Delta Natural Gas Company, Inc.
3617 Lexington Road
Winchester, Kentucky 40391
Notice To Common Shareholders Of Annual Meeting
To Be Held November 16, 2000
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 16, 2000 at
10:00 a.m. for the purposes of:
1. Electing three Directors for three year terms expiring in 2003, one Director
for one year term expiring in 2001; and
2. Acting on such other business as may properly come before the meeting.
Holders of Common Stock of record at the close of business on October 2, 2000
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 9, 2000
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 9, 2000. 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 2000, 2001 or 2002. The terms of three Directors, Jane
Hylton Green, Harrison D. Peet and Henry C. Thompson, are scheduled to end
in 2000. Henry C. Thompson has chosen not to stand for re-election as a
Director. Accordingly, Michael R. Whitley is nominated to replace Mr.
Thompson as a Director for a three year term ending in 2003. Jane Hylton
Green and Harrison D. Peet are nominated to continue as Directors for a new
three year term ending 2003.
John D. Harrison resigned from Delta's Board of Directors effective January 15,
2000, and the Board of Directors appointed Lanny D. Greer to fill the vacancy
created by Mr. Harrison's resignation. Mr. Greer now is nominated as a
Director to complete the normal term of Mr. Harrison, which will expire in
2001.
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 Jane Hylton Green, Lanny D.
Greer, Harrison D. Peet and Michael R. Whitley 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 (2) - 66 Retired Senior Analyst 1966 to present
Director Department of Insurance
Commonwealth of Kentucky
Lexington, Kentucky
Jane Hylton Green (1) - 70 Retired Vice President - 1976 to present
Director Human Resources and
Secretary, Delta and
Delta's subsidiaries
Lanny D. Greer (2) - 49 Chairman of the Board and 2000 to present
Director President, First National
Financial Corporation and
First National Bank
(commercial banking); both of
Manchester, Kentucky
Billy Joe Hall (2) - 63 Investment Broker, 1978 to present
Director LPL Financial Services
(general brokerage
services)
Mount Sterling, Kentucky
Glenn R. Jennings (3) - 51 President and Chief 1984 to present
Vice Chairman of the Executive Officer and
Board, President and Director of Delta's
Chief Executive Officer subsidiaries
Lewis N. Melton (3)- 60 Professional Engineer 1999 to present
Director Secretary
Vaughn & Melton, Inc.
Middlesboro, Kentucky
(consulting engineering)
Harrison D. Peet (1) - 80 Chairman of the Board of 1950 to present
Chairman of the Board Delta's subsidiaries
Arthur E. Walker, Jr.(3) - 55
Director President 1981 to present
The Walker Company
(general and
highway construction)
Mount Sterling, Kentucky
Michael R. Whitley - 57 Retired President and Nominee
Chief Operating Officer
LG&E Energy,
Louisville, Kentucky;
Chairman of the Board,
President and Chief
Executive Officer
KU Energy and Kentucky
Utilities
Lexington, Kentucky
(1) Term expires November 18, 2000.
(2) Term expires on date of Annual Meeting of Shareholders in 2001.
(3) Term expires on date of Annual Meeting of Shareholders in 2002.
Committees and Board Meetings
Delta has an Audit Committee comprised of Mrs. Green and Messrs. Greer, Melton
and Thompson. The Committee, which met one time during fiscal 2000, 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. The Committee was in compliance
with its written charter.
Delta has a Nominating and Compensation Committee comprised of Messrs. Crowe,
Hall and Walker. The Committee, which met three times during fiscal 2000, 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 2000, 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 2000, 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 $3,600. Mr. Jennings, as Vice-Chairman of the Board
of Directors, is paid a monthly fee of $1,000. Each Non-Officer Director
(except for the Chairman) received a bonus of $576. Mr. Peet, as Chairman
of the Board of Directors, received a bonus of $3,456. Mr. Jennings, as
Vice-Chairman of the Board of Directors, received a bonus of $960.
In addition, each Director was issued one hundred shares of Delta's common
stock in fiscal year 2000.
Officers of Delta
Date Began
in this
Name Position(1) Age Position(2)
John B. Brown(3) Controller 33 3/1/99
Johnny L. Caudill Vice President - 51 3/1/95
Administration and
Customer Service
John F. Hall Vice President - 57 3/1/95
Finance, Secretary
and Treasurer
Robert C. Hazelrigg Vice President- 53 5/20/93
Public and Consumer
Affairs
Alan L. Heath Vice President - 53 5/21/84
Operations and
Engineering
Glenn R. Jennings Vice-Chairman of the 51 6/1/00
Board, President and
Chief Executive Officer
(1) Each Officer is normally elected to serve a one year term. Each Officer's
current term is scheduled to end on November 16, 2000, 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, 2004 (see "Employment Agreement and Change in Control
Agreement").
(2) All current Officers except Mr. Brown 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.
Board Nominating and Compensation Committee
Report on Executive Compensation
The Nominating and Compensation Committee of the Board of Directors
("Committee") is composed of three independent, non-employee directors.
Among other duties, the Committee is responsible for developing and making
recommendations to the Board with respect to Delta's executive compensation.
All decisions by the Committee relating to the compensation of Delta's
executive officers, including the Chief Executive Officer, are reviewed and
given final approval by the full Board of Directors. During 2000, 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
2000 salary packages are generally consistent with prior years.
Arthur E. Walker, Jr., Committee Chairman
Donald R. Crowe
Billy Joe Hall
Audit Committee Report
The Audit Committee is made up of non-employee, financially literate,
independent directors. Members of the Audit Committee have accounting or
related financial management expertise. The Audit Committee has adopted a
written charter, which is attached to this Proxy Statement as Appendix A.
The Committee has complied with its charter including the requirement to
meet periodically with Delta's independent auditors, its internal auditor
and management to discuss the auditors' findings and other financial and
accounting matters.
Arthur Andersen LLP, Delta's independent auditor, has provided the Audit
Committee with written assurance of its independence (as required by
Independence Standards Board Standard No. 1). The Audit Committee also met
with Arthur Andersen and discussed Arthur Andersen's independence, the results
of its audit and other matters required to be discussed by applicable
accounting standards (including SAS 61).
The Audit Committee has also reviewed and discussed with management the
audited financial statements that appear in the 2000 Annual Report.
Based on all of its activities during the year, the Audit Committee recommended
to the Board of Directors that the financial statements for 2000 be included
in the Annual Report on Form 10-K for filing with the Securities and Exchange
Commission.
Respectfully submitted,
THE AUDIT COMMITTEE
Jane Hylton Green, Committee Chair
Lanny D. Greer
Lewis N. Melton
Henry C. Thompson
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 2000 $159,400 $ 12,992 $ 24,000
Vice-Chairman of 1999 $154,500 $ -- $ 24,000
the Board, 1998 $150,000 $ -- $ 24,000
President and Chief
Executive Officer
Alan L. Heath 2000 $103,300 $ 4,240 $ --
Vice President - 1999 $100,700 $ -- $ --
Operations and 1998 $ 97,000 $ -- $ --
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, 1995 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-three natural gas distribution companies chosen by Edward D. Jones
& Co. The Company is among the twenty-three companies included in the
Industry Index.
