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 December 31, 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
2,394,633 Shares Outstanding as of December 31, 1998.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
December 31 December 31 December 31
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
$8,630,074 $11,787,820 $13,568,209 $ 17,003,092 $ 40,823,124 $ 45,074,546
OPERATING EXPENSES
Purchased gas $ 3,560,085 $ 6,377,384 $5,081,164 $ 8,486,072 $ 19,094,583 $ 24,562,876
Operation and
maintenance 2,232,268 2,221,490 4,384,316 4,450,761 8,901,768 8,896,894
Depreciation and
depletion 961,346 848,404 1,900,275 1,694,558 3,651,099 3,201,585
Taxes other than
income taxes 323,076 272,398 634,237 602,852 1,243,443 1,161,923
Income taxes 138,025 341,975 (278,750) (139,225) 1,261,475 1,154,275
Total operating
expenses $ 7,214,800 $ 10,061,651 $ 11,721,242 $ 15,095,018 $ 34,152,368 $ 38,977,553
OPERATING INCOME $ 1,415,274 $ 1,726,169 $ 1,846,967 $ 1,908,074 $ 6,670,756 $ 6,096,993
OTHER INCOME AND
DEDUCTIONS, NET 10,487 6,518 15,082 10,931 72,059 28,794
INCOME BEFORE
INTEREST CHARGES $ 1,425,761 $ 1,732,687 $ 1,862,049 $ 1,919,005 $ 6,742,815 $ 6,125,787
INTEREST CHARGES 1,172,986 1,140,875 2,303,051 2,141,175 4,510,374 4,087,549
NET INCOME (LOSS) $ 252,775 $ 591,812 $ (441,002) $ (222,170) $ 2,232,441 $ 2,038,238
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,390,737 2,357,107 2,386,177 2,352,637 2,376,645 2,342,910
BASIC AND DILUTED
EARNINGS (LOSS) PER
COMMON SHARE $ .11 $ .25 $ (.18) $ (.09) $ .94 $ .87
DIVIDENDS DECLARED PER
COMMON SHARE $ .285 $ .285 $ .57 $ .57 $ 1.14 $ 1.14
</TABLE>
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS December 31, 1998 June 30, 1998 December 31, 1997
UTILITY PLANT $ 131,386,516 $ 127,028,159 $ 123,913,386
Less-Accumulated provision
for depreciation (36,790,643) (34,929,481) (33,251,728)
Net utility plant $ 94,595,873 $ 92,098,678 $ 90,661,658
CURRENT ASSETS
Cash and cash
equivalents $ 422,379 $ 118,536 $ 444,404
Accounts receivable - net 1,903,643 2,538,800 3,615,358
Gas in storage 3,364,903 2,050,000 1,855,202
Deferred gas cost 1,354,892 - 3,796,666
Materials and supplies 451,812 520,362 710,358
Prepayments 106,884 241,731 120,607
Total current assets $ 7,604,513 $ 5,469,429 $ 10,542,595
OTHER ASSETS
Cash surrender value of
Officers' life insurance $ 347,789 $ 339,215 $ 329,913
Note receivable from officer 134,000 110,000 122,000
Unamortized debt expense
and other 4,589,311 4,849,291 3,603,172
Total other assets $ 5,071,100 $ 5,298,506 $ 4,055,085
Total assets $ 107,271,486 $ 102,866,613 $ 105,259,338
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders' equity $ 28,351,812 $ 29,810,294 $ 28,255,698
Long-term debt 51,757,845 52,612,494 37,976,596
Total capitalization $ 80,109,657 $ 82,422,788 $ 66,232,294
CURRENT LIABILITIES
Notes payable $ 9,030,000 $ 1,875,000 $ 19,395,000
Current portion of long-
term debt 2,450,000 1,790,000 1,553,777
Accounts payable 2,870,630 2,050,628 4,391,125
Accrued taxes (43,869) 1,085,766 592,850
Refunds due customers 72,839 117,123 461,147
Advance recovery of gas costs - 1,148,019 -
Customers' deposits 594,863 438,134 498,566
Accrued interest on debt 1,220,198 1,215,265 1,081,096
Accrued vacation 528,952 528,952 516,032
Other accrued liabilities 382,906 485,018 385,701
Total current liabilities $ 17,106,519 $ 10,733,905 $ 28,875,294
DEFERRED CREDITS AND OTHER
Deferred income taxes $ 8,436,725 $ 8,023,475 $ 8,393,000
Investment tax credits 602,550 637,300 673,500
Regulatory liability 795,975 831,425 867,675
Advances for construction
and other 220,060 217,720 217,575
Total deferred credits
and other $ 10,055,310 $ 9,709,920 $ 10,151,750
Total liabilities and
shareholders' equity $ 107,271,486 $102,866,613 $ 105,259,338
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended Twelve Months Ended
December 31 December 31
1998 1997 1998 1997
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (441,002) $ (222,170) $ 2,232,441 $ 2,038,238
Adjustments to reconcile net
income (loss) to net cash
from operating activities:
Depreciation, depletion
and amortization 2,238,006 1,823,208 4,307,282 3,436,840
Deferred income taxes and
investment tax credits 343,050 412,575 (98,925) 473,275
Other, net 387,858 380,844 705,594 688,134
(Increase)decrease in other
assets (3,011,834) (3,109,967) 2,594,114 (1,651,758)
Increase(decrease) in other
liabilities (292,027) 1,419,556 (2,297,513) 917,894
Net cash provided by (used
in) operating activities $(775,949) $ 704,046 $ 7,442,993 $ 5,902,623
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures $(4,820,728) $(7,659,582) $(8,355,710) $(14,236,815)
Net cash used in
