SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 19134 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
DELTA NATURAL GAS COMPANY, INC.
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
Notice To Common Shareholders Of Annual Meeting
To Be Held November 18, 1999
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 18, 1999 at
10:00 a.m. for the purposes of:
1. Electing three Directors for three year terms expiring in 2002; 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 4, 1999
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 11, 1999
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 11, 1999. 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 1999, 2000 or 2001. The terms of three Directors,
Glenn R. Jennings, Virgil E. Scott and Arthur E. Walker, Jr. are scheduled
to end in 1999. Virgil E. Scott has chosen not to stand for re-election
as a Director. Accordingly, Lewis N. Melton is nominated to replace Mr.
Scott as a Director for a three year term ending in 2002. Glenn R. Jennings
and Arthur E. Walker, Jr. are nominated to continue as Directors for a new
three year term ending in 2002.
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 Glenn R. Jennings, Lewis N.
Melton and Arthur E. Walker, Jr. 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 (3) - 65 Retired Senior Analyst, 1966 to present
Director Department of Insurance,
Commonwealth of Kentucky,
Lexington, Kentucky
Jane Hylton Green (2) - 69 Retired Vice President - 1976 to present
Director Human Resources and
Secretary, Delta and
Delta's subsidiaries
Billy Joe Hall (3) - 62 Investment Broker, 1978 to present
Director LPL Financial Services
(general brokerage
services), Mount Sterling,
Kentucky
John D. Harrison (3) - 84 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 (1) - 50 President and Chief Execu- 1984 to present
President and Chief tive Officer and Director of
Executive Officer; Director Delta's subsidiaries
Additional Business
Name, Age and Position Experience During Period of Service
Held With Delta Last Five Years As Director
Lewis N. Melton - 59 Professional Engineer, Nominee
Secretary, Vaughn &
Melton, Inc.
Middlesboro, Kentucky
(consulting engineering)
Harrison D. Peet (2) - 79 Chairman of the Board of 1950 to present
Chairman of the Board Delta's subsidiaries
Virgil E. Scott (1) - 78 Retired Vice President - 1950 to present
Director Administration, Delta and
Resources; Retired Director
of Delta's subsidiaries
Henry C. Thompson (2) - 77 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.(1) - 54
Director President, The Walker 1981 to present
Company (general and
highway construction),
Mount Sterling,
Kentucky
(1) Term expires November 18, 1999.
(2) Term expires on date of Annual Meeting of Shareholders in 2000.
(3) Term expires on date of Annual Meeting of Shareholders in 2001.
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 1999,
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 5 times during fiscal 1999, 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 1999, 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 1999, 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)
John B. Brown(3) Controller 32 3/1/99
Johnny L. Caudill(4) Vice President - 50 3/1/95
Administration and
Customer Service
John F. Hall Vice President - 56 3/1/95
Finance, Secretary
and Treasurer
Robert C. Hazelrigg Vice President- 52 5/20/93
Public and Consumer
Affairs
Alan L. Heath Vice President - 52 5/21/84
Operations and
Engineering
Glenn R. Jennings President and Chief 50 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 18, 1999, 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. Brown and Mr. Caudill have functioned as
Officers of Delta for at least five years.
(3) Mr. Brown was elected an Officer on March 1, 1999. Mr. Brown held the
position of Manager - Accounting & Finance for 4 years. Prior to that,
Mr. Brown, a Certified Public Accountant, was employed in various accounting
capacities for approximately 5 years by Arthur Andersen LLP.
(4) 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 decicions 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
1999, 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 and the other components of Mr. Jennings' and Mr.
Heath's 1999 salary packages are generally consistent with prior years.
Donald R. Crowe
Billy Joe Hall
Arthur E. Walker, Jr., Committee Chairman
Summary Compensation Table
The following table sets forth information for the last three fiscal years
concerning the compensation of the Company's Chief Executive Officer and
the only Executive Officer whose total annual salary and bonus exceeded
$100,000.
Annual
Name and Compensation All Other
Principal Position Year Salary Bonus Compensation(1)
Glenn R. Jennings 1999 $154,500 $ -- $ 24,000
President and Chief 1998 $150,000 $ -- $ 24,000
Executive Officer 1997 $143,000 $ -- $ 24,000
Alan L. Heath 1999 $100,700 $ -- $ --
Vice President - 1998 $ 97,000 $ -- $ --
Operations and 1997 $ 93,200 $ -- $ --
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, 1994 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 twenty-seven natural gas distribution companies chosen by Edward D. Jones
& Co. The Company is among the twenty-seven companies included in the
Industry Index.
