<PAGE> 1
Registration No. 333-47791
Filed Pursuant to Rule 424(b)(1)
PROSPECTUS
DELTA NATURAL GAS COMPANY, INC.
DELTA
LOGO $25,000,000 7.15% DEBENTURES DUE 2018
The 7.15% Debentures due 2018 (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 April 1 and October
1 of each year, commencing on October 1, 1998. 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 $750,000 in the aggregate for all deceased
Beneficial Owners during the initial period ending April 1, 1999 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 April 1, 2003, although the
Company may, but is not required to, redeem interests in the Debentures
tendered in excess of the above limitations. After April 1, 2003, however,
interests in the Debentures will be redeemable at 100% of the principal amount
redeemed plus accrued interest to the redemption date, in whole or in part, at
the option of the Company. There can be no assurance that a Beneficial Owner's
or a deceased Beneficial Owner's interest in the Debentures will be redeemed
before maturity. 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".
The Debentures will be issued in denominations of $1,000 or integral
multiples thereof.
There is no market for the Debentures, and no assurance can be given that
one will develop.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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 Debenture....................................... 100% 3.25% 96.75%
- -----------------------------------------------------------------------------------------------------------------
Total........................................... $25,000,000 $812,500 $24,187,500
=================================================================================================================
<FN>
<F1> The Company has agreed to indemnify Edward D. Jones & Co., L.P. (the
"Underwriter") 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 $85,000.
</TABLE>
------------------------
The Debentures are offered by the Underwriter, subject to prior sale, when,
as and if issued to and accepted by the Underwriter, subject to its right to
reject any order in whole or in part and subject to certain other conditions.
The Debentures will bear interest from the date of delivery of the Global
Security to the Underwriter, which is expected to be on or about March 27,
1998.
EDWARD D. JONES & CO., L.P.
THE DATE OF THIS PROSPECTUS IS MARCH 23, 1998.
<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. The Commission maintains an internet web site that contains reports,
proxy and information statements, and other information regarding the Company,
and the address of such site is http://www.sec.gov.
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, 1997.
2. The quarterly reports of the Company on Form 10-Q for the fiscal
quarters ended September 30, 1997, and December 31, 1997.
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.
--------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF DEBENTURES TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, 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.
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 38,000 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
<C> <S>
Debentures Offered..................... $25,000,000 in aggregate principal amount
Maturity............................... April 1, 2018
Interest............................... 7.15% payable, semi-annually on each April 1 and October 1, commencing
October 1, 1998
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
$750,000 in the aggregate for all deceased Beneficial Owners
during the initial period ending April 1, 1999 and during each
twelve-month period thereafter. See "Description of
Debentures--Limited Right of Redemption upon Death of Beneficial
Owner".
Company's Redemption Privilege......... The Debentures can be redeemed by the Company, in whole or in part,
upon not less than 30 days notice, on or after April 1, 2003, at
100% of the principal amount to be redeemed plus accrued interest
to the redemption date. See "Description of
Debentures--Redemption at the Option of the Company".
Use of Proceeds........................ To redeem the Company's outstanding 9% Debentures due 2011 and to
reduce short-term notes payable.
</TABLE>
3
<PAGE> 4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain summary consolidated financial
information of the Company and its subsidiaries and the ratio of earnings to
fixed charges as of December 31, 1997 and for the twelve months then ended, and
as of and for each of the three fiscal years ended June 30, 1997. The summary
financial information is qualified by reference to the consolidated financial
statements and other information and data set forth elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE TWELVE FOR THE FISCAL YEARS ENDED JUNE 30,
MONTHS ENDED --------------------------------------------
DECEMBER 31, 1997 1997 1996 1995
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME DATA
Operating Revenues............................ $45,074,546 $42,169,185 $36,576,055 $31,844,339
Operating Income.............................. 6,096,993 5,315,582 5,437,055 4,255,088
Net Income.................................... 2,038,238 1,724,265 2,661,349 1,917,735
Basic Earnings per Common Share............... .87 .75 1.41 1.04
Diluted Earnings per Common Share............. .87 .75 1.41 1.04
Dividends Declared per Common Share........... 1.14 1.14 1.12 1.12
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
ACTUAL AS ADJUSTED<F1>
--------------------- ----------------------
<S> <C> <C> <C> <C>
CAPITALIZATION
Long-Term Debt (Including Current Portion).... $39,530,373 58.3% $54,530,373 65.9%
Common Shareholders' Equity................... 28,255,698 41.7 28,255,698 34.1
----------- ----- ----------- -----
Total Capitalization...................... $67,786,071 100.0% $82,786,071 100.0%
=========== ===== =========== =====
SHORT-TERM NOTES PAYABLE.......................... $19,395,000 $ 5,592,500
=========== ===========
<CAPTION>
FOR THE TWELVE FOR THE FISCAL YEARS ENDED JUNE 30,
MONTHS ENDED -----------------------------------
DECEMBER 31, 1997 1997 1996 1995
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES<F2>
Actual........................................ 1.78x 1.74x 2.50x 2.24x
Pro Forma<F1>................................. 1.74x
<FN>
- --------
<F1> Adjusted to reflect the issuance of the Debentures offered hereby and the
application of the estimated net proceeds of $24,102,500 therefrom. 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
consist of net income before income taxes and fixed charges. Fixed charges
consist of interest expense and amortization of debt expense.
</TABLE>
4
<PAGE> 5
RISK FACTORS
Prospective purchasers should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors before purchasing the Debentures offered hereby.
Prospective purchasers should note, in particular, that this Prospectus
contains forward-looking statements and that actual results could differ
materially from those contemplated by such statements. Prospective purchasers
should also refer to the factors discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Affect Future Results".
FACTORS AFFECTING THE GAS UTILITY INDUSTRY AND THE COMPANY'S OPERATIONS
The natural gas utility industry in general and the Company's operations in
particular are subject to numerous regulations and uncertainties. Issues which
have affected or may affect the Company from time to time include the following:
* Fluctuations in demand attributable to weather (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview");
* New business and operational requirements for gas supply resulting from
changes in federal regulation of interstate pipelines;
* Competition with other sources of gas supply;
* Competition with alternative sources of energy (see
"Business--Distribution and Transmission of Natural Gas");
* 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 (see "Business--Regulatory
Matters");
* Uncertainty in recovery of gas cost (gas supply, pipeline capacity and
storage) through the Gas Cost Recovery clause of Delta's rates (see
"Business--Regulatory Matters");
* 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;
* Bypass of the Company's intrastate gas transportation system by customers
installing private transmission mains from the interstate transmission
system;
* Volatility in the price of natural gas;
* Increases in construction and operating costs;
* Environmental regulations and costs of environmental remediation;
* The possibility of state regulation requiring the unbundling of various
elements of gas distribution and service (see "Business--Regulatory
Matters");
* Rates and margin for gas transportation service and customer choice of
transportation service without gas sales service (see
"Business--Distribution and Transmission of Natural Gas");
* The possibility of change from cost-based rate regulation; and
* Uncertainty in the projected rate of growth of customers' energy
requirements.
ABSENCE OF PUBLIC MARKET FOR DEBENTURES
There is no public trading market for the Debentures, and the Company does
not intend to apply for listing of the Debentures on any national securities
exchange or for quotation of the Debentures on any automated dealer quotation
system. The Company has been advised by the Underwriter that it presently
intends to make a market in the Debentures after the consummation of the
offering contemplated hereby, although the Underwriter is under no
5
<PAGE> 6
obligation to do so, and may discontinue any market-making activities at any
time without any notice. No assurance can be given as to the liquidity of the
trading market for the Debentures or that an active public market for the
Debentures will develop. If an active public trading market for the Debentures
does not develop, the market price and liquidity of the Debentures may be
adversely affected. If the Debentures are traded, they may trade at a discount
from their initial offering price, depending on prevailing interest rates, the
market for similar securities, performance of the Company, and certain other
factors.
EFFECTS OF WEATHER
The Company's business is influenced by seasonal weather conditions. The
amount of gas sold and transported for central and space heating purposes and,
to a lesser extent, water heating is directly related to the ambient air
temperature. Consequently, more gas is sold and transported during the winter
months than during the summer months, resulting in seasonal differences in
revenues. Because the Company's rates are set based on normal temperatures,
warmer than normal temperatures will have an adverse impact on the Company's
revenues and earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
THE COMPANY
Delta is engaged primarily in the distribution, transmission and storage of
natural gas with its facilities which are located in 20 counties in central and
southeastern Kentucky. Delta serves 38,000 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"), Enpro, Inc. ("Enpro") and
TranEx Corporation ("TranEx"). 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 production properties and undeveloped acreage.
TranEx owns a 43 mile intrastate pipeline. Delta and its subsidiaries are under
common executive management.
Delta's principal executive offices are located at 3617 Lexington Road,
Winchester, Kentucky 40391. Its telephone number is (606) 744-6171, its Fax
number is (606) 744-6552 and its internet address is www.deltagas.com.
SYSTEM MAP
This map displays Delta's service area. 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 interstate supply lines from which Delta
receives a portion of its supply.
[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.
