and 1994, 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, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1993, the Company changed its method of accounting for income taxes.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Louisville, Kentucky
August 11, 1995
F-2
<PAGE> 26
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
FOR THE
TWELVE MONTHS
ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
MARCH 31, --------------------------------------------
1996 1995 1994 1993
------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES.............................................. $ 34,380,315 $ 31,844,339 $ 34,846,941 $ 31,221,410
------------ ------------ ------------ ------------
OPERATING EXPENSES
Purchased gas............................................... $ 16,071,147 $ 15,497,156 $ 17,250,556 $ 14,234,258
Operation and maintenance (Note 1).......................... 8,212,164 8,002,797 8,382,767 8,020,622
Depreciation and depletion (Note 1)......................... 2,382,070 2,183,558 1,977,868 1,833,072
Taxes other than income taxes............................... 970,275 863,340 875,477 797,942
Income taxes (Note 1)....................................... 1,503,200 1,042,400 1,509,600 1,543,700
------------ ------------ ------------ ------------
Total operating expenses................................ $ 29,138,856 $ 27,589,251 $ 29,996,268 $ 26,429,594
------------ ------------ ------------ ------------
OPERATING INCOME................................................ $ 5,241,459 $ 4,255,088 $ 4,850,673 $ 4,791,816
OTHER INCOME AND DEDUCTIONS, NET................................ 28,243 50,582 34,987 39,681
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES.................................. $ 5,269,702 $ 4,305,670 $ 4,885,660 $ 4,831,497
------------ ------------ ------------ ------------
INTEREST CHARGES
Interest on long-term debt.................................. $ 1,861,577 $ 1,879,442 $ 1,879,526 $ 1,875,901
Other interest.............................................. 638,774 419,693 243,729 258,405
Amortization of debt expense................................ 88,800 88,800 91,404 76,527
------------ ------------ ------------ ------------
Total interest charges.................................. $ 2,589,151 $ 2,387,935 $ 2,214,659 $ 2,210,833
------------ ------------ ------------ ------------
NET INCOME...................................................... $ 2,680,551 $ 1,917,735 $ 2,671,001 $ 2,620,664
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............ 1,877,207 1,850,986 1,775,068 1,635,945
EARNINGS PER COMMON SHARE....................................... $ 1.43 $ 1.04 $ 1.50 $ 1.60
DIVIDENDS DECLARED PER COMMON SHARE............................. $ 1.12 $ 1.12 $ 1.105 $ 1.085
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-3
<PAGE> 27
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE
TWELVE FOR THE FISCAL YEARS ENDED JUNE 30,
MONTHS ENDED -----------------------------------------
MARCH 31,
1996 1995 1994 1993
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 2,680,551 $ 1,917,735 $ 2,671,001 $ 2,620,664
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation, depletion and amortization.................... 2,470,872 2,272,358 2,069,013 1,922,102
Deferred income taxes and investment tax credits............ (82,200) (77,000) 874,800 839,100
Other--net.................................................. 527,730 602,180 446,969 493,848
(Increase) decrease in assets:
Accounts receivable......................................... (853,484) (118,237) 802,197 (707,605)
Materials and supplies...................................... (111,028) 173,319 (229,275) 155,358
Prepayments................................................. 36,701 (105,903) 25,701 8,096
Other assets................................................ 15,751 (209,225) (780) (95,564)
Increase (decrease) in liabilities:
Accounts payable............................................ 1,851,837 (178,609) 513,265 438,897
Refunds due customers....................................... (427,258) 83,572 358,270 37,226
Accrued taxes............................................... 375,838 (72,210) (34,543) (162,982)
Other current liabilities................................... (73,995) 69,742 38,675 16,435
Advance (deferred) recovery of gas cost..................... (3,942,280) 2,583,128 (1,372,030) (993,136)
Advances for construction and other......................... 7,584 2,333 8,756 (5,416)
------------ ----------- ----------- -----------
Net cash provided by operating activities............... $ 2,476,619 $ 6,943,183 $ 6,172,019 $ 4,567,023
------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ $(11,327,477) $(8,122,838) $(7,374,747) $(6,289,508)
------------ ----------- ----------- -----------
Net cash used in investing activities................... $(11,327,477) $(8,122,838) $(7,374,747) $(6,289,508)
------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on common stock....................................... $ (2,103,594) $(2,073,374) $(1,972,368) $(1,775,411)
Issuance of common stock, net................................... 671,664 502,361 3,965,113 428,634
Issuance of debentures, net..................................... -- -- 14,246,937 --
Decrease in long-term debt...................................... (351,150) (240,100) (11,330,286) (591,425)
Issuance of short-term debt..................................... 23,905,000 19,495,000 20,180,000 17,615,000
