item 14 principal accountant fees services information required item contained caption audit committee report definitive proxy statement 2012 annual meeting shareholders filed securities exchange commission later 120 days june 30 2012 incorporate information document reference part iv item 15 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 except language item 10 report 11 12 13 14 incorporated herein reference definitive proxy statement neither report executive compensation performance graph included companys definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement 2013 annual meeting shareholders filed securities exchange commission later 120 days june 30 2013 incorporate information document reference part iv item 15 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 11 12 13 14 incorporated herein reference definitive proxy statement neither report executive compensation performance graph included companys definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement 2014 annual meeting shareholders filed securities exchange commission later 120 days june 30 2014 incorporate information document reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incor porated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated april 1 1991 respect 9 debentures due april 30 2011 incorporated herein reference exhibit 4e deltas form s2 dated april 23 1991 4b indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4c indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta sale gas tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10e contract tennessee delta sale gas tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta sale gas tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta sale gas tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta sale gas columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser incorporated herein reference exhibit 10j deltas form 10k period ended june 30 1994 10k employment agreement delta alan l heath officer incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement dated may 31 1995 delta glenn r jennings officer incorporated herein reference exhibit 10m deltas form 10k period ended june 30 1995 10n employment agreement dated june 19 1995 delta johnny l caudill officer incorporated herein reference exhibit 10n deltas form 10k period ended june 30 1995 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent public accountants b reports 8k april 8 1997 registrant filed report form 8k disclosing filing kentucky public service commission psc general rate case march 14 1997 subsequent order psc april 3 1997 suspending implementation proposed rates september 12 1997 requested rates would generate approximately 2962000 additional annual revenues delta signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 11th day september 1997 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer glenn r jennings president chief executive september 11 1997 glenn r jennings officer director ii principal financial officer principal accounting officer john f hall vice president finance september 11 1997 john f hall secretary treasurer iii majority board directors h peet chairman board september 11 1997 h peet donald r crowe director september 11 1997 donald r crowe jane hylton green director september 11 1997 jane hylton green billy joe hall director september 11 1997 billy joe hall john harrison director september 11 1997 john harrison virgil e scott director september 11 1997 virgil e scott henry c thompson director september 11 1997 henry c thompson arthur e walker jr director september 11 1997 arthur e walker jr managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity generally accepted accounting principles management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall president chief executive officer vice president finance secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1997 1996 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1997 financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1997 1996 results operations cash flows three years period ended june 30 1997 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 15 1997 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1997 1996 1995 operating revenues 42169185 36576055 31844339 operating expenses purchased gas 23265222 17389755 15497156 operation maintenance note 1 8631635 8642511 8002797 depreciation depletion note 1 2935257 2510952 2183558 taxes income taxes 1056689 1036282 863340 income taxes note 2 964800 1559500 1042400 total operating expenses 36853603 31139000 27589251 operating income 5315582 5437055 4255088 income deductions 40874 32503 50582 net income interest charges 5356456 5469558 4305670 interest charges interest longterm debt 2997393 1851768 1879442 interest 519432 867641 419693 amortization debt expense 115366 88800 total interest charges 3632191 2808209 2387935 net income 1724265 2661349 1917735 weighted average number common shares outstanding 2294134 1886629 1850986 earnings per common share 75 141 104 dividends declared per common share 114 112 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1997 1996 1995 cash flows operating activities net income 1724265 2661349 1917735 adjustments reconcile net income net cash operating activities depreciation depletion amortization 3049229 2663475 2272358 deferred income taxes investment tax credits 485400 1762500 77000 net 666798 484474 602180 increase decrease assets accounts receivable 318178 860255 118237 gas storage 782007 63546 138138 advance deferred recovery gas cost 495751 3788143 2583128 materials supplies 120969 124697 173319 prepayments 346532 53702 105903 assets 541669 31723 71087 increase decrease liabilities accounts payable 439721 871207 178609 refunds due customers 554520 456283 83572 accrued taxes 1038761 270394 72210 current liabilities 744054 56951 69742 advances construction 476 9100 2333 net cash provided operating activities 6209226 3094809 6943183 cash flows investing activities capital expenditures 16648994 13373416 8122838 net cash used investing activities 16648994 13373416 8122838 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1997 1996 1995 cash flows financing activities note 6 dividends common stock 2651073 2113414 2073374 issuance common stock net 6773054 568875 502361 issuance debentures net 14334833 repayment longterm debt 478256 561000 240100 issuance notes payable 30975000 25955000 19495000 repayment notes payable38185000 13555000 16525000 net cash provided financing activities 10768558 10294461 1158887 net increase decrease cash equivalents 328790 15854 20768 cash equivalents beginning year 151633 135779 156547 cash equivalents end year 480423 151633 135779 supplemental disclosures cash flow information cash paid year interest 3019881 2491091 2253472 income taxes net refunds 432163 193560 1264942 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1997 1996 assets gas utility plant cost 116829158 98795623 less accumulated provision depreciation 31734976 26749774 net gas plant 85094182 72045849 current assets cash equivalents 480423 151633 accounts receivable less accumulated provisions doubtful accounts 113945 105756 1997 1996 respectively 2414632 2096454 gas storage average cost 1209171 427164 deferred gas costs note 1 2180606 2676357 materials supplies firstin firstout cost 773108 652139 prepayments 716076 369544 total current assets 7774016 6373291 assets cash surrender value officers life insurance face amount 1036009 321339 304339 note receivable officer 134000 126000 unamortized debt expense note 6 3357628 2291158 total assets 3812967 2721497 total assets 96681165 81140637 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1997 1996 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 29474569 23628323 longterm debt notes 6 7 38107860 24488916 notes payable refinanced subsequent yearend note 5 18075000 total capitalization 67582429 66192239 current liabilities notes payable note 5 10865000 current portion longterm debt notes 6 7 1987600 1084800 accounts payable 2386717 2826438 accrued taxes 1132315 93554 refunds due customers 577874 23354 customers deposits 368561 304246 accrued interest debt 1033220 637596 accrued vacation 516032 485847 accrued liabilities 492501 238571 total current liabilities 19359820 5694406 deferred credits deferred income taxes 7921100 7318500 investment tax credits 708400 779400 regulatory liability note 2 892100 938300 advances construction 217316 217792 total deferred credits 9738916 9253992 commitments contingencies note 8 total liabilities shareholders equity 96681165 81140637 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements changes shareholders equity years ended june 30 1997 1996 1995 common shares balance beginning year 1903580 1868734 1839340 100 par