6
<PAGE> 7
USE OF PROCEEDS AND CAPITAL EXPENDITURES
The net proceeds to Delta from the sale of the Debentures, after deducting
the underwriter's commission and the other expenses of the offering, are
estimated to be approximately $24,102,500 and will be used to (i) redeem
Delta's 9% Debentures due 2011, the outstanding principal amount of which, as
of March 4, 1998, was $10,000,000; (ii) pay an early redemption premium of
$300,000 on the 9% Debentures; and (iii) reduce short-term notes payable, which
at March 4, 1998 were $16,425,000. The short-term notes payable were incurred
pursuant to Delta's bank credit line under a $25,000,000 revolving credit loan
agreement that expires November 15, 1998 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 March 4, 1998 was 6.835%. 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
development of an underground storage field. Delta's capital expenditures were
$16,649,000, $13,373,000 and $8,123,000 in fiscal years 1997, 1996 and 1995,
respectively. For the six months ended December 31, 1997, Delta's capital
expenditures were $7,660,000, and Delta estimates total capital expenditures
for fiscal 1998 at $11,600,000. Capital expenditures for fiscal 1999 are
estimated at $8,000,000 and will be primarily used for 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.
CONSOLIDATED CAPITALIZATION
The following tables set forth the consolidated capitalization and
short-term debt of the Company as of December 31, 1997, and as adjusted to
reflect the issuance of the Debentures offered hereby and the application of
the net proceeds 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
----------- -----------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (INCLUDING CURRENT PORTION)
9% Debentures, due 2011........................................... $10,000,000 $ --
6 5/8% Debentures, due 2023....................................... 13,325,000 13,325,000
8.3% Debentures, due 2026......................................... 15,000,000 15,000,000
7.15% Debentures, due 2018........................................ -- 25,000,000
Other long-term debt.............................................. 1,205,373 1,205,373
----------- -----------
Total long-term debt.......................................... $39,530,373 58.3% $54,530,373 65.9%
----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common shares, par value $1 per share
Authorized--6,000,000 shares
Outstanding--2,361,922 shares................................. $ 2,361,922 $ 2,361,922
Premium on common shares.......................................... 27,528,243 27,528,243
Capital stock expense............................................. (1,917,020) (1,917,020)
Retained earnings................................................. 282,553 282,553
----------- -----------
Total common shareholders' equity............................. $28,255,698 41.7% $28,255,698 34.1%
----------- ----- ----------- -----
Total capitalization...................................... $67,786,071 100.0% $82,786,071 100.0%
=========== ===== =========== =====
SHORT-TERM NOTES PAYABLE.............................................. $19,395,000 $ 5,592,500
=========== ===========
</TABLE>
7
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain selected consolidated financial
information of the Company and the ratio of earnings to fixed charges as of
December 31, 1997 and for the twelve months then ended and as of and for each
of the five fiscal years ended June 30, 1997. The selected consolidated
financial information is qualified by reference to the consolidated financial
statements and other information and data set forth elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR
THE TWELVE
MONTHS ENDED AS OF AND FOR THE FISCAL YEARS ENDED JUNE 30,
DECEMBER 31, -------------------------------------------------------------------
1997 1997<Fa> 1996<Fa> 1995 1994<Fb> 1993
------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS ($)
Operating revenues.................. 45,074,546 42,169,185 36,576,055 31,844,339 34,846,941 31,221,410
Operating income.................... 6,096,993 5,315,582 5,437,055 4,255,088 4,850,673 4,791,816
Net income.......................... 2,038,238 1,724,265 2,661,349 1,917,735 2,671,001 2,620,664
Basic earnings per common share..... .87 .75 1.41 1.04 1.50 1.60
Diluted earnings per common share... .87 .75 1.41 1.04 1.50 1.60
Dividends declared per common
share............................. 1.14 1.14 1.12 1.12 1.11 1.09
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING........................... 2,342,910 2,294,134 1,886,629 1,850,986 1,775,068 1,635,945
TOTAL ASSETS ($)........................ 105,259,338 96,681,165 81,140,637 65,948,716 61,932,480 55,129,912
CAPITALIZATION ($)
Common shareholders' equity......... 28,255,698 29,474,569 23,628,323 22,511,513 22,164,791 17,501,045
Long-term debt...................... 37,976,596 38,107,860 24,488,916 23,702,200 24,500,000 19,596,401
Notes payable refinanced subsequent
to year end....................... -- -- 18,075,000 -- -- --
---------- ----------- ---------- ---------- ---------- ----------
Total capitalization................ 66,232,294 67,582,429 66,192,239 46,213,713 46,664,791 37,097,446
========== =========== ========== ========== ========== ==========
SHORT-TERM DEBT ($) <Fc>................ 20,948,777 12,852,600 1,084,800 6,732,700 3,205,000 7,729,000
OTHER ITEMS ($)
Capital expenditures................ 14,236,815 16,648,994 13,373,416 8,122,838 7,374,747 6,289,508
Gross plant......................... 123,913,386 116,829,158 98,795,623 84,944,969 77,882,135 71,187,860
RATIO OF EARNINGS TO FIXED CHARGES<Fd>
Actual.............................. 1.78x 1.74x 2.50x 2.24x 2.89x 2.88x
Pro forma<Fe>....................... 1.74x
<FN>
- --------
<Fa> During July, 1996, $15,000,000 of debentures and 400,000 shares of common
stock were sold, and the proceeds were used to repay short-term debt and
for general corporate purposes. The balance of the note payable at June
30, 1996 ($18,075,000) is included in total capitalization as a result of
the subsequent refinancing.
<Fb> 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.
<Fc> Includes current portion of long-term debt.
<Fd> 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.
<Fe> As adjusted to reflect the issuance of the Debentures offered hereby and
the application of the net proceeds therefrom.
</TABLE>
8
<PAGE> 9
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-13.
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 generally resulting in
increased sales by the Company. The Company anticipates that this sensitivity
to seasonal and weather conditions will continue to be so reflected in the
Company's operating results in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Because of the seasonal nature of Delta's sales, the smallest proportion of
cash generated from operations is received during the warmer months when sales
volumes decrease considerably. Additionally, most construction activity takes
place during the non-heating season because of more favorable weather
conditions. During the warmer, non-heating months, therefore, cash needs for
operations and construction are partially met through short-term borrowings.
Capital expenditures for Delta for fiscal 1998 are expected to be
$11,600,000, of which $7,660,000 was expended during the six months ended
December 31, 1997. Delta generates internally only a portion of the cash
necessary for its capital expenditure requirements and finances the balance of
its capital expenditures on an interim basis through the use of its borrowing
capability under its short-term line of credit. The current available line of
credit is $25,000,000, of which $19,400,000 was borrowed at December 31, 1997.
The line of credit, which is with Bank One, Kentucky, NA, expires during
November, 1998. These short-term borrowings are periodically repaid with the
net proceeds from the sale of long-term debt and equity securities, as was done
in July, 1996 when the net proceeds of $20,400,000 from the sale of $15,000,000
of debentures and 400,000 shares of common stock were used to repay short-term
debt and for working capital.
The primary cash flows during the twelve months ended December 31, 1997 and
the fiscal years ended June 30, 1997, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED FISCAL YEARS ENDED
DECEMBER 31, -----------------------------------------------
1997 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Provided by operating activities............................ $ 5,902,623 $ 6,209,226 $ 3,094,809 $ 6,943,183
Used in investing activities................................ (14,236,815) (16,648,994) (13,373,416) (8,122,838)
Provided by financing activities............................ 8,760,395 10,768,558 10,294,461 1,158,887
------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ $ 426,203 $ 328,790 $ 15,854 $ (20,768)
============ ============ ============ ===========
</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 short-term borrowings, will be sufficient to satisfy its
operating, normal capital expenditure and dividend requirements.
9
<PAGE> 10
RESULTS OF OPERATIONS
OPERATING REVENUES
The increase in operating revenues of $2,906,000 for the twelve months
ended December 31, 1997 over fiscal 1997 was due primarily to increases in the
cost of gas purchased that were reflected in rates billed to customers through
Delta's gas cost recovery clause and to the general rate increase effective
November 30, 1997. On-system transportation volumes for the twelve months ended
December 31, 1997 increased 431,000 Mcf, or 15.1% as compared with fiscal 1997.
Retail sales volumes increased 109,000 Mcf, or 2.5%, as heating degree days
billed were 107% of the thirty year average ("normal") degree days for the
twelve months ended December 31, 1997 as compared with 103% for fiscal 1997.
The increase in operating revenues of $5,593,000 for fiscal 1997 was due
primarily to increases in the cost of gas purchased that were reflected in
rates billed to customers through Delta's gas cost recovery clause. This was
partially offset by a decrease in retail sales volumes of 406,000 Mcf as a
result of the warmer winter weather in fiscal 1997. Billed degree days were
103% of normal for fiscal 1997 as compared with 112% for fiscal 1996. In
addition, on-system transportation volumes for fiscal 1997 increased 293,000
Mcf, or 11.4%.