1994 1995 1996 1997 1998 1999
Delta 100 89.6 85.9 104.8 111.7 111.7
S & P Utilities Index 100 115.2 142.5 150.3 195.7 212.6
Industry Index 100 111.6 137.9 156.7 188.7 203.0
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 twenty years and fifteen 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 $158,400. 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 salary of Mr. Heath is $103,300. 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 (6) 4,655 *
(2,055 shares jointly owned)
Jane Hylton Green (6) 8,308
(763 shares jointly owned) *
Billy Joe Hall (6) 4,238 *
John D. Harrison (6) 11,012 *
(10,010 shares jointly owned)
Alan L. Heath (7) 3,723 *
Glenn R. Jennings (6) (7) 6,800 *
Lewis N. Melton (8) 585 *
Harrison D. Peet (6)(10) 17,756 *
(15,000 shares jointly owned)
Virgil E. Scott (6) (9) 12,542 *
Henry C. Thompson (6) 4,433 *
Arthur E. Walker, Jr. (5) 14,990 *
(5,230 shares jointly owned)
All Directors, Officers 95,604 3.9%
and Nominees, as a (33,100 shares jointly owned)
Group (15 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, 1999 annual salary level on a monthly basis. At the
end of fiscal 2000, Delta will issue its Common Stock, based upon 2000
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, 2000, 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 2000. Stock acquired pursuant to the Plan during fiscal 2000
will not be issued until July, 2000. Accordingly, ownership figures in the
above table do not include shares to be issued under the Plan for fiscal 2000.
(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, 1999, are based on information
supplied to Delta by its Officers, Directors and Nominees.
(5) The listed shares include 4,430 shares held by Mr. Walker as guardian for
his children and 800 shares held by his wife.
(6) Director.
(7) Officer.
(8) Nominee.
(9) Term ends in 1999 and has chosen not to stand for re-election.
(10) The listed shares include 15,000 shares held by Mr. Peet's 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, 1999. 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 6%, 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
$118,000 as of August 31, 1999. The maximum amount outstanding during
fiscal 1999 was $136,000.
Shareholders' Proposals For 2000 Annual Meeting
Shareholder proxies in connection with Delta's 2000 annual shareholders'
meeting will confer on the proxyholders discretionary authority to vote on
any matter presented at that meeting, unless notice that such matter will
be presented at the 2000 meeting is provided to Delta no
later than August 28, 2000.
Any proposal by a shareholder to be submitted for possible inclusion in Delta's
proxy soliciting materials for its 2000 annual meeting of shareholders must be
received by Delta no later than June 14, 2000.
Financial Statements
Delta's 1999 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 1999 all filing requirements applicable to their respective
directors, officers, and 10 percent shareholders were satisfied, with the
exception of Mr. John B. Brown, who inadvertently failed to file
timely a Form 3 following his appointment as an officer (Controller) of
Delta on March 1, 1999. Mr. Brown subsequently filed a Form 5 reflecting
his appointment and otherwise reporting pursuant to the requirements of
Form 5.
Other Matters
Management is not aware of any other matters to be presented at the meeting of
Shareholders to be held on November 18, 1999. 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 4, 1999, the record date fixed for
determination of voting rights, Delta had outstanding 2,421,456 shares of
ommon 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, 1999, 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 11, 1999
APPENDIX
FORM OF PROXY
DELTA NATURAL GAS COMPANY, INC.
Holders of Common Stock
Appointment of Proxy
For the Annual Meeting of Shareholders
To Be Held November 19, 1999 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, 1999 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 2002:
Glenn R. Jennings
Lewis N. Melton
Arthur E. Walker, Jr.
__ ___ ___
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 ____________________________, 1999
1999
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, 1999 1998(a) 1997 1996(b) 1995
Summary of Operations ($)
Operating
revenues ........ 38,672,238 44,258,000 42,169,185 36,576,055 31,844,339
Operating
income ........... 6,652,070 6,731,859 5,315,582 5,437,055 4,255,088
Net income ...... 2,150,794 2,451,272 1,724,265 2,661,349 1,917,735
Basic and diluted
earnings per
common share ......... .90 1.04 .75 1.41 1.04
Dividends
declared per
common share ....... 1.14 1.14 1.14 1.12 1.12
Average Number of
Common Shares
Outstanding ......... 2,394,181 2,359,598 2,294,134 1,886,629 1,850,986
Total Assets ($)... 107,473,117 102,866,613 96,681,165 81,140,637 65,948,716
Capitalization ($).......
Common share-
holders' equity .. 29,912,007 29,810,294 29,474,569 23,628,323 22,511,513
Long-term debt .. 51,699,700 52,612,494 38,107,860 24,488,916 23,702,200
Notes payable re-
financed subsequent
to yearend - - - 18,075,000 -
Total
capitalization .. 81,611,707 82,422,788 67,582,429 66,192,239 46,213,713
Short-Term
Debt ($)(c)....... 8,145,000 3,665,000 12,852,600 1,084,800 6,732,700
To Our Shareholders
October 10, 1999 will be the 50th anniversary of Delta's founding. As we
celebrate this milestone, it is a time to reflect on Delta's accomplishments
and to remember all those who have contributed to that process over the last
50 years. We realize Delta has attained its current measure of success
because of the efforts of all those who support it now as well as
all who have worked so hard on Delta's behalf over the years.
Since its beginning serving a few customers as a start-up company, Delta has
continued to grow and develop. Expansion and pursuit of new revenue
sources has been a consistent effort by the Company over the years. Fiscal
1999 was no exception, as Delta's customer base continued to expand. We
plan to continue with this growth into the year 2000 and beyond as
our service area continues to grow and develop. Delta now provides service to
over 37,000 customers with its facilities in 21 Kentucky counties and we plan
to continue growing to meet our area's expanding service needs.
