DELTA NATURAL GAS COMPANY, INC.
Holders of Common Stock
Appointment of Proxy
For the Annual Meeting of Shareholders
To Be Held November 19, 1998 at 10:00 a.m.
at the Principal Office of the Company at
3617 Lexington Road, Winchester, Kentucky
The undersigned hereby appoints Harrison D. Peet and Glenn R. Jennings, and
either of them with power of substitution, as proxies to vote the shares of
Common Stock of the undersigned in Delta Natural Gas Company, Inc. at the
Annual Meeting of its Shareholders to be held November 18, 1998 and at any
adjournments thereof, upon all matters that may properly come before the
meeting, including the matters identified (and in the manner indicated) on
the reverse side of this proxy and described in the proxy statement furnished
herewith.
This proxy is solicited on behalf of the Board of Directors, which recommends
votes FOR all items. It will be voted as specified. If not specified, the
shares represented by this proxy will be voted FOR all items.
Please sign and date this proxy on the reverse side, and return it promptly
in the enclosed envelope.
Indicate your vote by an (X) in the appropriate boxes:
ITEM:
1. Election of Directors
Nominees for three year term expiring 2001:
Donald R. Crowe
Billy Joe Hall
John D. Harrison
__ ___ ___
FOR all Nominees WITHHELD all Nominees FOR all
Nominees EXCEPT
those listed below
_________________________
NUMBER OF SHARES
SIGN EXACTLY AS NAME(S) APPEARS HEREON:
X______________________________________
X______________________________________
If joint account, each joint owner must sign. If
signing for a corporation or partnership or as agent,
attorney or fiduciary, indicate the capacity in which
you are signing.
Date ____________________________, 1998
Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
Notice To Common Shareholders Of Annual Meeting
To Be Held November 19, 1998
Please take notice that the Annual Meeting of Shareholders of Delta Natural Gas
Company, Inc. will be held at the principal office of the Company, 3617
Lexington Road, Winchester, Kentucky, on Thursday, November 19, 1998 at
10:00 a.m. for the purposes of:
1. Electing three Directors for three year terms expiring in 2001; and
2. Acting on such other business as may properly come before the meeting.
Holders of Common Stock of record at the close of business on October 5, 1998
will be entitled to vote at the meeting.
By Order of the Board of Directors
John F. Hall
Vice President - Finance,
Secretary and Treasurer
Winchester, Kentucky
October 12, 1998
To ensure proper representation at the meeting at a minimum of expense, it will
be very helpful if you fill out, sign and return the enclosed proxy promptly.
Proxy Statement
Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
Information Concerning Proxy
This solicitation of proxies is made by Delta Natural Gas Company, Inc.
("Delta" or "the Company"), upon the authority of Delta's Board of
Directors and the costs associated with this solicitation will be borne
by Delta. Management intends to use the mails to
solicit all Shareholders
and intends first to send this proxy statement and the accompanying form of
proxy to Shareholders
on or about October 12, 1998. Delta will provide copies of this proxy
statement, the accompanying
proxy and the Annual Report to brokers, dealers, banks and voting trustees and
their nominees for
mailing to beneficial owners and upon request therefor will reimburse such
record holders for their
reasonable expenses in forwarding solicitation materials. In addition to using
the mails, proxies
may be solicited by directors, officers and regular employees of Delta in
person or by telephone, but
without extra compensation. As part of its duties as registrar and transfer
agent, Fifth Third Bank
mails Delta's proxy solicitation materials to shareholders. Fees for this
service are included in the
annual fee paid by Delta to Fifth Third Bank for its services as registrar and
transfer agent.
You may revoke your proxy at any time before it is exercised by giving notice
to Mr. John F. Hall,
Vice President - Finance, Secretary and Treasurer of Delta.
Election of Directors
Delta's Board of Directors is classified into three classes, with terms
expiring in either 1998, 1999 or 2000.
The terms of three Directors, Donald R. Crowe, Billy Joe Hall and John D.
Harrison are scheduled
to end in 1998. Donald R. Crowe, Billy Joe Hall and John D. Harrison are
nominated as Directors
for a three year term ending in 2001 and until their successors have been
elected and qualified.
If the enclosed proxy is duly executed and received in time for the meeting,
and if no contrary
specification is made as provided therein, the shares represented by this proxy
will be voted for
Donald R. Crowe, Billy Joe Hall and John D. Harrison as Directors of Delta. If
one of them should
refuse or be unable to serve, the proxy will be voted for such person as shall
be designated by the
Board of Directors to replace them as a Nominee. Management presently has no
knowledge that
any of the Nominees will refuse or be unable to serve.
The names of Directors and Nominees and certain information about them are set
forth below:
Additional Business
Name, Age and Position Experience During Period of Service
Held With Delta Last Five Years As Director
Donald R. Crowe (1) - 64 Retired Senior Analyst, 1966 to present
Director Department of Insurance,
Commonwealth of Kentucky,
Lexington, Kentucky
Jane Hylton Green (3) - 68 Retired Vice President - 1976 to present
Director Human Resources and
Secretary, Delta and
Delta's subsidiaries
Billy Joe Hall (1) - 61 Investment Broker, 1978 to present
Director LPL Financial Services
(general brokerage
services), Mount Sterling,
Kentucky
John D. Harrison (1) - 83 Retired President, Power 1950 to 1993
Director Line Construction Co., Inc. 1996 to present
(Utility construction
contractor), Stanton,
Kentucky; Retired Vice-
President
Glenn R. Jennings (2) - 49 President and Chief Execu- 1984 to present
President and Chief tive Officer and Director of
Executive Officer;Director Delta's subsidiaries
Harrison D. Peet (3) - 78 Chairman of the Board of 1950 to present
Chairman of the Board Delta's subsidiaries
Virgil E. Scott (2) - 77 Retired Vice President 1950 to present
Director Administration, Delta and
Delta's subsidiaries;
Retired Director of
Delta's subsidiaries
Henry C. Thompson (3) - 76 President, Triple Land 1967 to present
Director Company, Inc. (land
development and real
estate rental); Retired
President, Henry Thompson
Construction Company, Inc.
(land development and
commercial real estate
rental); both of Nicholasville,
Kentucky
Arthur E. Walker, Jr.(2)(4) - 53
Director President, The Walker 1981 to present
Company (general and
highway construction),
Mount Sterling,
Kentucky
(1) Term expires November 19, 1998.
(2) Term expires on date of Annual Meeting of Shareholders in 1999.
(3) Term expires on date of Annual Meeting of Shareholders in 2000.
(4) On November 8, 1993, Arthur E. Walker, Jr., entered a guilty plea in
Montgomery County, Kentucky, District Court to the charge of making
a political contribution in the name of another, a misdemeanor under
Kentucky Law. The Court fined Mr. Walker $1,000 plus court costs.
Committees and Board Meetings
Delta has an Audit Committee comprised of Mrs. Green and Messrs. Harrison,
Scott and
Thompson. The Committee, which met one time during fiscal 1998, is empowered
to recommend
independent auditors to the Board, review audit results and financial
statements, review the
system of internal control and make reports and recommendations to the Board.
Delta has a Nominating and Compensation Committee comprised of Messrs. Crowe,
Hall and
Walker. The Committee, which met two times during fiscal 1998, is empowered to
make
recommendations to the Board as to the compensation of the Board and Officers
and any other
personnel matters. The Committee also is empowered to present to the Board
names of individuals
who would make suitable Directors. The Committee will consider Nominees
recommended by
Shareholders, if such nominations are submitted in writing to the attention of
Mr. John F. Hall at
Delta's corporate office in Winchester, Kentucky.
Delta has an Executive Committee comprised of Messrs. Jennings, Peet and
Walker. The
Committee, which met one time during fiscal 1998, is empowered to act for and
on behalf of the
Board of Directors, during the interval between the meetings of the Board of
Directors, in the
management and direction of the business of the Company.
During fiscal 1998, Delta's Board of Directors held four meetings. All
Directors attended 75% or
more of the aggregate number of meetings of the Board of Directors and
applicable committee
meetings.
Each Non-Officer Director (except for the Chairman) receives a monthly
Directors' fee of $600 and
no additional fees for attending board and committee meetings. Mr. Peet, as
Chairman of the
Board of Directors, is paid a monthly fee of $3,000. Directors who are also
Officers of the Company
receive no Directors' fees.
Officers of Delta
Date Began
in this
Name Position(1) Age Position(2)
Johnny L. Caudill(3) Vice President - 49 3/1/95
Administration and
Customer Service
John F. Hall Vice President - 55 3/1/95
Finance, Secretary
and Treasurer
Robert C. Hazelrigg Vice President- 51 5/20/93
Public and Consumer
Affairs
Alan L. Heath Vice President - 51 5/21/84
Operations and
Engineering
Glenn R. Jennings President and Chief 49 11/17/88
Executive Officer;
Director
(1) Each Officer is normally elected to serve a one year term. Each
Officer's current term is
scheduled to end on November 19, 1998, the date of the Board of Directors'
meeting following
the Annual Shareholders' Meeting, except Mr. Jennings has an employment
contract in his
present capacity through November 30, 2000 (see "Employment Contract and
Termination of
Employment and Change in Control Agreement").
(2) All current Officers except Mr. Caudill have functioned as Officers of
Delta for at least five years.
(3) Mr. Caudill was elected an Officer on March 1, 1995. Prior to that, Mr.
Caudill held the
position of Manager - Customer Service for 2 years. Mr. Caudill has been
employed by Delta since 1972.
Board Nominating and Compensation Committee
Report on Executive Compensation
The Nominating and Compensation Committee of the Board of Directors
("Committee") is composed
of three independent, non-employee directors. Among other duties, the
Committee is responsible
for developing and making recommendations to the Board with respect to Delta's
executive
compensation. All decisions by the Committee relating to the compensation of
Delta's executive
officers, including the Chief Executive Officer, are reviewed and given final
approval by the full
Board of Directors. During 1998, no decisions of the Committee were modified
in any material way
or rejected by the full Board.
The goal of the Committee in establishing the compensation for the Company's
executive officers is
to provide fair and appropriate levels of compensation that will ensure the
Company's ability to
attract and retain a competent and energetic management team.