1995 1996 1997 1998 1999 2000
Delta 100.0 95.9 117.0 124.7 124.7 123.1
S & P Utilities Index 100.0 123.7 130.5 169.9 184.5 191.7
Industry Index 100.0 123.6 140.4 169.1 181.9 172.4
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-one years and sixteen years,
respectively, of credited service in the plan.
Employment Agreement and
Change in Control Agreement
Delta entered into an agreement with Mr. Jennings on March 1, 2000 that
provides for Mr. Jennings' employment in his present capacity through
November 30, 2004, and such agreement automatically extends one additional
year on each November 30, unless either Delta or Mr. Jennings deliver to the
other notice that such automatic extension shall not occur. This agreement
provides for the termination of Mr. Jennings' employment in the event of his
death or disability 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 generally to include:
(i) the acquisition of 20% of Delta's voting stock by any entity, group or
person; (ii) a change in the majority of Delta's Board of Directors; or
(iii) certain organic changes involving Delta (e.g., reorganizations,
mergers, share exchanges, consolidations, liquidations, sale of
substantially all of Delta's assets, or similar transactions) that
result in significant shifts in the ownership or control of Delta.
If Delta terminates Mr. Jennings' employment in violation of the agreement,
Delta is required to continue to pay Mr. Jennings as severance pay his
salary for the number of years remaining under the agreement, but in no
event less than three years. If Mr. Jennings terminates his employment in
good faith following a change in control, as described in the preceding
paragraph, he is entitled to payment of the same total amount of severance
pay described in the immediately preceding sentence, but in a lump sum
payment, payable upon his termination. Mr. Jennings' current yearly salary
is $162,400.
If Delta terminates Mr. Jennings in violation of the agreement, or if Mr.
Jennings terminates his employment in good faith following a change in
control, then, in addition to his severance pay, Mr. Jennings, for the years
remaining under the agreement, but in no event less than three years, will
continue to participate in all employee benefits and programs for which he
otherwise would have been eligible and may at his option elect to receive
title to the automobile then being provided to him by Delta, and Delta will
forgive any remaining balance on the loan made to him (see "Certain
Relationships and Related Transactions: for a description of this
loan) and will pay Mr. Jennings an amount equal to any state or federal excise
taxes he is required to pay as a result of payments made to him under the
agreement.
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 March 1, 2000, Delta entered into an agreement with Mr. Heath. The terms of
the agreement become operative with a change in control while Mr. Heath is a
corporate officer of Delta. For the purpose of the agreement, a change in
control is defined generally to include: (i) the acquisition of 20% of
Delta's voting stock by any entity, group or person; (ii) a change in the
majority of Delta's Board of Directors; or (iii) certain organic changes
involving Delta (e.g., reorganizations, mergers, share exchanges,
consolidations, liquidations, sale of substantially all of Delta's assets,
or similar transactions) that result in significant shifts in the ownership
or control of Delta.
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 the levels, immediately before the change in
control, of his employee benefit plans and practices.
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 $106,000. If so terminated without cause, Mr. Heath
may elect to receive his total base salary due as a lump sum payment and, in
lieu of Delta's normal obligation to furnish him an automobile, may elect to
receive title to the automobile then currently being furnished to him.
Delta also agrees to pay Mr. Heath an amount equal to any state or federal
excise taxes he is required to pay as a result of payments made to
him under the agreement. 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.
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) 4,912 *
(2,212 shares jointly owned)
Jane Hylton Green (6) 9,044
(821 shares jointly owned) *
Lanny D. Greer (6) 100 *
Billy Joe Hall (6) 4,662 *
John D. Harrison (6) 11,012 *
(10,010 shares jointly owned)
Glenn R. Jennings (6) (7) 7,375 *
Lewis N. Melton (6) 3,073 *
Harrison D. Peet (6)(10) 17,456 *
(14,600 shares jointly owned)
Henry C. Thompson (6) 8,175 *
Arthur E. Walker, Jr. (5)(6) 16,136 *
(8,536 shares jointly owned)
Michael R. Whitley (8) 4,000 *
All Directors, Officers 68,244 2.8%
and Nominees, as a (26,215 shares jointly owned)
Group (14 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, 2000 annual salary level on a monthly basis. At the end of
fiscal 2001, Delta will issue its Common Stock, based upon 2001 contri-
butions, 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, 2001, 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 2001. Stock acquired pursuant
to the Plan during fiscal 2001 will not be issued until July, 2001.
Accordingly, ownership figures in the above table do not include shares to
be issued under the Plan for fiscal 2001.
(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, 2000, are based on information
supplied to Delta by its Officers, Directors and Nominees.
(5) The listed shares include 4,769 shares held by Mr. Walker as guardian for
his children and 860 shares held by his wife.
(6) Director.
(7) Officer.
(8) Nominee.
(9) Term ends in 2000 and has chosen not to stand for re-election.
(10) The listed shares include 14,600 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, 2000. 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 $160,000. 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 $148,000 as of August
31, 2000. The maximum amount outstanding during fiscal 2000 was $160,000.
Shareholders' Proposals For 2001 Annual Meeting
Shareholder proxies in connection with Delta's 2001 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 2001 meeting is provided to Delta no later than August 28,
2001.
Any proposal by a shareholder to be submitted for possible inclusion in Delta's
proxy soliciting materials for its 2001 annual meeting of shareholders must be
received by Delta no later than June 11, 2001.
Financial Statements
Delta's 2000 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 2000 all filing requirements applicable to their respective
directors, officers, and 10 percent shareholders were satisfied.
Other Matters
Management is not aware of any other matters to be presented at the meeting of
Shareholders to be held on November 16, 2000. 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.
The Bylaws of Delta do not contain any requirement for shareholders to provide
advance notice of proposals or nominations they intend to present at the annual
meeting of shareholders.
As of the close of business on October 2, 2000, the record date fixed for
determination of voting rights, Delta had outstanding 2,471,950 shares of
Common Stock, each share having one vote. A majority of the shares entitled to
be cast on a matter constitutes a quorum for action on that matter. Once a
share is represented for any purpose at the meeting, it will be deemed
present for quorum purposes for the remainder of the meeting and any
adjournment of the meeting (unless a new record date is set). If a quorum
exists, action on a matter (other than the election of Directors) will be
approved if the votes cast favoring the action exceed the votes cast
opposing the action, unless a higher vote is required by law.
Under applicable Kentucky law, each Common Shareholder of Delta is entitled to
vote cumulatively for the election of Directors. This means that each Common
Shareholder has the right to give one Nominee votes equal to the number of
Directors to be elected multiplied by the number of shares of Common Stock the
Shareholder owns or to distribute such votes among two or more Nominees as the
Shareholder desires. The four 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, 2000, 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 9, 2000
APPENDIX 1
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 16, 2000 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 16, 2000 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 2003:
Jane Hylton Green
Harrison D. Peet
Michael R. Whitley
Nominee for one year term expiring 2001:
Lanny D. Greer
__ ___ ___
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 ____________________________, 2000
APPENDIX A
DELTA NATURAL GAS COMPANY, INC.
AUDIT COMMITTEE CHARTER
1. ORGANIZATION:
A. The Audit Committee is composed of not less than three members of the Board
of Directors who meet the qualification requirements set forth in 1.B.