The increase in operating revenues of $4,732,000 for fiscal 1996 was due
primarily to an increase in retail sales volumes of 980,000 Mcf as a result of
the colder winter weather in fiscal 1996. Billed degree days were 112% of
normal for fiscal 1996 as compared with 89% for fiscal 1995. In addition,
on-system transportation volumes for fiscal 1996 increased 180,000 Mcf, or 8%.
These increases were partially offset by decreases in the cost of gas purchased
that were reflected in rates billed to customers through Delta's gas cost
recovery clause and by a decrease in off-system transportation volumes of
318,000 Mcf, or 22%, due primarily to reduced deliveries from local producers.
OPERATING EXPENSES
The increase in purchased gas expense of $1,298,000 for the twelve months
ended December 31, 1997 over fiscal 1997 was due primarily to increases in the
cost of gas purchased for retail sales and increased gas purchases for retail
sales resulting from the colder winter weather during the twelve months ended
December 31, 1997.
The increase in purchased gas expense of $5,875,000 for fiscal 1997 was due
primarily to increases in the cost of gas purchased for retail sales. The
increase was partially offset by the decreased gas purchases for retail sales
resulting from the warmer winter weather in fiscal 1997.
The increase in purchased gas expense of $1,893,000 for fiscal 1996 was due
primarily to the increased gas purchases for retail sales resulting from the
colder winter weather during fiscal 1996. The increase was partially offset by
decreases in the cost of gas purchased for retail sales.
The increase in operation and maintenance expenses of $640,000 during
fiscal 1996 was due primarily to increases in payroll and related benefit
costs.
The increases in depreciation expense during the twelve months ended
December 31, 1997, fiscal 1997 and fiscal 1996 of $266,000, $424,000 and
$327,000, respectively, were due primarily to additional depreciable plant.
The increases in taxes other than income taxes during the twelve months
ended December 31, 1997 over fiscal 1997 and fiscal 1996 over fiscal 1995 of
$105,000 and $173,000, respectively, were primarily due to increased property
taxes which resulted from increased plant and property valuations, and to
increased payroll taxes, which resulted from increased wages.
Changes in income taxes during the twelve months ended December 31, 1997,
fiscal 1997 and fiscal 1996 of approximately $189,000, $595,000 and $517,000,
respectively, were primarily due to changes in net income.
INTEREST CHARGES
The increase in interest on long-term debt during fiscal 1997 of $1,146,000
was due primarily to the issuance during July, 1996 of the $15,000,000 of 8.3%
Debentures due 2026.
The increase in other interest charges of $304,000 during the twelve months
ended December 31, 1997 over fiscal 1997 was due primarily to increased average
short-term borrowings.
10
<PAGE> 11
The decrease in other interest charges during fiscal 1997 of $348,000 was
due primarily to decreased average short-term borrowings as short-term debt was
repaid with the net proceeds from the sale of long-term debt and equity
securities during July, 1996.
The increase in other interest charges during fiscal 1996 of $448,000 was
due primarily to increased average short-term borrowings and increased average
interest rates.
BASIC EARNINGS PER COMMON SHARE
For the twelve months ended December 31, 1997 and fiscal 1997, basic
earnings per common share were diluted, as compared with previous periods, by
the increased average common shares outstanding that resulted from the
additional 400,000 shares of common stock issued in July, 1996, as well as the
common shares issued under Delta's dividend reinvestment plan and shares issued
to employees during the periods.
BALANCE SHEET
The Company experienced significant fluctuations in Balance Sheet line
items on December 31, 1997 compared with June 30, 1997. Those differences were
primarily the result of seasonal changes in Accounts Receivable, Gas in
Storage, Prepayments and Accounts Payable.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other sections of this Prospectus to which it
refers, that are not statements of historical fact, are forward-looking
statements, which concern (among other things) the impact of changes in the
cost of gas, projected capital expenditures, sources of cash to fund
expenditures and regulatory recovery mechanisms. Such statements are
accordingly subject to important risks and uncertainties which could cause the
Company's actual results to differ materially from those expressed in any such
forward-looking statements made herein. The aforesaid uncertainties include,
but are not limited to: uncertainty as to the regulatory allowance of recovery
of changes in the cost of gas, uncertain demands for capital expenditures, the
availability of cash from various sources and uncertainty as to regulatory
approval of the full recovery of costs and regulatory assets. See "Risk
Factors".
THE "YEAR 2000" ISSUE
Many computer systems are currently based on storing two digits to identify
the year of a transaction (for example, "97" for 1997), rather than a full
four digits, and are not programmed to consider the start of a new century.
Significant processing inaccuracies and even inoperability could result in the
year 2000 and thereafter. The Company's principal computer systems are
currently capable of processing the year 2000, or are in the process of being
upgraded or replaced by systems that are similarly capable. The Company does
not expect that the costs of addressing the "Year 2000" issue will have a
material impact on the Company's financial position or results of operations.
11
<PAGE> 12
BUSINESS
SUMMARY OF BUSINESS DEVELOPMENT
In 1951, Delta established its first retail gas distribution system, which
provided service to 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 to 38,000 customers in central and southeastern Kentucky and,
additionally, provides transportation service to industrial customers and
interconnected pipelines located in the area.
During fiscal 1996, Delta acquired leases for 8,000 acres on Canada
Mountain in Bell County, Kentucky, for the storage of natural gas. Delta has
completed the development of the property as an underground natural gas storage
facility with an estimated capacity to store 4,000,000 Mcf of natural gas. This
storage facility permits Delta to purchase and store gas during the non-heating
months 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 20
predominantly rural counties in central and southeastern Kentucky. The economy
of Delta's service area is based principally on coal mining, farming and light
industry. The communities in Delta's service area typically contain populations
of less than 20,000. The four largest service areas are Nicholasville, Corbin,
Berea and Middlesboro, where Delta serves 6,700, 6,500, 4,000 and 3,700
customers, respectively.
The communities served by Delta continue to expand, resulting in growth
opportunities for the Company. Industrial parks have been developed in certain
areas and have resulted in new industrial customers, some of which are
on-system transportation customers. As a result of this growth, Delta's total
customer count increased by 3.4% for the twelve months ended December 31, 1997.
Currently, over 99% of Delta's customers are residential and commercial.
Delta's remaining, light industrial customers purchased approximately 7% of the
total volume of gas sold by Delta at retail during the twelve months ended
December 31, 1997.
The Company's revenues are affected by various factors, including rates
billed to customers, the cost of natural gas, economic conditions in the areas
that the Company serves, weather conditions and competition. Delta competes for
customers and sales with alternative sources of energy, including electricity,
coal, oil, propane and wood. The Company's marketing subsidiaries, which
purchase gas and resell it to various industrial customers and others, also
compete for their customers with producers and marketers of natural gas. Gas
costs, which the Company is generally able to pass through to customers, may
influence customers to conserve, or, in the case of industrial customers, to
use alternative energy sources. Also, the potential bypass of Delta's system by
industrial customers and others is a competitive concern that Delta has
addressed and will continue to address as the need arises.
Delta's retail sales are seasonal and temperature-sensitive as the majority
of the gas sold by Delta is used for heating. This seasonality impacts Delta's
liquidity position and its management of its working capital requirements
during each twelve month period, and changes in the average temperature during
the winter months impact 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 December 31, 1997 were
4,408,000 Mcf, generating $34,951,000 in revenues, as compared to 4,299,000 Mcf
and $33,561,000 in revenues for fiscal 1997. Heating degree days billed during
the twelve months ended December 31, 1997 were 107% of normal as compared with
103% in fiscal 1997. Sales volumes increased by 109,000 Mcf, or 2.5%, for the
twelve months ended December 31, 1997 as compared to fiscal 1997.
Delta's transportation of natural gas during the twelve months ended
December 31, 1997 generated revenues of $4,124,000 as compared with $3,596,000
during fiscal 1997. Of the total transportation for the twelve months ended
December 31, 1997, $3,686,000 (3,294,000 Mcf) and $438,000 (1,372,000 Mcf) were
earned for transportation for on-
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<PAGE> 13
system and off-system customers, respectively. Of the total transportation for
fiscal 1997, $3,214,000 (2,863,000 Mcf) and $382,000 (1,205,000 Mcf) were
earned for transportation for on-system and off-system customers, respectively.
As an active participant in many areas of the natural gas industry, Delta
plans to continue its efforts to expand its gas distribution system. Delta
continues to consider acquisitions of other gas systems, some of which are
contiguous to its existing service areas, as well as expansion within its
existing service areas. During November, 1996, Delta acquired the City of North
Middletown gas system in Bourbon County, consisting of 180 primarily
residential customers. During July, 1997, Delta purchased the gas system of
Annville Gas & Transmission Corporation in Jackson County, which serves several
industrial and residential customers. This system was expanded by Delta during
the first part of fiscal 1998 to provide gas service to customers in the City
of Annville.
The Company also anticipates continuing activity in gas production and
transportation and plans to pursue and increase these activities wherever
practicable. The Company will continue to consider the construction or
acquisition of additional transmission, storage and gathering facilities to
provide for increased transportation, enhanced supply and system flexibility.
During June, 1997, Delta acquired TranEx Corporation, which owns a 43 mile, 8
inch diameter steel pipeline that extends from Clay County to Madison County.