value 438643 34846 29394 shares issued 1997 1996 1995 respectively public issuance common shares 400000 dividend reinvestment stock purchase plan 31187 28024 25802 employee stock purchase plan 7456 6822 3592 balance end year 2342223 1903580 1868734 premium common shares balance beginning year 20572132 20022643 19532909 premium issuance common shares public issuance common shares 6000000 dividend reinvestment stock purchase plan 519478 440621 425357 employee stock purchase plan 111701 108868 64377 balance end year 27203311 20572132 20022643 capital stock expense balance beginning year 1620252 1604792 1588025 issuance common shares 296768 15460 16767 balance end year 1917020 1620252 1604792 retained earnings balance beginning year 2772863 2224928 2380567 net income 1724265 2661349 1917735 cash dividends declared common shares see consolidated statements income rates 2651073 2113414 2073374 balance end year 1846055 2772863 224928 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1997 1996 common shareholders equity common shares par value 100 per share notes 3 4 authorized 6000000 shares issued outstanding 2342223 1903580 shares 1997 1996 respectively 2342223 1903580 premium common shares 27203311 20572132 capital stock expense 1917020 1620252 retained earnings note 6 1846055 2772863 total common shareholders equity 29474569 23628323 longterm debt notes 6 7 debentures 83 due 2026 15000000 debentures 6 58 due 2023 13505000 14000000 debentures 9 due 2011 10000000 promissory note acquisition ground storage noninterest bearing due 2001 less unamortized discount 297099 398419 1502901 1401581 1997 1996 respectively 87559 172135 total longterm debt 40095460 25573716 less amounts due within one year included current liabilities 1987600 1084800 net longterm debt 38107860 24488916 notes payable refinanced subsequent yearend note 5 18075000 total capitalization 67582429 66192239 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company five whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc operates underground natural gas storage facilities leases delta enpro inc owns operates production properties tranex corporation owns 43 mile intrastate pipeline subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 30 29 28 average depreciable plant 1997 1996 1995 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company supplies natural gas approximately 36000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements march 1995 financial accounting standards board issued statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed effective fiscal years beginning december 15 1995 company adopted provisions sfas 121 first quarter fiscal 1997 new standard requires longlived assets certain identified intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable performing impairment reviews companies required estimate sum future cash flows asset compare amount assets carrying amount excess carrying amount expected cash flows result possible writedown asset fair value adoption sfas 121 material adverse impact companys financial position results operations companies june 30 fiscal yearends sfas 123 accounting stockbased compensation required adopted june 30 1997 standard currently inapplicable delta company stock based compensation arrangements delta required adopt sfas 128 earnings per share second quarter fiscal 1998 company expect adoption standard material adverse impact financial position results operations 2 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 1997 1996 deferred tax liabilities accelerated depreciation 9018800 8091500 deferred gas cost 860100 1055700 accrued pension 433000 252900 debt expense 384900 399200 total 10696800 9799300 deferred tax assets alternative minimum tax credits 1534100 1305600 regulatory liabilities 339400 370000 unbilled revenue 327500 236100 investment tax credit 279400 307400 295300 261700 total 2775700 2480800 net accumulated deferred income tax liability 7921100 7318500 components income tax provision comprised following years ended june 30 1997 1996 1995 components income tax expense payable currently federal 242200 52100 453900 state 31300 255100 194500 total 210900 203000 648400 deferred 753900 1762500 394000 income tax expense 964800 1559500 1042400 reconciliation statutory federal income tax rate effective income tax rate shown table 1997 1996 1995 statutory federal income tax rate 340 state income taxes net federal 50 52 benefit amortization investment tax credit 26 17 24 differences net 9 effective income tax rate 364 375 359 3 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately funded status pension plan march 31 plan year end amounts recognized companys consolidated balance sheets june 30 follows 1997 1996 1995 plan assets fair value 6835393 6058458 5358108 actuarial present value benefit obligation vested benefits 4505619 2789736 3605363 nonvested benefits 11025 9346 21742 accumulated benefit 4516644 2799082 3627105 obligation additional amounts related projected salary 1828856 2811907 1638014 increases total projected benefit 6345500 5610989 5265119 obligation plan assets excess projected benefit 489893 447469 92989 obligation unrecognized net assets date initial application amortized 15 years 211972 254365 296759 unrecognized net gain loss 125777 13481 286557 accrued pension asset 403698 179623 82787 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 1997 1996 1995 service cost benefits earned 405386 382751 432546 year interest cost projected 392539 356897 382167 benefit obligation actual return plan assets 407965 886211 623972 net amortization deferral 136843 444044 185660 net periodic pension cost 253117 297481 376401 weighted average discount rates assumed rates increase future compensation levels used determining actuarial present values projected benefit obligation june 30 1997 1996 1995 70 discount rates 4 rates increase expected long term rates return plan assets 8 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits post retirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 1997 1996 1995 deltas savings plan expense approximately 151000 111000 112000 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent approximately 101000 issued july 1997 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 1998 4 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 31187 shares issued 1997 delta reserved 200000 shares reinvestment plan december 1994 june 30 1997 123604 shares still available issuance 5 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1997 june 30 1996 available line credit 20000000 10865000 18075000 borrowed interest rate 6785 6285 1997 1996 respectively maximum amount borrowed 1997 1996 10865000 18075000 respectively interest line option delta either daily prime rate based upon certificate deposit rates current line credit expires november 15 1997 shortterm borrowings june 30 1996 repaid july 1996 net proceeds approximately 20400000 sale 15000000 debentures 400000 shares common stock 6 longterm debt july 19 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 restrictions indenture agreement covering 83 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 18000000 retained earnings restricted provisions indenture october 18 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 may 1 1991 delta issued 10000000 9 debentures mature april 2011 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 9 debentures redeemed company 4 premium declining ratably ceases april 2001 company may assume additional mortgage indebtedness excess 1 million without effectively securing 9 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt addition losses extinguishment debt deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 10 1995 amount 1800000 payable installments 400000 1998 700000 2000 700000 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas delta secured promissory note escrow 102858 shares deltas common stock shares issued holder promissory note event default payment delta underground natural gas storage field located canada mountain bell county kentucky partially developed estimated working capacity 4000000 mcf upon completion delta utilized storage field help meet winter supply needs year storage capability permit delta continue purchase store gas nonheating months withdraw sell gas peak usage winter months storage project capital expenditures estimated approximately 26 million fiscal 1998 includes completion 14 mile 12 inch diameter steel pipeline provide expanded capacity deliver gas deltas system delta currently recovering return storage field investments rates longterm debt requires principal payments totaling approximately 88000 1998 7 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 1997 estimated 37723000 carrying amount accompanying consolidated