We had a very successful year in 1999 in many respects. Transportation
deliveries to on-system customers increased by 28% as compared with 1998,
reflecting a new, large volume customer, AFG Industries. This glass plant,
located in the Richmond, Kentucky industrial park, was completed in June,
1998. We continued to expand, upgrade and improve our gas systems. We
operated very effectively and efficiently. Customer surveys indicated a high
degree of satisfaction with our natural gas service. We surveyed our
employees and received valuable input and ideas. We emphasize that each of
them is a significant member of the Delta team.
The only shortcoming this year resulted from the impact of weather. Billed
degree days in fiscal 1999 were only 89.4% of thirty-year average ("normal")
degree days, as compared with 93.9% in 1998. As a result, net income per
share was only $.90 per share. This was considerably less than planned
under normal weather conditions, as our sales volumes for 1999 were 725,000
Mcf, or 16%, less than anticipated.
On July 2, 1999 Delta filed a general rate case with the Kentucky Public
Service Commission ("PSC"). This case requested a revenue increase of $2.5
million. The proposed rates were suspended by the PSC for a period expiring
December 31, 1999 while they review and consider the filing. The proposed
changes included a weather normalization tariff whereby Delta would be
permitted to adjust rates to reflect variations from normal weather,
as well as proposed alternative regulatory tariffs that would provide for
annual adjustments in Delta's rates under certain conditions. A public
hearing has been scheduled before the PSC on October 28, 1999.
We are pleased to report that Delta received a Governor's Environmental
Excellence Award in October, 1998. These awards, presented in several
categories, recognize those individuals and organizations who have gone
"above and beyond" in their dedication to the stewardship of Kentucky.
Delta was recognized for the unique methods it used while
constructing a gas pipeline across the Kentucky Ridge State Forest in
connection with our installation of 14 miles of 12" diameter steel pipeline
from our Canada Mountain storage field in Bell County. The route of the
pipeline was altered to preserve rare plants and control runoff and erosion.
Cover crops were planted and topsoil was set aside during construction to
be returned to the disturbed areas for reintroducing microbes and seeds of
native herbaceous and woody vegetation. The Division of Forestry stated that
it was "proud of the results brought about by Delta Gas. This project is
an outstanding example for other utility companies to follow." We are all
very proud of receiving this award and recognition. We thank and
congratulate all who were involved with this project.
As fellow shareholders, we want to express our appreciation for the support
and trust of all Delta's owners. We also express our sincere appreciation
and thanks to all of Delta's directors, officers and employees for their
service and untiring efforts to improve Delta and provide for Delta's
continued growth and success. Delta approaches the 21st century with
strength and optimism while remaining firmly committed to our mission of
quality service to all customers. It is our customers who provide us our
collective livelihood. We must continue to earn their business and trust
each and every day.
Sincerely,
H. D. Peet
Chairman of the Board
Glenn R. Jennings
President and
Chief Executive Officer
August 20, 1999
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, produces and stores gas for distribution to its retail
customers and also provides transportation service to industrial customers and
inter-connected pipelines through facilities located in 21 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 6,800, 6,500, 3,900 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 1.5% in 1999.
Currently, over 99% of Delta's customers are residential and commercial.
Delta's remaining, light industrial customers purchased 5% of the total volume
of gas sold by Delta at retail during 1999.
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.
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 1999 were 3,813,000 Mcf, generating $28,541,000 in
revenues, as compared to 4,112,000 Mcf and $33,435,000 in revenues for 1998.
Heating degree days billed during 1999 were 89.4% of normal as compared with
93.9% in 1998. Sales volumes decreased by 299,000 Mcf, or 7.3%, in 1999 as
compared to 1998.
Delta's transportation of natural gas during 1999 generated revenues of
$4,470,000 as compared with $4,360,000 during 1998. Of the total
transportation in 1999, $4,107,000 (4,434,000 Mcf) and $363,000 (1,144,000
Mcf) were earned for transportation for on-system and off-system customers,
respectively. Of the total transportation for 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.
As an active participant in many areas of the natural gas industry, Delta
plans to continue its efforts to expand its gas distribution system. Delta
continues to consider acquisitions of other gas systems, some of which are
contiguous to its existing service areas, as well as expansion within its
existing service areas. During November, 1996, Delta acquired the City of
North Middletown gas system in Bourbon County, consisting of 180
primarily residential customers. During July, 1997, Delta purchased the
gas system of Annville Gas & Transmission Corporation in Jackson County,
which serves several industrial and residential customers. This system was
expanded by Delta during 1998 to provide gas service to customers in the
City of Annville.
The Company also anticipates continuing activity in gas production and
transportation and plans to pursue and increase these activities wherever
practicable. The Company will continue to consider the construction or
acquisition of additional transmission, storage and gathering facilities to
provide for increased transportation enhanced supply and system flexibility.
During June, 1997, Delta acquired TranEx Corporation, which owns a 43 mile, 8
inch diameter steel pipeline that extends from Clay County to Madison
County. 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.
TranEx Corporation was merged into Delta during 1999.
Some producers in Deltas 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.
Delta's interstate gas supply is transported and/or stored by
Tennessee Gas Pipeline Company ("Tennessee"), Columbia Gas Transmission
Corporation ("Columbia"), Columbia Gulf and Texas Eastern Transmission
Corporation. Delta acquires its interstate gas supply from gas
marketers.