Delta is utilizing the pipeline to deliver natural gas for injection into its
Canada Mountain storage field as well as for a portion of Delta's system
supply.
13
<PAGE> 14
OPERATING STATISTICS
Set forth in the following table is information indicative of Delta's
business during the periods indicated.
<TABLE>
<CAPTION>
FOR THE
TWELVE MONTHS
ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
DECEMBER 31, --------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
RETAIL CUSTOMERS SERVED, END OF PERIOD
Residential................................................ 32,637 31,380 29,840 29,029 27,939 27,293
Commercial................................................. 5,081 4,761 4,453 4,287 4,242 4,093
Industrial................................................. 71 74 75 72 76 75
------ ------- ------- ------- ------- -------
Total.................................................. 37,789 36,215 34,368 33,388 32,257 31,461
------ ------- ------- ------- ------- -------
OPERATING REVENUES ($000)
Residential sales.......................................... 20,526 19,694 16,540 14,772 16,597 14,578
Commercial sales........................................... 12,449 11,977 9,788 8,673 9,663 8,269
Industrial sales........................................... 1,976 1,890 1,483 1,248 1,671 1,383
On-system transportation................................... 3,686 3,214 2,913 2,588 2,310 2,451
Off-system transportation.................................. 438 382 418 461 623 836
Subsidiary sales........................................... 5,889 4,904 5,297 3,959 3,755 3,532
Other...................................................... 111 108 137 143 228 172
------ ------- ------- ------- ------- -------
Total.................................................. 45,075 42,169 36,576 31,844 34,847 31,221
------ ------- ------- ------- ------- -------
SYSTEM THROUGHPUT (MILLION CU. FT.)
Residential sales.......................................... 2,528 2,464 2,741 2,173 2,511 2,341
Commercial sales........................................... 1,591 1,557 1,673 1,328 1,506 1,368
Industrial sales........................................... 289 278 291 223 316 281
------ ------- ------- ------- ------- -------
Total retail sales..................................... 4,408 4,299 4,705 3,724 4,333 3,990
On-system transportation................................... 3,294 2,863 2,570 2,390 2,186 2,248
Off-system transportation.................................. 1,372 1,205 1,134 1,452 1,997 2,668
------ ------- ------- ------- ------- -------
Total.................................................. 9,074 8,367 8,409 7,566 8,516 8,906
------ ------- ------- ------- ------- -------
AVERAGE ANNUAL CONSUMPTION PER END
OF PERIOD RESIDENTIAL CUSTOMER
(THOUSAND CU. FT.)........................................... 77 79 92 75 90 86
LEXINGTON, KENTUCKY DEGREE DAYS
Actual..................................................... 5,073 4,869 5,280 4,215 4,999 4,688
Percent of 30 year average (4,727)......................... 107.3 103.0 111.7 89.2 105.8 99.2
AVERAGE REVENUE PER MCF SOLD AT RETAIL ($)..................... 7.93 7.81 5.91 6.63 6.44 6.07
AVERAGE GAS COST PER MCF SOLD AT RETAIL ($).................... 4.73 4.62 2.81 3.37 3.34 2.90
</TABLE>
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<PAGE> 15
GAS SUPPLY
Delta receives its gas supply from a combination of interstate and Kentucky
sources.
Delta's interstate gas supply is transported and/or stored by Tennessee Gas
Pipeline Company ("Tennessee"), Columbia Gas Transmission Corporation
("Columbia"), Columbia Gulf Transmission Company ("Columbia Gulf") and
Texas Eastern Transmission Corporation ("Texas Eastern"). Delta acquires its
interstate gas supply from gas marketers.
Delta's agreements with Tennessee extend until 2000 and thereafter continue
on a year-to-year basis until terminated by either party. Tennessee is
obligated under the agreements to transport up to 17,600 Mcf per day for Delta.
Delta acquires its gas for transportation by Tennessee under an agreement with
a gas marketer. During the twelve months ended December 31, 1997, Delta
purchased 1,806,000 Mcf from the gas marketer under an agreement that extends
through April, 1999.
Delta's agreements with Columbia and Columbia Gulf extend until 2008 and
thereafter continue on a year-to-year basis until terminated by one of the
parties to the particular agreement. Columbia and Columbia Gulf are obligated
under the agreements to transport up to 12,000 Mcf per day and 4,000 Mcf per
day, respectively, for Delta. Delta acquires its gas for transportation by
Columbia and Columbia Gulf under agreements with a gas marketer. During the
twelve months ended December 31, 1997, Delta purchased a total of 909,000 Mcf
from the gas marketer under agreements that extend through April, 2000.
Delta has an agreement with The Wiser Oil Company ("Wiser") to purchase
natural gas from Wiser through October, 1999. Delta and Wiser annually
determine the daily deliverability from Wiser, and Wiser is committed to
deliver that volume. Wiser currently is obligated to deliver 9,900 Mcf per day
to Delta through October 31, 1998 and 8,910 Mcf per day on and after November
1, 1998. Delta purchased 1,670,000 Mcf from Wiser during the twelve months
ended December 31, 1997.
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 4,400,000 Mcf. Delta purchased a total of
198,000 Mcf from those properties during the twelve months ended December 31,
1997. Enpro also produces oil from certain of these leases, but oil production
has not been significant.
Delta purchases gas under agreements with various marketers and Kentucky
producers. The combined volumes of gas purchased from these sources during the
twelve months ended December 31, 1997 were 55,000 Mcf.
Resources and Delgasco purchase gas under agreements with marketers and
Kentucky producers. The gas is resold to industrial customers on Delta's
system, to Delta for system supply and to others. The combined volumes of gas
purchased by Resources and Delgasco from these sources during the twelve months
ended December 31, 1997 were 2,965,000 Mcf.
Delta has completed the development of an underground natural gas storage
field with an estimated eventual working capacity of 4,000,000 Mcf. See
"Business--Properties". This field has been used to provide a portion of
Delta's winter supply needs since 1996. This storage capability permits Delta
to purchase and store gas during the non-heating months, and then withdraw and
sell the gas during the peak usage months.
Although there are competitors for the acquisition of gas supplies, Delta
continues to seek additional new gas supplies from all available sources,
including those in the proximity of its facilities in southeastern Kentucky.
Also, Resources and Delgasco continue to pursue acquisitions of new gas
supplies from Kentucky producers and others.
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.
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<PAGE> 16
REGULATORY MATTERS
Delta is subject to the regulatory authority of the Public Service
Commission of Kentucky ("PSC") with respect to various aspects of Delta's
business, including rates and service to retail and transportation customers.
The Company monitors the need to file a general rate case as a way to adjust
its sales prices. Delta currently has no general rate cases filed with the PSC.
The history of Delta's general rate cases since 1985 is as follows:
<TABLE>
<CAPTION>
ANNUAL
REVENUE ANNUAL REVENUE INCREASE APPROVED TEST YEAR AUTHORIZED
DATE OF INCREASE -------------------------------- (TWELVE MONTHS RETURN ON
APPLICATION REQUESTED DATE EFFECTIVE AMOUNT ENDED) COMMON 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>
March 14, 1997 $ 2,962,000 November 30, 1997 $1,670,000<Fb> December 31, 1996 11.6%<Fc>
<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.
<Fb> The PSC has granted a rehearing, scheduled for April 2, 1998, on
tax-related items that could result in $157,000 of additional annual
revenues.
<Fc> Delta requested a 13% return on common equity.
</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. Although the PSC is allowing
Delta through its GCR clause to recover its costs in connection with its
recently developed storage facilities on Canada Mountain (see
"Business--Summary of Business Development"), this recovery through rates,
which amounts to approximately $0.56 per Mcf, is currently under review by the
PSC and thus is currently being billed to Delta's customers subject to refund.
Delta can currently predict neither the outcome of this review nor the impact on
Delta's rates, if any.
During 1997, the PSC established a proceeding to investigate affiliate
transactions. Delta is a party to this proceeding, and Delta responded to a PSC
data request relating to Delta's subsidiaries. Delta can currently predict
neither the outcome of this proceeding nor the impact on Delta's rates, if any.
The PSC convened meetings during 1997 with various regulated utilities and
other interested parties to discuss the potential unbundling of natural gas
rates and services in Kentucky. Delta participated actively in these meetings
and plans to continue to provide comments in future discussions concerning
regulatory and legislative issues relating to unbundling.
In addition to PSC regulation, Delta may obtain non-exclusive franchises
from the cities and communities in which it operates authorizing it to place
its facilities in the streets and public grounds. However, no utility may
obtain a franchise until it has obtained from the PSC a Certificate of
Convenience and Necessity authorizing it to bid on the franchise. Delta holds
franchises in four of the ten cities in which it maintains branch offices and
in seven other communities it serves. In the other cities and communities
served by the Company, either Delta's franchises have expired, the communities
do not have governmental organizations authorized to grant franchises, or the
local governments have not required or do not want to offer a franchise. Delta
attempts to acquire or reacquire franchises whenever feasible.