B. The Audit Committee shall be comprised solely of independent, non-employee
directors who are not, and in the past three years have not been, active
Officers or employees of the Company. All members of the Audit Committee
shall be able to read and understand fundamental financial statements,
including the Company's balance sheet, income statement and cash flow
statement or shall become able to do so within a reasonable period
of time after his or her appointment to the Audit Committee. Additionally,
at least one member of the Audit Committee shall have had past employment
experience in finance or accounting or a professional certification in
accounting or comparable experience or background which results in that
individual possessing financial sophistication.
C. The members of the Audit Committee, and a Chairman of the Committee, shall
be recommended by the Chairman and approved by the Board of Directors and
shall serve until their successors shall be duly elected and qualified. If a
Chairman of the Audit Committee is not recommended by the Chairman of the
Board, the members of the Audit Committee shall designate a Chairman. The
Chairman of the Audit Committee can convene a meeting of the Audit Committee at
his/her option and discretion, in addition to regularly scheduled meetings.
2. PURPOSE:
The primary purpose of the Audit Committee is to assist the Board in
fulfilling its oversight responsibilities by (i) reviewing financial
information which will be provided to shareholders and others, (ii)
reviewing the internal control systems which management and the
Board have established, (iii) reviewing the performance of the internal
auditors and the independent public accountants and (iv) nominating,
evaluating and, where appropriate, recommending replacement of the
independent public accountants.
3. RESPONSIBILITIES AND DUTIES:
The Audit Committee shall:
A. General
1. Meet with the independent public accountants and the internal auditor:
a. At least annually; and
b. Separately, with each, as appropriate.
2. Have the power to conduct or authorize investigations into any matters
within the scope of its responsibilities.
3. After initial approval of a charter, review it periodically and initiate
changes when necessary.
B. Relationship to the Independent Public Accountants
1. Make recommendations to the Board of Directors concerning the appointment of
and, where appropriate, the replacement of, the independent public accountants,
including the scope of services to be performed and fees to be paid.
2. Before the annual audit, meet with the independent public accountants,
review the scope and nature of the audit engagement, and recommend changes
wherever considered necessary.
3. After completion of the audit, discuss with the independent public
accountants:
a. The results of the annual audit, including significant audit adjustments; and
b. Their view of the status of the Company's internal controls; and
c. The impact on the financial statements of new pronouncements and prospective
changes in accounting and auditing standards; and
d. Any changes in planned scope and any difficulties encountered; and
e. The resolution of disagreements (if any) with management.
4. Periodically consult with the independent public accountants out of the
presence of management about internal controls, the quality of the Company's
financial reporting, and the adequacy/capability of the financial staff given
the business and changes in operations.
C. Relationship to the Internal Auditor
1. Communicate with the Company's internal auditor, review the internal audit
scope, assess the internal audit work performed and recommend changes when
necessary; and
2. Review the internal audit work plan and scope for adequacy as it relates to
the work of the independent public accountants; and
3. Review any changes required in planned scope and any difficulties
encountered; and
4. Periodically consult with the internal auditor out of the presence of
management.
D. Policies
1. Review, annually, the independence of the independent public accountants.
a. Ensure the receipt of a formal written statement from the independent public
accountants delineating relationships between the independent public
accountants and the Company, consistent with Independence Standards Board
Standard No. 1.
b. Engage in a dialogue with the independent public accountants with respect to
any disclosed relationships or services that may impact the objectivity of the
independent public accountants.
c. Recommend that the Board take appropriate action to oversee the
independence of the independent public accountants.
2. Review matters within the scope of its duties, such as determining
compliance with internal accounting controls and with regulations of
governmental bodies; and review recommendations made by the Board of
Directors, management, the independent public accountants, or the internal
auditors to improve internal accounting controls, to enhance current
management practices, or to adopt or change accounting principles.
3. Review with management and the independent public accountants legal and
regulatory matters that may have a material impact on the financial
statements and related compliance policies.
E. Communication and Reporting
1. Provide for a line of communication between the Board of Directors and both
internal auditing personnel and the independent public accountants.
2. Report its findings to the Board after each Audit Committee meeting.
Delta Natural Gas Company, Inc.
2000 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 23 counties in central and
southeastern Kentucky. Delta serves 40,000 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. ("Delta Resources"),
Delgasco, Inc. ("Delgasco"), and Enpro, Inc. ("Enpro"). Delta Resources
buys gas and resells it to industrial or other larage customers on Delta's
system and to Delta for system supply. Delgasco buys gas and resells it to
Delta Resources, to customers not on Delta's system and to Delta for system
supply. Enpro owns and operates production properties and undeveloped acreage.
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 (859) 744-6171, and its Fax number is
(859) 744-6552. Delta's website is www.deltagas.com.
Delta's Mission
Strive for total customer satisfaction
Ensure an excellent work environment for employees
Enhance the quality of shareholders' investment
Selected Consolidated Financial Information
For the Years Ended June 30, 2000 1999 1998(a) 1997 1996(b)
Summary of Operations ($)
Operating
revenues ......... 45,926,775 38,672,238 44,258,000 42,169,185 36,576,055
Operating
income .......... 8,176,722 6,652,070 6,731,859 5,315,582 5,437,055
Net income ........ 3,464,857 2,150,794 2,451,272 1,724,265 2,661,349
Basic and diluted
earnings per
common share ...... 1.42 .90 1.04 .75 1.41
Dividends
declared per
common share ...... 1.14 1.14 1.14 1.14 1.12
Average Number of
Common Shares
Outstanding .......... 2,433,397 2,394,181 2,359,598 2,294,134 1,886,629
Total Assets ($)..... 112,918,919 107,473,117 102,866,613 96,681,165 81,140,637
Capitalization ($).......
Common share-
holders' equity . 31,297,418 29,912,007 29,810,294 29,474,569 23,628,323
Long-term debt ... 50,723,795 51,699,700 52,612,494 38,107,860 24,488,916
Notes payable re-
financed subsequent
to yearend - - - - 18,075,000
Total
capitalization ... 82,021,213 81,611,707 82,422,788 67,582,429 66,192,239
Short-Term
Debt ($)(c)....... 11,375,000 8,145,000 3,665,000 12,852,600 1,084,800
For the Years Ended June 30, 2000 1999 1998(a) 1997 1996(b)
Other Items ($)
Capital
expenditures ..... 8,795,653 7,982,143 11,193,613 16,648,99 13,373,416
Total plant .. 141,986,856 133,804,954 127,028,159 116,829,158 98,795,623
_____________________
(a) During March, 1998, $25,000,000 of debentures were sold, and the proceeds
were used to repay short-term debt and to redeem the Company's $10,000,000 of
9% debentures.
(b) During July, 1996, $15,000,000 of debentures and 400,000 shares of common
stock were sold, and the proceeds were used to repay short-term debt and for
general corporate purposes. The balance of the note payable at June 30, 1996
($18,075,000) is included in total capitalization as a result of the
subsequent refinancing.
(c) Includes current portion of long-term debt.
TO OUR SHAREHOLDERS:
We are pleased to report that earnings have improved this year, despite
the fact that temperatures were much warmer than normal (thirty year average).