investing activities $(4,820,728) (7,659,582) $(8,355,710) $(14,236,815)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends on common stock $(1,360,481) $(1,341,332) $(2,709,382) $(2,671,093)
Issuance of common stock,
net 343,001 344,631 573,055 639,809
Issuance of long-term
debt, net - - 23,797,796 -
Repayment of long-term debt (237,000) (613,782) (10,405,777) (813,321)
Issuance of notes payable 12,140,000 16,605,000 21,735,000 35,280,000
Repayment of notes payable (4,985,000) (8,075,000) (32,100,000) (23,675,000)
Net cash provided by
financing activities $ 5,900,520 $ 6,919,517 $ 890,692 $ 8,760,395
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 303,843 $ (36,019) $ (22,025) $ 426,203
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 118,536 480,423 444,404 18,201
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 422,379 $ 444,404 $ 422,379 $ 444,404
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,378,698 $ 2,149,099 $ 4,520,604 $ 4,008,286
Income taxes (net of
refunds) $ 380,400 $ 563,200 $ 1,456,400 $ 366,032
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) 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. Delta adopted SFAS 130 during the quarter
ended September 30, 1998. The adoption of this statement had no
impact on the financial statements of the Company.
(4) 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 re-hearing of certain
tax-related items in this rate case, Delta also received approval
from the PSC for an additional revenue increase of $117,000.
(5) 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.
(6) On February 5, 1999, Delta filed proposed new tariffs with
the PSC that would provide for annual rate adjustments each July
1, beginning July 1, 1999. The tariffs would adjust Delta's
rates annually to reflect Delta's budgeted plans for the next
fiscal year and would provide a return on equity within a band of
11.1% to 12.1%. The tariffs are proposed for an experimental
three year period. The PSC has taken no action on the proposed
tariffs.
(7) 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 $4.8 million was expended during the six months
ended December 31, 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 $9 million was
borrowed at December 31, 1998. The line of credit, which is with Bank
One, Kentucky, NA, requires renewal during 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 $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 for the six and twelve month periods ending
December 31, 1998 and 1997 are summarized below:
Six Months Ended December 31
1998 1997
Used in operating activities $ (775,949) $ 704,046
Used in investing activities (4,820,728) (7,659,582)
Provided by financing activities 5,900,520 6,919,517
Net increase (decrease) in cash
and cash equivalents $ 303,843 $ (36,019)
Twelve Months Ended December 31
1998 1997
Provided by operating activities $ 7,442,993 $ 5,902,623
Used in investing activities (8,355,710) (14,236,815)
Provided by financing activities 890,692 8,760,395
Net increase (decrease) in cash
and cash equivalents $ (22,025) $ 426,203
RESULTS OF OPERATIONS
Operating Revenues
The decreases in operating revenues for the three, six and twelve
months ended December 31, 1998 of $3,158,000, $3,435,000 and $4,251,000,
respectively, were due primarily to decreases in retail sales volumes of
372,000 Mcf (34%), 410,000 Mcf (30%) and 706,000 Mcf (16%),
respectively, as compared to similar periods of 1997, resulting from
warmer winter weather in 1998. Heating degree days billed were 47%, 46%
and 83%, of the thirty-year average ("normal") for the three, six and
twelve months ended December 31, 1998, as compared with 76%, 75% and
104% for the similar periods of 1997.
Operating revenues for the periods also decreased due to decreases
in the cost of gas purchased that were reflected in rates billed to
customers through Delta's gas cost recovery clause. This decrease was
offset by the general rate increase effective November 30, 1997.
Operating Expenses
The decreases in purchased gas expense for the three, six and
twelve months ended December 31, 1998 of $2,817,000, $3,405,000 and
$5,468,000 respectively, were due primarily to 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 expense for the three, six and
twelve months ended December 31, 1998 of $113,000, $206,000 and
$450,000, respectively, were due primarily to additional depreciable
plant.
The decreases in income taxes for the three and six months ended
December 31, 1998, of $204,000 and $140,000, respectively, and the
increase in income taxes for the twelve months ended December 31, 1998
of $107,000, were primarily due to changes in net income.