Without a franchise, a local government could require Delta to cease its
occupation of the streets and public grounds or prohibit Delta from extending
its facilities into any new area of that city or community. To date, the
absence of a franchise has had no adverse effect on Delta's operations.
16
<PAGE> 17
PROPERTIES
Delta owns its corporate headquarters in Winchester, Kentucky. In addition,
Delta owns buildings used for branch operations in nine of the cities it serves
and rents an office building in one other city. Also, Delta owns a building in
Laurel County used for training as well as equipment and materials storage.
The Company owns approximately 1,960 miles of natural gas gathering,
transmission, distribution and service lines. These lines range in size up to
twelve inches in diameter. There are no significant encumbrances on these
assets.
Delta holds leases for the storage of natural gas under approximately 8,000
acres located in Bell County, Kentucky. This property was developed for the
underground storage of natural gas and has an estimated capacity to store
4,000,000 Mcf of gas.
Delta owns the rights to any oil and gas underlying 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
550,000 Mcf. These properties otherwise are currently non-producing, and no
reserve studies have been undertaken on the properties.
Enpro owns interests in certain oil and gas leases relating to
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
4,400,000 Mcf. Oil production from the property has not been significant. Also,
Enpro owns the oil and gas underlying 11,500 additional acres in Bell, Clay and
Knox Counties. These properties are currently non-producing, and no reserve
studies have been performed on the properties.
Under the terms of an agreement with a producer relating to approximately
14,000 acres of Enpro's undeveloped holdings, the producer is conducting
exploration activities on the acreage. Enpro reserved the option to participate
in wells drilled and also retained certain working and royalty interests in any
production from future wells.
There are no significant encumbrances on the Company's assets.
EMPLOYEES
On December 31, 1997, Delta had 181 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.
17
<PAGE> 18
DESCRIPTION OF DEBENTURES
GENERAL
The Debentures are to be issued under an Indenture dated as of March 1,
1998 (the "Indenture"), by and between the Company and The 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
$25,000,000 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 and principal 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 Underwriter 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
Underwriter), 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,
18
<PAGE> 19
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 April 1, 2018. 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 April 1 and October 1 of each year, commencing October
1, 1998 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 and principal 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 April 1, 2003, as
a whole or in part, at the election of the Company, at a Redemption Price equal
to 100% of the principal amount thereof plus accrued interest to the Redemption
Date.
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 at
par of all or part of his interest 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 April 1, 1999 (the "Initial Period"), and
during any twelve-month period which ends on and includes each April 1
thereafter (each such twelve-month period being hereinafter referred to as a
"Subsequent Period") (i) on behalf of a deceased Beneficial Owner any
interest in the Debentures which exceeds an aggregate principal amount of
$25,000 or (ii) interests in the Debentures in an aggregate principal amount
exceeding $750,000. 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
19
<PAGE> 20
limitation for any deceased Beneficial Owner, shall not be included in the
computation of the $750,000 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 $750,000 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 Participant through whom the deceased Beneficial
Owner owned 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 $750,000 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 [H.R.10] 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 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 redemption 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.
20
<PAGE> 21
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 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 December 31, 1997, after giving effect to the issuance of the
Debentures offered hereby, and the application of the proceeds therefrom,
Consolidated Net Utility Fixed Assets would have exceeded Consolidated Funded
Indebtedness by $36,131,000.
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 $21,500,000 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 December 31,
1997, after giving effect to the issuance of the Debentures, the Consolidated
Tangible Net Worth of the Company would have been $28,255,698.
Subject to certain exceptions described in the Indenture (including Liens
to secure Indebtedness having an outstanding principal balance aggregating not
more than $4,000,000), 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 with
(or, at the Company's option, prior to) such Indebtedness.
21
<PAGE> 22
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 Person, unless immediately after such transaction no Default will
exist, such Person 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 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 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 interests
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 then 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 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 interest rate on any Debenture or change the
interest payment date or otherwise modify the terms of payment of the principal
of 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.
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
22
<PAGE> 23
conducting any proceeding and any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee.
The 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, Agent for Delta's Dividend Reinvestment and Stock
Purchase Plan, as well as Trustee and Debenture Registrar for Delta's 8.3%
Debentures due 2026.
UNDERWRITING
Edward D. Jones & Co., L.P. (the "Underwriter") has 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 Debentures.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Debentures are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all of the Debentures offered
hereby if any are taken.
The Underwriter has advised the Company that it proposes to offer the
Debentures being purchased by it directly to the public at the initial public
offering price set forth on the cover page of this Prospectus.
Until the distribution of the Debentures is completed, rules of the
Commission may limit the ability of the Underwriter to bid for and purchase the
Debentures. As an exception to these rules, the Underwriter is permitted to
engage in certain transactions that stabilize the price of the Debentures. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Debentures.
If the Underwriter creates a short position in the Debentures in connection
with the Offering, i.e., if it sells more Debentures than are set forth on the
cover page of this Prospectus, the Underwriter may reduce that short position
by purchasing Debentures in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the securities.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Debentures. In addition, neither
the Company nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
The offering of the Debentures is made for delivery when, as and if
accepted by the Underwriter and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriter
reserves the right to reject any order for the purchase of Debentures in whole
or in part.
The Company has agreed to indemnify the Underwriter and persons who control
the Underwriter 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
Underwriter 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.
LEGAL OPINIONS
The validity of the Debentures 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 Underwriter 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 6,056 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 December 31, 1997
(unaudited) and the Years Ended June 30, 1997, 1996 and 1995 (audited).............. F-3
Consolidated Statements of Cash Flows for the Twelve Months Ended December 31, 1997
(unaudited) and the Years Ended June 30, 1997, 1996 and 1995 (audited).............. F-4
Consolidated Balance Sheets as of December 31, 1997 (unaudited) and June 30, 1997 and
1996 (audited)...................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Twelve Months Ended
December 31, 1997 (unaudited) and the Years Ended June 30, 1997, 1996 and 1995
(audited)........................................................................... F-6
Consolidated Statements of Capitalization as of December 31, 1997 (unaudited) and June
30, 1997 and 1996 (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, 1997 and 1996, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
August 15, 1997
F-2
<PAGE> 26
<TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
FOR THE
TWELVE MONTHS FOR THE FISCAL YEARS ENDED JUNE 30,
ENDED -------------------------------------------
DECEMBER 31, 1997 1997 1996 1995
----------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES.......................................... $45,074,546 $42,169,185 $36,576,055 $31,844,339
----------- ----------- ----------- -----------
OPERATING EXPENSES
Purchased gas........................................... $24,562,876 $23,265,222 $17,389,755 $15,497,156
Operation and maintenance (Note 1)...................... 8,896,894 8,631,635 8,642,511 8,002,797
Depreciation and depletion (Note 1)..................... 3,201,585 2,935,257 2,510,952 2,183,558
Taxes other than income taxes........................... 1,161,923 1,056,689 1,036,282 863,340
Income taxes (Note 2)................................... 1,154,275 964,800 1,559,500 1,042,400
----------- ----------- ----------- -----------
Total operating expenses............................ $38,977,553 $36,853,603 $31,139,000 $27,589,251
----------- ----------- ----------- -----------
OPERATING INCOME............................................ $ 6,096,993 $ 5,315,582 $ 5,437,055 $ 4,255,088
OTHER INCOME AND DEDUCTIONS, NET............................ 28,794 40,874 32,503 50,582
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES.............................. $ 6,125,787 $ 5,356,456 $ 5,469,558 $ 4,305,670
----------- ----------- ----------- -----------
INTEREST CHARGES
Interest on long-term debt.............................. $ 3,152,939 $ 2,997,393 $ 1,851,768 $ 1,879,442
Other interest.......................................... 823,010 519,432 867,641 419,693
Amortization of debt expense............................ 111,600 115,366 88,800 88,800
----------- ----------- ----------- -----------
Total interest charges.............................. $ 4,087,549 $ 3,632,191 $ 2,808,209 $ 2,387,935
----------- ----------- ----------- -----------
NET INCOME.................................................. $ 2,038,238 $ 1,724,265 $ 2,661,349 $ 1,917,735
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 2,342,910 2,294,134 1,886,629 1,850,986
BASIC EARNINGS PER COMMON SHARE............................. $ .87 $ .75 $ 1.41 $ 1.04
DILUTED EARNINGS PER COMMON SHARE........................... $ .87 $ .75 $ 1.41 $ 1.04
DIVIDENDS DECLARED PER COMMON SHARE......................... $ 1.14 $ 1.14 $ 1.12 $ 1.12
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
MONTHS ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
DECEMBER 31, ----------------------------------------------
1997 1997 1996 1995
-------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 2,038,238 $ 1,724,265 $ 2,661,349 $ 1,917,735