Salaries for Delta's officers, including all executive officers and the Chief
Executive Officer, are
determined in a manner similar to that for all employees, using a pay grade
system established
with the assistance of a consulting firm. Salary grades are developed for all
positions in the
Company through the use of external comparisons with other companies and are
periodically
adjusted for inflation. The salary grades have a minimum and maximum
compensation level for
each grade. Salary increases for executive officers are established by the
Committee, considering
factors which include the overall raises budgeted for the Company, individual
performance of the
executive officers and their position in their individual pay grades. There is
no specific, quantified
relationship between corporate performance and individual compensation.
There is no formal bonus plan for executive officers or the Chief Executive
Officer. Bonuses have
been paid in the past from time to time, at the discretion of the Company,
based on the Company's
overall performance and the contributions and performances of the individual
officers and other
employees. There has been no specific, quantified relationship between
corporate performance and
individual bonuses.
A summary of the compensation awarded to Glenn R. Jennings, President and Chief
Executive
Officer of the Company, and Alan L. Heath, Vice President - Operations and
Engineering, is set
forth in the "Summary Compensation Table". The compensation paid to Mr.
Jennings and Mr.
Heath for fiscal 1996 reflects a cash bonus. No bonus was paid for fiscal 1997
or fiscal 1998, and
the other components of Mr. Jennings' and Mr. Heath's 1998 salary packages are
generally consistent with prior years.
The Committee believes Mr. Jennings has positioned the Company well to address
a changing
business climate, to provide for total shareholder return and to continue the
Company's growth.
Donald R. Crowe
Billy Joe Hall
Arthur E. Walker, Jr., Committee Chairman
Summary Compensation Table
The following table sets forth information concerning the compensation of the
Company's Chief
Executive Officer and Executive Officers whose total annual salary and bonus
exceeded $100,000
for the last three fiscal years. No other executive officer of the Company
earned compensation in
excess of $100,000 for the periods.
Annual
Name and Compensation All Other
Principal Position Year Salary Bonus Compensation(1)
Glenn R. Jennings 1998 $150,000 $ -- $ 24,000
President and Chief 1997 $143,000 $ -- $ 24,000
Executive Officer 1996 $136,000 $ 42,900 $ 24,500
Alan L. Heath 1998 $ 97,000 $ -- $ --
Vice President - 1997 $ 93,200 $ -- $ --
Operations and 1996 $ 88,700 $ 16,776 $ --
Engineering
(1) During each of the last three fiscal years, Delta forgave a portion of the
principal amount of a
loan made by Delta to Mr. Jennings (see "Certain Relationships and Related
Transactions" for a
discussion of this loan).
Comparison of Five Year Cumulative Total Return
Among the Company, S & P Utilities and
Natural Gas Distribution Industry Index
The following graph sets forth a comparison of five year cumulative total
return among the
common shares of the Company, the S & P Utilities and the Edward D. Jones & Co.
Natural Gas
Distribution Industry Index ("Industry Index") for the fiscal years indicated.
Information reflected
on the graph assumes an investment of $100 on June 30, 1993 in each of the
common shares of the
Company, the S & P Utilities and the Industry Index. Cumulative total return
assumes
reinvestment of dividends. The Industry Index consists of thirty-three natural
gas distribution
companies chosen by Edward D. Jones & Co. The Company is among the thirty-
three companies
included in the Industry Index.
1993 1994 1995 1996 1997 1998
Delta 100 112.5 100.8 96.7 117.9 125.7
S & P Utilities 100 92.5 106.1 131.8 139.1 181.1
Industry Index 100 96.0 100.1 120.9 136.3 168.0
Estimated Annual Benefits Upon Retirement
Delta has a trusteed, non-contributory, defined benefit retirement plan. The
following table
illustrates the approximate pension benefits payable under the terms of the
plan to employees
retiring at the normal retirement age of 65 assuming five years' average annual
compensation and
years of service as indicated:
Average Annual Estimated Annual Benefits For
Compensation Years of Service Indicated
(Five Year
Average) 15 20 25 30 35
$100,000 $ 24,000 $ 32,000 $ 40,000 $ 48,000 $ 56,000
125,000 30,000 40,000 50,000 60,000 70,000
150,000 36,000 48,000 60,000 72,000 84,000
175,000 42,000 46,000 70,000 84,000 98,000
200,000 48,000 64,000 80,000 96,000 112,000
The plan is available to all employees as they become eligible. The basic
retirement benefit is
payable for 120 months certain and life thereafter, based upon a formula of
1.6% of the highest five
years average monthly salary for each year of service. The compensation used
to determine the
average monthly salary under the plan includes only base salary of employees
(see "Salary" in the
"Summary Compensation Table"). An employee may also elect from various joint,
survivor, lump
sum and annuitant provisions that would change the above amounts. Social
Security benefits
would be in addition to the amounts received under Delta's pension plan.
Mr. Jennings and Mr. Heath have nineteen years and fourteen years,
respectively, of credited service in the plan.
Employment Contract and Termination of
Employment and Change in Control Agreement
Delta entered into an agreement with Mr. Jennings on May 31, 1995. The
agreement provides for
Mr. Jennings' employment in his present capacity through November 30, 2000, and
such
agreement continues on a year-to-year basis thereafter. This agreement
provides for the
termination of Mr. Jennings' employment in the event of his death or incapacity
or for cause. In
addition, Mr. Jennings may terminate his employment following a change in
control if he
determines in good faith that, due to the change in control, either his
continued employment is not
in Delta's best interests or he is unable to carry out his duties effectively.
A change in control is
defined as a change in control that would be required to be reported under
Regulation 14A of the
Securities and Exchange Act of 1934 or an acquisition by any person or entity
of twenty percent or
more of Delta's issued and outstanding voting Common Stock.
Under the agreement, if Delta terminates Mr. Jennings without cause, or if Mr.
Jennings
terminates his employment under the agreement following a change in control
because he
determines in good faith that his continued employment is not in Delta's best
interests or that he is
unable to carry out his duties effectively, then in any such instance
Delta is required to continue to
pay Mr. Jennings as severance pay an amount equal to his salary for the
number of years
remaining under the agreement, but in no event less than three years. Mr.
Jennings' current
yearly salary is $154,500. In addition, in all such cases the agreement
provides for the
continuance, at not less than present levels, of Mr. Jennings' employee
benefit plans and practices,
including the retirement plan, 401-K Plan, stock purchase plan, life and
accidental death and
dismemberment insurance, company furnished automobile and office, vacation
plan, and medical,
dental, health, and long term disability plans, and the agreement obligates
Delta to forgive any
unpaid principal outstanding on a loan made to him (see "Certain
Relationships and Related Transactions" for a description of this loan).
If, as described above, Mr. Jennings elects under the terms of the agreement to
terminate his
employment following a change in control, he has, in addition to the rights
described in the
immediately preceding paragraph, the right to a lump sum payment for all such
amounts due to
him under the agreement as salary.
Delta also has agreed to indemnify Mr. Jennings for actions taken by him in
good faith while
performing services for Delta and has agreed to provide liability
insurance for lawsuits and to pay
legal expenses arising from any such proceedings.
On December 1, 1985, Delta entered into an agreement with Mr. Heath. The
terms of the
agreement will become effective with a change in control while Mr. Heath is
employed by Delta.
For the purpose of the agreement, a change in control will be deemed to take
place upon the
happening of either of the following events: (a) the acquisition by
anyone of ten percent of Delta's
issued and outstanding voting Common Stock followed by either (i) a change in
the majority of the
Board of Directors of Delta as it existed on December 1, 1985, as a result of a
Shareholders'
meeting involving a contest for the election of Directors or (ii) the
termination without cause of
Harrison D. Peet as Chairman of the Board of Delta; or (b) the election
at any time of two or more
Directors whose election is opposed by a majority of Delta's Board of
Directors as it existed on December 1, 1985.
The agreement provides that Mr. Heath may continue in the employment of Delta
in his customary
position for a period of three years immediately following a change in control.
During this time he
would receive compensation consisting of (i) a base salary which would be not
less than the annual
rate in effect on the day before the change in control, with such increase as
may thereafter be
awarded in accordance with Delta's regular compensation practices; and (ii)
incentive and bonus
awards not less than the annualized amount of any such awards paid to him for
the twelve months
ending on the date of a change in control. In addition, his agreement
provides for the continuance,
at not less than present levels, of employee benefit plans and practices,
including the retirement
plan, 401-K Plan, stock purchase plan, life and accidental death and
dismemberment insurance,
company furnished automobile and office, vacation plan and medical, dental,
health and long-term
disability plans.
Under the agreement, if Mr. Heath is terminated by Delta without cause during
the three year
period immediately following a change in control, his compensation and
benefits and service credits
under the employee benefit plans will be continued for the remainder of the
period, but in no event
for less than two years following termination of employment. The current
yearly base salary of Mr.
Heath is $100,700. If Mr. Heath determines that in good faith he cannot
continue to fulfill his
responsibilities as a result of a change in control, then that is to be
considered termination without
cause. Further, Delta has agreed to indemnify Mr. Heath for actions taken by
him in good faith
while performing services for Delta and has agreed to provide liability
insurance for lawsuits and
to pay legal expenses arising from any such proceedings.
Security Ownership Of Certain
Beneficial Owners and Management (1)
Amount and Nature
Of Beneficial Percent Of
Name Of Owner Ownership(2)(3)(4) Stock
Donald R. Crowe 3,965 *
(1,365 shares jointly owned)
Jane Hylton Green 7,791
(715 shares jointly owned) *
Billy Joe Hall 3,974 *
John D. Harrison 11,012 *
(10,010 shares jointly owned)
Glenn R. Jennings 6,616 *
Harrison D. Peet (5) 18,156 *
Virgil E. Scott 12,542 *
Henry C. Thompson 4,411 *
Arthur E. Walker, Jr. (6) 14,057 *
(4,904 shares jointly owned)
All Directors, Officers 91,467 3.8%
and Nominees, as a (17,014 shares jointly owned)
Group (13 persons)
* Less than 1%.
(1) The only class of stock issued and outstanding is Common Stock.