Repayment of short-term debt.................................... (13,340,000) (16,525,000) (23,945,000) (13,915,000)
------------ ----------- ----------- -----------
Net cash provided by financing activities............... $ 8,781,920 $ 1,158,887 $ 1,144,396 $ 1,761,798
------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ $ (68,938) $ (20,768) $ (58,332) $ 39,313
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................ 270,239 156,547 214,879 175,566
------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.............................. $ 201,301 $ 135,779 $ 156,547 $ 214,879
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................... $ 2,393,397 $ 2,253,472 $ 2,141,705 $ 2,107,168
Income taxes................................................ $ 1,000,586 $ 1,264,956 $ 715,000 $ 952,851
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-4
<PAGE> 28
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
AS OF AS OF JUNE 30,
MARCH 31, ----------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
GAS UTILITY PLANT, at cost..................................................... $ 95,017,635 $ 84,944,969 $ 77,882,135
Less--Accumulated provision for depreciation............................... (26,086,634) (24,588,203) (22,862,469)
------------ ------------ ------------
Net gas plant.......................................................... $ 68,931,001 $ 60,356,766 $ 55,019,666
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 201,301 $ 135,779 $ 156,547
Accounts receivable, less accumulated provisions for doubtful accounts of
$103,749, $81,608 and $131,324 as of March 31, 1996, and June 30, 1995
and 1994, respectively................................................... 3,532,467 1,236,199 1,117,962
Gas in storage, at average cost............................................ 349,909 490,710 352,572
Deferred gas costs (Note 1)................................................ 3,506,175 -- 1,471,342
Materials and supplies, at first-in, first-out cost........................ 526,717 527,442 700,761
Prepayments................................................................ 525,405 423,246 317,343
------------ ------------ ------------
Total current assets................................................... $ 8,641,974 $ 2,813,376 $ 4,116,527
------------ ------------ ------------
OTHER ASSETS
Cash surrender value of officers' life insurance (face amount of $1,044,355,
$1,044,355 and $1,031,000 as of March 31, 1996 and June 30, 1995 and 1994,
respectively)................................................................ $ 295,137 $ 293,116 $ 269,029
Note receivable from officer................................................... 112,000 130,000 83,000
Unamortized debt expense and other (Note 5).................................... 2,288,857 2,355,458 2,444,258
------------ ------------ ------------
Total other assets......................................................... $ 2,695,994 $ 2,778,574 $ 2,796,287
------------ ------------ ------------
Total assets........................................................... $ 80,268,969 $ 65,948,716 $ 61,932,480
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION (SEE CONSOLIDATED STATEMENTS OF CAPITALIZATION)
Common shareholders' equity................................................ $ 23,986,407 $ 22,511,513 $ 22,164,791
Long-term debt (Note 5).................................................... 24,976,650 23,702,200 24,500,000
------------ ------------ ------------
Total capitalization................................................... $ 48,963,057 $ 46,213,713 $ 46,664,791
------------ ------------ ------------
CURRENT LIABILITIES
Notes payable (Note 4)..................................................... $ 15,460,000 $ 5,675,000 $ 2,705,000
Current portion of long-term debt (Note 5)................................. 1,063,200 1,057,700 500,000
Accounts payable........................................................... 3,494,601 1,955,231 2,133,840
Accrued taxes.............................................................. 1,793,307 363,948 436,158
Refunds due customers...................................................... 101,967 479,637 396,065
Advance recovery of gas cost............................................... -- 1,111,786 --
Customers' deposits........................................................ 374,842 331,708 342,979
Accrued interest on debt................................................... 585,926 473,001 427,338
Accrued vacation........................................................... 445,335 454,728 454,362
Other accrued liabilities.................................................. 113,017 349,872 314,888
------------ ------------ ------------
Total current liabilities.............................................. $ 23,432,195 $ 12,252,611 $ 7,710,630
------------ ------------ ------------
DEFERRED CREDITS AND OTHER
Deferred income taxes...................................................... $ 5,952,100 $ 5,510,400 $ 5,116,400
Investment tax credits..................................................... 814,900 850,400 921,800
Regulatory liability (Note 1).............................................. 889,800 912,900 1,312,500
Advances for construction and other........................................ 216,917 208,692 206,359
------------ ------------ ------------
Total deferred credits and other....................................... $ 7,873,717 $ 7,482,392 $ 7,557,059
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 6).........................................