Interest Charges
The increases in interest charges for the six and twelve months
ended December 31, 1998 of $162,000 and $423,000, respectively, were due
primarily to increased borrowings for the periods.
The "Year 2000" Issue
The Company is working to address 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, which has coordinated 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 and service providers.
The Committee is assessing the likelihood of miscalculations or
system failures as a result of these items, systems or service
providers. The Company has assessed 94% of these inventoried items,
systems and service providers. This assessment percentage for the items
Delta deems as "critical" stands at 92%. Delta has been diligently
working to insure that critical or otherwise important items assessed as
certain to fail are either repaired or replaced so as not to cause
business interruption or data integrity problems on January 1, 2000.
The costs incurred to date related to Year 2000 activities have
not been material to the Company, and based upon current estimates, the
Company does not believe that the total cost of its Year 2000 readiness
programs will have a material adverse impact on the Company's results of
operations or 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 systems and 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
has sent 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Registrant held its annual meeting of shareholders on
November 19, 1998.
(b) Donald R. Crowe, Billy Joe Hall and John D. Harrison were
elected to Delta's Board of Directors for three-year terms
expiring in 2001. Glenn R. Jennings, Virgil E. Scott and
Arthur E. Walker, Jr. will continue to serve on Delta's Board
of Directors until the election in 1999. Jane Hylton Green,
Harrison D. Peet and Henry C. Thompson will continue to serve
on Delta's Board of Directors until the election in 2000.
(c) The total shares voted in the election of Directors were
2,134,581. There were no broker non-votes. The shares voted
for each Nominee were:
Donald R. Crowe For 2,113,653 Withheld 20,928
Billy Joe Hall For 2,115,754 Withheld 18,827
John D. Harrison For 2,109,490 Withheld 25,091
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. 10(M) - Employment agreement dated November 30,
1998 between Delta and Glenn R. Jennings, an officer.
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)
/s/Glenn R. Jennings_______________
DATE: February 11, 1999 Glenn R. Jennings
President and Chief Executive Officer
(Duly Authorized Officer)
/s/John F. Hall____________________
John F. Hall
Vice President - Finance, Secretary
and Treasurer
(Principal Financial Officer)
OFFICER AGREEMENT
THIS AGREEMENT (the "Agreement"), made and entered as of the 30th day of
November, 1998, by and between DELTA NATURAL GAS COMPANY, INC., a Kentucky
corporation ("Delta"), and GLENN R. JENNINGS ("Officer");
W I T N E S S E T H:
THAT, WHEREAS, Officer has been employed by Delta in positions of great
responsibility; and
WHEREAS, Officer has contributed, and, if he remains an executive officer of
Delta, it is anticipated that he will continue to contribute, to the welfare
of Delta, its shareholders and customers; and
WHEREAS, Delta desires to employ Officer and Officer desires to be so
employed; and
WHEREAS, Delta desires to retain the services of Officer and provide
continuity of management of Delta in the event of a Change of Control (as
hereinafter defined) of Delta; and
WHEREAS, Officer is willing to remain in the employ of Delta following a
Change of Control thereof on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, the parties hereto do hereby agree as follows:
1. Employment.
(a) Delta agrees to continue to employ Officer and Officer agrees to be so
employed in the capacity of President and Chief Executive Officer from the
date hereof until November 30, 2000, and from year to year thereafter unless,
at least thirty days preceding November 30, 2000, or November 30th of any
succeeding year, written Notice of Termination (as hereinafter defined)
is given by Delta to Officer or by Officer to Delta, as the case may be.
(b) Officer shall have such responsibilities and authority as may from time
to time be assigned to him by Delta's Board of Directors, provided that such
authority shall be reasonably similar to the duties traditionally associated
with the positions of president and chief executive officer in companies
similar-in size and operations to Delta.
2. Compensation and Related Matters.
(a) Salary. During the period of Officer's employment hereunder, Delta
shall pay to Officer salary at a rate of not less than $154,500.00 per
annum in equal semi-monthly installments. This salary may be increased
from time to time in accordance with normal business practices of Delta and,
if so increased, shall not thereafter during the term of this Agreement be
decreased. Compensation of Officer by salary payments shall not be deemed
exclusive and shall not prevent Officer from participating in any other
compensation or benefit plans of Delta. The salary payments (including
any increased salary payments) hereunder shall not in any way limit or
reduce any other obligation of Delta hereunder, and no other
compensation, benefit or payment hereunder shall in any way limit or
reduce the obligation of Delta to pay Officer's salary hereunder.
(b) Expenses. During the term of the Officer's employment hereunder,
Officer shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by Officer in performing services hereunder,
including all expenses of travel and living expenses while away from home
on business or at the request of and in the service of Delta,
provided that such expenses are incurred and accounted for in accordance
with the policies and procedures established by Delta.