(2) Under the terms of Delta's Employee Stock Purchase Plan, all Officers and
employees (with
certain limited exceptions) have the right to contribute 1% of their July 1,
1998 annual salary
level on a monthly basis. At the end of fiscal 1999, Delta will issue its
Common Stock, based
upon 1999 contributions, using an average of the last sale price of Delta's
stock as quoted in the
National Association of Securities Dealers Automated Quotation National
Market System at the
close of business for the last five business days in June, 1999, and will
match those share so
purchased. If employees cease to participate in the plan prior to year end,
their contributions
will be returned with no matching Company portion. The continuation
and terms of the plan
are subject to approval by Delta's Board of Directors on an annual basis. As a
result, all the
persons listed who are Officers (Directors, however, have no rights
under this plan, unless they
are also Officers) have the right to participate in the Plan in 1999. Stock
acquired pursuant to
the Plan during fiscal 1999 will not be issued until July, 1999. Accordingly,
ownership figures
in the above table do not include shares to be issued under the Plan for
fiscal 1999.
(3) The persons listed, unless otherwise indicated in this column, are the
sole beneficial owners of
the reported securities and accordingly exercise both sole voting and sole
investment power over
the securities.
(4) The figures, which are as of August 1, 1998, are based on information
supplied to Delta by its Officers and Directors.
(5) The listed shares include 15,000 shares held by Mr. Peet's wife in a voting
trust, which is administered and voted by Mr. Peet.
(6) The listed shares include 4,154 shares held by Mr. Walker as guardian for
his children and 749 shares held by his wife.
Appointment of Auditors
Arthur Andersen LLP, upon recommendation of the Audit Committee and
approval by Delta's
Board of Directors, was appointed independent public accountants and auditors
in connection with
Delta's accounting matters and made an annual audit of the accounts of Delta
and its subsidiary
companies for the fiscal year ending June 30, 1998. Arthur Andersen LLP have
been auditors for
Delta since 1962 and, both by virtue of their long familiarity with Delta's
affairs and their ability,
are considered to be well qualified to perform this important function.
Representatives of Arthur
Andersen LLP are expected to be present at the Annual Meeting of Shareholders,
and they will
have an opportunity to make a statement, if they so desire, and will be
available to respond to questions.
Certain Relationships and Related Transactions
Delta has an agreement with Glenn R. Jennings, President and Chief Executive
Officer and a
Director of Delta, under the terms of which Mr. Jennings received a secured
loan of $136,000. The
agreement provides that interest is to be paid by Mr. Jennings at the annual
rate of 8%, payable
monthly, with Delta forgiving $2,000 of the principal amount for each
month of service Mr.
Jennings completes. The outstanding balance on this loan was $106,000 as of
August 31, 1998.
The maximum amount outstanding during fiscal 1998 was $134,000.
Shareholders' Proposals
Proposals of security holders intended to be presented at Delta's 1999 annual
meeting must be
received by Delta no later than June 15, 1999, in order to be included in
Delta's proxy statement
and form of proxy related to that meeting.
Financial Statements
Delta's 1998 Annual Report to Shareholders containing financial
statements will precede or accompany the mailing of this proxy to
Common Shareholders.
Section 16(a) Beneficial Ownership Reporting Compliance
In accordance with Section 16(a) of the Securities Exchange Act of 1934 and
Securities and
Exchange Commission regulations, the Company's directors, certain officers,
and persons who own
greater than 10 percent of the Company's equity securities are required to
file reports of ownership
and changes in ownership of such equity securities with the Securities and
Exchange Commission
and the principal national securities exchange on which such equity
securities are registered, and
to furnish the Company with copies of all such reports they file.
Based solely on its review of copies of such reports received or written
representations from certain
reporting persons, the Company believes that during fiscal 1998 all filing
requirements applicable
to their respective directors, officers, and 10 percent shareholders were
satisfied.
Other Matters
Management is not aware of any other matters to be presented at the meeting of
Shareholders to
be held on November 19, 1998. However, if any other matters come before the
meeting, it is
intended that the Holders of proxies solicited hereby will vote such shares
thereon in their
discretion.
As of the close of business on October 5, 1998, the record date fixed for
determination of voting
rights, Delta had outstanding 2,387,989 shares of Common Stock, each share
having one vote.
A majority of the shares entitled to be cast on a matter constitutes a quorum
for action on that
matter. Once a share is represented for any purpose at the meeting, it
will be deemed present for
quorum purposes for the remainder of the meeting and any adjournment of the
meeting (unless a
new record date is set). If a quorum exists, action on a matter (other than
the election of Directors)
will be approved if the votes cast favoring the action exceed the votes cast
opposing the action,
unless a higher vote is required by law.
Under applicable Kentucky law, each Common Shareholder of Delta is
entitled to vote
cumulatively for the election of Directors. This means that each Common
Shareholder has the
right to give one Nominee votes equal to the number of Directors to be
elected multiplied by the
number of shares of Common Stock the Shareholder owns or to distribute such
votes among two or
more Nominees as the Shareholder desires. The three nominees for Director
receiving the highest number of votes will be elected.
There are no conditions precedent to the exercise of cumulative voting rights.
Shares represented by a limited proxy, such as where a broker may not vote on a
particular matter
without instructions from the beneficial owner and no instructions have been
received (i.e., "broker
non-vote"), will be counted to determine the presence of a quorum but will
not be deemed present
for other purposes and will not be the equivalent of a "no" vote on a
proposition. Shares
represented by a proxy with instructions to abstain on a matter will be
counted in determining
whether a quorum is in attendance. An abstention is not the equivalent of a
"no" vote on a proposition.
Under Kentucky law, there are no appraisal or similar rights of dissenters
with respect to any matter to be acted upon at the Shareholders' meeting.
Any stockholder may obtain without charge a copy of Delta's Annual Report on
Form 10-K, as filed
with the Securities and Exchange Commission for the year ended June 30, 1998,
by submitting a
request in writing to: John F. Hall, Vice President - Finance, Secretary and
Treasurer, Delta
Natural Gas Company, Inc., 3617 Lexington Road, Winchester, KY 40391.
The above Notice and Proxy Statement are sent by order of the Board of
Directors.
John F. Hall
Vice President - Finance,
Secretary and Treasurer
October 12, 1998
1998
Delta Natural Gas Company, Inc. and Subsidiary Companies
Annual Report
The Company
Delta Natural Gas Company, Inc. ("Delta" or "the Company") is engaged
primarily in the distribution, transmission,
storage and production of natural gas through facilities located in 20
counties in central and southeastern Kentucky. Delta
serves approximately 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 was incorporated under Kentucky law in 1949. Its principal executive
offices are located at 3617 Lexington Road,
Winchester, Kentucky 40391. Its telephone number is (606) 744-6171, and its
Fax number is (606) 744-6552. Delta's
website is www.deltagas.com and Delta's E-mail address is [email protected].
Selected Consolidated Financial Information
For the Years Ended June 30,
1998(a) 1997 1996(b) 1995 1994(c)
Summary of Operations ($)
Operating revenues 44,258,000 42,169,185 36,576,055 31,844,339 34,846,941
Operating income 6,731,859 5,315,582 5,437,055 4,255,088 4,850,673
Net income 2,451,272 1,724,265 2,661,349 1,917,735 2,671,001
Basic and diluted
earnings per common
share 1.04 .75 1.41 1.04 1.50
Dividends declared
per common share 1.14 1.14 1.12 1.12 1.11
Average Number of
Common Shares
Outstanding 2,359,598 2,294,134 1,886,629 1,850,986 1,775,068
Total Assets ($) 102,866,613 96,681,165 81,140,637 65,948,716 61,932,480
Capitalization ($)
Common shareholders'
equity 29,810,294 29,474,569 23,628,323 22,511,513 22,164,791
Long-term debt 52,612,494 38,107,860 24,488,916 23,702,200 24,500,000
Notes payable
refinanced subsequent
to yearend - - 18,075,000 - -
Total capitalization 82,422,788 67,582,429 66,192,239 46,213,713 46,664,791
Short-Term Debt
($) (d) 3,665,000 12,852,600 1,084,800 6,732,700 3,205,000
Other Items ($)
Capital expenditures 11,193,613 16,648,994 13,373,416 8,122,838 7,374,747
Total plant 127,028,159 116,829,158 98,795,623 84,944,969 77,882,135
(a) During March, 1998, $25,000,000 of debentures were sold, and the proceeds
were used to repay short-term debt and to
redeem the Company's $10,000,000 of 9% debentures.
(b) During July, 1996, $15,000,000 of debentures and 400,000 shares of common
stock were sold, and the proceeds were
used to repay short-term debt and for general corporate purposes. The balance
of the note payable at June 30, 1996
($18,075,000) is included in total capitalization as a result of the
subsequent refinancing.
(c) During October, 1993, $15,000,000 of debentures and 170,000 shares of
common stock were sold, and the proceeds
were used to repay short-term debt and to refinance certain long-term debt.
(d) Includes current portion of long-term debt.
To Our Shareholders
This past year has certainly been an eventful year for Delta. Our weather
was very mild as heating degree days were
only 93.5% of thirty year average ("normal") weather as compared with 103.5%
in 1997. January and February were two of
our warmest months on record, and thus our sales volumes were below
anticipated levels for normal weather. Our earnings
increased, however, despite the warmer weather, to $1.04 per share in 1998 as
compared with $.75 per share in 1997, as we
filed a rate case in March, 1997 and it was completed during fiscal 1998. We
implemented new rates effective November
30, 1997 that are designed to provide approximately $1.8 million of
additional annual revenues.
The Company continued during 1998 to expand its distribution and
transmission system, including the July, 1997
acquisition of the gas system of Annville Gas & Transmission Corporation in
Jackson County. This system served industrial
and residential customers, and we expanded it during 1998 to provide service
to customers in the City of Annville.
We also completed the development of our Canada Mountain underground
natural gas storage field during 1998,
including completion of 14 miles of 12-inch diameter pipeline that connects
the storage field to our system. We withdrew
gas this past winter from the field to supply a portion of our winter-time
gas needs, and we are presently injecting gas into
the field in preparation for its use during the upcoming winter.
In March, 1998, we successfully completed our largest public offering of
debt with the issuance of $25 million of 7.15%
debentures that will mature in 2018. The proceeds were used to repay our bank
credit line and to redeem our 9%
debentures, that were due in 2011, in the amount of $10 million. We will
continue to utilize our credit line, which is
presently $25 million, for our working capital and capital expenditure needs
as a supplement to our internally-generated cash.