Delta's agreements with Tennessee extend until 2000 and thereafter
continue on a year-to-year basis until terminated by either party. The
company expects to extend the terms of these agreements. Tennessee is
obligated under the agreements to transport up to 17,600 Mcf per day for
Delta. Delta acquires its gas for transportation by Tennessee under an
agreement with a gas marketer. During 1999, Delta purchased 1,167,000 Mcf
from the gas marketer under an agreement that extends through October,
2000.
Delta's agreements with Columbia and Columbia Gulf extend until 2008 and
thereafter continue on a year-to-year basis until terminated by one of the
parties to the particular agreement. Columbia and Columbia Gulf are
obligated under the agreements to transport up to 12,000 Mcf per day and 4,000
Mcf per day, respectively, for Delta. Delta acquires its gas for
transportation by Columbia and Columbia Gulf under agreements that extend
through April, 2000.
Delta has an agreement with Columbia Natural Resources ("CNR") to purchase gas
from CNR through October, 1999. Delta purchased 432,000 Mcf from CNR during
1999.
Delta has agreements with its wholly-owned subsidiary, Enpro,
to purchase all the natural gas produced from Enpro's wells on certain leases
in Bell, Knox and Whitley Counties, Kentucky. These agreements remain in
force so long as gas is produced in commercial quantities from the wells on
the leases. Remaining proved, developed natural gas reserves are estimated
at 3,700,000 Mcf. Delta purchased a total of 189,000 Mcf from those
properties during 1999. Enpro also produces oil from certain of these
leases, but oil production has not been significant.
Delta's wholly-owned subsidiaries, Delta Resources, Inc. ("Resources") and
Delgasco, Inc. ("Delgasco") purchase gas under agreements with various
marketers and Kentucky producers. The gas is resold to industrial
customers on Delta's system, to Delta for system supply and to others.
The combined volumes of gas purchased by Resources and Delgasco from
these sources during 1999 were 2,235,000 Mcf.
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.
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 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.
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.
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 PSC is reviewing and considering the proposed
rates. The proposed changes include 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. A public hearing has been
scheduled before the PSC on October 28, 1999.
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 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 1999 were $8.0 million and for 2000 are estimated
to be $9.9 million. 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 1999 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.
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 Business - Regulatory Matters).
The Company's business is temperature-sensitive. Accordingly, the Company's
operating results in any given period reflect, in addition to other factors,
the impact of weather, with colder temperatures generally resulting in
increased sales by the Company. The Company anticipates that this
sensitivity to seasonal and weather conditions will continue to be so
reflected in the Company's operating results in future periods.
Liquidity and Capital Resources
Because of the seasonal nature of Delta's sales, the smallest proportion of
cash generated from operations is received during the warmer months when sales
volumes decrease considerably. Additionally, most construction activity
takes place during the non-heating season because of more favorable weather
conditions. During the warmer, non-heating months, therefore, cash needs
for operations and construction are partially met through short-term
borrowings.
Capital expenditures for Delta for fiscal 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 $5,695,000 was borrowed at June 30, 1999.
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 $24,100,000 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 last three years are summarized below:
1999 1998 1997
Provided by operating activities $ 6,680,276 $ 8,922,037 $ 6,209,226
Used in investing activities (7,982,143) (11,193,613) (16,648,994)
Provided by financing activities 1,431,919 1,909,689 10,768,558
Net increase (decrease) in cash and cash equivalents
$ 130,052 $ (361,887) $ 328,790
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 decrease in operating revenues of $5,586,000 for 1999 was due primarily
to decreases in the cost of gas purchased that were reflected in rates
billed to customers through Delta's gas cost recovery clause and to
decreases in sales volumes. Mcf sales decreased 299,000 Mcf, or 7% as
compared to 1998, resulting from warmer winter weather in 1999. Heating
degrees billed were 89% of normal in 1999, compared with 94% in 1998.
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
94% of normal degree days for 1998 as compared with 104% for 1997.
Operating Expenses
The decrease in purchased gas expense for 1999 of $6,032,000 was due
primarily to the decreases in the cost of gas purchased for retail sales and
from decreased gas purchases for retail sales resulting from the warmer
winter weather in 1999.
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 increases in depreciation expense during 1999 and 1998 of $396,000 and
$510,000, respectively, were due primarily to additional depreciable plant.
The increase in taxes other than income taxes during 1999 and 1998 of $123,000
and $155,000, respectively 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 1999 and 1998 of $162,000 and $436,000,
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.
Basic and Diluted Earnings Per Common Share
For the years ended June 30, 1999 and 1998, 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 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 the Delta's gas distribution
system, acquisitions of gas customers and systems, activity in gas
production and transportation and acquisition and management 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.
Factors that could cause future results to differ materially from those
expressed in or implied by the forward-looking statements or historical
results include the impact or outcome of:
- - The ongoing restructuring of the gas industry and the outcome of the
regulatory proceedings related to that restructuring.
- - The changing regulatory environment generally.
- - A change in the right under present regulatory rules to recover through
rates increased costs of gas supply.
- - Uncertainty as to regulatory approval for full recovery of Delta's costs and
for its expenditures for regulatory assets.
- - Uncertainty as to the outcome of Delta's pending general rate case.
- - Uncertainty in Delta's capital expenditure requirements.
- - Changes in economic conditions, demographic patterns and weather
conditions in Delta's retail service areas.