(c) Other Benefits. Delta shall maintain in full force and effect, and
Officer shall be entitled to continue to participate in, all of its
employee benefit plans and arrangements in effect on the date hereof in
which Officer participates or plans or arrangements providing Officer with
at least equivalent benefits thereunder (including without limitation
each pension and retirement plan and arrangement, stock option plan, life
insurance and health-and-accident plan and arrangement, medical insurance
plan, disability plan and vacation plan). Delta shall not make any changes
in such plans or arrangements which would adversely affect Officer's rights
or benefits thereunder, unless such change occurs pursuant to a
program applicable to all executives of Delta and does not result in a
proportionately greater reduction in the rights of or benefits to Officer
as compared with any other executive of Delta. Officer shall be entitled
to participate in or receive benefits under any employee benefit plan or
arrangement made available by Delta in the future to its executives and
key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and
arrangements. Nothing paid to Officer under any plan or arrangement
presently in effect or made available in the future shall be deemed to
be in lieu of the salary payable to Officer pursuant to Paragraph 2(a).
Any payments or benefits payable to Officer hereunder in respect of any
calendar year during which Officer is employed by Delta for less than the
entire such year shall, unless otherwise provided in the applicable plan
or arrangement, be prorated in accordance with the number of days in
such calendar year during which he is so employed.
(d) Vacations. Officer shall be entitled to the number of vacation days in
each calendar year, and to compensation in respect of earned but unused
vacation days, determined in accordance with Delta's vacation policy.
Officer shall also be entitled to all paid holidays given by Delta to its
executives.
(e) Services Furnished. Delta shall furnish Officer with office space,
stenographic assistance and such other facilities and services as shall
be suitable to Officer's position and adequate for the performance of his
duties as set forth herein.
(f) Loan. It is acknowledged and agreed that, as of the date of this
Agreement, Officer is indebted to Delta in the amount of $136,000.00 (the
"Loan"). The Loan shall be repaid by Officer to Delta in accordance with
the following terms and conditions:
(i) So long as Officer shall remain an employee of Delta in any capacity,
Delta shall forgive $2,000.00 of the outstanding principal amount of the
Loan for each month of service completed by Officer after the date of
this Agreement. With the express approval of Delta's Board of Directors,
Delta may forgive additional amounts of the Loan at any time.
(ii) In the event of termination of Officer's employment hereunder either
(A) by Delta other than as permitted by and provided in Paragraph 1(a), due
to Officer's death as provided in Paragraph 3(a), due to Officer's
disability as provided in Paragraph 3(b) or for Cause (as hereinafter
defined) as provided in Paragraph 3(c), or (B) by Officer following a
Change in Control pursuant to Paragraph 3(d) hereof, then Delta shall
forgive and Officer shall be relieved of liability for repayment of the
entire unpaid principal balance of and all accrued interest on the Loan
then outstanding.
(iii) In the event Officer ceases to be an employee of Delta for any
reason or under any circumstances whatsoever other than a reason or
circumstance that would obligate Delta to forgive and entitle Officer to be
relieved of liability for repayment of the Loan as provided above in Paragraph
2(f)(ii) (a "Cessation of Employment"):
(A) Delta's forgiveness of the Loan as provided above in Paragraph 2(f)(i)
shall cease as of the month during which the Cessation of Employment occurs
and there shall be no further forgiveness of any remaining principal amount
of the Loan following such month.
(B) The entire unpaid principal amount of the Loan shall become due and
payable and shall be paid by Officer on a date (the "Payment Date")
selected by Officer; provided, however, that in no event shall such
Payment Date selected by Officer be later than six months after the date
on which the Cessation of Employment occurred. The Officer shall select
and give Delta written notice of the Payment Date within thirty days
following the date the Cessation of Employment occurred.
(C) During the time period between the Cessation of Employment and the
Payment Date, the Officer shall make no payment with respect to the unpaid
principal amount of the Loan but shall continue to pay interest thereon at
the rate and on the terms hereinafter set forth.
(iv) Officer shall pay interest on the outstanding principal balance of the
Loan at a rate of 6% per annum. Such interest shall be paid on or about the
last day of each month during which such Loan or any part thereof is
outstanding (the "Due Date"), beginning on December 31, 1998. Such
payments of interest shall continue until the Loan is entirely forgiven
or entirely paid in accordance with the terms and provisions of this
Paragraph 2(f). Notwithstanding the foregoing, in the event a Condition
of Default (as hereinafter defined) occurs, interest shall thereafter
accrue and be paid at a rate of 6% per annum on any due and unpaid
interest until such time as the entire amount of principal of and interest
on the Loan is paid to Delta as hereinafter provided.