We acquired TranEx Corporation during June, 1997. This company owns a 43
mile, 8 inch diameter steel pipeline, and
during 1998 we connected it to our system in the Richmond area. It also
interconnects with Columbia Gulf's pipeline in
Madison County and our transmission pipeline system in Clay County. We are
utilizing this pipeline to provide natural gas
to our Canada Mountain storage field, as well as for system supply and
transportation.
Thank you for your continued support. Delta had a good year, with growth
and earnings improvement. We look to the
future with optimism, believing that Delta is prepared to continue to grow
and prosper.
Sincerely,
H. D. Peet
Chairman of the Board
Glenn R. Jennings
President and
Chief Executive Officer
August 21, 1998
Delta's Mission
Maximize business growth
Strive for complete customer satisfaction
Ensure an excellent work environment for employees
Enhance the quality of shareholders' investment
Summary Of Operations
Gas Operations and Supply
The Company purchases and produces gas for distribution to its retail
customers and also provides transportation
service to industrial customers and inter-connected pipelines with its
facilities that are located in 20 predominantly rural
counties in central and southeastern Kentucky. The economy of Delta's service
area is based principally on light industry,
farming and coal mining. The communities in Delta's service area typically
contain populations of less than 20,000. The
four largest service areas are Nicholasville, Corbin, Berea and Middlesboro,
where Delta serves 6,600, 6,300, 3,800 and
3,500 customers, respectively.
The communities served by Delta continue to expand, resulting in growth
opportunities for the Company. Industrial
parks have been developed in certain areas and have resulted in new industrial
customers, some of which are on-system
transportation customers. As a result of this growth, Delta's total average
customer count increased by 2.6% in 1998.
Currently, over 99% of Delta's customers are residential and commercial.
Delta's remaining, light industrial customers
purchased 6% of the total volume of gas sold by Delta at retail during 1998.
The Company's revenues are affected by various factors, including rates
billed to customers, the cost of natural gas,
economic conditions in the areas that the Company serves, weather conditions
and competition. Delta competes for
customers and sales with alternative sources of energy, including electricity,
coal, oil, propane and wood. The Company's
marketing subsidiaries, which purchase gas and resell it to various industrial
customers and others, also compete for their
customers with producers and marketers of natural gas. Gas costs, which the
Company is generally able to pass through to
customers, may influence customers to conserve, or, in the case of industrial
customers, to use alternative energy sources.
Also, the potential bypass of Delta's system by industrial customers and others
is a competitive concern that Delta has
addressed and will continue to address as the need arises.
Delta's retail sales are seasonal and temperature-sensitive as the
majority of the gas sold by Delta is used for heating.
This seasonality impacts Delta's liquidity position and its management of its
working capital requirements during each
twelve month period, and changes in the average temperature during the winter
months impacts its revenues year-to-year
(see Management's Discussion and Analysis of Financial Condition and Results of
Operations).
Retail gas sales in 1998 were 4,112,000 Mcf, generating $33,435,000 in
revenues, as compared to 4,299,000 Mcf and
$33,561,000 in revenues for 1997. Heating degree days billed during 1998 were
93.5% of normal as compared with 103.5%
in 1997 and as a result, sales volumes decreased by 187,000 Mcf, or 4.4%, in
1998 as compared to 1997.
Delta's transportation of natural gas during 1998 generated revenues of
$4,360,000 as compared with $3,596,000
during 1997. Of the total transportation in 1998, $3,877,000 (3,467,000 Mcf)
and $483,000 (1,489,000 Mcf) were earned
for transportation for on-system and off-system customers, respectively. Of the
total transportation for 1997, $3,214,000
(2,863,000 Mcf) and $382,000 (1,205,000 Mcf) were earned for transportation for
on-system and off-system customers,
respectively.
As an active participant in many areas of the natural gas industry, Delta
plans to continue its efforts to expand its gas
distribution system. During November, 1996, Delta acquired the City of North
Middletown gas system in Bourbon County,
consisting of 180 primarily residential customers. During July, 1997, Delta
purchased the gas system of Annville Gas &
Transmission Corporation in Jackson County, which serves several industrial and
residential customers. This system was
expanded by Delta during 1998 to provide gas service to customers in the City
of Annville. Delta continues to consider
acquisitions of other gas systems, some of which are contiguous to its existing
service areas, as well as expansion within its
existing service areas.
The Company also anticipates continuing activity in gas production and
transportation and plans to pursue and increase
these activities wherever practicable. During June, 1997, Delta acquired TranEx
Corporation, which owns a 43 mile, 8 inch
diameter steel pipeline that extends from Clay County to Madison County.
During 1998, the TranEx pipeline was connected
to Delta's system in the Richmond area. It also interconnects with a pipeline
of Columbia Gulf Transmission Company
("Columbia Gulf") in Madison County as well as Delta's transmission pipeline
system in Clay County. Delta is utilizing the
pipeline to deliver natural gas for injection into the Company's Canada
Mountain storage field as well as for system supply
and transportation. 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.
Some producers in Delta's service area can access certain pipeline
delivery systems other than Delta, which provides
competition from others for transportation of such gas. Delta will continue
its efforts to purchase or transport any natural
gas available that is produced in reasonable proximity to its facilities.
Delta receives its gas supply from a combination of interstate and
Kentucky sources. The Company intends to pursue an
adequate gas supply to provide service to existing and future customers. Delta
will continue to maintain an active gas supply
management program that emphasizes long-term reliability and the pursuit of
cost effective sources of gas for its customers.
Delta's interstate gas supply is transported and/or stored by Tennessee
Gas Pipeline Company, Columbia Gas
Transmission Corporation, Columbia Gulf and Texas Eastern Transmission
Corporation. Delta acquires its interstate gas
supply from gas marketers. Delta also acquires gas supply from Kentucky
producers and suppliers. There is a competitive
national market for natural gas supplies as supply and demand determine the
availability and prices of natural gas.
Enpro produces oil and gas from leases it owns in southeastern Kentucky.
Enpro's natural gas production is purchased
by Delta for system supply, and Enpro's remaining proved, developed natural
gas reserves are estimated at 4,200,000 Mcf.
Delta purchased a total of 225,000 Mcf from those properties in 1998. Enpro's
oil production has not been significant.
Resources and Delgasco purchase gas from various marketers and Kentucky
producers. The gas is resold to industrial
customers on Delta's system, to Delta for system supply and to others.
Although there are competitors for the acquisition of
gas supplies, Delta continues to seek additional new gas supplies from all
available sources, including those in the
proximity of its facilities in southeastern Kentucky. Also, Resources and
Delgasco continue to pursue acquisitions of new
gas supplies from Kentucky producers and others.
Delta has completed the development of an underground natural gas storage
field, with an estimated working capacity
of 4,000,000 Mcf. This field has been used to provide a portion of Delta's
winter supply needs since 1996. This storage
capability permits Delta to purchase and store gas during the non-heating
months, and then withdraw and sell the gas during the peak usage months.
Regulatory Matters
Delta is subject to the regulatory authority of the Public Service
Commission of Kentucky ("PSC") with respect to
various aspects of Delta's business, including rates and service to retail
and transportation customers. The Company
monitors the need to file a general rate case as a way to adjust its sales
prices. Delta currently has no general rate cases filed
with the PSC.
Effective November 30, 1997, Delta received approval from the PSC for an
annual revenue increase of $1,670,000.
This resulted from a general rate case that Delta had filed with the PSC
during March, 1997. Effective May 1, 1998, Delta
also received approval from the PSC for an additional annual revenue increase
of $117,000 in this rate case, resulting from
a rehearing of certain tax-related items.
Delta's rates include a Gas Cost Recovery ("GCR") clause, which permits
changes in Delta's gas costs to be reflected in
the rates charged to customers. The GCR requires Delta to make quarterly
filings with the PSC, but such procedure does not
require a general rate case. The PSC is allowing Delta through its GCR clause
to recover its costs in connection with its
recently developed storage facilities on Canada Mountain.
During 1997, the PSC established a proceeding to investigate affiliate
transactions. Delta is a party to this proceeding,
and has responded to a PSC data request relating to Delta's subsidiaries.
Delta cannot currently predict the outcome of this
proceeding or the impact on Delta's rates, if any.
The PSC convened proceedings during 1997 with various regulated utilities
and other interested parties to discuss the
potential unbundling of natural gas rates and services in Kentucky. On
July 1, 1998 the PSC concluded the proceedings
without requiring further unbundling at this time of prices and service
options for residential and small commercial
customers. Delta participated actively in those meetings and plans to
continue to provide comments in future discussions
concerning regulatory and legislative issues relating to unbundling.
In addition to PSC regulation, Delta may obtain non-exclusive franchises
from the cities and communities in which it
operates authorizing it to place its facilities in the streets and public
grounds. However, no utility may obtain a franchise
until it has obtained from the PSC a Certificate of Convenience and Necessity
authorizing it to bid on the franchise. Delta
holds franchises in four of the ten cities in which it maintains branch
offices and in seven other communities it serves. In
the other cities and communities served by the Company, either Delta's
franchises have expired, the communities do not
have governmental organizations authorized to grant franchises, or the local
governments have not required or do not want
to offer a franchise. Delta attempts to acquire or reacquire franchises
whenever feasible.
Without a franchise, a local government could require Delta to cease its
occupation of the streets and public grounds or
prohibit Delta from extending its facilities into any new area of that
city or community. To date, the absence of a franchise
has had no adverse effect on Delta's operations.
Capital Expenditures
Capital expenditures during 1998 were $11.2 million and for 1999 are
estimated to be $6.8 million. The Company
expects a reduced level of capital expenditures in 1999 due to the
substantial completion of the underground natural gas
storage field in 1998. The Company is planning for expenditures for system
extensions, computer system upgrades and the
replacement and improvement of existing transmission, distribution, gathering
and general facilities.
Financing
The Company's capital expenditures and operating cash requirements are met
through the use of internally generated
funds and a short-term line of credit. The available line of credit at June 30,
1998, was $25 million of which $1.9 million
had been borrowed. These short-term borrowings are periodically repaid with
long-term debt and equity securities, as was
done in March, 1998, when the net proceeds of $24.1 million from the sale of
$25 million of debentures was used to repay
short-term notes payable, as well as to redeem the Company's 9% debentures,
that would have matured in 2011, in the
amount of $10 million.
