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, 1999
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
2,428,182 Shares Outstanding as of September 30, 1999.
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
1999 1998 1999 1998
OPERATING REVENUES $ 4,753,043 $ 4,938,135 $ 38,487,145 $ 43,978,166
OPERATING EXPENSES
Purchased gas $ 1,259,111 $ 1,521,079 $ 16,206,022 $ 21,911,879
Operation and
maintenance 2,308,117 2,152,048 9,293,176 8,888,290
Depreciation and
depletion 974,067 938,929 3,876,133 3,538,158
Taxes other than
income taxes 347,201 311,161 1,371,017 1,192,765
Income taxes (480,075) (416,775) 1,175,800 1,465,425
Total operating
expenses $ 4,408,421 $ 4,506,442 $ 31,922,148 $ 36,996,517
OPERATING INCOME $ 344,622 $ 431,693 $ 6,564,997 $ 6,981,649
OTHER INCOME AND
DEDUCTIONS, NET 4,582 4,595 33,646 68,093
INCOME BEFORE INTEREST
CHARGES $ 349,204 $ 436,288 $ 6,598,643 $ 7,049,742
INTEREST CHARGES 1,151,063 1,130,065 4,555,934 4,478,264
NET INCOME (LOSS) $ (801,859) $ (693,777) $ 2,042,709 $ 2,571,478
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,417,032 2,382,071 2,402,942 2,368,302
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ (.33) $ (.29) $ 0.85 $ 1.09
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, 1999 June 30, 1999 September 30, 1998
GAS UTILITY PLANT $ 136,506,274 $ 133,804,954 $ 129,173,462
Less-Accumulated provision
for depreciation (39,225,816) (38,308,798) (35,976,662)
Net gas plant $ 97,280,458 $ 95,496,156 $93,196,800
CURRENT ASSETS
Cash and cash
equivalents $ 182,052 $ 248,588 $ 194,422
Accounts receivable
- net 623,019 1,629,883 1,416,525
Gas in storage 5,591,253 3,501,177 4,106,886
Materials and supplies 723,914 664,830 547,122
Prepayments 186,466 188,089 246,809
Total current assets $7,306,704 $ 6,232,567 $ 6,511,764
OTHER ASSETS
Cash surrender value of
officers' life
insurance $ 339,450 $ 339,450 $ 347,789
Note receivable from
officer 116,000 122,000 104,000
Unamortized debt expense
and other 5,542,111 5,282,944 4,719,301
Total other assets $ 5,997,561 $ 5,744,394 $ 5,171,090
Total assets $ 110,584,723 $ 107,473,117 $ 104,879,654
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders'
equity $ 28,662,526 $ 29,912,007 $ 28,660,763
Long-term debt 51,570,208 51,699,700 52,507,485
Total capitalization $ 80,232,734 $ 81,611,707 $ 81,168,248
CURRENT LIABILITIES
Notes payable $ 10,980,000 $ 5,695,000 $ 7,050,000
Current portion of
long-term debt 2,450,000 2,450,000 1,790,000
Accounts payable 2,474,303 2,324,383 1,854,078
Accrued taxes 461,682 954,675 245,527
Refunds due customers 39,002 41,349 89,604
Advance recovery of gas
costs 609,839 1,198,465 1,894
Customers' deposits 544,469 524,263 449,093
Accrued interest on debt 1,574,214 1,225,903 1,591,563
Accrued vacation 584,014 584,014 528,952
Other accrued liabilities 388,415 493,518 404,810
Total current liabilities $ 20,105,938 $ 15,491,570 $ 14,005,521
DEFERRED CREDITS AND OTHER
Deferred income taxes $ 8,826,655 $ 8,826,655 $ 8,023,475
Investment tax credits 567,800 567,800 637,300
Regulatory liability 754,250 760,625 825,050
Advances for construction
and other 97,346 214,760 220,060
Total deferred credits
and other $ 10,246,051 $ 10,369,840 $ 9,705,885
Total liabilities and
shareholders' equity $110,584,723 $107,473,117 $104,879,654
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Twelve Months Ended
September 30 September 30
1999 1998 1999 1998
CASH FLOWS FROM OPERATING
ACTIVITIE
Net income (loss) $ (801,859) $ (693,777) $ 2,042,709 $ 2,571,478
Adjustments to reconcile net
income (loss) to net cash from
Operating activities:
Depreciation, depletion
and amortization 1,059,357 1,036,810 4,090,105 3,884,545
Deferred income taxes
and investment tax
credits (6,375) (6,375) 662,880 (35,775)