Delta's earnings per share increased to $1.42 this year
compared with $.90 last year. Billed degree days were only 88% of normal for
fiscal 2000 as compared with 89% for the previous year.
We received an order in our rate case granting a rate increase effective
January 1, 2000. This order also allowed Delta to adjust rates to reflect
variances from normal weather. We also took significant steps to
reduce expenses and to operate as efficiently as feasible. This included
combining some branch offices and reducing our workforce in any areas
possible. Our efforts further streamlined Delta and will help us to be
more competitive as we go into the future.
The Company has continued to expand service to newly developing areas and
to customers converting from other energy sources. We continue to have
opportunities for growth with our 2,200 miles of pipe that are in place to
provide service in an expanding 23 county service area in central and
southeastern Kentucky. As a result, our customers served this past winter
were in excess of 40,000. Delta's transportation of gas, for both on-system
and off-system customers, has continued to grow and develop. Our
sales subsidiaries increased their business and revenues this past year
and were a contributor to the Company's improved earnings.
We wish to recognize the tireless service and dedication of two Board
members, John D. Harrison and Henry C. Thompson. Mr. Harrison left Delta's
Board in January, 2000, after 47 years of service to Delta. Mr. Thompson
will leave Delta's Board in November, after serving since 1967. We
appreciate the sound advice, loyal support and devotion to the Company
provided by both of these gentlemen. They will both be missed.
Thank you for your confidence in the Company. We will do our best to
continue to earn that confidence in 2001 and beyond.
Sincerely,
H. D. Peet Glenn R. Jennings
Chairman of President & Chief
the Board Executive Officer
August 23, 2000
(Information for Graphs)
System Throughput (Billion cu. ft.) Retail Sales On-system Trans. Off-
System Trans.
'00 10.2 3.8 4.7 1.7
'99 9.4 3.8 4.4 1.2
'98 9.1 4.1 3.5 1.5
'97 8.4 4.3 2.9 1.2
'96 8.4 4.7 2.6 1.1
Degree Days (% of 30 year average)
'00 88.3
'99 88.8
'98 93.3
'97 103.2
'96 112.0
Capital Expenditures ($ Millions)
'01* 5.5
'00 8.8
'99 8.0
'98 11.2
'97 16.6
'96 13.4
* estimated
Gas Operations and Supply
The Company purchases, produces and stores natural gas for distribution to
its retail customers and also provides transportation service to industrial
customers and inter-connected pipelines through facilities located in 23
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 7,000, 6,500,
4,000 and 3,400 customers, respectively.
The communities served by Delta continue to expand, resulting in growth
opportunities for the Company. Industrial parks have been developed in
several areas and have resulted in additional industrial customers, some of
which are on-system transportation customers.
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 2000.
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. Higher 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.
Delta's current tariffs provide for some adjustments of gas rates through a
weather normalization tariff. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations).
Retail gas sales in 2000 were 3,837,000 Mcf, generating $31,728,000 in
revenues, as compared to 3,813,000 Mcf and $28,541,000 in revenues for
1999. Heating degree days billed during 2000 were 88.3% of normal as
compared with 88.8% in 1999. Sales volumes increased by 24,000 Mcf, or 1%,
in 2000 as compared to 1999.
Delta's transportation of natural gas during 2000 generated revenues of
$4,578,000 as compared with $4,470,000 during 1999. Of the total
transportation in 2000, $4,056,000 (4,703,000 Mcf) and $522,000 (1,672,000
Mcf) were earned for transportation for on-system and off-system customers,
respectively. Of the total transportation for 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.
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 October, 1999 Delta acquired the Mt.
Olivet Natural Gas Company in Robertson and Mason counties, consisting of
approximately 300 primarily residential customers.
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.
Some producers in Delta's service area can access certain pipeline
delivery systems other than Delta, which provides competition from others
for transportation of such gas. Delta will continue its efforts to purchase
or transport any natural gas available that is produced in reasonable
proximity to its facilities.
Delta receives its gas supply from a combination of interstate and
Kentucky sources. 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 2005 and thereafter
continue on a year-to-year basis until terminated by either party.
Tennessee is obligated under the agreements to transport up to 17,000 Mcf
per day for Delta. Delta acquires its gas for transportation by Tennessee
under an agreement with gas marketers. During 2000, Delta purchased
1,144,000 Mcf from two gas marketers under one agreement that
terminated April 30, 2000 and another agreement that began May 1, 2000 and
extends through April 30, 2003.
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 12,500 Mcf per day
and 4,200 Mcf per day, respectively, for Delta. Delta acquires its gas
for transportation by Columbia and Columbia Gulf under agreements with a
gas marketer. During 2000, Delta purchased a total of 824,000
Mcf from the gas marketer under an agreement that extends through April 30,
2001 and continues thereafter on a year-to-year basis.
Delta has an agreement with Columbia Natural Resources ("CNR") to purchase
natural gas from CNR through October 31, 2004. Delta purchased 373,000 Mcf
from CNR during 2000.
Delta has an agreement with its wholly-owned subsidiary, Enpro to purchase
natural gas, and during 2000 Delta purchased a total of 192,000 Mcf from
Enpro. Enpro also produces oil , but that production has not been
significant.
Delta's wholly-owned subsidiaries, Delta Resources and 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.
Delta owns and operates 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, Delta 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 December 27, 1999, Delta received approval from the PSC for an annual
revenue increase of
$420,000. This resulted from a general rate case that Delta had filed with the
PSC during July, 1999. The new tariffs include a weather normalization tariff
whereby Delta is permitted to adjust rates for the billing
months of December through April to reflect variations from normal weather.
The new rates were effective for service on and after January 1, 2000.
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.
During 1997, the PSC established a proceeding to investigate affiliate
transactions. This regulatory
process ultimately culminated in new Kentucky legislation this year. The
legislation requires that affiliate
transactions be conducted on an arms-length basis. Delta does not expect the
legislation to have a significant
effect on its financial condition or results of operations.
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 cities and 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 2000 were $8.8 million and for 2001 are
estimated to be $5.5 million. The Company's planned expenditures include
system extensions as well as 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, 2000, was $25 million of
which $9.6 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 2000 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 6,726 shares of common stock resulting in an
increase of $113,000 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 37,499
shares of common stock providing an increase of $571,000 in Delta's common
shareholders' equity.
Common Stock Dividends and Prices
Delta has paid cash dividends on its common stock each year since 1964.
While it is the intention of the
Board of Directors to continue to declare dividends on a quarterly basis, the
frequency and amount of future
dividends will depend upon the Company's earnings, financial requirements and
other relevant factors,
including limitations imposed by the indenture for the Debentures. There were
2,374 record holders of Delta's common stock as of August 1, 2000.
Delta's common stock is traded in the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System under the
symbol DGAS. The accompanying table reflects the high and low sales prices
during each quarter as reported by NASDAQ and the quarterly dividends
declared per share.
Range of Stock Prices($) Dividends
Quarter High Low Per Share($)
Fiscal 2000
First 17.75 14.125 .285
Second 16.25 14.375 .285
Third 15.625 13.813 .285
Fourth 15.75 13.625 .285
Fiscal 1999
First 18.00 16.438 .285
Second 19.00 16.75 .285
Third 19.00 17.25 .285
Fourth 17.75 16.438 .285
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company's utility operations are subject to regulation by the PSC, which
plays a significant role in determining the Company's return on equity.