Present plans are to utilize the short-term line of credit to help meet
planned capital expenditures and operating cash
requirements. The amounts and types of future long-term debt and equity
financings will depend upon the Company's
capital needs and market conditions.
During 1998 the requirements of the Employee Stock Purchase Plan (see Note
3(c) of the Notes to Consolidated
Financial Statements) were met through the issuance of 5,746 shares of common
stock resulting in an increase of $101,000
in Delta's common shareholders' equity. The Dividend Reinvestment and Stock
Purchase Plan (see Note 4 of the Notes to
Consolidated Financial Statements) resulted in the issuance of 27,124 shares of
common stock providing an increase of
$474,000 in Delta's common shareholders' equity.
Common Stock Dividends and Prices
Delta has paid cash dividends on its common stock each year since 1964.
While it is the intention of the Board of
Directors to continue to declare dividends on a quarterly basis, the
frequency and amount of future dividends will depend
upon the Company's earnings, financial requirements and other relevant
factors, including limitations imposed by the
indenture for the Debentures. There were 2,410 record holders of Delta's
common stock as of August 1, 1998.
Delta's common stock is traded in the National Association of Securities
Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol DGAS. The accompanying table reflects
the high and low sales prices during
each quarter as reported by NASDAQ and the quarterly dividends declared per
share.
Retail Sales Volume (Billion cu. ft.)
98 4.1
97 4.3
96 4.7
95 3.7
94 4.3
Degree Days (% of 30 year average)
98 93.5
97 103.5
96 112.3
95 89.7
94 106.3
Capital Expenditures ($ Millions)
98 6.8*
97 11.2
96 16.6
95 13.4
94 7.4
* estimated
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview
The Company's utility operations are subject to regulation by the PSC,
which plays a significant role in determining the
Company's return on equity. The PSC approves rates that are intended to
permit a specified rate of return on investment.
The Company's rate tariffs allow the cost of gas to be passed through to
customers (see Regulatory Matters).
The Company's business is temperature-sensitive. Accordingly, the
Company's operating results in any given period
reflect, in addition to other factors, the impact of weather, with colder
temperatures generally resulting in increased sales by
the Company. The Company anticipates that this sensitivity to seasonal and
weather conditions will continue to be so
reflected in the Company's operating results in future periods.
Liquidity and Capital Resources
Because of the seasonal nature of Delta's sales, the smallest proportion
of cash generated from operations is received
during the warmer months when sales volumes decrease considerably.
Additionally, most construction activity takes place
during the non-heating season because of more favorable weather conditions.
During the warmer, non-heating months,
therefore, cash needs for operations and construction are partially met
through short-term borrowings.
Capital expenditures for Delta for fiscal 1999 are expected to be $6.8
million. Delta generates internally only a portion
of the cash necessary for its capital expenditure requirements and finances
the balance of its capital expenditures on an
interim basis through the use of its borrowing capability under its short-term
line of credit. The current available line of
credit is $25,000,000, of which $1,875,000 was borrowed at June 30, 1998. The
line of credit, which is with Bank One,
Kentucky, NA, requires renewal during November, 1998. These short-term
borrowings are periodically repaid with the net
proceeds from the sale of long-term debt and equity securities, as was
done in March, 1998, when the net proceeds of
$24,100,000 from the sale of $25,000,000 of debentures were used to repay
short-term debt and to redeem the Company's
9% debentures, that would have matured in 2011, in the amount of $10,000,000.
1998 1997 1996
Provided by operating activities $ 8,922,037 $ 6,209,226 $ 3,094,809
Used in investing activities (11,193,613) (16,648,994) (13,373,416)
Provided by financing activities 1,909,689 10,768,558 10,294,461
Net increase (decrease) in cash
and cash equivalents $ (361,887) $ 328,790 $ 15,854
Cash provided by operating activities consists of net income and noncash items
including depreciation, depletion,
amortization and deferred income taxes. Additionally, changes in working
capital are also included in cash provided by
operating activities. The Company expects that internally generated cash,
coupled with short-term borrowings, will be
sufficient to satisfy its operating, normal capital expenditure and dividend
requirements.
Results of Operations
Operating Revenues
The increase in operating revenues of $2,089,000 for 1998 was due
primarily to the general rate increase effective
November 30, 1997 and to the increases in on-system and off-system
transportation volumes of 604,000 Mcf and 284,000
Mcf, respectively. The increase in operating revenues includes $200,000 of
additional revenue caused by a non-recurring
change. These increases were partially offset by a decrease in retail sales
volumes of 187,000 Mcf as a result of the warmer
winter weather in 1998. Billed degree days were 93.5% of normal degree days
for 1998 as compared with 103.5% for 1997.
The increase in operating revenues of $5,593,000 for 1997 was due
primarily to increases in the cost of gas purchased
that were reflected in rates billed to customers through Delta's gas cost
recovery clause. This was partially offset by a
decrease in retail sales volumes of 406,000 Mcf as a result of the warmer
winter weather in 1997. Billed degree days were
103.5% of normal degree days for 1997 as compared with 112.3% for 1996. In
addition, on-system transportation volumes
for 1997 increased 293,000 Mcf, or 11.4%.
Operating Expenses
The decrease in purchased gas expense for 1998 of $766,000 was due
primarily to the decreased gas purchases for retail
sales resulting from the warmer winter weather in 1998.
The increase in purchased gas expense of $5,875,000 for 1997 was due
primarily to increases in the cost of gas
purchased for retail sales. The increase was partially offset by the
decreased gas purchased for retail sales resulting from the
warmer winter weather in 1997.
The increases in depreciation expense during 1998 and 1997 of $510,000 and
$424,000, respectively, were due
primarily to additional depreciable plant.
The increase in taxes other than income taxes during 1998 of $155,000 was
primarily due to increased property taxes
which resulted from increased plant and property valuations, and to increased
payroll taxes, which resulted from increased
wages.
Changes in income taxes during 1998 and 1997 of $436,000 and $595,000,
respectively, were primarily due to changes
in net income.
Interest Charges
The increase in interest on long-term debt during 1998 of $329,000 was due
primarily to the issuance of $25 million of
7.15% Debentures in March, 1998. The increase in other interest during
1998 of $378,000 was due primarily to increased
average short-term debt borrowings.
The increases in interest on long-term debt and amortization of debt
expense during 1997 of $1,146,000 and $27,000,
respectively, were due primarily to the issuance of $15 million of 8.3% Deben-
tures during July, 1996. The decrease in
other interest during 1997 of $348,000 was due primarily to decreased average
short-term borrowings as short-term debt
was repaid with the net proceeds from the sale of long-term debt and equity
securities during July, 1996.
Earnings Per Common Share
For the years ended June 30, 1998 and 1997, basic earnings per common
share declined, as compared with previous
periods, as a result of the increased average common shares outstanding that
resulted from the additional 400,000 shares of
common stock issued in July, 1996, as well as the common shares issued under
Delta's dividend reinvestment plan and
shares issued to employees during the periods. Other than Delta's outstanding
common shares, there are no potentially
dilutive securities. Therefore basic and diluted earnings per common share are
the same.
Factors That May Affect Future Results
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other sections of this
report (including the letter To Our Shareholders) contain forward-looking
statements, that are not statements of historical
facts. These forward-looking statements are identified by their language,
which may in some cases include words such as
"estimates," "expects," "plans," "anticipates," "intends," "will continue,"
"believes," and similar expressions. Such
forward-looking statements may concern (among other things) the impact of
changes in the cost of gas, projected capital
expenditures, sources of cash to fund expenditures, regulatory recovery
mechanisms, regulatory matters, expansion of
Delta's gas distribution system, acquisitions of gas customers and systems,
activity in gas production and transportation and
acquisition and mangement of gas supply. Such forward-looking statements are
accordingly subject to important risks and
uncertainties that could cause the Company's actual results to differ
materially from those expressed in any such forward-
looking statements. These uncertainties include, but are not limited to, the
ongoing restructuring of the gas industry and the
outcome of the regulatory proceedings related to that restructuring, changing
regulatory environment generally, uncertainty
as to the regulatory allowance of recovery of changes in the cost of gas,
uncertain demands for capital expenditures, the
availability of cash from various sources and uncertainty as to regulatory
approval of the full recovery of costs and
regulatory assets.
The "Year 2000" Issue
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized
information systems to accurately process information that may be date-
sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The
Company utilizes a number of computer programs across its entire operation.
The Company has not completed its assessment, but currently believes that
costs of addressing this issue will not have a
material adverse impact on the Company's financial position. However, if the
Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result
in a material financial risk to the Company. The
Company intends to use its best efforts to resolve any significant year 2000
issues in a timely manner.
New Accounting Pronouncements
In 1997, Delta adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Adoption of SFAS No. 121 did not have a
material impact on the Company's financial position or results of operations.
For companies with June 30 fiscal yearends, SFAS No. 123, "Accounting for
Stock-Based Compensation", was
required to be adopted as of June 30, 1997. This standard is currently
inapplicable to Delta because the Company has no
stock-based compensation arrangements.
Delta adopted SFAS No. 128, "Earnings per Share", during the second
quarter of fiscal 1998. The adoption of this
standard had no effect upon current or prior period earnings per common share.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", effective for periods
beginning after December 15, 1997. These statements do not affect the
accounting recognition or measurement of
transactions, but rather require expanded disclosures regarding financial
results. The Company will adopt these standards in
1999 as required by the FASB.