Other, net 174,651 210,903 633,546 749,201
(Increase) decrease in other
assets (2,044,655) (2,047,348) (1,138,423) 1,244,226
Increase (decrease) in other
liabilities (199,420) (754,919) 779,758 (1,288,995)
Net cash provided by
(used in) operating
activities $ (1,818,301) $(2,254,706) $ 7,070,575 $ 7,124,680
CASH FLOWS FROM INVESTING
ACTIVITIE
Capital expenditures $ (2,933,613) $ (2,262,654) $(8,606,999) $ (9,141,669)
Net cash used in
investing
activities $ (2,933,613) $ (2,262,654) $(8,606,999 $ (9,141,669)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends on common
stock $ (690,460) $ (679,190) $ (2,740,266) $(2,699,928)
Issuance of common
stock, net 242,838 223,436 699,320 597,213
Issuance of long-term
debt, net - - - 23,707,499
Repayment of long-term
debt (152,000) (126,000) (365,000) (11,128,104)
Issuance of notes
payable 7,160,000 7,205,000 21,570,000 25,175,000
Repayment of notes
payable (1,875,000) (2,030,000) (17,640,000) (33,610,000)
Net cash provided
by financing
activities $ 4,685,378 $ 4,593,246 $ 1,524,054 $ 2,041,680
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS $ (66,536) $ 75,886 $ (12,370) $ 24,691
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 248,588 118,536 194,422 169,731
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 182,052 $ 194,422 $ 182,052 $ 194,422
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 843,042 $ 794,057 $ 4,734,443 $ 4,264,865
Income taxes (net of
refunds) $ 199,531 $ 380,400 $ 531,154 $ 1,459,564
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 four 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. All subsidiaries of Delta
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, 1999 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, Delta 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.
(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) On July 2, 1999, Delta filed a request for increased
rates with the PSC. This general rate case (Case No. 99-176)
requested an annual revenue increase of $2,500,000, an
increase of 6.8%. The test year for the case was December 31,
1998. The rates were suspended by the PSC for a period
expiring December 31, 1999, after which time Delta may bill
the proposed rates subject to refund. The proposed changes
included a weather normalization tariff whereby Delta would be
permitted to adjust rates for the billing months of November
through March to reflect variations from normal weather, as
well as proposed alternative regulatory tariffs that would
provide for annual adjustments in Delta's rates to reflect
budgeted plans and to adjust to a target rate of return. A
public hearing for cross examination of witnesses was held at the PSC
on October 28 and 29, 1999, and the case is now before the PSC for a
decision.
(6) External and intersegment revenues and income (loss) by
business segment are shown below:
($000) Three Months Ended Twelve Months Ended
September 30 September 30
1999 1998 1999 1998
Revenues
Regulated
External customers $ 2,881 $ 2,873 $ 30,007 $ 34,429
Intersegment 1,281 1,251 5,527 5,298
Total regulated $ 4,162 $ 4,124 $ 35,534 $ 39,727
Non-regulated
External customers 1,872 2,065 8,480 9,549
Intersegment 3,842 6,353 13,369 18,292
Total non-regulated $ 5,714 $ 8,418 $ 21,849 $ 27,841
Eliminations for
intersegment (5,123) (7,604) (18,896) (23,590)
Total operating
revenues $ 4,753 $ 4,938 $ 38,487 $ 43,978
Net Income (Loss)
Regulated $ (900) $ (829) $ 1,694 $ 2,064
Non-regulated 98 135 349 507
Total net income
(loss) $ (802) $ (694) $ 2,043 $ 2,571
(7) On July 1, 1999, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The adoption of this SOP
did not and is not expected to have a material impact on the
Company's financial position, results of operations or financial
statement disclosures.