Total liabilities and shareholders' equity......................... $ 80,268,969 $ 65,948,716 $ 61,932,480
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-5
<PAGE> 29
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
FOR THE
TWELVE
MONTHS
ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
MARCH 31, -----------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON SHARES
Balance, beginning of year...................................... $ 1,855,760 $ 1,839,340 $ 1,648,485 $ 1,624,878
$1.00 par value of 39,191, 29,394, 190,855 and 23,607
shares issued during the twelve months ended March 31,
1996 and fiscal years 1995, 1994 and 1993, respectively--
Public issuance of common shares........................ -- -- 170,000 --
Dividend reinvestment and stock purchase plan........... 32,269 25,802 15,355 16,265
Employee stock purchase plan and other.................. 6,922 3,592 5,500 7,342
----------- ----------- ----------- -----------
Balance, end of year............................................ $ 1,894,951 $ 1,868,734 $ 1,839,340 $ 1,648,485
=========== =========== =========== ===========
PREMIUM ON COMMON SHARES
Balance, beginning of year...................................... $19,806,849 $19,532,909 $15,562,427 $15,157,400
Premium on issuance of common shares--
Public issuance of common shares........................ -- -- 3,570,000 --
Dividend reinvestment and stock purchase plan........... 520,431 425,357 293,782 281,074
Employee stock purchase plan and other.................. 112,043 64,377 106,700 123,953
----------- ----------- ----------- -----------
Balance, end of year............................................ $20,439,323 $20,022,643 $19,532,909 $15,562,427
=========== =========== =========== ===========
CAPITAL STOCK EXPENSE
Balance, beginning of year...................................... (1,604,792) $(1,588,025) $(1,391,801) $(1,391,801)
Issuance of common shares................................... -- (16,767) (196,224) --
----------- ----------- ----------- -----------
Balance, end of year............................................ $(1,604,792) $(1,604,792) $(1,588,025) $(1,391,801)
=========== =========== =========== ===========
RETAINED EARNINGS
Balance, beginning of year...................................... $ 2,679,969 $ 2,380,567 $ 1,681,934 $ 836,681
Net income.................................................. 2,680,551 1,917,735 2,671,001 2,620,664
Cash dividends declared on common shares--(See Consolidated
Statements of Income for rates)........................... (2,103,595) (2,073,374) (1,972,368) (1,775,411)
----------- ----------- ----------- -----------
Balance, end of year............................................ $ 3,256,925 $ 2,224,928 $ 2,380,567 $ 1,681,934
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-6
<PAGE> 30
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
AS OF AS OF JUNE 30,
MARCH 31, ---------------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common shares, par value $1.00 per share (Notes 2 and 3)
Authorized--6,000,000 shares
Issued and outstanding--1,894,951, 1,868,734 and 1,839,340 shares as of
March 31, 1996 and June 30, 1995 and 1994, respectively................. $ 1,894,951 $ 1,868,734 $ 1,839,340
Premium on common shares...................................................... 20,439,323 20,022,643 19,532,909
Capital stock expense......................................................... (1,604,792) (1,604,792) (1,588,025)
Retained earnings (Note 5).................................................... 3,256,925 2,224,928 2,380,567
----------- ----------- -----------
Total common shareholders' equity......................................... $23,986,407 $22,511,513 $22,164,791
----------- ----------- -----------
LONG-TERM DEBT (NOTE 5)
Debentures, 6 5/8%, due 2023.................................................. $14,092,000 $14,561,000 $15,000,000
Debentures, 9%, due 2011...................................................... 10,000,000 10,000,000 10,000,000
Promissory note payable, due through 2001..................................... 1,800,000 -- --
Capital lease, due 1998....................................................... 147,850 198,900 --
----------- ----------- -----------
Total long-term debt...................................................... $26,039,850 $24,759,900 $25,000,000
Less--Amounts due within one year, included in current liabilities............ (1,063,200) (1,057,700) (500,000)
----------- ----------- -----------
Net long-term debt........................................................ $24,976,650 $23,702,200 $24,500,000
----------- ----------- -----------
Total capitalization.................................................. $48,963,057 $46,213,713 $46,664,791
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-7
<PAGE> 31