The PSC approves rates that are intended to permit a
specified rate of return on investment. The Company's rate tariffs allow the
cost of gas to be passed through to customers (see Regulatory Matters).
The Company's business is temperature-sensitive. Accordingly, the
Company's sales volumes in any given period reflect, in addition to other
factors, the impact of weather, with colder temperatures generally
resulting in increased sales volumes by the Company. The Company anticipates
that this sensitivity to
seasonal and other weather conditions will continue to be reflected in the
Company's sales volumes in future
periods. However, Delta's current tariffs, approved by the PSC effective
January 1, 2000, provide for some
adjustment of gas rates through a weather normalization tariff. Under the
weather normalization tariff,
Delta's rates for residential and small non-residential customers are generally
increased when winter weather
is warmer than normal and decreased when winter weather is colder than normal.
Delta is permitted to adjust rates for these classes of customers for the
billing months of December through April under this tariff.
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 2001 are expected to be $5.5
million. Delta has been
generating internally only a portion of the cash necessary for its capital
expenditure requirements and thus 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 $9,625,000 was borrowed at June 30, 2000. The line
of credit, which is with Bank One, Kentucky, NA, requires renewal during
November, 2000. These short-term borrowings are periodically repaid with
the net proceeds from the sale of long-term debt and equity securities, as
was done in March, 1998, when the net proceeds of $24,100,000 from the
sale of $25,000,000 of debentures were used to repay short-term debt and to
redeem the Company's 9% debentures, that would have matured in 2011, in the
amount of $10,000,000.
The primary cash flows during the last three years are summarized below:
2000 1999 1998
Provided by operating activities $ 8,827,505 $ 6,680,276 $ 8,922,037
Used in investing activities (8,795,653) (7,982,143) (11,193,613)
Provided by financing activities 115,554 1,431,919 1,909,689
Net increase (decrease) in cash
and cash equivalents
$ 147,406 $ 130,052 $ (361,887)
Cash provided by operating activities consists of net income and noncash
items including depreciation, depletion, amortization and deferred income
taxes. Additionally, changes in working capital are also included in cash
provided by operating activities. The Company expects that internally
generated cash, coupled with short-term borrowings, will be sufficient to
satisfy its operating, normal capital expenditure and dividend requirements.
Results of Operations
Operating Revenues
The increase in operating revenues for 2000 of $7,254,600 was primarily
attributable to increased gas rates
and increased non-regulated sales volumes. Gas rates increased due to higher
gas prices coupled with
increases from the impact of the weather normalization tariff. Non-regulated
revenues increased due to the
1,092,000 Mcf, or 52.6%, increase in non-regulated sales volumes.
The decrease in operating revenues for 1999 of $5,585,800, was primarily
attributable to lower gas rates and
lower sales volumes. Gas rates decreased due to lower gas prices. Sales
volumes declined primarily due to
milder winter weather.
Heating degree days billed for 2000 were 88.3% of normal as compared with 88.8%
of normal for 1999 and
93.3% of normal for 1998.
The following table sets forth certain comparisons for variations in revenues
for the last two fiscal years:
Increase (Decrease) 2000 compared 1999 compared
to 1999 to 1998
Variations in regulated revenues
Gas rates $ 2,307,700 $ (2,656,100)
Weather normalization adjustment 679,200 -
Sales volumes 199,500 (2,237,400)
Transportation 109,100 110,200
Other 20,100 41,700
Total $ 3,315,600 $ (4,741,600)
Variations in non-regulated revenues
Gas rates $ 595,000 $ (80,600)
Sales volumes 3,344,000 (763,600)
Total $ 3,939,000 $ (844,200)
Total variations in revenues $ 7,254,600 $ (5,585,800)
Variations in regulated volumes(%)
Gas Sales 0.6% (7.3%)
Transportation 14.2% 12.6%
Variations in non-regulated volumes(%)
Gas Sales 52.6% (11.9%)
Operating Expenses
The increase in purchased gas expense for 2000 of $4,747,000 was due
primarily to increased gas
purchases for non-regulated sales and from increases in the cost of gas
purchased for retail sales.
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 increases in depreciation expense during 2000 and 1999 of $148,000 and
$396,000, respectively,
were due primarily to additional depreciable plant.
Changes in income taxes during 2000 and 1999 of $829,000 and $162,000,
respectively, were
primarily due to changes in net income.
Interest Charges
The increase in interest other charges during 2000 was due primarily to
increased average short-term
borrowings.
The increase in interest on long-term debt during 1999 was due primarily to the
issuance of $25
million of 7.15% Debentures in March, 1998. The decrease in other interest
during 1999 was due primarily
to decreased average short-term borrowings.
Basic and Diluted Earnings Per Common Share
For the years ended June 30, 2000, 1999 and 1998, basic earnings per common
share changed as a
result of changes in net income and 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. 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 future
matters (among other matters) such as: Delta's cost and the availability of
natural gas supplies; Delta's capital expenditures; its sources and
availability of funding for operation and expansion and acquisition;
competitive conditions; Delta's productive and transportation activities;
regulatory and legislative matters;
dividends; and external and internal funding sources.
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
changes in costs of gas supply.
- Uncertainty as to regulatory approval for full recovery of Delta's costs and
for its expenditures for regulatory assets.
- 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.
New Accounting Pronouncements
Delta adopted SFAS No. 128, "Earnings per Share", during 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 fiscal 1999.
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", during 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. The
statement has subsequently been
amended by SFAS No. 137 issued June, 1999 and SFAS No. 138 issued June, 2000.
This statement, as
amended, is effective for fiscal years beginning after June 15, 2000, and thus
for the Company's fiscal year
2001. Delta is currently not a party to any derivatives for hedging or other
purposes. Delta has concluded that
its contracts for the purchase, sale, transportation and storage of natural gas
constitute "normal purchases and
sales" under SFAS No. 133 and, as such, are not subject to the accounting
requirements of the new standard.