financial statements 38505000 carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 8 commitments contingencies company entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 9 rates reference made regulatory matters herein respect rate matters 10 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods earnings operating net loss per operating income common quarter ended revenues loss sharea fiscal 1997 september 30 4074332 36149 734296 33 december 31 10023399 1090513 198153 09 march 31 18651406 3034844 2050318 88 june 30 9420048 1154076 210090 09 fiscal 1996 september 30 3774849 147522 760662 41 december 31 8406787 1331803 649089 34 march 31 16023581 3421608 2725444 144 june 30 8370838 831166 47478 03 quarterly earnings per share may equal annual earnings per share due changes shares outstanding schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 1997 1996 1995 column b column c column e additions balance charged deductions charged amounts balance beginning costs accounts charged end description period expenses recoveries paid period deducted asset applies allowance doubtful accounts years ended june 30 1997 105756 220000 27402 239213 113945 june 30 1996 81608 156000 13344 145196 105756 june 30 1995 131324 140800 24449 214965 81608 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incorporated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4b indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 4c indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 dated march 11 1998 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10e contract tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser incorporated herein reference exhibit 10j deltas form 10k period ended june 30 1994 10k employment agreement delta alan l heath officer incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement delta glenn r jennings officer incorporated herein reference exhibit 10m deltas form 10k period ended june 30 1995 10n employment agreement delta johnny l caudill officer incorporated herein reference exhibit 10n deltas form 10k period ended june 30 1995 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent public accountants b reports 8k reports form 8k filed three months ended june 30 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 11th day september 1998 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer glenn r jennings president chief executive september 11 1998 glenn r jennings officer director ii principal financial officer principal accounting officer john f hall vice president finance september 11 1998 john f hall secretary treasurer iii majority board directors h peet chairman board september 11 1998 h peet donald r crowe director september 11 1998 donald r crowe jane hylton green directo september 11 1998 jane hylton green billy joe hall director september 11 1998 billy joe hall john harrison director september 11 1998 john harrison virgil e scott director september 11 1998 virgil e scott henry c thompson director september 11 1998 henry c thompson arthur e walker jr director september 11 1998 arthur e walker jr managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity generally accepted accounting principles management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters sglenn r jennings sjohn f hall glenn r jennings john f hall president chief executive officer vice president finance secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1998 1997 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1998 financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1998 1997 results operations cash flows three years period ended june 30 1998 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 17 1998 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1998 1997 1996 operating revenues 44258000 42169185 36576055 operating expenses purchased gas 22499488 23265222 17389755 operation maintenance note 1 8968213 8631635 8642511 depreciation depletion note 1 3445382 2935257 2510952 taxes income taxes 1212058 1056689 1036282 income taxes note 2 1401000 964800 1559500 total operating expenses 37526141 36853603 31139000 operating income 6731859 5315582 5437055 income deductions net 67911 40874 32503 income interest charges 6799770 5356456 5469558 interest charges interest longterm debt 3326681 2997393 1851768 interest 897265 519432 867641 amortization debt expense 124552 115366 88800 total interest charges 4348498 3632191 2808209 net income 2451272 1724265 2661349 weighted average number common shares outstanding 2359598 2294134 1886629 basic diluted earnings per common share 104 75 141 dividends declared per common share 114 112 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1998 1997 1996 cash flows operating activities net income 2451272 1724265 2661349 adjustments reconcile net income net cash operating activities depreciation depletion amortization 3755929 3049229 2663475 deferred income taxes investment tax credits 29400 485400 1762500 net 698584 666798 484474 increase decrease assets accounts receivable 124168 318178 860255 gas storage 840829 782007 63546 advance deferred recovery gas cost 3328625 495751 3788143 materials supplies 252746 120969 124697 prepayments 70648 346532 53702 assets 55440 541669 31723 increase decrease liabilities accounts payable 336089 439721 871207 refunds due customers 460751 554520 456283 accrued taxes 46549 1038761 270394 current liabilities 257055 744054 56951 advances construction 404 476 9100 net cash provided operating activities 8922037 6209226 3094809 cash flows investing activities capital expenditures 1119361316648994 13373416 net cash used investing activities 11193613 16648994 13373416 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1998 1997 1996 cash flows financing activities note 6 dividends common stock 2690233 2651073 2113414 issuance common stock net 574686 6773054 568875 issuance debentures net 23837795 14334833 repayment longterm debt 10822559 478256 561000 issuance notes payable 26200000 30975000 25955000 repayment notes payable 35190000 38185000 13555000 net cash provided financing activities 1909689 10768558 10294461 net increase decrease cash equivalents 361887 328790 15854 cash equivalents beginning year 480423 151633 135779 cash equivalents end year 118536 480423 151633 supplemental disclosures cash flow information cash paid year interest 4291005 3019881 2491091 income taxes net refunds 1642964 432163 193560 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1998 1997 assets gas utility plant cost 127028159 116829158 less accumulated provision depreciation 34929481 31734976 net gas plant 92098678 85094182 current assets cash equivalents 118536 480423 accounts receivable less accumulated provisions doubtful accounts 120002 113945 1998 1997 respectively 2538800 2414632 gas storage average cost 2050000 1209171 deferred gas costs note 1 2180606 materials supplies firstin firstout cost 520362 773108 prepayments 241731 312379 total current assets 5469429 7370319 assets cash surrender value officers life insurance face amount 1036009 339215 321339 note receivable officer 110000 134000 unamortized debt expense note 6 4849291 3761325 total assets 5298506 4216664 total assets 102866613 96681165 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1998 1997 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 29810294 29474569 longterm debt notes 6 7 52612494 38107860 total capitalization 82422788 67582429 current liabilities notes payable note 5 1875000 10865000 current portion longterm debt notes 6 7 1790000 1987600 accounts payable 2050628 2386717 accrued taxes 1085766 1132315 refunds due customers 117123 577874 advance recovery gas costs note 1 1148019 customers deposits 438134 368561 accrued interest debt 1215265 1033220 accrued vacation 528952 516032 accrued liabilities 485018 492501 total current liabilities 10733905 19359820 deferred credits deferred income taxes 8023475 7921100 investment tax credits 637300 708400 regulatory liability note 2 831425 892100 advances construction 217720 217316 total deferred credits 9709920 9738916 commitments contingencies note 8 total liabilities shareholders equity 102866613 96681165 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements changes shareholders equity years ended june 30 1998 1997 1996 common shares balance beginning year 2342223 1903580 1868734 100 par value 32870 438643 34846 shares issued 1998 1997 1996 respectively public issuance common shares 400000 dividend reinvestment stock purchase plan 27124 31187 28024 employee stock purchase plan 5746 7456 6822 balance end year 2375093 2342223 1903580 premium common shares balance beginning year 27203311 20572132 20022643 premium issuance common shares public issuance common shares 6000000 dividend reinvestment stock purchase plan 446432 