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion and amortization............. 3,436,840 3,049,229 2,663,475 2,272,358
Deferred income taxes and investment tax credits..... 473,275 485,400 1,762,500 (77,000)
Other--net........................................... 688,134 666,798 484,474 602,180
(Increase) decrease in assets
Accounts receivable.................................. (1,396,817) (318,178) (860,255) (118,237)
Gas in storage....................................... 3,995,951 (782,007) 63,546 (138,138)
Advance (deferred) recovery of gas cost.............. (3,385,041) 495,751 (3,788,143) 2,583,128
Materials and supplies............................... (69,636) (120,969) (124,697) 173,319
Prepayments.......................................... (213,592) (346,532) 53,702 (105,903)
Other assets......................................... (582,623) (541,669) (31,723) (71,087)
Increase (decrease) in liabilities
Accounts payable..................................... (587,907) (439,721) 871,207 (178,609)
Refunds due customers................................ 379,087 554,520 (456,283) 83,572
Accrued taxes........................................ 776,972 1,038,761 (270,394) (72,210)
Other current liabilities............................ 354,593 744,054 56,951 69,742
Advances for construction and other.................. (4,851) (476) 9,100 2,333
------------ ------------ ------------ ------------
Net cash provided by operating activities.......... $ 5,902,623 $ 6,209,226 $ 3,094,809 $ 6,943,183
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... $(14,236,815) $(16,648,994) $(13,373,416) $ (8,122,838)
------------ ------------ ------------ ------------
Net cash used in investing activities.............. $(14,236,815) $(16,648,994) $(13,373,416) $ (8,122,838)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock.............................. $ (2,671,093) $ (2,651,073) $ (2,113,414) $ (2,073,374)
Issuance of common stock, net.......................... 639,809 6,773,054 568,875 502,361
Issuance of long-term debt, net........................ -- 14,334,833 -- --
Repayment of long-term debt............................ (813,321) (478,256) (561,000) (240,100)
Issuance of short-term debt............................ 35,280,000 30,975,000 25,955,000 19,495,000
Repayment of short-term debt........................... (23,675,000) (38,185,000) (13,555,000) (16,525,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities.......... $ 8,760,395 $ 10,768,558 $ 10,294,461 $ 1,158,887
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... $ 426,203 $ 328,790 $ 15,854 $ (20,768)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 18,201 151,633 135,779 156,547
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 444,404 $ 480,423 $ 151,633 $ 135,779
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest........................................... $ 4,008,286 $ 3,019,881 $ 2,491,091 $ 2,253,472
Income taxes....................................... $ 366,032 $ (432,163) $ 193,560 $ 1,264,942
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,
DECEMBER 31, -------------------------------
1997 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
GAS UTILITY PLANT, at cost............................................ $123,913,386 $116,829,158 $ 98,795,623
Less--Accumulated provision for depreciation...................... (33,251,728) (31,734,976) (26,749,774)
------------ ------------ ------------
Net gas plant................................................. $ 90,661,658 $ 85,094,182 $ 72,045,849
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents......................................... $ 444,404 $ 480,423 $ 151,633
Accounts receivable, less accumulated provisions for doubtful
accounts of $83,647, $113,945 and $105,756 as of December 31,
1997 and June 30, 1997 and 1996, respectively................... 3,615,358 2,414,632 2,096,454
Gas in storage, at average cost................................... 1,855,202 1,209,171 427,164
Deferred gas costs (Note 1)....................................... 3,796,666 2,180,606 2,676,357
Materials and supplies, at first-in, first-out cost............... 710,358 773,108 652,139
Prepayments....................................................... 388,449 716,076 369,544
------------ ------------ ------------
Total current assets.......................................... $ 10,810,437 $ 7,774,016 $ 6,373,291
------------ ------------ ------------
OTHER ASSETS
Cash surrender value of officers' life insurance
(face amount of $1,036,009)..................................... $ 329,913 $ 321,339 $ 304,339
Note receivable from officer...................................... 122,000 134,000 126,000
Unamortized debt expense and other (Note 6)....................... 3,335,330 3,357,628 2,291,158
------------ ------------ ------------
Total other assets............................................ $ 3,787,243 $ 3,812,967 $ 2,721,497
------------ ------------ ------------
Total assets.............................................. $105,259,338 $ 96,681,165 $ 81,140,637
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION (SEE CONSOLIDATED STATEMENTS
OF CAPITALIZATION)
Common shareholders' equity....................................... $ 28,255,698 $ 29,474,569 $ 23,628,323
Long-term debt (Note 6)........................................... 37,976,596 38,107,860 24,488,916
Notes payable refinanced subsequent to year end................... -- -- 18,075,000
------------ ------------ ------------
Total capitalization.......................................... $ 66,232,294 $ 67,582,429 $ 66,192,239
------------ ------------ ------------
CURRENT LIABILITIES
Notes payable (Note 5)............................................ $ 19,395,000 $ 10,865,000 $ --
Current portion of long-term debt (Note 6)........................ 1,553,777 1,987,600 1,084,800
Accounts payable.................................................. 4,391,125 2,386,717 2,826,438
Accrued taxes..................................................... 592,850 1,132,315 93,554
Refunds due customers............................................. 461,147 577,874 23,354
Customers' deposits............................................... 498,566 368,561 304,246
Accrued interest on debt.......................................... 1,081,096 1,033,220 637,596
Accrued vacation.................................................. 516,032 516,032 485,847
Other accrued liabilities......................................... 385,701 492,501 238,571
------------ ------------ ------------
Total current liabilities................................. $ 28,875,294 $ 19,359,820 $ 5,694,406
------------ ------------ ------------
DEFERRED CREDITS AND OTHER
Deferred income taxes............................................. $ 8,393,000 $ 7,921,100 $ 7,318,500
Investment tax credits............................................ 673,500 708,400 779,400
Regulatory liability (Note 2)..................................... 867,675 892,100 938,300
Advances for construction and other............................... 217,575 217,316 217,792
------------ ------------ ------------
Total deferred credits and other.............................. $ 10,151,750 $ 9,738,916 $ 9,253,992
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Total liabilities and shareholders' equity................ $105,259,338 $ 96,681,165 $ 81,140,637
============ ============ ============
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,
DECEMBER 31, -------------------------------------------
1997 1997 1996 1995
-------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON SHARES
Balance, beginning of year............................... $ 2,325,333 $ 1,903,580 $ 1,868,734 $ 1,839,340
$1.00 par value of 36,589, 438,643, 34,846 and 29,394
shares issued during the twelve months ended December
31, 1997 and fiscal years 1997, 1996 and 1995,
respectively
Public issuance of common shares..................... -- 400,000 -- --
Dividend reinvestment and stock purchase plan........ 29,843 31,187 28,024 25,802
Employee stock purchase plan and other............... 6,746 7,456 6,822 3,592
----------- ----------- ----------- -----------
Balance, end of year..................................... $ 2,361,922 $ 2,342,223 $ 1,903,580 $ 1,868,734
=========== =========== =========== ===========
PREMIUM ON COMMON SHARES
Balance, beginning of year............................... $26,924,496 $20,572,132 $20,022,643 $19,532,909
Premium on issuance of common shares
Public issuance of common shares..................... -- 6,000,000 -- --
Dividend reinvestment and stock purchase plan........ 491,113 519,478 440,621 425,357
Employee stock purchase plan and other............... 112,634 111,701 108,868 64,377
----------- ----------- ----------- -----------
Balance, end of year..................................... $27,528,243 $27,203,311 $20,572,132 $20,022,643
=========== =========== =========== ===========
CAPITAL STOCK EXPENSE
Balance, beginning of year............................... $(1,916,493) $(1,620,252) $(1,604,792) $(1,588,025)
Issuance of common shares............................ (527) (296,768) (15,460) (16,767)
----------- ----------- ----------- -----------
Balance, end of year..................................... $(1,917,020) $(1,917,020) $(1,620,252) $(1,604,792)
=========== =========== =========== ===========
RETAINED EARNINGS
Balance, beginning of year............................... $ 915,408 $ 2,772,863 $ 2,224,928 $ 2,380,567
Net income........................................... 2,038,238 1,724,265 2,661,349 1,917,735
Cash dividends declared on common shares (See
Consolidated Statements of Income for rates)....... (2,671,093) (2,651,073) (2,113,414) (2,073,374)
----------- ----------- ----------- -----------
Balance, end of year..................................... $ 282,553 $ 1,846,055 $ 2,772,863 $ 2,224,928
=========== =========== =========== ===========
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,
DECEMBER 31, -----------------------------
1997 1997 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common shares, par value $1.00 per share (Notes 3 and 4)
Authorized--6,000,000 shares
Issued and outstanding--2,361,922, 2,342,223 and 1,903,580 shares as
of December 31, 1997 and June 30, 1997 and 1996, respectively....... $ 2,361,922 $ 2,342,223 $ 1,903,580
Premium on common shares.................................................. 27,528,243 27,203,311 20,572,132
Capital stock expense..................................................... (1,917,020) (1,917,020) (1,620,252)
Retained earnings (Note 6)................................................ 282,553 1,846,055 2,772,863
------------ ----------- -----------
Total common shareholders' equity..................................... $ 28,255,698 $29,474,569 $23,628,323
------------ ----------- -----------
LONG-TERM DEBT (NOTES 6 AND 7)
Debentures, 8.3%, due 2026................................................ $ 15,000,000 $15,000,000 $ --
Debentures, 6 5/8%, due 2023.............................................. 13,325,000 13,505,000 14,000,000
Debentures, 9%, due 2011.................................................. 10,000,000 10,000,000 10,000,000
Promissory note payable, due through 2001................................. 1,151,596 1,502,901 1,401,581
Other..................................................................... 53,777 87,559 172,135
------------ ----------- -----------
Total long-term debt.................................................. $ 39,530,373 $40,095,460 $25,573,716
Less--Amounts due within one year, included in current liabilities........ (1,553,777) (1,987,600) (1,084,800)
------------ ----------- -----------
Net long-term debt.................................................... $ 37,976,596 $38,107,860 $24,488,916
------------ ----------- -----------
NOTES PAYABLE REFINANCED SUBSEQUENT TO YEAR END (NOTE 5)...................... $ -- $ -- $18,075,000
------------ ----------- -----------
Total capitalization.............................................. $ 66,232,294 $67,582,429 $66,192,239
============ =========== ===========
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 five wholly-owned subsidiaries. Delta Resources, Inc.