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) PRINCIPLES OF CONSOLIDATION--Delta Natural Gas Company, Inc. (Delta or
the Company) has four 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. 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 2.8%, 2.8%, 2.7%
and 2.7% of average depreciable plant for the twelve months ended March 31,
1996 and fiscal 1995, 1994 and 1993, 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) 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 adopted Statement of Financial Accounting Standards (SFAS) No.
109, ``Accounting for Income Taxes'', effective on July 1, 1993, as required.
SFAS No. 109 adopts the liability method of accounting for income taxes,
requiring deferred income tax assets and liabilities to be computed using tax
rates that will be in effect when the book and tax temporary differences
reverse. For regulated companies, the change in tax rates applied to
accumulated
F-8
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. As a
result, the adoption of SFAS No. 109 did not have a material impact on the
results of operations or financial position of the Company. The temporary
differences which gave rise to the net accumulated deferred income tax
liability for the periods are as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred Tax Liabilities
Accelerated depreciation........................................................................ $7,186,700 $6,257,200
Deferred gas cost............................................................................... -- 580,400
Debt expense.................................................................................... 413,500 29,400
Other........................................................................................... 178,900 200,000
---------- ----------
$7,779,100 $7,067,000
---------- ----------
Deferred Tax Assets
Unamortized investment tax credit............................................................... $ 335,400 $ 363,600
Regulatory liabilities.......................................................................... 360,100 517,700
Alternative minimum tax credits................................................................. 724,300 667,200
Deferred gas cost............................................................................... 438,500 --
Other........................................................................................... 410,400 402,100
---------- ----------
$2,268,700 $1,950,600
---------- ----------
Net accumulated deferred income tax liability............................................... $5,510,400 $5,116,400
========== ==========
</TABLE>
The components of the income tax provision are comprised of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Components of income tax expense:
Payable currently:
Federal................................................................. $ 453,900 $ 306,300 $ 432,300
State................................................................... 194,500 100,800 121,900
---------- ---------- ----------
Total............................................................... $ 648,400 $ 407,100 $ 554,200
Deferred to future years from:
Use of accelerated depreciation......................................... $ 929,500 $ 675,000 $ 660,300
Deferred (advance) recovery of gas cost................................. (1,018,900) 541,200 418,000
Other deferred tax effects, net......................................... 483,400 (113,700) (88,800)
---------- ---------- ----------
Income tax expense.................................................. $1,042,400 $1,509,600 $1,543,700
========== ========== ==========
</TABLE>
Reconciliation of the statutory federal income tax rate to the effective
income tax rate is shown in the table below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate............................................................... 34.0% 34.0% 34.0%
State income taxes net of federal benefit....................................................... 5.2 5.2 5.2
Amortization of investment tax credit........................................................... (2.4) (1.8) (1.7)
Other differences--net.......................................................................... (.9) (.9) --
---- ---- ----
Effective income tax rate....................................................................... 35.9% 36.5% 37.5%
==== ==== ====
</TABLE>
(2) EMPLOYEE BENEFITS 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
F-9
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
compensation. The Company makes annual contributions equal to the amounts
necessary to fund the plan adequately. The funded status of the pension plan
and the amounts recognized in the Company's consolidated balance sheets at June