(8) 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 2000 are expected
to be $9.9 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 $10,980,000 was borrowed at September
30, 1999. The line of credit, which is with Bank One, Kentucky,
NA, requires renewal during November, 1999 at which time Delta
plans to extend the line of credit through November, 2000. 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.
The primary cash flows during the three and twelve month
periods ending September 30, 1999 and 1998 are summarized below:
Three Months Ended September 30,
1999 1998
Used in operating
activities $ (1,818,301) $ (2,254,706)
Used in investing activities (2,933,613) (2,262,654)
Provided by financing
activities 4,685,378 4,593,246
Net increase (decrease) in
cash and cash equivalents $ (66,536) $ 75,886
Twelve Months Ended September 30,
1999 1998
Provided by operating
activities $ 7,070,575 $ 7,124,680
Used in investing activities (8,606,999) (9,141,669)
Provided by financing activities 1,524,054 2,041,680
Net increase (decrease) in cash
and cash equivalents $ (12,370) $ 24,691
RESULTS OF OPERATIONS
Operating Revenues
A comparison of Delta's revenues and volumes for the three
and twelve months ended September 30, 1999 with the same periods
in the preceding year are set forth below:
Increase or (Decrease)
1999 Compared with 1998
Three months ended Twelve months ended
September 30 September 30
Retail sales
Variation in gas rates $ 67,000 $ (2,946,000)
Variation in sales volume (302,000) (2,793,000)
Transportation 50,000 248,000
$ (185,000) $ (5,491,000)
Volumes sold at retail (Mcf) (82,000) (570,000)
Volumes transported (Mcf) (100,000) 369,000
Billed heating degree days were 89.5% of thirty year average
("normal") degree days for the twelve months ended September 30,
1999 as compared with 93.0% in 1998.
Operating Expenses
The decreases in purchased gas expense of $262,000 and
$5,706,000 for the three and twelve months ended September 30,
1999, respectively, were due primarily to the decreased gas
purchases for retail sales resulting from the warmer winter
weather in 1999 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, 1999 of $35,000 and
$338,000, respectively, were primarily due to additional
depreciable plant.
The increases in taxes other than income taxes for the three
and twelve months ended September 30, 1999 of $36,000 and
$178,000, respectively, were primarily due to increased property
taxes which resulted from increased plant and property
valuations, and to increased payroll taxes, which resulted from
increased wages.
The decreases in income taxes for the three and twelve
months ending September 30, 1999 of $63,000 and $290,000,
respectively, were primarily due to decreased net income.
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 process accurately 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 currently assessed and deems compliant
approximately 98% of these inventoried items, systems and service
providers. This assessment and compliance percentage for the items
Delta deems as "critical" stands at 98%. The Company has
substantially completed all Year 2000 remediation and testing
activities.
The costs incurred to date related to its 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
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 has sent each of these parties a letter
inquiring about the nature and extent of their efforts.
Although the Company has initiated Year 2000 communications
with significant customers, key vendors, service suppliers and
other parties material to the Company's operations, such third
parties nonetheless represent a risk that cannot be assessed with
precision or controlled with certainty.
The major risks to 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 has prepared contingency plans to address
alternatives in the event that Year 2000 failures of automatic
systems and equipment occur. These plans cover a wide range of
possible scenarios and include steps to remediation. Also, included
in the contingency plans are mitigating actions designed to lessen
the chances of problem scenarios being realized.
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, 1999.
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)
/s/Glenn R. Jennings________________
DATE: November 10, 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)
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