Therefore, the Company believes that adoption of this standard will not have a
material effect on its financial
position or results of operation.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Income
For the Years Ended June 30, 2000 1999 1998
Operating Revenues ............ $45,926,775 $ 38,672,238 $ 44,258,000
Operating Expenses
Purchased gas .............. $21,214,834 $ 16,467,988 $ 22,499,488
Operation and maintenance
(Note 1) ................. 9,139,143 9,137,107 8,968,213
Depreciation and depletion
(Note 1) ................. 3,989,090 3,840,996 3,445,382
Taxes other than income
taxes .................... 1,338,486 1,334,977 1,212,058
Income taxes (Note 2) ...... 2,068,500 1,239,100 1,401,000
Total operating expenses. $37,750,053 $ 32,020,168 $ 37,526,141
Operating Income .............. $ 8,176,722 $ 6,652,070 $ 6,731,859
Other Income and Deductions, Net 42,866 33,660 67,911
Income Before Interest Charges. $ 8,219,588 $ 6,685,730 $ 6,799,770
Interest Charges
Interest on long-term debt.. $ 3,845,565 $ 3,912,826 $ 3,326,681
Other interest ............. 748,006 460,950 897,265
Amortization of debt expense 161,160 161,160 124,552
Total interest charges .. $ 4,754,731 $ 4,534,936 $ 4,348,498
Net Income $ 3,464,857 $ 2,150,794 $ 2,451,272
Weighted Average Number of
Common Shares Outstanding ... 2,433,397 2,394,181 2,359,598
Basic and Diluted Earnings Per
Common Share. . . . . . . . . . $ 1.42 $ .90 $ 1.04
Dividends Declared Per Common
Share ....................... $ 1.14 $ 1.14 $ 1.14
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 Cash Flows
For the Years Ended June 30, 2000 1999 1998
Cash Flows From Operating Activities
Net income ...................... $ 3,464,857 $ 2,150,794 $ 2,451,272
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation, depletion and
amortization ............... 4,584,976 4,370,197 3,755,929
Deferred income taxes and
investment tax credits ..... 1,446,444 662,880 (29,400)
Other - net .................. 841,877 730,601 698,584
(Increase) decrease in assets
Accounts receivable .......... (1,160,957) 908,917 (124,168)
Gas in storage ............... 48,005 (1,451,177) (840,829)
Materials and supplies ....... 200,689 (144,468) 252,746
Prepayments .................. (51,964) 53,642 70,648
Other assets ................. (906,274) (875,815) (55,440)
Increase (decrease) in
liabilities
Accounts payable ............. 1,630,760 273,755 (336,089)
Refunds due customers ........ 2,679 (75,774) (460,751)
Advance recovery of gas cost.. (1,124,219) 50,446 3,328,625
Accrued taxes ................ 284,891 (131,091) (46,549)
Other current liabilities .... (302,553) 160,329 257,055
Advances for construction and
other ...................... (131,706) (2,960) 404
Net cash provided by
operating activities .... $ 8,827,505 $ 6,680,276 $ 8,922,037
Cash Flows From Investing Activities
Capital expenditures ............ $ (8,795,653) $ (7,982,143) $(11,193,613)
Net cash used in investing
activities .............. $ (8,795,653) $ (7,982,143) $(11,193,613)
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 Cash Flows (continued)
For the Years Ended June 30, 2000 1999 1998
Cash Flows From Financing
Activities
Dividends on common stock ....... $ (2,777,372) $ (2,728,997) $ (2,690,233)
Issuance of common stock, net.... 697,926 679,916 574,686
Issuance of debentures, net...... - - 23,837,795
Repayment of long-term debt ..... (1,735,000) (339,000) (10,822,559)
Issuance of notes payable........ 27,810,000 21,615,000 26,200,000
Repayment of notes payable....... (23,880,000) (17,795,000) (35,190,000)
Net cash provided by
financing activities $ 115,554 $ 1,431,919 $ 1,909,689
Net Increase (Decrease) in Cash and
Cash Equivalents ................... $ 147,406 $ 130,052 $ (361,887)
Cash and Cash Equivalents,
Beginning of Year .................. 248,588 118,536 480,423
Cash and Cash Equivalents,
End of Year ........................ $ 395,994 $ 248,588 $ 118,536
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 4,626,542 $ 4,685,458 $ 4,291,005
Income taxes (net of refunds) $ 533,908 $ 712,023 $ 1,642,964
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, 2000 1999
Assets
Gas Utility Plant, at cost ............... $141,986,856 $133,804,954
Less - Accumulated provision for
depreciation ......................... (42,067,229) (38,308,798)
Net gas plant $ 99,919,627 $ 95,496,156
Current Assets
Cash and cash equivalents ............. $ 395,994 $ 248,588
Accounts receivable, less accumulated
provisions for doubtful accounts of
$144,380 and $138,514 in 2000 and
1999, respectively .................. 2,790,840 1,629,883
Gas in storage, at average cost ....... 2,963,137 3,501,177
Materials and supplies, at first-in,
first-out cost ...................... 464,141 664,830
Prepayments ........................... 240,053 188,089
Total current assets $ 6,854,165 $ 6,232,567
Other Assets
Cash surrender value of officers' life
insurance (face amount of $1,236,009). $ 356,753 $ 339,450
Note receivable from officer ........... 152,000 122,000
Unamortized debt expense and other
(Note 6) ............................. 5,636,374 5,282,944
Total other assets $ 6,145,127 $ 5,744,394
Total assets $112,918,919 $107,473,117
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, 2000 1999
Liabilities and Shareholders' Equity
Capitalization (See Consolidated Statements
of Capitalization)
Common shareholders' equity .......... $ 31,297,418 $ 29,912,007
Long-term debt (Notes 6 and 7)........ 50,723,795 51,699,700
Total capitalization .............. $ 82,021,213 $ 81,611,707
Current Liabilities
Notes payable (Note 5) ............... $ 9,625,000 $ 5,695,000
Current portion of long-term
debt (Notes 6 and 7)................ 1,750,000 2,450,000
Accounts payable ..................... 3,955,143 2,324,383
Accrued taxes ........................ 1,239,566 954,675
Refunds due customers ................ 44,028 41,349
Advance recovery of gas costs ........ 74,246 1,198,465
Customers' deposits .................. 421,900 524,263
Accrued interest on debt ............. 1,192,932 1,225,903
Accrued vacation ..................... 519,066 584,014
Other accrued liabilities ............ 391,247 493,518
Total current liabilities $ 19,213,128 $ 15,491,570
Deferred Credits and Other
Deferred income taxes ................ $ 10,403,299 $ 8,826,655
Investment tax credits ............... 504,400 567,800
Regulatory liability (Note 2) ........ 693,825 760,625
Advances for construction and other .. 83,054 214,760
Total deferred credits and other. . $ 11,684,578 $ 10,369,840
Commitments and Contingencies (Note 8) .. ____________ ____________
Total liabilities and
shareholders' equity ......... $112,918,919 $107,473,117
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, 2000 1999 1998
Common Shares
Balance, beginning of year ....... $ 2,413,942 $ 2,375,093 $ 2,342,223
$1.00 par value of 45,125, 38,849,
and 32,870 shares issued in 2000,
1999 and 1998, respectively
Dividend reinvestment and stock
purchase plan ............ 37,499 32,551 27,124
Employee stock purchase plan and
other .................... 7,626 6,298 5,746
Balance, end of year ............. $ 2,459,067 $ 2,413,942 $ 2,375,093
Premium on Common Shares
Balance, beginning of year ....... $ 28,386,194 $ 27,745,127 $ 27,203,311
Premium on issuance of common shares
Dividend reinvestment and stock
purchase plan ............. 533,760 536,520 446,432
Employee stock purchase plan and
other .................... 119,041 104,547 95,384
Balance, end of year ............. $ 29,038,995 $ 28,386,194 $ 27,745,127
Capital Stock Expense
Balance, beginning and end of year. $(1,917,020) $ (1,917,020) $(1,917,020)
Retained Earnings
Balance, beginning of year ....... $ 1,028,891 $ 1,607,094 $ 1,846,055
Net income .................... 3,464,857 2,150,794 2,451,272
Cash dividends declared on common
shares (See Consolidated
Statements of Income for rates) (2,777,372) (2,728,997) (2,690,233)