Consolidated Statements of Income
For the Years Ended June 30, 1998 1997 1996
Operating Revenues $ 44,258,000 $ 42,169,185 $ 36,576,055
Operating Expenses
Purchased gas $ 22,499,488 $ 23,265,222 $ 17,389,755
Operation and maintenance (Note 1) 8,968,213 8,631,635 8,642,511
Depreciation and depletion (Note 1) 3,445,382 2,935,257 2,510,952
Taxes other than income taxes 1,212,058 1,056,689 1,036,282
Income taxes (Note 2) 1,401,000 964,800 1,559,500
Total operating expenses $ 37,526,141 $ 36,853,603 $ 31,139,000
Operating Income $ 6,731,859 $ 5,315,582 $ 5,437,055
Other Income and Deductions, Net 67,911 40,874 32,503
Income Before Interest Charges $ 6,799,770 $ 5,356,456 $ 5,469,558
Interest Charges
Interest on long-term debt $ 3,326,681 $ 2,997,393 $ 1,851,768
Other interest 897,265 519,432 867,641
Amortization of debt expense 124,552 115,366 88,800
Total interest charges $ 4,348,498 $ 3,632,191 $ 2,808,209
Net Income $ 2,451,272 $ 1,724,265 $ 2,661,349
Weighted Average Number of
Common Shares Outstanding 2,359,598 2,294,134 1,886,629
Basic and Diluted Earnings Per
Common Share $ 1.04 $ .75 $ 1.41
Dividends Declared Per
Common Share $ 1.14 $ 1.14 $ 1.12
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998 1997 1996
Cash Flows From Operating Activities
Net income $ 2,451,272 $ 1,724,265 $ 2,661,349
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation, depletion and
amortization 3,755,929 3,049,229 2,663,475
Deferred income taxes and
investment tax credits (29,400) 485,400 1,762,500
Other - net 698,584 666,798 484,474
(Increase) decrease in assets:
Accounts receivable (124,168) (318,178) (860,255)
Gas in storage (840,829) (782,007) 63,546
Advance (deferred) recovery of
gas cost 3,328,625 495,751 (3,788,143)
Materials and supplies 252,746 (120,969) (124,697)
Prepayments 70,648 (346,532) 53,702
Other assets (55,440) (541,669) (31,723)
Increase (decrease) in liabilities:
Accounts payable (336,089) (439,721) 871,207
Refunds due customers (460,751) 554,520 (456,283)
Accrued taxes (46,549) 1,038,761 (270,394)
Other current liabilities 257,055 744,054 56,951
Advances for construction and other 404 (476) 9,100
Net cash provided by operating
activities $ 8,922,037 $ 6,209,226 $ 3,094,809
Cash Flows From Investing Activities
Capital expenditures $(11,193,613) $(16,648,994) $(13,373,416)
Net cash used in investing
activities $(11,193,613) $(16,648,994) $(13,373,416)
Cash Flows From Financing
Activities (Note 6)
Dividends on common stock $ (2,690,233) $ (2,651,073) $ (2,113,414)
Issuance of common stock, net 574,686 6,773,054 568,875
Issuance of debentures, net 23,837,795 14,334,833 -
Repayment of long-term debt (10,822,559) (478,256) (561,000)
Issuance of notes payable 26,200,000 30,975,000 25,955,000
Repayment of notes payable (35,190,000) (38,185,000) (13,555,000)
Net cash provided by financing
activities $ 1,909,689 $ 10,768,558 $ 10,294,461
Net Increase (Decrease) in Cash
and Cash Equivalents $ (361,887) $ 328,790 $ 15,854
Cash and Cash Equivalents,
Beginning of Year 480,423 151,633 135,779
Cash and Cash Equivalents,
End of Year $ 118,536 $ 480,423 $ 151,633
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 4,291,005 $ 3,019,881 $ 2,491,091
Income taxes (net of refunds) $ 1,642,964 $ (432,163) $ 193,560
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Consolidated Balance Sheets
As of June 30, 1998 1997
Assets
Gas Utility Plant, at cost $ 127,028,159 $ 116,829,158
Less - Accumulated provision for
depreciation (34,929,481) (31,734,976)
Net gas plant $ 92,098,678 $ 85,094,182
Current Assets
Cash and cash equivalents $ 118,536 $ 480,423
Accounts receivable, less accumulated
provisions for doubtful accounts of
$120,002 and $113,945 in 1998 and 1997,
respectively 2,538,800 2,414,632
Gas in storage, at average cost 2,050,000 1,209,171
Deferred gas costs (Note 1) - 2,180,606
Materials and supplies, at first-in,
first-out cost 520,362 773,108
Prepayments 241,731 312,379
Total current assets $ 5,469,429 $ 7,370,319
Other Assets
Cash surrender value of officers'
life insurance (face amount of
$1,036,009) $ 339,215 $ 321,339
Note receivable from officer 110,000 134,000
Unamortized debt expense and other (Note 6) 4,849,291 3,761,325
Total other assets $ 5,298,506 $ 4,216,664
Total assets $ 102,866,613 $ 96,681,165
Liabilities and Shareholders' Equity
Capitalization (See Consolidated
Statements of Capitalization)
Common shareholders' equity $ 29,810,294 $ 29,474,569
Long-term debt (Notes 6 and 7) 52,612,494 38,107,860
Total capitalization $ 82,422,788 $ 67,582,429
Current Liabilities
Notes payable (Note 5) $ 1,875,000 $ 10,865,000
Current portion of long-term debt
(Notes 6 and 7) 1,790,000 1,987,600
Accounts payable 2,050,628 2,386,717
Accrued taxes 1,085,766 1,132,315
Refunds due customers 117,123 577,874
Advance recovery of gas costs (Note 1) 1,148,019 -
Customers' deposits 438,134 368,561
Accrued interest on debt 1,215,265 1,033,220
Accrued vacation 528,952 516,032
Other accrued liabilities 485,018 492,501
Total current liabilities $ 10,733,905 $ 19,359,820
Deferred Credits and Other
Deferred income taxes $ 8,023,475 $ 7,921,100
Investment tax credits 637,300 708,400
Regulatory liability (Note 2) 831,425 892,100
Advances for construction and other 217,720 217,316
Total deferred credits and other $ 9,709,920 $ 9,738,916
Commitments and Contingencies (Note 8)
Total liabilities and shareholders' equity $ 102,866,613 $ 96,681,165
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 1998 1997 1996
Common Shares
Balance, beginning of year $ 2,342,223 $ 1,903,580 $ 1,868,734
$1.00 par value of 32,870, 438,643
and 34,846 shares issued in 1998,
1997 and 1996, respectively:
Public issuance of common shares - 400,000 -
Dividend reinvestment and stock
purchase plan 27,124 31,187 28,024
Employee stock purchase plan
and other 5,746 7,456 6,822
Balance, end of year $ 2,375,093 $ 2,342,223 $ 1,903,580
Premium on Common Shares
Balance, beginning of year $ 27,203,311 $ 20,572,132 $ 20,022,643
Premium on issuance of common shares:
Public issuance of common shares - 6,000,000 -
Dividend reinvestment and stock
purchase plan 446,432 519,478 440,621
Employee stock purchase plan
and other 95,384 111,701 108,868
Balance, end of year $ 27,745,127 $ 27,203,311 $ 20,572,132
Capital Stock Expense
Balance, beginning of year $ (1,917,020) $ (1,620,252) $ (1,604,792)
Issuance of common shares - (296,768) (15,460)
Balance, end of year $ (1,917,020) $ (1,917,020) $ (1,620,252)
Retained Earnings
Balance, beginning of year $ 1,846,055 $ 2,772,863 $ 2,224,928
Net income 2,451,272 1,724,265 2,661,349
Cash dividends declared on
common shares (See Consolidated
Statements of Income for rates) (2,690,233) (2,651,073) (2,113,414)
Balance, end of year $ 1,607,094 $ 1,846,055 $ 2,772,863
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Consolidated Statements of Capitalization
As of June 30, 1998 1997
Common Shareholders' Equity
Common shares, par value $1.00 per
share (Notes 3 and 4)
Authorized 6,000,000 shares
Issued and outstanding 2,375,093 and
2,342,223 shares in 1998 and 1997,
respectively $ 2,375,093 $ 2,342,223
Premium on common shares 27,745,127 27,203,311
Capital stock expense (1,917,020) (1,917,020)
Retained earnings (Note 6) 1,607,094 1,846,055
Total common shareholders' equity $ 29,810,294 $ 29,474,569
Long-Term Debt (Notes 6 and 7)
Debentures, 8.3%, due 2026 $ 15,000,000 $ 15,000,000
Debentures, 6 5/8%, due 2023 13,170,000 13,505,000
Debentures, 9%, due 2011 - 10,000,000
Debentures, 7.15%, due 2018 25,000,000 -
Promissory note from acquisition of
underground storage, non-interest
bearing, due through 2001 (less
unamortized discount of $207,506 and
$297,099 in 1998 and 1997, respectively) 1,192,494 1,502,901
Other 40,000 87,559
Total long-term debt $ 54,402,494 $ 40,095,460
Less amounts due within one year,
included in current liabilities (1,790,000) (1,987,600)
Net long-term debt $ 52,612,494 $ 38,107,860
Total capitalization $ 82,422,788 $ 67,582,429
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation Delta Natural Gas Company, Inc. ("Delta"
or "the Company") has five wholly-owned
subsidiaries. Delta Resources, Inc. ("Resources") buys gas and resells it to
industrial customers on Delta's system and to
Delta for system supply. Delgasco, Inc. buys gas and resells it to Resources
and to customers not on Delta's system. Deltran,
Inc. operates underground natural gas storage facilities that it leases from
Delta. Enpro, Inc. owns and operates production
properties. TranEx Corporation owns a 43 mile intrastate pipeline. All
subsidiaries of Delta are included in the consolidated
financial statements. Inter-company balances and transactions have been
eliminated.
(b) Cash Equivalents For the purposes of the Consolidated Statements of
Cash Flows, all temporary cash investments
with a maturity of three months or less at the date of purchase are
considered cash equivalents.
(c) Depreciation The Company determines its provision for depreciation
using the straight-line method and by the
application of rates to various classes of utility plant. The rates are based
upon the estimated service lives of the properties
and were equivalent to composite rates of 3.1%, 3.0%, and 2.9% of average
depreciable plant for 1998, 1997, and 1996,
respectively.
(d) Maintenance All expenditures for maintenance and repairs of units of
property are charged to the appropriate
maintenance expense accounts. A betterment or replacement of a unit of
property is accounted for as an addition and
retirement of utility plant. At the time of such a retirement, the
accumulated provision for depreciation is charged with the
original cost of the property retired and also for the net cost of removal.