519478 440621 employee stock purchase plan 95384 111701 108868 balance end year 27745127 27203311 20572132 capital stock expense balance beginning year 1917020 1620252 1604792 issuance common shares 296768 15460 balance end year 1917020 1620252 retained earnings balance beginning year 1846055 2772863 2224928 net income 2451272 1724265 2661349 cash dividends declared common shares see consolidated statements income rates 2690233 2651073 2113414 balance end year 1607094 1846055 2772863 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1998 1997 common shareholders equity common shares par value 100 per share notes 3 4 authorized 6000000 shares issued outstanding 2375093 2342223 shares 1998 1997 respectively 2375093 2342223 premium common shares 27745127 27203311 capital stock expense 1917020 retained earnings note 6 1607094 1846055 total common shareholders equity 29810294 29474569 longterm debt notes 6 7 debentures 83 due 2026 15000000 debentures 6 58 due 2023 13170000 13505000 debentures 9 due 2011 10000000 debentures 715 due 2018 25000000 promissory note acquisition underground storage non interest bearing due 2001 less unamortized discount 207506 297099 1998 1997 respectively 1192494 1502901 40000 87559 total longterm debt 54402494 40095460 less amounts due within one year included current liabilities 1790000 1987600 net longterm debt 52612494 38107860 total capitalization 82422788 67582429 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company five whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc operates underground natural gas storage facilities leases delta enpro inc owns operates production properties tranex corporation owns 43 mile intrastate pipeline subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 31 30 29 average depreciable plant 1998 1997 1996 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company 38000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements delta adopted statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed first quarter fiscal 1997 adoption sfas 121 material impact companys financial position results operations companies june 30 fiscal yearends sfas 123 accounting stockbased compensation required adopted june 30 1997 standard currently inapplicable delta company stock based compensation arrangements delta adopted sfas 128 earnings per share second quarter fiscal 1998 adoption standard effect upon current prior period earnings per share june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information effective periods beginning december 15 1997 statements affect accounting recognition measurement transactions rather require expanded disclosures regarding financial results company adopt standards 1999 required fasb 2 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 1998 1997 deferred tax liabilities accelerated depreciation 9933400 9018800 deferred gas cost 860100 accrued pension 568900 433000 debt expense 487400 384900 total 10989700 10696800 deferred tax assets alternative minimum tax credits 1274100 1534100 regulatory liabilities 486245 339400 deferred gas costunbilled revenue 670100 327500 investment tax credit 251400 279400 284380 295300 total 2966225 2775700 net accumulated deferred income tax liability 8023475 7921100 components income tax provision comprised following years ended june 30 1998 1997 1996 components income tax expense payable currently federal 1164800 242200 52100 state 265600 31300 255100 total 1430400 210900 203000 deferred 29400 753900 1762500 income tax expense 1401000 964800 1559500 reconciliation statutory federal income tax rate effective income tax rate shown table 1998 1997 1996 statutory federal income tax rate 340 state income taxes net federal benefit 50 52 amortization investment tax credit 18 26 17 differences net 2 effective income tax rate 370 364 375 3 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately funded status pension plan march 31 plan year end amounts recognized companys consolidated balance sheets june 30 follows 1998 1997 1996 plan assets fair value 8637638 6835393 6058458 actuarial present value benefit obligation vested benefits 4800745 4505619 2789736 nonvested benefits 19934 11025 9346 accumulated benefit obligation 4820679 4516644 2799082 additional amounts related projected salary increases 1924590 1828856 2811907 total projected benefit obligation 6745269 6345500 5610989 plan assets excess projected benefit obligation 1892369 489893 447469 unrecognized net assets date initial application amortized 15 years 169577 211972 254365 unrecognized net gain loss 869909 125777 13481 accrued pension asset 852883 403698 179623 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 1998 1997 1996 service cost benefits earned year 445288 405386 382751 interest cost projected benefit obligation 443955 392539 356897 actual return plan assets 1584403 407965 886211 net amortization deferral 966615 136843 444044 net periodic pension cost 271455 253117 297481 weighted average discount rates assumed rates increase future compensation levels used determining actuarial present values projected benefit obligation june 30 1998 1997 1996 70 discount rates 4 rates increase expected longterm rates return plan assets 8 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 1998 1997 1996 deltas savings plan expense 156000 151000 111000 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent 111000 issued july 1998 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 1999 4 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 27124 31187 28024 shares issued 1998 1997 1996 respectively delta reserved 200000 shares reinvestment plan december 1994 june 30 1998 96480 shares still available issuance 5 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1998 june 30 1997 available line credit 25000000 20000000 respectively 1875000 10865000 borrowed interest rate 6885 6785 1998 1997 respectively maximum amount borrowed 1998 1997 20160000 10865000 respectively interest line option delta either daily prime rate based upon certificate deposit rates current line credit must renewed november 1998 shortterm borrowings repaid march 1998 net proceeds 24100000 sale 25000000 debentures net proceeds also used redeem companys 9 debentures would matured april 2011 redemption debt outstanding principal amount 10000000 completed april 1998 6 longterm debt march 1998 delta issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed company april 1 2003 restrictions indenture agreement covering 715 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 21500000 retained earnings restricted provisions indenture july 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 october 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 company may assume additional mortgage indebtedness excess 2 million without effectively securing 6 58 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1998 300000 loss extinguishment debt 332000 deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 1995 amount 1800000 remaining installments due amounts 700000 2000 700000 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas promissory note installments secured escrow 80000 shares deltas common stock shares issued holder promissory note event default payment delta longterm debt requires principal payments 40000 1999 time longterm debt fully repaid 7 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 1998 1997 estimated 54387000 37723000 respectively carrying amount accompanying consolidated financial statements june 30 1998 1997 53170000 38505000 respectively carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 8 commitments contingencies company entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 9 rates reference made regulatory matters herein respect rate matters 10 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earningsloss quarter operating net income per common ended revenues incomeloss loss sharea fiscal 1998 september 30 5215272 181905 813982 35 december 31 11787820 1726169 591812 25 march 31 18305458 3442234 2366329 100 june 30 8949450 1381551 307113 14 fiscal 1997 september 30 4074332 36149 734296 33 december 31 10023399 1090513 198153 09 march 31 18651406 3034844 2050318 88 june 30 9420048 1154076 210090 09 quarterly earnings per share may equal annual earnings per share due changes shares outstanding schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 1998 1997 1996 column b column c column e additions balance charged deductions charged amounts balance beginning costs accounts charged end description period expenses recoveries paid period deducted asset applies allowance doubtful accounts years ended june 30 1998 113945 369870 46013 409827 120001 june 30 1997 105756 220000 27402 239213 113945 june 30 1996 81608 156000 13344 145196 105756 