30 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Plan assets at fair value...................................................... $ 5,358,108 $5,251,296 $ 4,931,658
----------- ---------- -----------
Actuarial present value of benefit obligation:
Vested benefits............................................................ $ 3,605,363 $4,114,517 $ 4,042,029
Non-vested benefits........................................................ 21,742 30,562 37,777
----------- ---------- -----------
Accumulated benefit obligation................................................. $ 3,627,105 $4,145,079 $ 4,079,806
Additional amounts related to projected salary increases....................... 1,638,014 1,734,413 1,881,303
----------- ---------- -----------
Total projected benefit obligation......................................... $ 5,265,119 $5,879,492 $ 5,961,109
----------- ---------- -----------
Plan assets in excess of (less than) projected benefit obligation.............. $ 92,989 $ (628,196) $(1,029,451)
Unrecognized net assets at date of initial application being amortized over 15
years........................................................................ (296,759) (339,153) (381,547)
Unrecognized net loss.......................................................... 286,557 950,735 1,407,072
----------- ---------- -----------
Accrued pension asset (liability).......................................... $ 82,787 $ (16,614) $ (3,926)
=========== ========== ===========
</TABLE>
The assets of the plan consist primarily of common stock, bonds and
certificates of deposit. Pension expense for the twelve months ended March 31,
1996 was $336,554. Net pension costs for the years ended June 30 include the
following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the year--service cost.................................. $ 432,546 $ 455,097 $ 401,054
Interest cost on projected benefit obligation.................................. 382,167 357,372 317,897
Actual return on plan assets................................................... (623,972) (45,100) (356,971)
Net amortization and deferral.................................................. 185,660 (353,530) (24,856)
--------- --------- ---------
Net periodic pension cost.................................................. $ 376,401 $ 413,839 $ 337,124
========= ========= =========
</TABLE>
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, 1995, 1994 and 1993 were 7.0%,
6.5% and 6.0%, respectively (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'', did 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% of the employee's annual compensation through June 30, 1996. The maximum
Company contribution has been increased to 2 1/2% effective July 1, 1996. For
the twelve months ended March 31, 1996 and the fiscal years ended June 30,
1995, 1994 and 1993, Delta's Savings Plan expense was $110,928, $112,379,
$106,863 and $93,749, 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
$99,400 was issued in July, 1995. 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, 1997.
F-10
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) 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
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 32,269 shares were issued
during the twelve months ended March 31, 1996. Delta registered with the
Securities and Exchange Commission 200,000 shares under the Reinvestment Plan
in December, 1994, and, as of March 31, 1996 there were 162,420 shares still
available for issuance.
(4) 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 March 31,
1996, the available line of credit was $20,000,000, ($15,000,000 at June 30,
1995 and 1994) of which 15,460,000, $5,675,000 and $2,705,000 had been borrowed
at an interest rate of 6.585%, 6.935% and 5.5%, respectively. The maximum
amount borrowed during the twelve months ended March 31, 1996 and the year
ended June 30, 1995 was $15,460,000 and $8,430,000, 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, 1996.
(5) LONG-TERM DEBT:
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 of
the 6 5/8% Debentures 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. Restrictions under the indenture agreement covering the 6 5/8% Debentures
include, among other things, a restriction whereby dividend payments cannot be
made unless consolidated shareholders' equity of the company exceeds
$12,000,000. As of March 31, 1996, no retained earnings were restricted under
the provisions of the indenture.
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 of the 9%
Debentures 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 beginning in April, 1996 at a 5%
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. Call premium in 1994 of approximately $475,000 was deferred and
is being amortized over the term of the related debt consistent with regulatory
treatment.