- - Changes affecting Delta's cost of providing gas service, including
changes in interest rates, changes in the availability of external sources
of financing for Delta's operations, tax laws, environmental laws, and the
general rate of inflation.
- - Changes affecting the cost of competing energy alternatives and competing gas
distributors.
- - Changes in accounting principles or the application of such principles to
Delta.
- - Y2K disruptions resulting from unidentified or unremediated problems for
systems which Delta controls, and Y2K disruptions resulting from systems or
parties which Delta does not control.
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, 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 approximately 97% of these inventoried items,
systems and service providers. This assessment percentage for the items
Delta deems as "critical" stands at 98%. 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 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 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 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.
New Accounting Pronouncements
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.
Delta adopted SFAS No. 130, "Comprehensive Income" during the quarter
ended September 30, 1998. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The adoption of this statement had
no impact on the financial statements of the Company.
Delta adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information" and SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits" in the fourth quarter of fiscal
1999. These statements do not affect the accounting recognition or
measurements of transactions, but rather require expanded disclosures
regarding financial results.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. This statement is
effective for fiscal years beginning after June 15, 1999. It will be
effective for the Company's fiscal year 2000. Delta does not have
derivative instruments and does not enter into financial hedges.
The Company is still evaluating the impact, if any, this standard will have
on the financial statements.
Consolidated Statements of Income
For the Years Ended June 30, 1999 1998 1997
Operating Revenues ............ $ 38,672,238 $ 44,258,000 $ 42,169,185
Operating Expenses
Purchased gas .............. $ 16,467,988 $ 22,499,488 $ 23,265,222
Operation and maintenance
(Note 1) ................. 9,137,107 8,968,213 8,631,635
Depreciation and depletion
(Note 1) ................. 3,840,996 3,445,382 2,935,257
Taxes other than income
taxes .................... 1,334,977 1,212,058 1,056,689
Income taxes (Note 2) ...... 1,239,100 1,401,000 964,800
Total operating expenses. $32,020,168 $ 37,526,141 $ 36,853,603
Operating Income .............. $ 6,652,070 $ 6,731,859 $ 5,315,582
Other Income and Deductions, Net 33,660 67,911 40,874
Income Before Interest Charges. $ 6,685,730 $ 6,799,770 $ 5,356,456
Interest Charges
Interest on long-term debt.. $ 3,912,826 $ 3,326,681 $ 2,997,393
Other interest ............. 460,950 897,265 519,432
Amortization of debt expense 161,160 124,552 115,366
Total interest charges .. $ 4,534,936 $ 4,348,498 $ 3,632,191
Net Income $ 2,150,794 $ 2,451,272 $ 1,724,265
Weighted Average Number of
Common Shares Outstanding ... 2,394,181 2,359,598 2,294,134
Basic and Diluted Earnings Per
Common Share. . . . . . . . . . $ .90 $ 1.04 $ .75
Dividends Declared Per Common
Share ....................... $ 1.14 $ 1.14 $ 1.14
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999 1998 1997
Cash Flows From Operating Activities
Net income ...................... $ 2,150,794 $ 2,451,272 $ 1,724,265
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation, depletion and
amortization ............... 3,941,370 3,755,929 3,049,229
Deferred income taxes and
investment tax credits ..... 662,880 (29,400) 485,400
Other - net .................. 730,601 698,584 666,798
(Increase) decrease in assets:
Accounts receivable .......... 908,917 (124,168) (318,178)
Gas in storage ............... (1,451,177) (840,829) (782,007)
Materials and supplies ....... (144,468) 252,746 (120,969)
Prepayments .................. 53,642 70,648 (346,532)
Other assets ................. (446,988) (55,440) (541,669)
Increase (decrease) in
liabilities:
Accounts payable ............. 273,755 (336,089) (439,721)
Refunds due customers ........ (75,774) (460,751) 554,520
Advance recovery of gas cost.. 50,446 3,328,625 495,751
Accrued taxes ................ (131,091) (46,549) 1,038,761
Other current liabilities .... 160,329 257,055 744,054
Advances for construction and
other ...................... (2,960) 404 (476)
Net cash provided by
operating activities .... $ 6,680,276 $ 8,922,037 $ 6,209,226
Cash Flows From Investing Activities
Capital expenditures ............ $ (7,982,143) $(11,193,613) $(16,648,994)
Net cash used in investing
activities .............. $ (7,982,143) $(11,193,613) $(16,648,994)
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1999 1998 1997
Cash Flows From Financing
Activities (Note 6)
Dividends on common stock ....... $ (2,728,997) $ (2,690,233) $ (2,651,073)
Issuance of common stock, net.... 679,916 574,686 6,773,054
Issuance of debentures, net...... - 23,837,795 14,334,833
Repayment of long-term debt ..... (339,000) (10,822,559) (478,256)
Issuance of notes payable........ 21,615,000 26,200,000 30,975,000
Repayment of notes payable....... (17,795,000) (35,190,000) (38,185,000)
Net cash provided by
financing activities $ 1,431,919 $ 1,909,689 $ 10,768,558
Net Increase (Decrease) in Cash and
Cash Equivalents ................... $ 130,052 $ (361,887) $ 328,790
Cash and Cash Equivalents,
Beginning of Year .................. 118,536 480,423 151,633
Cash and Cash Equivalents,
End of Year ........................ $ 248,588 $ 118,536 $ 480,423
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 4,685,458 $ 4,291,005 $ 3,019,881
