SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-8788
DELTA NATURAL GAS COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
Incorporated in the State 61-0458329
of Kentucky (I.R.S. Employer Identification No.)
3617 LEXINGTON ROAD, WINCHESTER, KENTUCKY 40391
(Address of Principal Executive Offices) (Zip Code)
606-744-6171
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
YES X . NO .
Common Shares, Par Value $1.00 Per Share
2,387,989 Shares Outstanding as of September 30, 1998.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Twelve Months Ended
September 30 September 30
1998 1997 1998 1997
OPERATING REVENUES $ 4,938,135 $ 5,215,272 $ 43,978,166 $ 43,310,125
OPERATING EXPENSES
Purchased gas $ 1,521,079 $ 2,108,688 $ 21,911,879 $ 23,907,765
Operation and
maintenance 2,152,048 2,229,271 8,888,290 8,822,381
Depreciation and
depletion 938,929 846,154 3,538,158 3,054,221
Taxes other than
income taxes 311,161 330,454 1,192,765 1,141,020
Income taxes (416,775) (481,200) 1,465,425 923,400
Total operating
expenses $ 4,506,442 $ 5,033,367 $ 36,996,517 $ 37,848,787
OPERATING INCOME $ 431,693 $ 181,905 $ 6,981,649 $ 5,461,338
OTHER INCOME AND
DEDUCTIONS, NET 4,595 4,413 68,093 31,284
INCOME BEFORE
INTEREST CHARGES $ 436,288 $ 186,318 $ 7,049,742 $ 5,492,622
INTEREST CHARGES 1,130,065 1,000,300 4,478,264 3,848,043
NET INCOME (LOSS) $ (693,777) $ (813,982) $ 2,571,478 $ 1,644,579
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 2,382,071 2,348,453 2,368,302 2,334,164
BASIC AND DILUTED
EARNINGS (LOSS)
PER COMMON SHARE $ (.29) $ (.35) $ 1.09 $ .70
DIVIDENDS DECLARED
PER COMMON SHARE $ .285 $ .285 $ 1.14 $ 1.14
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS September 30, 1998 June 30, 1998 September 30, 1997
GAS UTILITY PLANT $ 129,173,462 $ 127,028,159 $ 121,085,327
Less-Accumulated
provision for
depreciation (35,976,662) (34,929,481) (32,684,990)
Net gas plant $ 93,196,800 $ 92,098,678 $ 88,400,337
CURRENT ASSETS
Cash and cash
equivalents $ 194,422 $ 118,536 $ 169,731
Accounts
receivable - net 1,416,525 2,538,800 1,313,799
Gas in storage 4,106,886 2,050,000 2,368,774
Deferred gas costs - - 2,631,094
Materials and
supplies 547,122 520,362 688,607
Prepayments 246,809 241,731 250,615
Total current assets$ 6,511,764 $ 5,469,429 $ 7,422,620
OTHER ASSETS
Cash surrender value
of Officers' life
insurance $ 347,789 $ 339,215 $ 329,917
Note receivable
from officer 104,000 110,000 128,000
Unamortized debt
expense and other 4,719,301 4,849,291 3,695,646
Total other
assets $ 5,171,090 $ 5,298,506 $ 4,153,563
Total assets $104,879,654 $102,866,613 $99,976,520
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders'
equity $ 28,660,763 $ 29,810,294 $ 28,192,000
Long-term debt 52,507,485 52,612,494 38,117,638
Total capitali-
zation $ 81,168,248 $ 82,422,788 $ 66,309,638
CURRENT LIABILITIES
Notes payable $ 7,050,000 $ 1,875,000 $ 15,485,000
Current portion of
long-term debt 1,790,000 1,790,000 1,987,600
Accounts payable 1,854,078 2,050,628 3,096,744
Accrued taxes 245,527 1,085,766 238,147
Refunds due customers 89,604 117,123 566,142
Advance recovery of
gas costs 1,894 1,148,019 -
Customers' deposits 449,093 438,134 392,158
Accrued interest
on debt 1,591,563 1,215,265 1,241,222
Accrued vacation 528,952 528,952 516,032
Other accrued
liabilities 404,810 485,018 405,796
Total current
liabilities $ 14,005,521 $ 10,733,905 $ 23,928,841
DEFERRED CREDITS AND OTHER
Deferred income
taxes $ 8,023,475 $ 8,023,475 $ 7,921,100
Investment tax
credits 637,300 637,300 708,400
Regulatory liability 825,050 831,425 892,100
Advances for con-
struction and other 220,060 217,720 216,441
Total deferred
credits and other $ 9,705,885 $ 9,709,920 $ 9,738,041
Total liabilities and
shareholders'
equity $ 104,879,654 $ 102,866,613 $ 99,976,520
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Twelve Months Ended
September 30 September 30
1998 1997 1998 1997
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (693,777) $ (813,982) $ 2,571,478 $ 1,644,579
Adjustments to reconcile net
income (loss) to net cash from
operating activities:
Depreciation, depletion
and amortization 1,036,810 902,512 3,884,545 3,270,189
Deferred income taxes and
investment tax credits (6,375) - (35,775) 485,400
Other, net 210,903 160,285 749,201 692,449
(Increase) decrease in other
Assets (2,047,348) (327,792) 1,244,226 (2,926,294)
Increase (decrease) in other
liabilities (754,919) (51,854) (1,288,995) 2,733,759
Net cash provided by
(used in) operating
activities $ (2,254,706) $ (130,831) $ 7,124,680 $ 5,900,082
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures $(2,262,654) $(4,314,597) $(9,141,669) $(15,485,538)
Net cash used in
investing activities $(2,262,654) $(4,314,597) $(9,141,669) $(15,485,538)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends on common