(v) (A) In the event that Officer has not paid the full amount of any
monthly interest by the Due Date, as provided above, Delta may at any time
following such Due Date provide notice to Officer (the "Notice of
Non-payment") stating that such interest is due and unpaid. Such Notice
of Non-payment shall also state that the failure to pay such due and
unpaid interest within fifteen days of the date of such Notice of Non-payment
shall constitute a Condition of Default.
(B) Failure by Officer to pay such due and unpaid interest within the
fifteen days following such Notice of Non-payment, or failure by Officer to
perform any other obligation to which he is subject pursuant to
the provisions of this Paragraph 2(f) within fifteen days following
written notice from Delta to Officer specifying the nature of such
nonperformance and demanding that Officer perform same, shall constitute
a "Condition of Default". Upon the occurrence of a Condition of Default,
the entire unpaid principal amount of and all unpaid interest on the Loan
automatically shall be accelerated and become immediately due and payable
in full by Officer to Delta, without the requirement of any further notice
from Delta.
(vi) (A) Officer has granted Delta a first and prior mortgage on that
certain real property located at 9 Fairway Drive, Berea, Kentucky (the
"Property"), to secure payment of the Loan, in form and substance
satisfactory to Delta in its sole discretion.
(B) In the event that Officer sells, transfers or assigns the Property or
any part thereof, Delta agrees to release its mortgage lien on the Property
provided that Officer grants Delta a first and prior mortgage on other real
property (the "Substitute Property") with an appraised value at least equal
to the principal amount of the Loan then outstanding. It shall be the
obligation of Officer to provide an appraisal of the Substitute Property
reasonably satisfactory to Delta. The form and substance of any such
appraisal of the Substitute Property and the appraiser selected by Officer
to make such appraisal shall all be subject to the approval of Delta in its
reasonable discretion. Officer shall also be obligated to provide Delta
with an opinion of title from an attorney chosen by Officer, but acceptable
to Delta in its sole discretion, certifying that the Substitute Property
is owned in fee simple by Officer, subject only to Delta's mortgage lien
hereinabove described.
(C) The Officer shall be responsible for paying all fees, costs and
expenses of preparing, recording and releasing any such mortgage(s) and
of obtaining such title opinion(s) and any such appraisal(s).
3. Termination.
Except as otherwise provided above in Paragraph 1(a) hereof, Officer's
employment hereunder may be terminated without any breach of this
Agreement only under the following circumstances:
(a) Death. Officer's employment hereunder shall terminate upon his death.
(b) Disability. If, as a result of Officer's incapacity due to physical or
mental illness, Officer shall have been absent from his duties hereunder on a
full-time basis for the entire period of six consecutive months, and within
thirty days after Delta gives Officer written notice of Delta's intention
to terminate Officer's employment pursuant to this Paragraph 3(b) (which
notice may be given before or after the end of such six month period)
Officer shall not have returned to the performance of his duties hereunder
on a full-time basis, Delta may terminate Officer's employment hereunder.
(c) Cause. Delta may terminate Officer's employment hereunder for Cause.
For purposes of this Paragraph 3(c):
(i) Delta shall have "Cause" to terminate Officer's employment hereunder
only upon (A) the willful and continued failure by Officer to substantially
perform his duties hereunder, after written demand for substantial
performance is delivered by Delta that specifically identifies the manner
in which Delta believes Officer has not substantially performed his duties,
or (B) the willful engaging by Officer in misconduct which is materially
injurious to Delta, monetarily or otherwise.
(ii) No act or failure to act on Officer's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the best
interest of Delta.
(iii) Notwithstanding the foregoing, Officer shall not be deemed to have
been terminated for Cause without (A) reasonable notice to Officer setting
forth the reasons for Delta's intention to terminate for Cause, (B) an
opportunity for Officer, together with counsel, to be heard before the
Board of Directors of Delta, and (C) delivery to Officer of a Notice of
Termination as defined in Paragraph 3(e) hereof.
(d) Termination by Officer. Following a Change of Control, Officer may
terminate his employment hereunder if Officer determines in good faith,
but otherwise in his sole and absolute discretion, that, as a result of the
Change in Control, either (i) his continued employment with Delta is not in
the best interests of Delta or (ii) he is unable effectively to
carry out his duties and responsibilities as contemplated hereby. As
used herein, "Change of Control" means a change in control of a nature
that would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended and in effect on the date hereof (the "Exchange Act"),
provided that, without limitation, such a Change of Control shall be deemed
to have occurred if and when any "person" (as that term is used in Sections
13(d) and 14(d) of the Exchange Act) becomes a beneficial owner directly or
indirectly of securities of Delta representing 20% or more of the combined
voting power of Delta's then outstanding securities.
(e) Notice of Termination. Any termination by Delta or by Officer of
Officer's employment (other than termination pursuant to Paragraph 3(a)
above) shall be communicated by written Notice of Termination to the other
party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision
in this Agreement relied upon and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of
Officer's employment under the provision so indicated.