delta natural gas company inc subsidiary companies computation consolidated ratio earnings fixed charges 1998 1997 1996 1995 1994 earnings net income 2451272 1724265 2661349 1917735 2671001 provisions income taxes 1401000 964800 1559500 1042400 1509600 fixed charges 4348498 3632191 2808209 2387935 2214659 total 8200770 6321256 7029058 5348070 6395260 fixed charges interest debt 4223946 3516825 2719409 2299135 2123255 amortization debt expense 124552 115366 88800 91404 total 4348498 3632191 2808209 2387935 2214659 ratio earnings fixed charges 189x 174x 250x 224x 289x exhibit 21 subsidiaries registrant delgasco inc deltran inc enpro inc delta resources inc tranex corporation whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent public accountants independent public accountants hereby consent incorporation report dated august 17 1998 included form 10k companys previously filed registration statement 3356689 relating dividend reinvestment stock purchase plan company arthur andersen llp louisville kentucky september 11 1998 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incorporated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4b indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 4c indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 dated march 11 1998 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10c contract tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10d contract tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10e contract tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10f contract tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10g service agreements columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10h employment agreements delta five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k deltas form 0q period ended march 31 2000 10i agreement delta harrison peet chairman board incorporated herein reference exhibit 10l deltas form 10q period ended march 31 2000 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent public accountants b reports 8k reports form 8k filed three months ended june 30 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 4th day september 2001 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 4 2001 officer vice chairman glenn r jennings board ii principal financial officer sjohn f hall september 4 2001 vicepresident finance john f hall secretary treasurer iii principal accounting officer sjohn b brown controller september 4 2001 john b brown iv majority board directors sh peet chairman board september 4 2001 h peet sdonald r crowe director september 4 2001 donald r crowe sjane hylton green director september 4 2001 jane hylton green slanny greer director september 4 2001 lanny greer sbilly joe hall director september 4 2001 billy joe hall slewis n melton director september 4 2001 lewis n melton sarthur e walker jr director september 4 2001 arthur e walker jr smichael r whitley director september 4 2001 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief vice president finance controller executive officer secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 2001 2000 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 2001 financial statements schedule referred responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 2001 2000 results operations cash flows three years period ended june 30 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 10 2001 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 2001 2000 1999 operating revenues 70770156 45926775 38672238 operating expenses purchased gas 44707739 21214834 16467988 operation maintenance 9844728 9139143 9137107 depreciation depletion 3840450 3989090 3840996 taxes income taxes 1423020 1338486 1334977 income taxes note 2 2232500 2068500 1239100 total operating expenses 62048437 37750053 32020168 operating income 8721719 8176722 6652070 income deductions net 31141 42866 33660 income interest charges 8752860 8219588 6685730 interest charges interest longterm debt 3775856 3845565 3912826 interest 1179949 748006 460950 amortization debt expense 161160 total interest charges 5116965 4754731 4534936 net income 3635895 3464857 2150794 weighted average number common shares outstanding 2477983 2433397 2394181 basic diluted earnings per common share 147 142 90 dividends declared per common share 114 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 2001 2000 1999 cash flows financing activities dividends common stock 2825267 2777372 2728997 issuance common stock net 646514 697926 679916 repayment longterm debt 810999 1735000 339000 issuance notes payable 52415000 27810000 21615000 repayment notes payable 45240000 23880000 17795000 net cash provided financing activities 4185248 115554 1431919 net increase decrease cash equivalents 231893 147406 130052 cash equivalents beginning year 395994 248588 118536 cash equivalents end year 164101 395994 248588 supplemental disclosures cash flow information cash paid year interest 4970327 4626542 4685458 income taxes net refunds 395737 533908 712023 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 2001 2000 assets gas utility plant cost 147792390 141986856 less accumulated provision depreciation 45375230 42067229 net gas plant 102417160 99919627 current assets cash equivalents 164101 395994 accounts receivable less accumulated provisions doubtful accounts 575000 144380 2001 2000 respectively 4651766 2790840 gas storage average cost 4659901 2963137 deferred gas costs 4444707 materials supplies firstin firstout cost 593419 464141 prepayments 1090515 240053 total current assets 15604409 6854165 assets cash surrender value officers life insurance face amount 1236009 354891 356753 note receivable officer 128000 152000 unamortized debt expense note 6 5674678 5636374 total assets 6157569 6145127 total assets 124179138 112918919 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 2001 2000 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 32754560 31297418 longterm debt notes 6 7 49258902 50723795 total capitalization 82013462 82021213 current liabilities notes payable note 5 16800000 9625000 current portion longterm debt notes 6 7 2450000 1750000 accounts payable 5602199 3955143 accrued taxes 718376 1239566 refunds due customers 38320 44028 advance recovery gas costs 74246 customers deposits 418582 421900 accrued interest debt 1178410 1192932 accrued vacation 538595 519066 accrued liabilities 400898 391247 total current liabilities 28145380 19213128 deferred credits deferred income taxes 12851457 10403299 investment tax credits 449800 504400 regulatory liability note 2 632725 693825 advances construction 86314 83054 total deferred credits 14020296 11684578 commitments contingencies note 8 total liabilities shareholders equity 124179138 112918919 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 2001 2000 common shareholders equity common shares par value 100 per share notes 3 4 authorized 6000000 shares issued outstanding 2495679 2459067 shares 2001 2000 respectively 2495679 2459067 premium common shares 29657308 29038995 capital stock expense 1925431 1917020 retained earnings note 6 2527004 1716376 total common shareholders equity 32754560 31297418 longterm debt notes 6 7 debentures 83 due 2026 14821000 14925000 debentures 6 58 due 2023 11933000 12243000 debentures 715 due 2018 24271000 24668000 promissory note acquisition ground storage noninterest bearing due 2001 less unamortized discount 16098 62205 2001 2000 respectively 683902 637795 total longterm debt 51708902 52473795 less amounts due within one year included current liabilities 2450000 1750000 net longterm debt 49258902 50723795 total capitalization 82013462 82021213 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 31 32 average depreciable plant 2001 2000 1999 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company serves 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements delta adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities subsequently amended sfas 137 sfas 138 effective july 1 2000 adoption standard impact companys financial position results operations june 2001 financial accounting standards board issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 currently applies business combinations initiated sfas 142 effective july 1 2002 delta adoption standards expected significant impact companys financial position results operations however new standards applied future acquisitions extent delta completes transactions 2 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 2001 2000 deferred tax liabilities accelerated depreciation 12440957 11521999 deferred gas costunbilled revenue 1444200 accrued pension 1157200 988000 debt expense 426900 447100 total 15469257 12957099 deferred tax assets alternative minimum tax credits 1701100 1400800 regulatory