Income taxes (net of refunds) $ 712,023 $ 1,642,964 $ (432,163)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
As of June 30, 1999 1998
Assets
Gas Utility Plant, at cost ............... $133,804,954 $127,028,159
Less - Accumulated provision for
depreciation ......................... (38,308,798) (34,929,481)
Net gas plant $ 95,496,156 $ 92,098,678
Current Assets
Cash and cash equivalents ............. $ 248,588 $ 118,536
Accounts receivable, less accumulated
provisions for doubtful accounts of
$138,514 and $120,001 in 1999 and
1998, respectively .................. 1,629,883 2,538,800
Gas in storage, at average cost ....... 3,501,177 2,050,000
Materials and supplies, at first-in,
first-out cost ...................... 664,830 520,362
Prepayments ........................... 188,089 241,731
Total current assets $ 6,232,567 $ 5,469,429
Other Assets
Cash surrender value of officers' life
insurance (face amount of $1,236,009). $ 339,450 $ 339,215
Note receivable from officer ........... 122,000 110,000
Unamortized debt expense and other
(Note 6) ............................. 5,282,944 4,849,291
Total other assets $ 5,744,394 $ 5,298,506
Total assets $107,473,117 $102,866,613
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (continued)
As of June 30, 1999 1998
Liabilities and Shareholders' Equity
Capitalization (See Consolidated Statements
of Capitalization)
Common shareholders' equity .......... $ 29,912,007 $ 29,810,294
Long-term debt (Notes 6 and 7)........ 51,699,700 52,612,494
Total capitalization .............. $ 81,611,707 $ 82,422,788
Current Liabilities
Notes payable (Note 5) ............... $ 5,695,000 $ 1,875,000
Current portion of long-term
debt (Notes 6 and 7)................ 2,450,000 1,790,000
Accounts payable ..................... 2,324,383 2,050,628
Accrued taxes ........................ 954,675 1,085,766
Refunds due customers ................ 41,349 117,123
Advance recovery of gas costs (Note 1) 1,198,465 1,148,019
Customers' deposits .................. 524,263 438,134
Accrued interest on debt ............. 1,225,903 1,215,265
Accrued vacation ..................... 584,014 528,952
Other accrued liabilities ............ 493,518 485,018
Total current liabilities $ 15,491,570 $ 10,733,905
Deferred Credits and Other
Deferred income taxes ................ $ 8,826,655 $ 8,023,475
Investment tax credits ............... 567,800 637,300
Regulatory liability (Note 2) ........ 760,625 831,425
Advances for construction and other .. 214,760 217,720
Total deferred credits and other $ 10,369,840 $ 9,709,920
Commitments and Contingencies (Note 8) ..
Total liabilities and
shareholders' equity ............ $107,473,117 $102,866,613
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in
Shareholders' Equity
For the Years Ended June 30, 1999 1998 1997
Common Shares
Balance, beginning of year ...... $ 2,375,093 $ 2,342,223 $ 1,903,580
$1.00 par value of 38,849,
32,870 and 438,643
shares issued in 1999,
1998 and 1997, respectively:
Public issuance of common shares. - 400,000 -
Dividend reinvestment and stock
purchase plan ............ 32,551 27,124 31,187
Employee stock purchase plan and
other ....................... 6,298 5,746 7,456
Balance, end of year ............$ 2,413,942 $ 2,375,093 $ 2,342,223
Premium on Common Shares
Balance, beginning of year .... $ 27,745,127 $ 27,203,311 $ 20,572,132
Premium on issuance of common shares:
Public issuance of common shares .. - - 6,000,000
Dividend reinvestment and stock
purchase plan ................ 536,520 446,432 519,478
Employee stock purchase plan and
other ........................ 104,547 95,384 111,701
Balance, end of year ..... .... . $ 28,386,194 $ 27,745,127 $ 27,203,311
Capital Stock Expense
Balance, beginning of year .... $ (1,917,020) $ (1,917,020) $ (1,620,252)
Issuance of common shares -___ -___ (296,768)
Balance, end of year ....... .... $ (1,917,020) $ (1,917,020) $ (1,917,020)
Retained Earnings
Balance, beginning of year ..... $ 1,607,094 $ 1,846,055 $ 2,772,863
Net income ................... 2,150,794 2,451,272 1,724,265
Cash dividends declared on common
shares (See Consolidated
Statements of Income for rates).. (2,728,997) (2,690,233) (2,651,073)
Balance, end of year ....... ... $ 1,028,891 $ 1,607,094 $ 1,846,055
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Capitalization
As of June 30, 1999 1998
Common Shareholders' Equity
Common shares, par value $1.00 per share
(Notes 3 and 4)
Authorized 6,000,000 shares
Issued and outstanding 2,413,942 and
2,375,093 shares in 1999 and
1998, respectively ................... $ 2,413,942 $ 2,375,093
Premium on common shares .................. 28,386,194 27,745,127
Capital stock expense ..................... (1,917,020) (1,917,020)
Retained earnings (Note 6) ................ 1,028,891 1,607,094
Total common shareholders' equity ...... $29,912,007 $29,810,294
Long-Term Debt (Notes 6 and 7)
Debentures, 8.3%, due 2026 ................ $15,000,000 $15,000,000
Debentures, 6 5/8%, due 2023 .............. 12,886,000 13,170,000
Debentures, 7.15%, due 2018 . . . . . . . . 24,985,000 25,000,000
Promissory note from acquisition of under-
ground storage, non-interest bearing,
due through 2001 (less unamortized
discount of $121,300 and $207,506 in
1999 and 1998, respectively) 1,278,700 1,192,494
Other -___ 40,000
Total long-term debt ................. $54,149,700 $54,402,494
Less amounts due within one year,
Included in current liabilities ....... (2,450,000) (1,790,000)
Net long-term debt ................... $51,699,700 $52,612,494
Total capitalization .............. $81,611,707 $82,422,788
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 four 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. All
subsidiaries of Delta are included in the consolidated financial
statements. Intercompany balances and transactions have been eliminated.