(e) Gas Cost Recovery Delta has a Gas Cost Recovery ("GCR") clause which
provides for a dollar-tracker that matches
revenues and gas costs and provides eventual dollar-for-dollar recovery of
all gas costs incurred. The Company expenses gas
costs based on the amount of gas costs recovered through revenue. Any
differences between actual gas costs and those
estimated costs billed are deferred and reflected in the computation of
future billings to customers using the GCR mechanism.
(f) Revenue Recognition The Company records revenues as billed to its
customers on a monthly meter reading cycle.
At the end of each month, gas service which has been rendered from the latest
date of each cycle meter reading to the
month-end is unbilled.
(g) Revenues and Customer Receivables The Company has 38,000 customers in
central and southeastern Kentucky.
Revenues and customer receivables arise primarily from sales of natural gas
to customers and from transportation services
for others. Provisions for doubtful accounts are recorded to reflect the
expected net realizable value of accounts receivable.
(h) Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(i) New Accounting Pronouncements Delta adopted Statement of Financial
Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" in the first quarter of
fiscal 1997. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position or results of
operations.
For companies with June 30 fiscal yearends, SFAS No. 123, "Accounting for
Stock-Based Compensation", was
required to be adopted as of June 30, 1997. This standard is currently
inapplicable to Delta because the Company has no
stock based compensation arrangements.
Delta adopted SFAS No. 128, "Earnings per Share", during the second
quarter of fiscal 1998. The adoption of this
standard had no effect upon current or prior period earnings per share.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", effective for periods
beginning after December 15, 1997. These statements do not affect the
accounting recognition or measurement of
transactions, but rather require expanded disclosures regarding financial
results. The Company will adopt these standards in 1999 as required by
the FASB.
(2) Income Taxes
The Company provides for income taxes on temporary differences resulting
from the use of alternative methods of
income and expense recognition for financial and tax reporting purposes. The
differences result primarily from the use of
accelerated tax depreciation methods for certain properties versus the
straight-line depreciation method for financial
purposes, differences in recognition of purchased gas cost recoveries and
certain other accruals which are not currently
deductible for income tax purposes. Investment tax credits were deferred for
certain periods prior to fiscal 1987 and are
being amortized to income over the estimated useful lives of the applicable
properties. The Company utilizes the liability
method for accounting for income taxes, which requires that deferred income tax
assets and liabilities are computed using
tax rates that will be in effect when the book and tax temporary differences
reverse. The change in tax rates applied to
accumulated deferred income taxes may not be immediately recognized in
operating results because of ratemaking
treatment. A regulatory liability has been established to recognize the
future revenue requirement impact from these
deferred taxes. The temporary differences which gave rise to the net accumulated
deferred income tax liability for the periods are as follows:
1998 1997
Deferred Tax Liabilities
Accelerated depreciation $ 9,933,400 $ 9,018,800
Deferred gas cost - 860,100
Accrued pension 568,900 433,000
Debt expense 487,400 384,900
Total $10,989,700 $10,696,800
Deferred Tax Assets
Alternative minimum tax credits $ 1,274,100 $ 1,534,100
Regulatory liabilities 486,245 339,400
Unbilled revenue 670,100 327,500
Investment tax credit 251,400 279,400
Other 284,380 295,300
Total $ 2,966,225 $ 2,775,700
Net accumulated deferred
income tax liability $ 8,023,475 $ 7,921,100
The components of the income tax provision are comprised of the following for
the years ended June 30:
1998 1997 1996
Components of Income Tax Expense:
Payable currently:
Federal $ 1,164,800 $ 242,200 $ 52,100
State 265,600 (31,300) (255,100)
Total $ 1,430,400 $(210,900) $ (203,000)
Deferred (29,400) 753,900 1,762,500
Income tax expense $ 1,401,000 $ 964,800 $1,559,500
Reconciliation of the statutory federal income tax rate to the effective income
tax rate is shown in the table below:
1998 1997 1996
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes net of federal benefit 5.0 5.0 5.2
Amortization of investment tax credit (1.8) (2.6) (1.7)
Other differences - net (.2) - -
Effective income tax rate 37.0% 36.4% 37.5%
(3) Employee Benefit Plans
(a) Defined Benefit Retirement Plan Delta has a trusteed,
noncontributory, defined benefit pension plan covering all
eligible employees. Retirement income is based on the number of years of service
and annual rates of compensation. The
Company makes annual contributions equal to the amounts necessary to fund the
plan adequately. The funded status of the
pension plan at March 31, the plan year end, and the amounts recognized in the
Company's consolidated balance sheets at
June 30 were as follows:
1998 1997 1996
Plan assets at fair value $ 8,637,638 $ 6,835,393 $ 6,058,458
Actuarial present value of
benefit obligation:
Vested benefits $ 4,800,745 $ 4,505,619 $ 2,789,736
Non-vested benefits 19,934 11,025 9,346
Accumulated benefit obligation $ 4,820,679 $ 4,516,644 $ 2,799,082
Additional amounts related
to projected salary increases 1,924,590 1,828,856 2,811,907
Total projected benefit obligation $ 6,745,269 $ 6,345,500 $ 5,610,989
Plan assets in excess of
projected benefit obligation $ 1,892,369 $ 489,893 $ 447,469
Unrecognized net assets at date
of initial application being
amortized over 15 years (169,577) (211,972) (254,365)
Unrecognized net (gain) loss (869,909) 125,777 (13,481)
Accrued pension asset $ 852,883 $ 403,698 $ 179,623
The assets of the plan consist primarily of common stocks, bonds and
certificates of deposit. Net pension costs for the years
ended June 30 include the following:
1998 1997 1996
Service cost for benefits earned
during the year $ 445,288 $ 405,386 $ 382,751
Interest cost on projected
benefit obligation 443,955 392,539 356,897
Actual return on plan assets (1,584,403) (407,965) (886,211)
Net amortization and deferral 966,615 (136,843) 444,044
Net periodic pension cost $ 271,455 $ 253,117 $ 297,481
The weighted average discount rates and the assumed rates of increase in
future compensation levels used in
determining the actuarial present values of the projected benefit obligation at
June 30, 1998, 1997 and 1996 were 7.0%
(discount rates), and 4% (rates of increase). The expected long-term rates of
return on plan assets were 8%.
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits", and
SFAS No. 112, "Employers' Accounting
for Post-Employment Benefits", do not affect the Company, as Delta does not
provide benefits for post-retirement or post-
employment other than the pension plan for retired employees.
(b) Employee Savings Plan The Company has an Employee Savings Plan
("Savings Plan") under which eligible
employees may elect to contribute any whole percentage between 2% and 15% of
their annual compensation. The Company
will match 50% of the employee's contribution up to a maximum Company
contribution of 2.5% of the employee's annual
compensation. For 1998, 1997 and 1996, Delta's Savings Plan expense was
$156,000, $151,000 and $111,000, respectively.
(c) Employee Stock Purchase Plan The Company has an Employee Stock
Purchase Plan ("Stock Plan") under which
qualified permanent employees are eligible to participate. Under the terms of
the Stock Plan, such employees can contribute
on a monthly basis 1% of their annual salary level (as of July 1 of each year)
to be used to purchase Delta's common stock.
The Company issues Delta common stock, based upon the fiscal year contributions,
using an average of the last sale price of
Delta's stock as quoted in NASDAQ's National Market System at the close of
business for the last five business days in
June and matches those shares so purchased. Therefore, stock equivalent to
$111,000 was issued in July, 1998. The
continuation and terms of the Stock Plan are subject to approval by Delta's
Board of Directors on an annual basis. Delta's
Board has continued the Stock Plan through June 30, 1999.
(4) Dividend Reinvestment and Stock Purchase Plan
The Company's Dividend Reinvestment and Stock Purchase Plan (Reinvestment
Plan) provides that shareholders of
record can reinvest dividends and also make limited additional investments of up
to $50,000 per year in shares of common
stock of the Company. Shares purchased under the Reinvestment Plan are
authorized but unissued shares of common stock
of the Company, and 27,124, 31,187 and 28,024 shares were issued in 1998, 1997
and 1996, respectively. Delta reserved
200,000 shares under the Reinvestment Plan in December, 1994, and as of June 30,
1998, there were 96,480 shares still
available for issuance.
(5) Notes Payable and Line of Credit
Substantially all of the cash balances of Delta are maintained to
compensate the respective banks for banking services
and to obtain lines of credit; however, no specific amounts have been designated
as compensating balances, and Delta has
the right of withdrawal of such funds. At June 30, 1998 and June 30, 1997, the
available line of credit was $25,000,000 and
$20,000,000, respectively, of which $1,875,000 and $10,865,000 had been borrowed
at an interest rate of 6.885% and
6.785% for 1998 and 1997, respectively. The maximum amount borrowed during 1998
and 1997 was $20,160,000 and
$10,865,000, respectively. The interest on this line is, at the option of Delta,
either at the daily prime rate or is based upon
certificate of deposit rates. The current line of credit must be renewed during
November, 1998.
Short-term borrowings were repaid in March, 1998, with the net proceeds of
approximately $24.1 million from the sale
of $25,000,000 of debentures. The net proceeds were also used to redeem the
Company's 9% Debentures that would have
matured in April, 2011. The redemption of this debt, the outstanding principal
amount of which was $10,000,000, was completed in April, 1998.
(6) Long-Term Debt
In March, 1998, Delta issued $25,000,000 of 7.15% Debentures that mature
in March, 2018. Redemption of up to
$25,000 annually will be made on behalf of deceased holders within 60 days of
notice, subject to an annual aggregate
$750,000 limitation. The 7.15% Debentures can be redeemed by the Company after
April 1, 2003. Restrictions under the
indenture agreement covering the 7.15% Debentures include, among other things, a
restriction whereby dividend payments
cannot be made unless consolidated shareholders' equity of the Company exceeds
$21,500,000. No retained earnings are
restricted under the provisions of the indenture.
In July, 1996, Delta issued $15,000,000 of 8.3% Debentures that mature in
July, 2026. Redemption on behalf of
deceased holders within 60 days of notice of up to $25,000 per holder will be
made annually, subject to an annual aggregate
limitation of $500,000. The 8.3% Debentures can be redeemed by the Company
beginning in August, 2001 at a 5%
premium, such premium declining ratably until it ceases in August, 2006.