liabilities 249600 273700 deferred gas costunbilled revenue 309300 investment tax credit 177400 199000 489700 371000 total 2617800 2553800 net accumulated deferred income tax liability 12851457 10403299 components income tax provision comprised following years ended june 30 2001 2000 1999 components income tax expense current federal 77000 568100 563400 state 71700 137500 63000 total 148700 705600 626400 deferred 2381200 1362900 612700 income tax expense 2232500 2068500 1239100 reconciliation statutory federal income tax rate effective income tax rate shown table 2001 2000 1999 statutory federal income tax rate 340 state income taxes net federal benefit 54 52 amortization investment tax credit 09 11 20 differences net 03 04 effective income tax rate 382 377 368 3 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately following table provides reconciliation changes plans benefit obligations fair value assets twoyear period ended march 31 2001 statement funded status march 31 years recognized companys consolidated balance sheets june 30 2001 2000 change benefit obligation benefit obligation beginning year 8188361 8286366 service cost 487392 535681 interest cost 592537 538400 actuarial loss 332610 91615 effect curtailment 2834 benefits paid 1114797 1260867 benefit obligation end year 8486103 8188361 change plan assets fair value plan assets beginning year 10176049 9188450 actual return loss plan assets 636591 1507558 employer contribution 648737 740908 benefits paid 1114797 1260867 fair value plan assets end year 9073398 10176049 funded status 587295 1987688 unrecognized net actuarial loss gain 1652236 117267 net transition asset 29262 71656 prepaid benefit cost included assets accompanying balance sheet 2210269 1798765 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 2001 2000 1999 components net periodic benefit cost service cost 487392 535681 467417 interest cost 592537 538400 471939 expected return plan assets 800303 764449 715795 amortization net transition asset 42394 net periodic benefit cost 237232 267238 181167 weightedaverage assumptions discount rate 775 650 expected return plan assets 800 rate compensation increase 400 plan year ended march 31 2000 delta eliminated 16 positions conjunction workforce reduction plan subsequently 7 additional positions eliminated result reorganization deltas branch offices completed june 30 2000 events constituted curtailment sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits combined impact curtailment gain savings salary expense cost one time payments made severed employees material results operations sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 2001 2000 1999 deltas savings plan expense 154600 170800 169300 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs national market system last business day june matches shares purchased therefore stock equivalent market value 96000 issued july 2001 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 2002 4 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan company issued 28958 37499 32551 shares 2001 2000 1999 respectively delta reserved 150000 shares issuance reinvestment plan december 2000 june 30 2001 134772 shares still available issuance 5 notes payable line credit current available line credit 40000000 16800000 borrowed interest rate 485 june 30 2001 june 30 2000 available line credit 25000000 9625000 borrowed interest rate 651 maximum amount borrowed 2001 2000 21445000 16700000 respectively interest line determined monthly london interbank offered rate libor plus 1 used line credit cost unused line credit 030 current line credit must renewed october 2002 6 longterm debt march 1998 delta issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed company april 1 2003 restrictions indenture agreement covering 715 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 21500000 retained earnings restricted provisions indenture july 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 october 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 company may assume additional mortgage indebtedness excess 2 million without effectively securing 6 58 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1998 300000 loss extinguishment debt 332000 deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 1995 amount 1800000 remaining installment 700000 due note payable 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas promissory note installment secured escrow 40000 shares deltas common stock shares issued holder promissory note event default payment delta 7 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 2001 2000 estimated 48429000 47152000 respectively carrying amount accompanying consolidated financial statements june 30 2001 2000 51025000 51836000 respectively carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 8 commitments contingencies company entered individual employment agreements five officers agreement chairman board agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company 9 rates reference made regulatory matters herein respect rate matters 10 operating segments delta adopted sfas 131 disclosures segments enterprise related information fiscal 1999 sfas 131 established standards reporting information operating segments annual financial statements requires selected information operating segments interim financial reports issued stockholders also established standards related disclosures products services geographic areas operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker decision making group deciding allocate resources assessing performance deltas chief operating decision making group companys officers company two segments regulated natural gas distribution transmission storage segment ii unregulated segment participates related ventures consisting natural gas marketing production company operates single geographic area central southeastern kentucky segments follow accounting policies described summary significant accounting policies principles consolidation note 1 notes consolidated financial statements company earns revenues transportation natural gas regulated segment management evaluates performance unregulated natural gas marketing subsidiaries based additional margin added sales ability maintain contact customers choose transport regulated system intersegment transportation revenueexpense recorded deltas tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated unregulated segment information shown periods 11 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earningsloss per operating revenues operating income net income loss common sharea quarter ended fiscal 2001 september 30 6722188 152070 1055810 43 december 31 16941117 2081843 765633 31 march 31 32330755 5315853 3983175 160 june 30 14776096 1171953 57103 02 fiscal 2000 september 30 4753043 344622 801859 33 december 31 9964446 1869292 633318 26 march 31 20708156 4609595 3400687 139 june 30 10501130 1353213 232711 09 quarterly earnings per share may equal annual earnings per share due changes shares outstanding exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent public accountants independent public accountants hereby consent incorporation report dated august 10 2001 included form 10k companys previously filed registration statement 3356689 relating dividend reinvestment stock purchase plan company arthur andersen llp louisville kentucky september 4 2001 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 11 12 13 14 incorporated herein reference definitive proxy statement neither report executive compensation performance graph included companys definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement 2017 annual meeting shareholders filed securities exchange commission later 120 days june 30 2017 incorporate information document reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 17 1995 4a indenture dated april 1 1991 respect 9 debentures due april 30 2011 incorporated herein reference exhibit 4e deltas form s2 dated april 23 1991 4b indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta sale gas tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10e contract tennessee delta sale gas tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta sale gas tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta sale gas tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta sale gas columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser incorporated herein reference exhibit 10j deltas form 10k period ended june 30 1994 10k employment agreement delta alan l heath officer incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement dated may 31 1995 delta glenn r jennings officer 10n employment agreement dated june 19 1995 delta johnny l caudill officer 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant incorporated herein reference exhibit 22 deltas form 10k period ended june 30 1986 23 consent independent public accountants b reports 8k reports form 8k filed three months ended june 30 1995 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day september 1995 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief september 6 1995 glenn r jennings executive officer director ii principal financial officer principal accounting officer sjohn f hall vice president september 6 1995 john f hall finance secretary treasurer iii majority board directors sh peet chairman september 6 1995 h peet board sdonald r crowe director september 6 1995 donald r crowe sbilly joe hall director september 6 1995 billy joe hall sjane w hylton director september 6 1995 jane w hylton svirgil e scott director september 6 1995 virgil e scott shenry c thompson director september 6 1995 henry c thompson sarthur e walker jr director september 6 1995 arthur e walker jr srobert watt iii director september 6 1995 robert watt iii managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report statements prepared accordance generally accepted accounting principles include amounts based managements best estimates judgments company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1995 1994 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1995 consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1995 1994 results operations cash flows three years period ended june 30 1995 conformity generally accepted accounting principles discussed note 1 consolidated financial statements effective july 1 1993 company changed method accounting income taxes audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 11 1995 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1995 1994 1993 operating revenues 31844339 34846941 31221410 operating expenses purchased gas 15497156 17250556 14234258 operation maintenance note 1 8002797 8382767 8020622 depreciation depletion note 1 2183558 1977868 1833072 taxes income taxes 863340 875477 797942 income taxes note 1 1042400 1509600 1543700 total operating expenses 27589251 29996268 26429594 operating income 4255088 4850673 4791816 income deductions net 50582 34987 39681 income interest charges 4305670 4885660 4831497 interest charges interest longterm debt 1879442 1879526 1875901 interest 419693 243729 258405 amortization debt expense 88800 91404 76527 total interest charges 2387935 2214659 2210833 net income 1917735 2671001 2620664 weighted average number common shares outstanding 1850986 1775068 1635945 earnings per common share 104 150 160 dividends declared per common share 112 1105 1085 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1995 1994 1993 cash flows operating activities net income 1917735 2671001 2620664 adjustments reconcile net income net cash operating activities depreciation depletion amortization 2272358 2069013 1922102 deferred income taxes investment tax credits 77000 874800 839100 net 602180 446969 493848 increase decrease assets accounts receivable 118237 802197 707605 materials supplies 173319 229275 155358 prepayments 105903 25701 8096 assets 209225 780 95564 increase decrease liabilities accounts payable 178609 513265 438897 refunds due customers 83572 358270 37226 accrued taxes 72210 34543 162982 current liabilities 69742 38675 16435 advance deferred recovery gas cost 2583128 1372030 993136 advances construction 2333 8756 5416 net cash provided operating activities 6943183 6172019 4567023 cash flows investing activities capital expenditures 8122838 7374747 6289508 net cash used investing activities 8122838 73747476289508 delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1995 1994 1993 cash flows financing activities dividends common stock 2073374 1972368 1775411 issuance common stock net 502361 3965113 428634 issuance debentures net 14246937 repayment longterm debt 240100 11330286 591425 increase decrease notes payable 2970000 3765000 3700000 net cash provided financing activities 1158887 1144396 1761798 net increase decrease cash equivalents 20768 58332 39313 cash equivalents beginning year 156547 214879 175566 cash equivalents end year 135779 156547 214879 supplemental disclosures cash flow information cash paid year interest 2253472 2141705 2107168 income taxes 1264956 715000 952851 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1995 1994 assets gas utility plant cost 84944969 77882135 less accumulated provision depreciation 24588203 22862469 net gas plant 60356766 55019666 current assets cash equivalents 135779 156547 accounts receivable less accumulated provisions doubtful accounts 81608 131324 1995 1994 respectively 1236199 1117962 gas storage average cost 490710 352572 deferred gas costs note 1 1471342 materials supplies firstin firstout cost 527442 700761 prepayments 423246 317343 total current assets 2813376 4116527 assets cash surrender value officers life insurance face amount 1044355 1031000 1995 1994 respectively 293116 269029 note receivable officer 130000 83000 unamortized debt expense note 5 2355458 2444258 total assets 2778574 2796287 total assets 65948716 61932480 delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1995 1994 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 22511513 22164791 longterm debt note 5 23702200 24500000 total capitalization 46213713 46664791 current liabilities notes payable note 4 5675000 2705000 current portion longterm debt note 5 1057700 500000 accounts payable 1955231 2133840 accrued taxes 363948 436158 refunds due customers 479637 396065 advance recovery gas cost 1111786 customers deposits 331708 342979 accrued interest debt 473001 427338 accrued vacation 454728 454362 accrued liabilities 349872 314888 total current liabilities 12252611 7710630 deferred credits deferred income taxes 5510400 5116400 investment tax credits 850400 921800 regulatory liability note 1 912900 1312500 advances construction 208692 206359 total deferred credits 7482392 7557059 commitments contingencies note 6 total liabilities shareholders equity 65948716 61932480 accompanying notes consolidated financialstatements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1995 1994 common shareholders equity common shares par value 100 per share notes 2 3 authorized 6000000 shares issued outstanding 1868734 1839340 shares 1995 1994 respectively 1868734 1839340 premium common shares 20022643 19532909 capital stock expense 1604792 1588025 retained earnings note 5 2224928 2380567 total common shareholders equity 22511513 22164791 longterm debt note 5 debentures 6 58 due 2023 14561000 15000000 debentures 9 due 2011 10000000 capital lease due 1998 198900 total longterm debt 24759900 25000000 less amounts due within one year included current liabilities 1057700 500000 net longterm debt 23702200 24500000 total capitalization 46213713 46664791 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company four whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc formed engage potential pipeline storage projects consideration enpro inc owns operates existing production properties subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 27 average depreciable plant 1995 1994 1993 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company supplies natural gas approximately 34000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company adopted statement financial accounting standards sfas 109 accounting income taxes effective july 1 1993 required sfas 109 adopts liability method accounting income taxes requiring deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse regulated companies change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes result adoption sfas 109 material impact results operations financial position company temporary differences gave rise net accumulated deferred income tax liabilities june 30 follows 1995 1994 deferred tax liabilities accelerated depreciation 7186700 6257200 deferred gas cost 580400 debt expense 413500 29400 178900 200000 total 7779100 7067000 deferred tax assets unamortized investment tax credit 335400 363600 regulatory liabilities 360100 517700 alternative minimum tax credits 724300 667200 deferred gas cost 438500 410400 402100 total 2268700 1950600 net accumulated deferred income tax liability 5510400 5116400 components income tax provision comprised following years ended june 30 1995 1994 1993 components income tax expense payable currently federal 453900 306300 432300 state 194500 100800 121900 total 648400 407100 554200 deferred future years use accelerated depreciation 929500 675000 660300 deferred advance recovery 1018900 541200 418000 gas cost deferred tax effects net 483400 113700 88800 income tax expense 1042400 1509600 1543700 reconciliation statutory federal income tax rate effective income tax rate shown