stock $ (679,190) $ (669,494) $ (2,699,928) $ (2,660,781)
Issuance of common
stock, net 223,436 200,907 597,213 606,252
Issuance of long-term
debt, net - - 23,707,499 -
Repayment of long-term
debt (126,000) (16,677) (11,128,104) (580,356)
Issuance of notes
payable 7,205,000 8,230,000 25,175,000 34,190,000
Repayment of notes
payable (2,030,000) (3,610,000) (33,610,000) (22,060,000)
Net cash provided
by financing
activities $ 4,593,246 $ 4,134,736 $ 2,041,680 $ 9,495,115
NET INCREASE (DECREASE)IN
CASH AND CASH
EQUIVALENTS $ 75,886 $ (310,692) $ 24,691 $ (90,341)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 118,536 480,423 169,731 260,072
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 194,422 $ 169,731 $ 194,422 $ 169,731
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the
period for:
Interest $ 794,057 $ 764,398 $ 4,264,865 $ 3,143,138
Income taxes
(net of refunds) $ 380,400 $ 563,200 $ 1,459,564 $ 262,037
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) 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 or other large
use 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 an
underground natural gas storage field that it leases from Delta.
Enpro, Inc. owns and operates production properties and
undeveloped acreage. TranEx Corporation owns a 43 mile
intrastate pipeline. All subsidiaries are included in the
consolidated financial statements. Intercompany balances and
transactions have been eliminated.
(2) The accompanying information reflects, in the opinion of
management, all normal recurring adjustments necessary to
present fairly the results for the interim periods. Reference
should be made to Delta's Form 10-K for the year ending June 30,
1998 for additional footnote disclosures, including a summary of
significant accounting policies.
(3) Effective November 30, 1997, Delta received approval from
the Kentucky Public Service Commission (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, resulting from a rehearing of certain
tax-related items in this rate case, Delta also received
approval from the PSC for an additional annual revenue increase
of $117,000.
(4) On March 23, 1998, Delta completed the issuance and sale
of $25,000,000 of 7.15% Debentures that mature in March, 2018.
The net proceeds of approximately $24.1 million were used to
repay short-term notes payable and 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 on April 30, 1998. Loss on
extinguishment of debt of $632,000, which included $332,000 of
unamortized debt issuance expense and call premium of $300,000
on the redeemed 9% Debentures, was deferred and is being
amortized over the term of the related debt consistent with
regulatory treatment.
(5) In June 1997, Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Comprehensive Income," was issued. SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose
financial statements. SFAS 130 was adopted in the financial
statements for the quarter ended September 30, 1998. The
adoption of this statement had no impact on the financial
statements of the Company.
(6) Reference is made to Part II - Item 1 relative to the
status of legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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, of which $2.5 million was expended during the three
months ended September 30, 1998. 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 million, of which $7.1 million was borrowed at September 30,
1998. The line of credit, which is with Bank One, Kentucky, NA,
requires renewal during November, 1998 at which time Delta plans to
extend the line of credit through November, 1999. 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 $24.1 million from the sale of $25
million 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 million.
The primary cash flows during the three and twelve month periods
ending September 30, 1998 and 1997 are summarized below:
Three Months Ended September 30
1998 1997
Provided by (used in)
Operating activities $ (2,254,706) $ (130,831)
Used in investing activities (2,262,654) (4,314,597)
Provided by financing
activities 4,593,246 4,134,736
Net increase (decrease) in
cash and cash equivalents $ 75,886 $ (310,692)
Twelve Months Ended September 30
1998 1997
Provided by operating
activities $ 7,124,680 $ 5,900,082
Used in investing activities (9,141,669) (15,485,538)
Provided by financing
activities 2,041,680 9,495,115
Net increase (decrease) in
cash and cash equivalents $ 24,691 $ (90,341)
RESULTS OF OPERATIONS
Operating Revenues
The decrease in operating revenues for the three months ended
September 30, 1998 of $280,000 was due primarily to a decrease in
retail sales volumes of 38,000 Mcf (13.7%) and a decrease in sales
volumes to Resources customers of 55,000 Mcf (9.6%). These
decreases were partially offset by the general rate increase
effective November 30, 1997.