A promissory note was issued by Delta on November 10, 1995 in the amount of
$1,800,000, payable in three installments of $400,000 in 1997, $700,000 in 1999
and $700,000 in 2001. 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, which would be issued to the holder of the note in the event of default
in payment by Delta.
A capital lease of computer equipment, entered into during June, 1995,
requires principal payments of approximately $57,700 in 1996, $66,000 in 1997
and $75,200 in 1998.
(6) 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
F-11
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(7) RATES:
Reference is made to ``Regulatory Matters'' herein with respect to rate
matters.
(8) 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.
<TABLE>
<CAPTION>
EARNINGS
OPERATING NET (LOSS) PER
OPERATING INCOME INCOME COMMON
QUARTER ENDED REVENUES (LOSS) (LOSS) SHARE<Fa>
- ------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
FISCAL 1996
September 30............................................. $ 3,774,849 $ (147,522) $ (760,662) $ (.41)
December 31.............................................. 8,406,787 1,381,803 649,089 .34
March 31................................................. 16,023,581 3,421,608 2,729,444 1.44
FISCAL 1995
September 30............................................. $ 3,634,262 $ (45,141) $ (633,058) $ (.34)
December 31.............................................. 7,131,698 822,241 228,119 .12
March 31................................................. 14,903,281 2,842,418 2,255,994 1.22
June 30.................................................. 6,175,098 635,570 66,680 .04
FISCAL 1994
September 30............................................. $ 3,585,499 $ 11,056 $ (542,285) $ (.33)
December 31.............................................. 7,814,638 1,117,871 578,448 .32
March 31................................................. 16,494,674 3,270,274 2,713,563 1.48
June 30.................................................. 6,952,130 451,472 (78,725) (.04)
<FN>
- --------
<Fa> Quarterly earnings per share may not equal annual earnings per share due to changes in shares
outstanding.
</TABLE>
(9) UNDERGROUND STORAGE ACQUISITION (UNAUDITED)
On November 10, 1995, Delta acquired interests, primarily consisting of
leases and depleted gas wells, in certain property located in Bell County,
Kentucky to be developed for the underground storage of natural gas. This
acquisition continues Delta's effort to provide for enhanced supply security
and system flexibility. The storage field includes approximately 8,000 acres
and is expected to have an estimated working capacity of approximately 4
million Mcf of gas, which will be utilized to provide supply to the Company's
customers during the winter heating months. The purchase price of $2,800,000
consists of $1,000,000 cash and a $1,800,000 promissory note payable in three
installments through 2001. Delta secured the promissory note by escrow of
102,858 shares of Delta's common stock, which would be issued to the holder of
the note in the event of default in payment by Delta.
F-12
<PAGE> 36
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE OR JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE OR
JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME OR ANY SALES MADE
HEREUNDER SHALL NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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<TABLE>
TABLE OF CONTENTS
PAGE
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<S> <C>
Available Information.................................. 2
Incorporation of Certain Documents by Reference........ 2
Prospectus Summary..................................... 3
The Company............................................ 5
System Map............................................. 5
Special Factors Affecting the Gas Utility Industry..... 6
Use of Proceeds and Capital Expenditures............... 6
Price Range of Common Stock and Dividends.............. 7
Consolidated Capitalization............................ 8
Selected Consolidated Financial Information............ 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Business............................................... 12
Description of Common Stock............................ 16
Description of Debentures.............................. 17
Underwriting........................................... 22
Experts................................................ 23
Legal Opinions......................................... 23
Index to Consolidated Financial Statements............. F-1
Report of Independent Public Accountants............... F-2
Consolidated Financial Statements...................... F-3
</TABLE>
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DELTA NATURAL GAS
COMPANY, INC.
DELTA
350,000 SHARES OF COMMON STOCK
$15,000,000
8.3% DEBENTURES DUE 2026
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PROSPECTUS
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EDWARD D. JONES & CO.
J.J.B. HILLIARD, W.L. LYONS, INC.
THE OHIO COMPANY
July 15, 1996
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