("Resources") buys gas and resells it to industrial customers on Delta's
system and to Delta for system supply. Delgasco, Inc. buys gas and resells it
to Resources and to customers not on Delta's system. Deltran, Inc. operates
underground natural gas storage facilities that it leases from Delta. Enpro,
Inc. owns and operates production properties. TranEx Corporation owns a 43 mile
intrastate pipeline. All subsidiaries of Delta are included in the consolidated
financial statements. Intercompany balances and transactions have been
eliminated.
(b) CASH EQUIVALENTS--For the purposes of the Consolidated Statements of
Cash Flows, all temporary cash investments with a maturity of three months or
less at the date of purchase are considered cash equivalents.
(c) DEPRECIATION--The Company determines its provision for depreciation
using the straight-line method and by the application of rates to various
classes of utility plant. The rates are based upon the estimated service lives
of the properties and were equivalent to composite rates of 3.1%, 3.0%, 2.9%
and 2.8% of average depreciable plant for the twelve months ended December 31,
1997, fiscal 1997, 1996 and 1995, respectively.
(d) MAINTENANCE--All expenditures for maintenance and repairs of units of
property are charged to the appropriate maintenance expense accounts. A
betterment or replacement of a unit of property is accounted for as an addition
and retirement of utility plant. At the time of such a retirement, the
accumulated provision for depreciation is charged with the original cost of the
property retired and also for the net cost of removal.
(e) GAS COST RECOVERY--Delta has a Gas Cost Recovery ("GCR") clause which
provides for a dollar-tracker that matches revenues and gas costs and provides
eventual dollar-for-dollar recovery of all gas costs incurred. The Company
expenses gas costs based on the amount of gas costs recovered through revenue.
Any differences between actual gas costs and those estimated costs billed are
deferred and reflected in the computation of future billings to customers using
the GCR mechanism.
(f) REVENUE RECOGNITION--The Company records revenues as billed to its
customers on a monthly meter reading cycle. At the end of each month, gas
service which has been rendered from the latest date of each cycle meter
reading to the month-end is unbilled.
(g) REVENUES AND CUSTOMER RECEIVABLES--The Company supplies natural gas to
38,000 customers in central and southeastern Kentucky. Revenues and customer
receivables arise primarily from sales of natural gas to customers and from
transportation services for others. Provisions for doubtful accounts are
recorded to reflect the expected net realizable value of accounts receivable.
(h) USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(i) NEW ACCOUNTING PRONOUNCEMENTS--In March, 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", effective for fiscal years beginning
after December 15, 1995. The Company adopted the provisions of SFAS No. 121 in
the first quarter of fiscal 1997. The new standard requires that long-lived
assets and certain identified intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In performing such impairment reviews, companies
will be required to estimate the sum of future cash flows from an asset and
compare such amount to the asset's carrying amount. Any excess of carrying
amount over expected cash flows will result in a possible write-down of an
asset to its fair value. Adoption of SFAS No. 121 did not have a material
adverse impact on the Company's financial position or results of operations.
F-8
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For companies with June 30 fiscal yearends, SFAS No. 123, "Accounting for
Stock-Based Compensation", was required to be adopted as of June 30, 1997.
This standard is currently inapplicable to Delta because the Company has no
stock based compensation arrangements.
Delta adopted SFAS No. 128, "Earnings per Share", during the second
quarter of fiscal 1998. The adoption of this standard had no effect upon
current or prior period earnings per share.
(2) INCOME TAXES
The Company provides for income taxes on temporary differences resulting
from the use of alternative methods of income and expense recognition for
financial and tax reporting purposes. The differences result primarily from the
use of accelerated tax depreciation methods for certain properties versus the
straight-line depreciation method for financial purposes, differences in
recognition of purchased gas cost recoveries and certain other accruals which
are not currently deductible for income tax purposes. Investment tax credits
were deferred for certain periods prior to fiscal 1987 and are being amortized
to income over the estimated useful lives of the applicable properties. The
Company utilizes the liability method for accounting for income taxes, which
requires that deferred income tax assets and liabilities are computed using tax
rates that will be in effect when the book and tax temporary differences
reverse. The change in tax rates applied to accumulated deferred income taxes
may not be immediately recognized in operating results because of ratemaking
treatment. A regulatory liability has been established to recognize the future
revenue requirement impact from these deferred taxes. The temporary differences
which gave rise to the net accumulated deferred income tax liability for the
periods are as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Deferred Tax Liabilities
Accelerated depreciation.................................................... $ 9,018,800 $8,091,500
Deferred gas cost........................................................... 860,100 1,055,700
Accrued pension............................................................. 433,000 252,900
Debt expense................................................................ 384,900 399,200
----------- ----------
Total................................................................... $10,696,800 $9,799,300
----------- ----------
Deferred Tax Assets
Alternative investment tax credit........................................... $ 1,534,100 $1,305,600
Regulatory liabilities...................................................... 339,400 370,000
Unbilled revenue............................................................ 327,500 236,100
Investment tax credit....................................................... 279,400 307,400
Other....................................................................... 295,300 261,700
----------- ----------
Total................................................................... $ 2,775,700 $2,480,800
----------- ----------
Net accumulated deferred income tax liability....................... $ 7,921,100 $7,318,500
=========== ==========
</TABLE>
The components of the income tax provision are comprised of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------------
1997 1996 1995
-------- ---------- ----------
<S> <C> <C> <C>
Components of income tax expense
Payable currently
Federal....................................................... $242,200 $ 52,100 $ 453,900
State......................................................... (31,300) (255,100) 194,500
-------- ---------- ----------
Total..................................................... $210,900 $ (203,000) $ 648,400
Deferred.......................................................... 753,900 1,762,500 394,000
-------- ---------- ----------
Income tax expense........................................ $964,800 $1,559,500 $1,042,400
======== ========== ==========
</TABLE>
F-9
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................................... 34.0% 34.0% 34.0%
State income taxes net of federal benefit............................. 5.0 5.2 5.2
Amortization of investment tax credit................................. (2.6) (1.7) (2.4)
Other differences--net................................................ -- -- (.9)
---- ---- ----
Effective income tax rate......................................... 36.4% 37.5% 35.9%
==== ==== ====
</TABLE>
(3) EMPLOYEE BENEFIT PLANS
(a) DEFINED BENEFIT RETIREMENT PLAN--Delta has a trusteed, noncontributory,
defined benefit pension plan covering all eligible employees. Retirement income
is based on the number of years of service and annual rates of compensation.
The Company makes annual contributions equal to the amounts necessary to fund
the plan adequately. The funded status of the pension plan at March 31, the
plan year end, and the amounts recognized in the Company's consolidated balance
sheets at June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Plan assets at fair value............................................. $6,835,393 $6,058,458 $5,358,108
---------- ---------- ----------
Actuarial present value of benefit obligation
Vested benefits................................................... $4,505,619 $2,789,736 $3,605,363
Non-vested benefits............................................... 11,025 9,346 21,742
---------- ---------- ----------
Accumulated benefit obligation.................................... $4,516,644 $2,799,082 $3,627,105
Additional amounts related to projected salary increases.............. 1,828,856 2,811,907 1,638,014
---------- ---------- ----------
Total projected benefit obligation................................ $6,345,500 $5,610,989 $5,265,119
---------- ---------- ----------
Plan assets in excess of projected benefit obligation................. $ 489,893 $ 447,469 $ 92,989
Unrecognized net assets at date of initial application being amortized
over 15 years....................................................... (211,972) (254,365) (296,759)
Unrecognized net (gain) loss.......................................... 125,777 (13,481) 286,557
---------- ---------- ----------
Accrued pension asset............................................. $ 403,698 $ 179,623 $ 82,787
========== ========== ==========
</TABLE>
The assets of the plan consist primarily of common stocks, bonds and
certificates of deposit. Pension expense for the twelve months ended December
31, 1997 was approximately $262,000. Net pension costs for the years ended June
30 included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost for benefits earned during the year...................... $ 405,386 $ 382,751 $ 432,546
Interest cost on projected benefit obligation......................... 392,539 356,897 382,167
Actual return on plan assets.......................................... (407,965) (886,211) (623,972)
Net amortization and deferral......................................... (136,843) 444,044 185,660
---------- ---------- ----------
Net periodic pension cost......................................... $ 253,117 $ 297,481 $ 376,401
========== ========== ==========
</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, 1997, 1996 and 1995 were 7.0%
(discount rates), and 4% (rates of increase). The expected long-term rates of
return on plan assets were 8%.