Balance, end of year ............ $ 1,716,376 $ 1,028,891 $ 1,607,094
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, 2000 1999
Common Shareholders' Equity
Common shares, par value $1.00 per share
(Notes 3 and 4)
Authorized 6,000,000 shares
Issued and outstanding 2,459,067 and
2,413,942 shares in 2000 and
1999, respectively ................... $ 2,459,067 $ 2,413,942
Premium on common shares .................. 29,038,995 28,386,194
Capital stock expense ..................... (1,917,020) (1,917,020)
Retained earnings (Note 6) ................ 1,716,376 1,028,891
Total common shareholders' equity ...... $31,297,418 $29,912,007
Long-Term Debt (Notes 6 and 7)
Debentures, 8.3%, due 2026 ................ $14,925,000 $15,000,000
Debentures, 6 5/8%, due 2023 .............. 12,243,000 12,886,000
Debentures, 7.15%, due 2018 . . . . . . . . 24,668,000 24,985,000
Promissory note from acquisition of under-
ground storage, non-interest bearing,
due through 2001 (less unamortized
discount of $62,205 and $121,300 in
2000 and 1999, respectively) 637,795 1,278,700
Total long-term debt ................. $52,473,795 $54,149,700
Less amounts due within one year,
included in current liabilities ....... (1,750,000) (2,450,000)
Net long-term debt ................... $50,723,795 $51,699,700
Total capitalization .............. $82,021,213 $81,611,707
The accompanying notes to consolidated financial statements are an
Integral part of these statements.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
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 three wholly-owned subsidiaries. Delta Resources, Inc. ("Delta
Resources") buys
gas and resells it to industrial or other large use customers on Delta's system
and to Delta for
system supply. Delgasco, Inc. buys gas and resells it to Delta Resources, to
customers not on
Delta's system, and to Delta for system supply. Enpro, Inc. owns and operates
production
properties and undeveloped acreage. Deltran, Inc., which operated an
underground natural gas storage field that it leased from Delta through
December 31, 1999, was dissolved during
February, 2000. 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 3.1%, 3.2% and 3.1% of
average depreciable plant for 2000, 1999 and 1998, 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 40,000 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
accounting principles generally accepted in the United States 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 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 fiscal 1999.
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", during 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. The statement has
subsequently been amended by SFAS No. 137 issued June, 1999 and SFAS No.
138 issued June, 2000. This statement, as amended, is effective for fiscal
years beginning after June 15, 2000 and thus for the Company's fiscal year
2001. Delta is currently not a party to any derivatives for hedging or
other purposes. Delta has concluded that its contracts for the purchase, sale,
transportation and storage of natural gas constitute "normal purchases and
sales" under SFAS No. 133 and, as such, are not subject to
the accounting requirements of the new standard. Therefore, the Company
believes that adoption of this standard will not have a material effect on
its financial position or results of operations.
(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:
2000 1999
Deferred Tax Liabilities
Accelerated depreciation $11,521,999 $10,546,000
Accrued pension 988,000 789,700
Debt expense 447,100 467,200
Total $12,957,099 $11,802,900
Deferred Tax Assets
Alternative minimum tax credits $ 1,400,800 $ 1,521,100
Regulatory liabilities 273,700 193,445
Deferred gas cost/unbilled revenue 309,300 718,400
Investment tax credit 199,000 224,000
Other 371,000 319,300
Total $ 2,553,800 $ 2,976,245
Net accumulated deferred
income tax liability $10,403,299 $ 8,826,655
The components of the income tax provision are comprised of the following
for the years ended June 30:
2000 1999 1998
Components of Income Tax Expense
Payable currently
Federal $ 568,100 $ 563,400 $ 1,164,800
State 137,500 63,000 265,600
Total $ 705,600 $ 626,400 $ 1,430,400
Deferred 1,362,900 612,700 (29,400)
Income tax expense $ 2,068,500 $ 1,239,100 $ 1,401,000
Reconciliation of the statutory federal income tax rate to the effective
income tax rate is shown in the table below:
2000 1999 1998
Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
State income taxes net of
federal benefit 5.2 5.2 5.0
Amortization of investment
tax credit (1.1) (2.0) (1.8)
Other differences - net (0.4) (0.4) (0.2)
Effective income tax rate 37.7 % 36.8 % 37.0 %
(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, 2000, 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.
2000 1999
Change in Benefit Obligation
Benefit obligation at beginning of year $ 8,286,366 $ 6,745,269
Service cost 535,681 467,417
Interest cost 538,400 471,939
Actuarial loss 91,615 711,063
Effect of curtailment (2,834) -
Benefits paid (1,260,867) (109,322)
Benefit obligation at end of year $ 8,188,361 $ 8,286,366
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 9,188,450 $ 8,637,638
Actual return on plan assets 1,507,558 44,213
Employer contribution 740,908 615,921
Benefits paid (1,260,867) (109,322)
Fair value of plan assets at
end of year $ 10,176,049 $ 9,188,450
Funded status $ 1,987,688 $ 902,084
Unrecognized net actuarial loss (gain) (117,267) 512,737
Net transition cost (71,656) (127,183)
Prepaid benefit cost (included in other
assets in the accompanying balance sheet) $ 1,798,765 $ 1,287,638
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:
2000 1999 1998
Components of Net Periodic Benefit Cost
Service cost $ 535,681 $ 467,417 $ 445,288
Interest cost 538,400 471,939 443,955
Expected return on plan assets (764,449) (715,795) (575,394)
Amortization of net transition cost (42,394) (42,394) (42,394)
Net periodic benefit cost $ 267,238 $ 181,167 $ 271,455
Weighted-Average Assumptions as of March 31
Discount rate 7.75 % 6.50 % 7.00%
Expected return on plan assets 8.00 % 8.00 % 8.00%
Rate of compensation increase 4.00 % 4.00 % 4.00%
During the plan year ended March 31, 2000, Delta eliminated 16 positions in
conjunction with a workforce reduction plan. Subsequently, 7 additional
positions were eliminated as a result of reorganization of Delta's branch
offices, which was completed by June 30, 2000. These events resulted in
curtailment treatment in the pension plan in accordance with SFAS 88,
"Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The
combined impact of the curtailment gain, the savings in salary expense, and the
cost of one time payments
made to severed employees was not material to current year results of
operations.
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
2000, 1999 and 1998, Delta's Savings Plan expense was $170,800, $169,300,
and $156,000, 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 with an equivalent
market value of $100,300 was issued in July, 2000. 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, 2001.
(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. Under the
Reinvestment Plan the Company
issued 37,499, 32,551 and 27,124 shares in 2000, 1999 and 1998, respectively.
Delta reserved 200,000
shares for issuance under the Reinvestment Plan in December, 1994, and as of
June 30, 2000 there were
26,430 shares still available for issuance. The Company plans to reserve
additional shares under the
Reinvestment Plan during fiscal 2001.
(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, 2000 and 1999,
the available line of credit was $25,000,000 of which $9,625,000 and $5,695,000
had been borrowed at an
interest rate of 6.51% and 5.51%, for 2000 and 1999, respectively. The maximum
amount borrowed during 2000 and 1999 was $16,700,000 and $9,435,000,
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, 2000.