(f) Date of Termination. "Date of Termination" shall mean: (i) if Officer's
employment is terminated pursuant to Paragraph 1(a) above, the date such
termination of Officer's employment becomes effective in accordance with
the provisions of said Paragraph 1(a); (ii) if Officer's employment is
terminated by his death, the date of his death; (iii) if Officer's
employment is terminated pursuant to Paragraph 3(b) above, the later of
the date on which the six-month period referred to in Paragraph 3(b)
expires or the date that is thirty days after the notice of intention to
terminate provided for in Paragraph 3(b) is given (provided that Officer
shall not have returned to the performance of his duties on a full-time
basis prior to such date); (iv) if Officer's employment is terminated
pursuant to Paragraph 3(c) above, the date specified in the Notice of
Termination; or (v) if Officer's employment is terminated for any other
reason, the date on which a Notice of Termination is given.
Notwithstanding the foregoing provisions of this Paragraph 3(f), if, within
thirty days after any Notice of Termination is given, the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, by mutual written agreement of
the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected).
4. Compensation Upon Termination.
(a) In the event of termination of Officer's employment hereunder as
permitted by and provided in Paragraph 1(a), due to Officer's death as
provided in Paragraph 3(a), due to Officer's disability as provided in
Paragraph 3(b) or for Cause as provided in Paragraph 3(c), then:
(i) Such termination shall be effective at the Date of Termination;
(ii) All compensation to Officer provided herein shall cease as of the Date
of Termination; and
(iii) Delta's forgiveness of the Loan shall cease and Officer shall be
obligated to pay the Loan as provided above in Paragraph 2(f).
(b) In the event Delta shall terminate Officer's employment hereunder other
than pursuant to any of Paragraphs 1(a), 3(a), 3(b) or 3(c), or in the event
Officer shall terminate his employment hereunder pursuant to Paragraph
3(d), then:
(i) Delta shall pay Officer his full salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given;
(ii) In lieu of any further salary payments to Officer for periods
subsequent to the Date of Termination, Delta shall pay as severance pay
to Officer an amount equal to the product of (A) Officer's annual salary
rate in effect as of the Date of Termination, multiplied by (B) the greater
of the number of years (including partial years) remaining in the term of
employment hereunder or the number three, such payment to be made (X) if
pursuant to Paragraph 3(d) herein, in a lump sum on or before the fifth day
following the Date of Termination, or (Y) if resulting from any other
cause, in substantially equal semi-monthly installments on the fifteenth
and last days of each month commencing with the month in which the Date of
Termination occurs and continuing for the number of consecutive semi-monthly
payment dates (including the first such date as aforesaid) equal to the
product obtained by multiplying the number of years (including partial years)
applicable under Paragraph 4(b)(ii) above by twenty-four;
(iii) If termination of Officer's employment arises out of a breach by
Delta of this Agreement, Delta shall pay all other damages to which Officer
may be entitled as a result of such breach, including damages for any and
all loss of benefits to Officer under Delta's employee benefit plans which
Officer would have received if Delta had not breached this Agreement and
if Officer's employment had continued for the full term provided in
Paragraph 1(a) hereof (including specifically, but without limitation,
the benefits which Officer would have been entitled to receive pursuant to
Delta's retirement plan, and any other supplemental retirement income plan
or arrangement had his employment continued for the full term provided in
Paragraph 1(a) hereof at the rate of compensation specified herein), and
including all legal fees and expenses incurred by him as a result of such
termination;
(iv) Delta shall forgive the entire unpaid principal amount and accrued
interest, if any, then outstanding on the Loan, as provided above in
Paragraph 2(f);
(v) Delta shall maintain in full force and effect, for the continued
benefit of Officer for the greater of the number of years (including
partial years) remaining in the term of employment hereunder or the
number three, all employee benefit plans and programs in which Officer
was entitled to participate immediately prior to the Date of Termination,
provided that Officer's continued participation is possible under the
general terms and provisions of such plans and programs. In the event
that Officer's participation in any such plan or program is barred, Delta
shall arrange to provide Officer with benefits substantially similar to
those which Officer would otherwise have been entitled to receive under such
plans and programs from which his continued participation is barred; and
(vi) Officer shall not be required to mitigate the amount of any payment
provided for in this Paragraph 4(b) by seeking other employment or otherwise.
5. Cessation of Payments.
If, at any time while Officer is receiving payments hereunder, he directly or
indirectly owns, manages, operates, joins, controls, is employed by or
participates in the ownership, management, operation or control of, or is
connected in any manner with, any retail natural gas distribution business
(other than Delta) located, operating or conducting business or
operations within any county in which Delta's pipeline facilities are
located on the date of execution of this Agreement, then such payments
shall forthwith cease.