In October, 1993, Delta issued $15,000,000 of 6 5/8% Debentures that
mature in October, 2023. Each holder may
require redemption of up to $25,000 annually, subject to an annual aggregate
limitation of $500,000. Such redemption will
also be made on behalf of deceased holders within 60 days of notice, subject to
the annual aggregate $500,000 limitation.
The 6 5/8% Debentures can be redeemed by the Company beginning in October, 1998
at a 5% premium, such premium
declining ratably until it ceases in October, 2003. The Company may not assume
any additional mortgage indebtedness in
excess of $2 million without effectively securing the 6 5/8% Debentures equally
to such additional indebtedness.
Debt issuance expenses are deferred and amortized over the terms of the
related debt. Call premium in 1998 of
$300,000 and loss on extinguishment of debt of $332,000 was deferred and is
being amortized over the term of the related
debt consistent with regulatory treatment.
A non-interest bearing promissory note was issued by Delta in November,
1995 in the amount of $1,800,000, and
remaining installments are due in the amounts of $700,000 in 2000 and $700,000
in 2002. The note was issued when Delta
purchased leases and depleted gas wells to develop them for the underground
storage of natural gas. The promissory note
installments are secured by escrow of 80,000 shares of Delta's common stock.
These shares will be issued to the holder of
the promissory note only in the event of default in payment by Delta.
Other long-term debt requires principal payments of $40,000 in 1999 at
which time other long-term debt will be fully
repaid.
(7) Fair Values of Financial Instruments
The fair value of the Company's debentures is estimated using discounted
cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the Company's
debentures at June 30, 1998 and 1997 was estimated to be $54,387,000 and
$37,723,000, respectively. The carrying
amount in the accompanying consolidated financial statements as of June 30, 1998
and 1997 is $53,170,000 and $38,505,000, respectively.
The carrying amount of the Company's other financial instruments including
cash equivalents, accounts receivable,
notes receivable, accounts payable and the non-interest bearing promissory note
approximate their fair value.
(8) Commitments and Contingencies
The Company has entered into individual employment agreements with its
five officers. The agreements expire or may be terminated at various times.
The agreements provide for continuing monthly payments or lump sum
payments and continuation of certain benefits
over varying periods in the event employment is altered or terminated following
certain changes in ownership of the Company.
(9) Rates
Reference is made to "Regulatory Matters" herein with respect to rate
matters.
(10) Quarterly Financial Data (Unaudited)
The quarterly data reflects, in the opinion of management, all normal
recurring adjustments necessary to present fairly the results for
the interim periods.
Basic and Diluted
Operating Net Earnings (Loss)
Operating Income Income per Common
Quarter Ended Revenues (Loss) (Loss) Share (a)
Fiscal 1998
September 30 $ 5,215,272 $ 181,905 $ (813,982) $ (.35)
December 31 11,787,820 1,726,169 591,812 .25
March 31 18,305,458 3,442,234 2,366,329 1.00
June 30 8,949,450 1,381,551 307,113 .14
Fiscal 1997
September 30 $ 4,074,332 $ 36,149 $ (734,296) $ (.33)
December 31 10,023,399 1,090,513 198,153 .09
March 31 18,651,406 3,034,844 2,050,318 .88
June 30 9,420,048 1,154,076 210,090 .09
(a) Quarterly earnings per share may not equal annual earnings per share
due to changes in shares outstanding.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Delta Natural Gas Company, Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Delta Natural Gas
Company, Inc. (a Kentucky corporation) and subsidiary companies as of June 30,
1998 and 1997, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period
ended June 30, 1998. These financial statements 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, 1998
and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Louisville, Kentucky
August 17, 1998
Management's Statement of Responsibility for Financial Reporting and Accounting
Management is responsible for the preparation, presentation and integrity
of the financial statements and other
financial information in this report. In preparing financial statements in
conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The Company maintains a system of accounting and internal controls which
management believes provides reasonable
assurance that the accounting records are reliable for purposes of preparing
financial statements and that the assets are
properly accounted for and protected.
The Board of Directors pursues its oversight role for these financial
statements through its Audit Committee which
consists of three outside directors. The Audit Committee meets periodically
with management to review the work and
monitor the discharge of their responsibilities. The Audit Committee also meets
periodically with the Company's internal
auditor as well as Arthur Andersen LLP, the independent auditors, who have full
and free access to the Audit Committee,
with or without management present, to discuss internal accounting control,
auditing and financial reporting matters.
Glenn R. Jennings
President and
Chief Executive Officer
John F. Hall
Vice President-Finance,
Secretary and Treasurer
Consolidated Statistics
For the Years Ended June 30, 1998 1997 1996 1995 1994
Retail Customers Served,
End of Period
Residential 31,596 31,380 29,840 29,029 27,939
Commercial 4,753 4,761 4,453 4,287 4,242
Industrial 70 74 75 72 76
Total 36,419 36,215 34,368 33,388 32,257
Operating Revenues ($000)
Residential sales 19,969 19,694 16,540 14,772 16,597
Commercial sales 11,890 11,977 9,788 8,673 9,663
Industrial sales 1,576 1,890 1,483 1,248 1,671
On-system transportation 3,877 3,214 2,913 2,588 2,310
Off-system transportation 483 382 418 461 623
Subsidiary sales 6,335 4,904 5,297 3,959 3,755
Other 128 108 137 143 228
Total 44,258 42,169 36,576 31,844 34,847
System Throughput
(Million Cu. Ft.)
Residential sales 2,377 2,464 2,741 2,173 2,511
Commercial sales 1,504 1,557 1,673 1,328 1,506
Industrial sales 231 278 291 223 316
Total retail sales 4,112 4,299 4,705 3,724 4,333
On-system transportation 3,467 2,863 2,570 2,390 2,186
Off-system transportation 1,489 1,205 1,134 1,452 1,997
Total 9,068 8,367 8,409 7,566 8,516
Average Annual Consumption
Per End of Period
Residential Customer
(Thousand Cu. Ft.) 75 79 92 75 90
Lexington, Kentucky Degree Days
Actual 4,397 4,867 5,280 4,215 4,999
Percent of 30 year
average (4,701) 93.5 103.5 112.3 89.7 106.3
Average Revenue Per Mcf
Sold at Retail ($) 8.13 7.81 5.91 6.63 6.44
Average Gas Cost Per
Mcf Sold at Retail ($) 4.60 4.62 2.81 3.37 3.34
Directors & Officers
Board of Directors
Standing left to right:
Billy Joe Hall (a)
Investment Broker
LPL Financial Services
(general brokerage services)
Mount Sterling, Kentucky
Arthur E. Walker, Jr. (a)(c)
President
The Walker Company
(general and highway construction)
Mount Sterling, Kentucky
Henry C. Thompson (b)
President
Triple Land Co., Inc.
(land development and
real estate rental);
Retired President
Henry Thompson Construction Co., Inc.
(land development and commercial real estate
rental); both of Nicholasville, Kentucky
Glenn R. Jennings (c)
President and
Chief Executive Officer
Donald R. Crowe (a)
Retired Senior Analyst
Department of Insurance
Commonwealth of Kentucky
Lexington, Kentucky
Virgil E. Scott (b)
Retired Vice President -
Administration
Retired Director, Resources
Delgasco, Deltran and Enpro
Seated left to right:
John D. Harrison (b)
Retired President
Power Line Construction Co.
(utility construction contractor)
Stanton, Kentucky
Roger A. Byron
Director Emeritus
Harrison D. Peet (c)
Chairman of the Board
Retired President
and Chief Executive Officer
Jane Hylton Green (b)
Retired Vice President -
Human Resources and
Corporate Secretary
Officers
Standing left to right:
Johnny L. Caudill
Vice President -
Administration and
Customer Service
Robert C. Hazelrigg
Vice President -
Public and Consumer Affairs
Alan L. Heath
Vice President-
Operations and Engineering
Seated left to right:
John F. Hall
Vice President -
Finance, Secretary and Treasurer
Glenn R. Jennings
President and
Chief Executive Officer
(a) Member of Nominating and
Compensation Committee
(b) Member of Audit Committee
(c) Member of Executive Committee
Corporate Information
Shareholders' Inquiries
Communications regarding stock transfer requirements, lost certificates,
changes of address or other items may be directed
to the Transfer Agent and Registrar. Communications regarding dividends, the
above items or any other shareholder
inquiries may be directed to: Investor Relations, Delta Natural Gas Company,
Inc., 3617 Lexington Road, Winchester,
Kentucky 40391.
Independent Public Accountants
Arthur Andersen LLP
2300 Meidinger Tower
The Louisville Galleria
Louisville, Kentucky 40202
Disbursement Agent, Transfer Agent and Registrar for Common Shares
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
Trustee and Interest Paying Agents for Debentures
6 5/8% due 2023
Corporate Trust Bank One
235 W. Schrock Rd.
Westerville, Ohio 43081
8.3% due 2026; 7.15% due 2018
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
Dividend Reinvestment and Stock Purchase Plan Administrator and Agent
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
1998 Annual Report
This annual report and the financial statements contained herein are submitted
to the shareholders of the Company for their
general information and not in connection with any sale or offer to sell, or
solicitation of any offer to buy, any securities.
1998 Annual Meeting
The annual meeting of shareholders
of the Company will be held at the General Office of the Company in Winchester,
Kentucky on November 19, 1998, at
10:00 a.m. Proxies for the annual meeting will be requested from shareholders
when notice of meeting, proxy statement and
form of proxy are mailed on or about October 12, 1998.
SEC Form 10-K
A copy of Delta's most recent annual report on SEC Form 10-K is available,
without charge, upon written request to John
F. Hall, Vice President - Finance, Secretary and Treasurer, Delta Natural Gas
Company, Inc., 3617 Lexington Road,
Winchester, Kentucky 40391.
Dividend Reinvestment and Stock Purchase Plan
This plan provides shareholders of record with a convenient way to acquire
additional shares of the Company's common
stock without paying brokerage fees. Participants may reinvest their dividends
and make optional cash payments to acquire
additional shares. Fifth Third Bank administers the Plan and is the agent for
the participants. For more information,
inquiries may be directed to Emily P. Bennett, Director - Corporate Services,
Delta Natural Gas Company, Inc., 3617
Lexington Road, Winchester, Kentucky 40391.