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. The remaining installment of $700,000 due under this note is
payable 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 installment is secured by escrow of 40,000
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, 2000 and
1999 was estimated to
be $47,152,000 and $49,810,000, respectively. The carrying amount in the
accompanying consolidated
financial statements as of June 30, 2000 and 1999 is $51,836,000 and
$52,871,000, 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 and an
agreement with the Chairman of the Board. 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, in
deciding how to allocate
resources and in assessing performance. Delta's chief operating 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. Inter-segment transportation
revenue/expense is
recorded at Delta's tariff rates. Transfer pricing for 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) 2000 1999 1998
Revenues
Regulated
External customers 33,314 30,000 34,550
Intersegment 4,606 5,496 5,187
Total regulated 37,920 35,496 39,737
Non-regulated
External customers 12,613 8,672 9,708
Intersegment 16,249 15,881 14,467
Total non-regulated 28,862 24,553 24,175
Eliminations for intersegment (20,855) (21,377) (19,654)
Total operating
revenues 45,927 38,672 44,258
Expenses
Operating expenses
Regulated
Depreciation 3,940 3,804 3,399
Income taxes 1,657 1,001 1,089
Other 24,792 24,398 28,984
Total regulated 30,389 29,203 33,472
Non-regulated
Depreciation 49 37 46
Income taxes 412 238 312
Other 27,755 23,838 23,277
Total non-regulated 28,216 24,113 23,635
Eliminations for intersegment (20,855) (21,296) (19,581)
Total operating expenses 37,750 32,020 37,526
Other Income and Deductions
Regulated 43 25 37
Non-regulated - 9 31
Total other income and
deductions 43 34 68
($000) 2000 1999 1998
Interest Charges
Regulated 4,766 4,552 4,380
Non-regulated 41 64 42
Eliminations for intersegment (52) (81) (73)
Total interest charges 4,755 4,535 4,349
Net Income
Regulated 2,808 1,766 1,922
Non-regulated 657 385 529
Total net income 3,465 2,151 2,451
Assets
Regulated 108,876 105,716 101,016
Non-regulated 4,043 1,757 1,851
Total assets 112,919 107,473 102,867
Capital Expenditures
Regulated 8,796 7,981 11,192
Non-regulated - 1 2
Total capital
expenditures 8,796 7,982 11,194
(11) Quarterly Financial Data (Unaudited)
The quarterly data reflects, in the opinion of management, all normal
recurring adjustments
necessary to present fairly the results for the interim periods.
Quarter Ended
Operating Operating Net Income Basic and Diluted
Revenues Income (Loss) Earnings(Loss) per
Common Share(a)
Fiscal 2000
September 30 $ 4,753,043 $ 344,622 $ (801,859) $ (.33)
December 31 9,964,446 1,869,292 633,318 .26
March 31 20,708,156 4,609,595 3,400,687 1.39
June 30 10,501,130 1,353,213 232,711 .09
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
(a) Quarterly earnings per share may not equal annual earnings per share due to
changes in shares outstanding.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Delta Natural Gas Company, Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of
DELTA NATURAL GAS COMPANY, INC. (a Kentucky corporation) and subsidiary
companies as of
June 30, 2000 and 1999, 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,
2000. 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 auditing standards generally
accepted in the United
States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the
financial position of Delta Natural Gas Company, Inc. and subsidiary companies
as of June 30, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Louisville, Kentucky
August 15, 2000
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 four 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 John F. Hall John B. Brown
President & Chief Vice President - Finance, Controller
Executive Officer Secretary & Treasurer
Consolidated Statistics
For the Years Ended June 30, 2000 1999 1998 1997 1996
Retail Customers Served,
End of Period
Residential .............. 33,028 32,239 31,596 31,380 29,840
Commercial ............... 5,008 4,868 4,753 4,761 4,453
Industrial ............... 67 68 70 74 75
Total ................. 38,103 37,175 36,419 36,215 34,368
Operating Revenues ($000)
Residential sales ........ 19,672 17,329 19,969 19,694 16,540
Commercial sales ......... 10,952 10,039 11,890 11,977 9,788
Industrial sales ......... 1,104 1,173 1,576 1,890 1,483
On-system transportation . 4,056 4,107 3,877 3,214 2,913
Off-system transportation. 522 363 483 382 418
Subsidiary sales ......... 9,431 5,491 6,335 4,904 5,297
Other .................... 190 170 128 108 137
Total ................. 45,927 38,672 44,258 42,169 36,576
System Throughput
(Million Cu. Ft.)
Residential sales ........ 2,266 2,223 2,377 2,464 2,741
Commercial sales ......... 1,397 1,401 1,504 1,557 1,673
Industrial sales ......... 174 189 231 278 291
Total retail sales .... 3,837 3,813 4,112 4,299 4,705
On-system transportation.. 4,703 4,434 3,467 2,863 2,570
Off-system transportation. 1,672 1,144 1,489 1,205 1,134
Total ................. 10,212 9,391 9,068 8,367 8,409
Average Annual Consumption Per
End of Period Residential
Customer (Thousand Cu. Ft.). 69 69 75 79 92
Lexington, Kentucky Degree Days
Actual .................... 4,162 4,188 4,397 4,867 5,280
Percent of 30 year average
(4,714) ................. 88.3 88.8 93.3 103.2 112.0
For the Years Ended June 30, 2000 1999 1998 1997 1996
Average Revenue Per Mcf Sold
at Retail ($) ............. 8.27 7.49 8.13 7.81 5.91
Average Gas Cost Per Mcf Sold
at Retail ($) ............. 3.77 3.69 4.60 4.62 2.81
Directors & Officers
Board of Directors
Donald R. Crowe (a)
Retired Senior Analyst
Department of Insurance
Commonwealth of Kentucky
Lexington, Kentucky
Jane Hylton Green (b)
Retired Vice President-
Human Resources and
Corporate Secretary
Lanny D. Greer (b)
Chairman of the Board and President
First National Financial
Corporation and First National Bank
(commercial banking)
Manchester, Kentucky
Billy Joe Hall (a)
Investment Broker
LPL Financial Services
(general brokerage services)
Mount Sterling, Kentucky
Glenn R. Jennings (c)
Vice Chairman of the Board, President
and Chief Executive Officer
Lewis N. Melton (b)
Professional Engineer
Secretary
Vaughn & Melton, Inc.
(consulting engineering)
Middlesboro, Kentucky
Harrison D. Peet (c)
Chairman of the Board
Retired President
and Chief Executive Officer
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)
Nicholasville, Kentucky
Arthur E. Walker, Jr. (a)(c)
President
The Walker Company
(general and highway construction)
Mount Sterling, Kentucky
(a) Member of Nominating and
Compensation Committee
(b) Member of Audit Committee
(c) Member of Executive Committee
Officers
John B. Brown
Controller
Johnny L. Caudill
Vice President-
Administration and
Customer Service
John F. Hall
Vice President-
Finance, Secretary and Treasurer
Robert C. Hazelrigg
Vice President-
Public and Consumer Affairs
Alan L. Heath
Vice President-
Operations and Engineering
Glenn R. Jennings
President and
Chief Executive Officer
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, e-mail: [email protected].
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
2000 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.
2000 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 16, 2000, 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 9, 2000.
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, e-mail: [email protected].