6. Indemnification.
(a) As used in this Paragraph 6:
(i) "Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, and
whether formal or informal;
(ii) "Party" includes a person who was, is or is threatened to be made a
named defendant or respondent in a Proceeding;
(iii) "expenses" include attorneys fees;
(iv) "officer" means any person serving as Chief Executive Officer,
Chairman of the Board of Directors, President, Vice-President, Treasurer,
Secretary or Controller of Delta or Subsidiary (as hereinafter defined);
(v) "Director" means an individual who is or was a director of Delta or
Subsidiary or an individual who, while a director of Delta or Subsidiary,
is or was serving at the request of Delta or Subsidiary as a Director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise. A Director shall be considered serving an employee
benefit plan at Delta's or Subsidiary's request if his duties to Delta or
Subsidiary also impose duties on, or otherwise involve services by, him to
the plan or to participants in or beneficiaries of the plan. "Director"
includes, unless the context requires otherwise, the estate or
personal representatives of a Director.
(vi) "Subsidiary" means any company in which Delta is beneficial owner of
100% of all classes of voting stock.
(b) (i) Delta shall indemnify Officer if he is made a Party to any
Proceeding by reason of the fact that he is or was an officer or Director
and if:
(A) Officer conducted himself in good faith; and
(B) Officer reasonably believed:
(I) In the case of conduct in his official capacity with Delta or
Subsidiary, that his conduct was in Delta's or Subsidiary's best interest; or
(II) In all other cases, that his conduct was at least not opposed to
Delta's or Subsidiary best interest; and
(C) In the case of any criminal Proceeding, he had no reasonable cause to
believe his conduct was unlawful.
(ii) Officer's conduct with respect to an employee benefit plan for a
purpose he reasonably believes to be in the best interest of the
participants in and beneficiaries of the plan shall be conduct that
satisfies the requirement of Paragraph 6(b)(i)(B)(II) hereof.
(iii) Indemnification shall be made against judgments, penalties, fines,
settlements and reasonable expenses, including legal expenses, actually
incurred by Officer in connection with the Proceedings, except that if
the Proceeding was by or in the right of Delta or Subsidiary,
indemnification shall be made only against such reasonable expenses and
shall not be made in respect of any Proceeding in which Officer shall have
been adjudged to be liable to Delta or a Subsidiary. The termination of
any Proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not, by itself, be determinative
that Officer did not meet the requisite standard of conduct set forth in
this Paragraph 6(b).
(iv) (A) Reasonable expenses incurred by Officer as a Party to a Proceeding
with respect to which indemnity is to be provided under this Paragraph 6(b)
shall be paid or reimbursed by Delta in advance of the final disposition of
such Proceeding provided:
(I) Delta receives (1) a written affirmation by Officer of his good faith
belief that he has met the requisite standard of conduct set forth in this
Paragraph 6(b), and (2) Delta receives a written undertaking by or on
behalf of Officer to repay such amount if it shall ultimately be determined
that he has not met such standard of conduct; and
(II) Delta's Board of Directors (or other appropriate decision maker for
Delta) determines that the facts then known to the Board of Directors (or
decisionmaker) would not preclude indemnification under Kentucky law.
(B) The undertaking required herein shall be an unlimited general
obligation of Officer but shall not require any security and shall be
accepted without reference to the financial ability of Officer to make
repayment.
(C) Determinations and authorizations of payments under this Paragraph
6(b)(iv) shall be made in the manner specified in Paragraph 6(b)(v) hereof.
(v) (A) Delta shall not indemnify Officer under this Paragraph 6(b) unless
authorized in the specific case after a determination has been made that
indemnification of Officer is permissible in the circumstances because he
has met the requisite standard-of conduct set forth in this Paragraph 6(b).
(B) The determination shall be made:
(I) By Delta's Board of Directors by majority vote of a quorum consisting
of directors not at the time Parties to the Proceeding;
(II) If a quorum cannot be obtained under Paragraph 6(b)(v)(B)(I), by
majority vote of a committee duly designated by Delta's Board of Directors
(in which designation Officer may participate), consisting solely of two or
more members of the- Board of Directors not at the time Parties to the
Proceeding;
(III) By special legal counsel:
(1) Selected by Delta's Board of Directors or its committee in
the manner prescribed in Paragraph 6(b)(v)(B)(I) or (II); or
(2) If a quorum of the Board of Directors cannot be obtained
under Paragraph 6(b)(v)(B)(I) and a committee cannot be designated under
Paragraph 6(b)(v)(B)(II), selected by a majority vote of the full Board of
Directors (in which selection Officer may participate); or
(IV) By Delta's shareholders, but shares owned by or voted under the
control of members of Delta's Board of Directors who are at the time
Parties to the Proceeding shall not be voted on the determination.
(C) Authorization of indemnification and evaluation as to reasonableness
of expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made
by special legal counsel, authorization of indemnification and evaluation
as to reasonableness of expenses shall be made by those entitled under
Paragraph 6(b)(v)(B)(III) to select counsel.