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits", and
SFAS No. 112, "Employers' Accounting for Post-Employment Benefits", do not
affect the Company, as Delta does not provide benefits for post-retirement or
post-employment other than the pension plan for retired employees.
F-10
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) EMPLOYEE SAVINGS PLAN--The Company has an Employee Savings Plan
("Savings Plan") under which eligible employees may elect to contribute any
whole percentage between 2% and 15% of their annual compensation. The Company
will match 50% of the employee's contribution up to a maximum Company
contribution of 2.5% of the employee's annual compensation. For the twelve
months ended December 31, 1997 and the fiscal years ended June 30, 1997, 1996
and 1995, Delta's Savings Plan expense was approximately $140,000, $151,000,
$111,000 and $112,000, respectively.
(c) EMPLOYEE STOCK PURCHASE PLAN--The Company has an Employee Stock
Purchase Plan ("Stock Plan") under which qualified permanent employees are
eligible to participate. Under the terms of the Stock Plan, such employees can
contribute on a monthly basis 1% of their annual salary level (as of July 1 of
each year) to be used to purchase Delta's common stock. The Company issues
Delta common stock, based upon the fiscal year contributions, using an average
of the last sale price of Delta's stock as quoted in NASDAQ's National Market
System at the close of business for the last five business days in June and
matches those shares so purchased. Therefore, stock equivalent to approximately
$101,000 was issued in July, 1997. The continuation and terms of the Stock Plan
are subject to approval by Delta's Board of Directors on an annual basis.
Delta's Board has continued the Stock Plan through June 30, 1998.
(4) DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company's Dividend Reinvestment and Stock Purchase Plan (Reinvestment
Plan) provides that shareholders of record can reinvest dividends and also make
limited additional investments of up to $50,000 per year in shares of common
stock of the Company. Shares purchased under the Reinvestment Plan are
authorized but unissued shares of common stock of the Company, and 29,843,
31,187, 28,024 and 25,802 shares were issued during the twelve months ended
December 31, 1997 and the fiscal years ended June 30, 1997, 1996 and 1995.
Delta reserved 200,000 shares under the Reinvestment Plan in December, 1994,
and as of December 31, 1997 there were 109,651 shares still available for
issuance.
(5) NOTES PAYABLE AND LINE OF CREDIT
Substantially all of the cash balances of Delta are maintained to
compensate the respective banks for banking services and to obtain lines of
credit; however, no specific amounts have been designated as compensating
balances, and Delta has the right of withdrawal of such funds. The available
line of credit was $25,000,000, $20,000,000 and $20,000,000 at December 31,
1997, June 30, 1997 and June 30, 1996, of which $19,395,000, $10,865,000 and
$18,075,000 had been borrowed at an interest rate of 6.935%, 6.785% and 6.285%,
respectively. The maximum amount borrowed during the twelve months ended
December 31, 1997 and the fiscal years ended June 30, 1997 and 1996 was
$20,160,000, $10,865,000 and $18,075,000, respectively. The interest on this
line is, at the option of Delta, either at the daily prime rate or is based upon
certificate of deposit rates. The current line of credit expires during
November, 1998.
Short-term borrowings at June 30, 1996 were repaid in July, 1996, with the
net proceeds of approximately $20,400,000 from the sale of $15,000,000 of
debentures and 400,000 shares of common stock.
(6) LONG-TERM DEBT
On July 19, 1996, Delta issued $15,000,000 of 8.3% Debentures that mature
in July, 2026. Redemption on behalf of deceased holders within 60 days of
notice of up to $25,000 per holder will be made annually, subject to an annual
aggregate limitation of $500,000. The 8.3% Debentures can be redeemed by the
Company beginning in August, 2001 at a 5% premium, such premium declining
ratably until it ceases in August, 2006. Restrictions under the indenture
agreement covering the 8.3% Debentures include, among other things, a
restriction whereby dividend payments cannot be made unless consolidated
shareholders' equity of the Company exceeds $18,000,000. No retained earnings
are restricted under the provisions of the indenture.
On October 18, 1993, Delta issued $15,000,000 of 6 5/8% Debentures that
mature in October, 2023. Each holder may require redemption of up to $25,000
annually, subject to an annual aggregate limitation of $500,000. Such
redemption will also be made on behalf of deceased holders within 60 days of
notice, subject to the annual aggregate $500,000 limitation. The 6 5/8%
Debentures can be redeemed by the Company beginning in October, 1998 at a 5%
premium, such premium declining ratably until it ceases in October, 2003.
F-11
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 1, 1991, Delta issued $10,000,000 of 9% Debentures that mature in
April, 2011. Each holder may require redemption of up to $25,000 annually,
subject to an annual aggregate limitation of $500,000. Such redemption will
also be made on behalf of deceased holders within 60 days of notice, subject to
the annual aggregate $500,000 limitation. The 9% Debentures can be redeemed by
the Company at a 3% premium, such premium declining ratably until it ceases in
April, 2001. The Company may not assume any additional mortgage indebtedness in
excess of $1 million without effectively securing the 9% Debentures equally to
such additional indebtedness.
Debt issuance expenses are deferred and amortized over the terms of the
related debt. In addition, losses on extinguishment of debt are deferred and
amortized over the terms of the related debt, consistent with regulatory
treatment.
A non-interest bearing promissory note was issued by Delta on November 10,
1995 in the amount of $1,800,000, and remaining installments are due in the
amounts of $700,000 in 2000 and $700,000 in 2002. The note was issued when
Delta purchased leases and depleted gas wells to develop them for the
underground storage of natural gas. The promissory note installments are
secured by escrow of 80,000 shares of Delta's common stock. These shares will
be issued to the holder of the promissory note only in the event of default in
payment by Delta.
Other long-term debt requires principal payments of $54,000 for the twelve
months ending December 31, 1998, at which time other long-term debt will be
fully repaid.
(7) FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of the Company's debentures is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The fair value of the Company's
debentures at December 31, 1997, June 30, 1997 and 1996 was estimated to be
$40,402,000, $37,723,000 and $22,073,000, respectively. The carrying amount in
the accompanying consolidated financial statements as of December 31, 1997,
June 30, 1997 and 1996 is $38,325,000, $38,505,000 and $24,000,000,
respectively.
The carrying amount of the Company's other financial instruments including
cash equivalents, accounts receivable, notes receivable, accounts payable and
the non-interest bearing promissory note approximate their fair value.
(8) COMMITMENTS AND CONTINGENCIES
The Company has entered into individual employment agreements with its five
officers. The agreements expire or may be terminated at various times. The
agreements provide for continuing monthly payments or lump sum payments and
continuation of certain benefits over varying periods in the event employment
is altered or terminated following certain changes in ownership of the Company.
(9) RATES
Reference is made to "Regulatory Matters" herein with respect to rate
matters.
F-12
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly data reflects, in the opinion of management, all normal
recurring adjustments necessary to present fairly the results for the interim
periods.
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
OPERATING NET (LOSS) PER (LOSS) PER
OPERATING INCOME INCOME COMMON COMMON
QUARTER ENDED REVENUES (LOSS) (LOSS) SHARE<Fa> SHARE<Fa>
- ------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FISCAL 1996
September 30.............. $ 3,774,849 $ (147,522) $ (760,662) $ (.41) $ (.41)
December 31............... 8,406,787 1,331,803 649,089 .34 .34
March 31.................. 16,023,581 3,421,608 2,725,444 1.44 1.44
June 30................... 8,370,838 831,166 47,478 .03 .03
FISCAL 1997
September 30.............. $ 4,074,332 $ 36,149 $ (734,296) $ (.33) $ (.33)
December 31............... 10,023,399 1,090,513 198,153 .09 .09
March 31.................. 18,651,406 3,034,844 2,050,318 .88 .88
June 30................... 9,420,048 1,154,076 210,090 .09 .09
FISCAL 1998
September 30.............. $ 5,215,272 $ 181,905 $ (813,982) $ (.35) $ (.35)
December 31............... 11,787,820 1,726,169 591,312 .25 .25
<FN>
- --------
<Fa> Quarterly earnings per share may not equal annual earnings per share due
to changes in shares outstanding.
</TABLE>
F-13
<PAGE> 37
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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.
--------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................. 2
Incorporation of Certain Documents by Reference........ 2
Prospectus Summary..................................... 3
Risk Factors........................................... 5
The Company............................................ 6
System Map............................................. 6
Use of Proceeds and Capital Expenditures............... 7
Consolidated Capitalization............................ 7
Selected Consolidated Financial Information............ 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
Business............................................... 12
Description of Debentures.............................. 18
Underwriting........................................... 23
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 LOGO]
$25,000,000
7.15% DEBENTURES DUE 2018
----------------
PROSPECTUS
----------------
EDWARD D. JONES & CO., L.P.
MARCH 23, 1998
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