The increase in operating revenues for the twelve months ended
September 30, 1998 of $665,000, was due primarily to the general
rate increase effective November 30, 1997 and to increases in on-
system and off-system transportation volumes of 510,000 Mcf and
216,000 Mcf, respectively. These increases were partially offset by
a decrease in retail sales volumes of 245,000 Mcf as a result of
the warmer winter weather in 1998. Billed heating degree days were
only 93% of thirty year average ("normal") degree days for 1998 as
compared with 103.6% in 1997.
Operating Expenses
The decreases in purchased gas expense of $588,000 and
$1,996,000 for the three and twelve months ended September 30,
1998, respectively, were due primarily to the decreased gas
purchases for retail sales resulting from the warmer winter weather
in 1998 and decreases in the cost of gas purchased for retail
sales.
The increases in depreciation and depletion expense for the
three and twelve months ended September 30, 1998 of $93,000 and
$484,000, respectively, were primarily due to additional
depreciable plant.
The changes in income taxes for the three and twelve months
ending September 30, 1998 of $64,000 and $542,000, respectively,
were primarily due to the changes in net income.
Interest Charges
The increases in interest charges for the three and twelve
months ended September 30, 1998 of $130,000 and $630,000,
respectively, were due primarily to increased borrowings for the
periods.
THE "YEAR 2000" ISSUE
The Company is working to determine the potential impact of the
Year 2000 on the ability of Delta's computerized information systems
to accurately process information that may be date-sensitive. Any of
Delta'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 uses a number of computer programs across its entire
operation.
In recent years, Delta has replaced virtually all of its
financial computer systems (both hardware and software) with systems
from third party vendors who certify their products as being Year
2000 compliant.
The Company has established a Year 2000 committee, comprised of
members of management, to coordinate an extensive inventory of all
operational systems, including information technology (IT) hardware
and software, as well as non-IT embedded systems such as process
controls for gas delivery and metering systems. The purpose of this
effort is to determine which items might be adversely affected by
date-sensitive materials. In addition, the Company has been
diligently working to insure that each of these items are either
repaired or replaced so as not to cause business interruption or data
integrity problems on January 1, 2000. Moreover, Delta is currently
in the process of testing its equipment to determine what work
remains to be done in this regard. 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.
Like most businesses, the Company relies upon various suppliers
and vendors in order to provide services and supplies to its
customers. Delta understands that even though it is taking necessary
steps to prepare it could, nevertheless, be adversely affected by the
failures and/or delays caused by any non-compliant equipment used by
its suppliers or vendors. Therefore, Delta is currently gathering
information regarding the steps its "mission-critical" suppliers and
vendors are taking to become Year 2000 compliant. For instance,
Delta intends to send each of these parties a letter inquiring about
the nature and extent of their efforts.
Although the Company intends to complete all Year 2000
remediation and testing activities by the end of the third quarter of
1999, and although the Company has initiated Year 2000 communications
with significant customers, key vendors, service suppliers and other
parties material to the Company's operations and is diligently
monitoring the progress of such third parties in Year 2000
compliance, such third parties nonetheless represent a risk that
cannot be assessed with precision or controlled with certainty.
The major applications which pose the greatest Year 2000 risks
for the Company if implementation of the Year 2000 compliance program
is not successful are the gas delivery, metering and billing systems.
Potential problems related to these systems include service
interruptions to customers, interrupted revenue data gathering and
poor customer relations resulting from delayed billing.
The Company intends to develop contingency plans to address
alternatives in the event that Year 2000 failures of automatic
systems and equipment occur. Preliminary discussions have been held
regarding the contingency plan and a final contingency plan is
scheduled to be completed by mid-year 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The detailed information required by Item 1 has been disclosed
in previous reports filed with the Commission and is unchanged from
the information as presented in Item 3 of Form 10-K for the period
ending June 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. No exhibits are required to be filed with this
report.
(b) Reports on Form 8-K. No reports on Form 8-K have been
filed by the Registrant during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DELTA NATURAL GAS COMPANY, INC.
(Registrant)
___________________________________
DATE: November 3, 1998 Glenn R. Jennings
President and Chief Executive Officer
(Duly Authorized Officer)
_____________________________________
John F. Hall
Vice President - Finance, Secretary
and Treasurer
(Principal Financial Officer)
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