(c) Notwithstanding any limitation imposed by Paragraph 6(b) or elsewhere
and in addition to the indemnification set forth in Paragraph 6(b), Delta,
to the full extent permitted by law, may or may agree by contract or
otherwise to indemnify Officer and hold him harmless against any judgments,
penalties, fines, settlements and reasonable expenses actually incurred or
reasonably anticipated in connection with any Proceeding in which Officer
is a Party, provided Officer was made a Party to such Proceeding by reason
of the fact the he is or was an officer or Director of Delta or Subsidiary
or by reason of any inaction, nondisclosure, action or statement made, taken
or omitted by or on behalf of Officer with respect to Delta or Subsidiary
or by or on behalf of Officer in his capacity as an officer or Director.
(d) Delta shall purchase and maintain or cause to be purchased and
maintained insurance on behalf of Officer against any liability asserted
against him or incurred by him in his capacity or arising out of his
status as an officer or Director. Such insurance shall provide complete
coverage for Officer to the extent reasonably available.
7. Due Authorization.
Delta hereby warrants and represents to Officer that this Agreement has been
duly authorized by all necessary corporate action on the part of Delta and
has been duly executed by a duly authorized officer of Delta.
8. Binding Effect: Assignability.
This Agreement shall inure to the benefit of and be binding upon Delta, its
successors and assigns, including, without limitation, any person, group of
persons, partnership or corporation which may acquire substantially all of
Delta's assets or business or with which or into which Delta may be
liquidated, consolidated, merged or otherwise combined, and shall inure
to the benefit of and be binding upon Officer, his heirs and personal
representatives. Officer may assign his right to payment under this
Agreement, but not his obligations under this Agreement. This Agreement
shall not be assigned by Delta without the prior written consent of Officer.
9. Severability.
If any term, provision, covenant or restriction of this Agreement is held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
10. Amendments.
This Agreement may not be modified, amended, altered or supplemented except
upon the execution and delivery of a written agreement by the parties hereto.
11. Entire Agreement.
This Agreement, together with any other document or agreement specifically
referred to herein, constitutes the entire agreement between the parties
with respect to the terms and conditions of Officer's employment with Delta
and with respect to the Loan, superseding and replacing any and all prior
understandings, contracts, agreements, representations or undertakings,
whether oral or written, with respect thereto.
12. Notices.
All notices, requests, claims, demands and other communications hereunder
shall be in writing, shall be given and shall be deemed to have been duly
given if so given, if delivered in person, sent by telegram or facsimile
transmission, or sent by registered or certified mail, postage pre-paid,
return receipt requested, to the respective parties as follows:
If to Delta:
Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
Attention: Corporate Secretary
If to Officer:
Glenn R. Jennings
Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
or to such other address as either party may have furnished to the other in
writing in accordance herewith. Any such notice shall be deemed to have
been given and shall be effective (a) as of the date delivered to the
intended recipient, if personally delivered or if sent by telegram or
facsimile as provided above, or (b) three business days following the date
deposited in a regularly maintained receptacle for the deposit of U.S. mail,
if mailed in the manner provided above.
13. Governing Law.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Kentucky.
14. Effect of Headings.
The paragraph headings herein are for convenience only and shall not affect
the construction hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.
DELTA NATURAL GAS COMPANY, INC.
By: ____________________________________
Chairman of the Board
________________________________________
GLENN R. JENNINGS
jennings
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<ARTICLE> OPUR1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 94,595,873
<OTHER-PROPERTY-AND-INVEST> 0
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<COMMON> 2,394,633
<CAPITAL-SURPLUS-PAID-IN> 26,151,568
<RETAINED-EARNINGS> (194,389)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 28,351,812
0
0
<LONG-TERM-DEBT-NET> 51,757,845
<SHORT-TERM-NOTES> 9,030,000
<LONG-TERM-NOTES-PAYABLE> 0
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<LONG-TERM-DEBT-CURRENT-PORT> 2,450,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 15,681,829
<TOT-CAPITALIZATION-AND-LIAB> 107,271,486
<GROSS-OPERATING-REVENUE> 13,568,209
<INCOME-TAX-EXPENSE> (278,750)
<OTHER-OPERATING-EXPENSES> 11,999,992
<TOTAL-OPERATING-EXPENSES> 11,721,242
<OPERATING-INCOME-LOSS> 1,846,967
<OTHER-INCOME-NET> 15,082
<INCOME-BEFORE-INTEREST-EXPEN> 1,862,049
<TOTAL-INTEREST-EXPENSE> 2,303,051
<NET-INCOME> (441,002)
0
<EARNINGS-AVAILABLE-FOR-COMM> (441,002)
<COMMON-STOCK-DIVIDENDS> 1,360,481
<TOTAL-INTEREST-ON-BONDS> 0
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<EPS-PRIMARY> (.18)
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