(b) Cash Equivalents -- For the purposes of the Consolidated Statements of Cash
Flows, all temporary cash investments with a maturity of three months or less
at the date of purchase are considered cash equivalents.
(c) Depreciation -- The Company determines its provision for depreciation
using the straight-line method and by the application of rates to various
classes of utility plant. The rates are based upon the estimated service
lives of the properties and were equivalent to composite rates of 3.2%,
3.1% and 3.0% of average depreciable plant for 1999, 1998, and 1997,
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 37,000 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 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.
Delta adopted SFAS No. 130, "Comprehensive Income" during the quarter ended
September 30, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact
on the financial statements of the company.
Delta adopted SFAS No. 131, "Disclosures about segments of an Enterprise and
Related Information" and SFAS No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits" in the fourth quarter of fiscal 1999.
These statements do not affect the accounting recognition or measurements
of transactions, but rather require expanded disclosures regarding
financial results.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. This statement
is effective for fiscal years beginning after June 15, 1999 so it will be
effective for the Company's fiscal year 2000. Delta does not have
derivative instruments and does not enter into financial hedges. The
Company is still evaluating the impact, if any, this standard will have on
the financial statements.
(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:
1999 1998
Deferred Tax Liabilities
Accelerated depreciation $10,546,000 $ 9,933,400
Accrued pension 789,700 568,900
Debt expense 467,200 487,400
Total $11,802,900 $10,989,700
Deferred Tax Assets
Alternative minimum tax credits $ 1,521,100 $ 1,274,100
Regulatory liabilities 193,445 486,245
Deferred gas cost/unbilled revenue 718,400 670,100
Investment tax credit 224,000 251,400
Other 319,300 284,380
Total $ 2,976,245 $ 2,966,225
Net accumulated deferred
income tax liability $ 8,826,655 $ 8,023,475
The components of the income tax provision are comprised of the following for
the years ended June 30:
1999 1998 1997
Components of Income Tax Expense:
Payable currently:
Federal $ 563,400 $ 1,164,800 $ 242,200
State 63,000 265,600 (31,300)
Total 626,400 $ 1,430,400 $ 210,900
Deferred 612,700 (29,400) 753,900
Income tax expense $1,239,100 $ 1,401,000 $ 964,800
Reconciliation of the statutory federal income tax rate to the effective
income tax rate is shown in the table below:
1999 1998 1997
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes net of federal benefit 5.2 5.0 5.0
Amortization of investment tax credit 2.0 (1.8) (2.6)
Other differences - net 0.4_ (.2) -
Effective income tax rate 36.8% 37.0% 36.4%
(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 following table provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
March 31, 1999, and a statement of the funded status as of March 31 of both
years, as recognized in the Company's consolidated balance sheets at June 30.
1999 1998
Change in benefit obligation
Benefit obligation at beginning of year $ 6,745,269 $ 6,345,500
Service cost 467,417 445,288
Interest cost 471,939 443,955
Actuarial gain 711,063 (6,677)
Benefits paid (109,322) (482,797)
Benefit obligation at end of year $ 8,286,366 $ 6,745,269
Change in plan assets
Fair value of plan assets at
beginning of years $ 8,637,638 $ 6,835,393
Actual return on plan assets 44,213 1,564,402
Employer contribution 615,921 720,640
Benefits paid (109,322) (482,797)
Fair value of plan assets at end of year $ 9,188,450 $ 8,637,638
Funded status $ 902,084 $ 1,892,369
Unrecognized net actuarial loss 512,737 (869,909)
Unrecognized prior service cost (127,183) (169,577)
$ 1,287,638 $ 852,883
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:
1999 1998 1997
Components of net periodic
benefit cost
Service cost $ 467,417 $445,288 $ 405,386
Interest cost 471,939 443,955 392,539
Expected return on plan assets (715,385) (575,394) (502,414)
Amortization of prior
service cost (42,804) (42,394) (42,394)
Net periodic benefit cost $ 181,167 $271,455 $ 253,117
Weighted-average assumptions
as of March 31
Discount rate 7% 7% 7%
Expected return on plan assets 8% 8% 8%
Rate of compensation increase 4% 4% 4%
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, 1999, 1998 and 1997 were 7%
(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
1999, 1998, and 1997, Delta's Savings Plan expense was $169,300, $156,000
and $151,000, 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 $113,000 was issued in July, 1999. 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, 2000.
(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
32,551, 27,124, and 31,187 shares were issued in 1999, 1998, and 1997,
respectively. Delta reserved 200,000 shares under the Reinvestment Plan in
December, 1994, and as of June 30, 1999, there were 63,929 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, 1999 and
1998, the available line of credit was $25,000,000 of which $5,695,000 and
$1,875,000 had been borrowed at an interest rate of 5.510%, and 6.885%
for 1999 and 1998, respectively. The maximum amount borrowed during 1999 and
1998 was $9,435,000 and $20,160,000, 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, 1999.
Short-term borrowings were repaid in March, 1998, with the net proceeds of
$24,100,000 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.
(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, 1999 and 1998 was estimated to be $49,810,000 and
$54,387,000, respectively. The carrying amount in the accompanying
consolidated financial statements as of June 30, 1999 and 1998 is
$52,871,000 and $53,170,000, 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 six
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) Operating Segments
Delta adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", during fiscal 1999. SFAS No. 131 established
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services
in geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group is the Company's officers.
The Company has two segments (i) a regulated natural gas distribution,
transmission and storage segment, and (ii) an unregulated segment which
participates in related ventures, consisting of natural gas marketing and
production. The Company operates in a single geographic area of central and
southeastern Kentucky.
The segments follow the same accounting policies as described in the
Summary of Significant Accounting Policies and Principles of Consolidation
in Note 1 of the Notes to Consolidated Financial Statements. Because the
Company earns revenues on the transportation of natural gas in its regulated
segment, management evaluates the performance of the unregulated natural gas
marketing subsidiaries based on the additional margin added from their sales
and their ability to maintain contact with customers who choose to transport
on the regulated system. Intersegment transportatio revenue/expense is
recorded at Delta's tariff rates. Transfer pricing for the sales of gas
between segments is at cost. Operating expenses, taxes and interest are
allocated to the unregulated segment.
Segment information is shown below for the periods:
($000) 1999 1998 1997
Revenues
Regulated
Esternal customers 30,000 34,550 34,567
Intersegment 5,496 5,187 3,602
Total regulated 35,496 39,737 38,169
Non-regulated
External customers 8,672 9,708 7,602
Intersegment 15,881 14,467 13,999
Total non-regulated 24,553 24,175 21,601
Eliminations for intersegment (21,377) (19,654) (17,601)
Total operating revenues 38,672 44,258 42,169
Operating Expenses
Regulated
Depreciation 3,804 3,399 2,896
Income taxes 1,001 1,089 772
Other 24,398 28,984 29,438
Total regulated 29,203 33,472 33,106
Non-regulated
Depreciation 37 46 39
Income taxes 238 312 193
Other 23,838 23,277 21,043
Total non-regulated 24,113 23,635 21,275
Eliminations for intersegment (21,296) (19,581) (17,527)
Total operating expenses 32,020 37,526 36,854
Other Income and Deductions
Regulated 25 37 41
Non-regulated 9 31 -
Eliminations for intersegment 34 68 41
Total other income and
deductions
Net Income
Regulated 1,766 1,922 1,409
Non-regulated 385 529 315
Total net income 2,151 2,451 1,724
Assets
Regulated 105,716 101,016 94,407
Non-regulated 1,757 1,851 2,274
Total assets 107,473 102,867 96,681
Capital Expenditures
Regulated 7,981 11,192 16,648
Non-regulated 1 2 -
Total capital expenditures 7,982 11,194 16,648
(11) Quarterly Financial Data
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
Net Earnings(Loss)
Quarter Operating Operating Income per Common
Ended Revenues Income Income(Loss) Share(a)
Fiscal 1999
September 30 $ 4,938,135 431,693 (693,777) $ (.29)
December 31 8,630,074 1,415,274 252,775 .11
March 31 16,890,711 3,651,078 2,515,336 1.05
June 30 8,213,318 1,154,025 76,460 .03
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
(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 Companpy, 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, 1999 and 1998, 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,
1999. 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 standards.
These 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Louisville, Kentucky
August 16, 1999
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 and Officers
Board of Directors
Standing left to right:
Glenn R. Jennings (c)
President and
Chief Executive Officer
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
Donald R. Crowe (a)
Retired Senior Analyst
Department of Insurance
Commonwealth of Kentucky
Lexington, Kentucky
Billy Joe Hall (a)
Investment Broker
LPL Financial Services
(general brokerage services)
Mount Sterling, Kentucky
Seated left to right:
John D. Harrison (b)
Retired President
Power Line Construction Co.
(utility construction contractor)
Stanton, Kentucky
Jane Hylton Green (b)
Retired Vice President -
Human Resources and
Corporate Secretary
Harrison D. Peet (c)
Chairman of the Board
Retired President
and Chief Executive Officer
Virgil E. Scott (b)
Retired Vice President -
Administration
Retired Director, Resources
Delgasco, Deltran and Enpro
Officers
Standing left to right:
John F. Hall
Vice President-
Finance, Secretary and Treasurer
Johnny L. Caudill
Vice President-
Administration and
Customer Service
Glenn R. Jennings
President and
Chief Executive Officer
Robert C. Hazelrigg
Vice President-
Public and Consumer Affairs
Alan L. Heath
Vice President-
Operations and Engineering
John B. Brown
Controller
(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
1999 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.
1999 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 18, 1999, 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 11, 1999.
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 Emily P. Bennett, Director -
Corporate Services, 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.