table 1995 1994 1993 statutory federal income tax rate 340 state income taxes net federal benefit 52 amortization investment tax credit 24 18 17 differences net 9 effective income tax rate 359 365 375 2 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary adequately fund plan funded status pension plan amounts recognized companys consolidated balance sheets june 30 follows 1995 1994 1993 plan assets fair value 5358108 5251296 4931658 actuarial present value benefit obligation vested benefits 3605363 4114517 4042029 nonvested benefits 21742 30562 37777 accumulated benefit obligation 3627105 4145079 4079806 additional amounts related projected salary increases 1638014 1734413 1881303 total projected benefit obligation 5265119 5879492 5961109 plan assets excess less projected benefit obligation 92989 628196 1029451 unrecognized net assets date initial application amortized 15 years 296759 339153 381547 unrecognized net loss 286557 950735 1407072 accrued pension asset liability 82787 16614 3926 assets plan consist primarily common stock bonds certificates deposit net pension costs years ended june 30 include following 1995 1994 1993 benefits earned year service cost 432546 455097 401054 interest cost projected benefit obligation 382167 357372 317897 actual return plan assets 623972 45100 356971 net amortization deferral 185660 353530 24856 net periodic pension cost 376401 413839 337124 weighted average discount rates assumed rates increase future compensation levels used determining actuarial present values projected benefit obligation june 30 1995 1994 1993 70 65 60 respectively discount rates 4 rates increase expected longterm rates return plan assets 8 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 2 employees annual compensation years ended june 30 1995 1994 1993 deltas savings plan expense 112379 106863 93749 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent approximately 99400 issued july 1995 continuation terms stock plan subject approval deltas board directors annual basis 3 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 25802 shares issued 1995 delta reserved 200000 shares reinvestment plan december 1994 june 30 1995 182815 shares still available issuance 4 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1995 1994 available line credit 15000000 5675000 2705000 borrowed interest rate 6935 55 respectively maximum amount borrowed 1995 8430000 interest line either daily prime rate based upon certificate deposit rates current line credit expires november 15 1995 5 longterm debt october 18 1993 delta issued 15000000 6 58 debentures mature october 2023 commencing october 1995 holder may require redemption 25000 6 58 debentures annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within sixty days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 restrictions indenture agreement covering 6 58 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 12 million june 30 1995 retained earnings restricted provisions indenture may 1 1991 delta issued 10000000 9 debentures mature april 2011 holder may require redemption 25000 9 debentures annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within sixty days notice subject annual aggregate 500000 limitation 9 debentures redeemed company beginning april 1996 5 premium declining ratably ceases april 2001 company may assume additional mortgage indebtedness excess 1 million without effectively securing 9 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1994 approximately 475000 deferred amortized term related debt consistent regulatory treatment capital lease computer equipment entered june 1995 requires principal payments approximately 57700 1996 66000 1997 75200 1998 6 commitments contingencies company entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 7 rates reference made regulatory matters herein respect rate matters 8 quarterly financial data unaudited earnings net loss per operating income common quarter ended revenues income loss sharea fiscal 1995 september 30 3634262 45141 633058 34 december 31 7131698 822241 228119 12 march 31 14903281 2842418 2255994 122 june 30 6175098 635570 66680 04 fiscal 1994 september 30 3585499 11056 542285 33 december 31 7814638 1117871 578448 32 march 31 16494674 3270274 2713563 148 june 30 6952130 451472 78725 04 quarterly earnings per share may equal annual earnings per share due changes shares outstanding item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 11 12 13 14 incorporated herein reference definitive proxy statement neither report executive compensation performance graph included companys definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incorporated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4b indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 4c indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 dated march 11 1998 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10c contract tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10d contract tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10e contract tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10f contract tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10g service agreements columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10h employment agreements delta six officers john b brown johnny l caudill john f hall robert c hazelrigg alan l heath glenn r jennings incorporated herein reference exhibit 10k deltas form 10q period ended march 31 2000 10i agreement delta harrison peet chairman board incorporated herein reference exhibit 10l deltas form 10q period ended march 31 2000 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent public accountants 27 financial data schedule b reports 8k reports form 8k filed three months ended june 30 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day september 2000 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 6 2000 glenn r jennings officer vice chairman board ii principal financial officer sjohn f hall vicepresident finance september 6 2000 john f hall secretary treasurer iii principal accounting officer sjohn b brown controller september 6 2000 john b brown iv majority board directors sh peet chairman board september 6 2000 h peet sdonald r crowe director september 6 2000 donald r crowe sjane hylton green director september 6 2000 jane hylton green director september 6 2000 lanny greer sbilly joe hall director september 6 2000 billy joe hall slewis n melton director september 6 2000 lewis n melton shenry c thompson director september 6 2000 henry c thompson sarthur e walker jr director september 6 2000 arthur e walker jr managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity generally accepted accounting principles management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief executive vice president finance controller officer secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 2000 1999 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 2000 1999 results operations cash flows three years period ended june 30 2000 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 15 2000 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 2000 1999 1998 operating revenues 45926775 38672238 44258000 operating expenses purchased gas 21214834 16467988 22499488 operation maintenance note 1 9139143 9137107 8968213 depreciation depletion note 1 3989090 3840996 3445382 taxes income taxes 1338486 1334977 1212058 income taxes note 2 2068500 1239100 1401000 total operating expenses 37750053 32020168 37526141 operating income 8176722 6652070 6731859 income deductions net 42866 33660 67911 income interest charges 8219588 6685730 6799770 interest charges interest longterm debt 3845565 3912826 3326681 interest 748006 460950 897265 amortization debt expense 161160 124552 total interest charges 4754731 4534936 4348498 net income 3464857 2150794 2451272 weighted average number common shares outstanding 2433397 2394181 2359598 basic diluted earnings per common share 142 90 104 dividends declared per common share 114 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 2000 1999 1998 cash flows operating activities net income 3464857 2150794 2451272 adjustments reconcile net income net cash operating activities depreciation depletion amortization 4584976 4370197 3755929 deferred income taxes investment tax credits 1446444 662880 29400 net 841877 730601 698584 increase decrease assets accounts receivable 1160957 908917 124168 gas storage 48005 1451177 840829 materials supplies 200689 144468 252746 prepayments 51964 53642 70648 assets 906274 875815 55440 increase decrease liabilities accounts payable 1630760 273755 336089 refunds due customers 2679 75774 460751 advance recovery gas cost 1124219 50446 3328625 accrued taxes 284891 131091 46549 current liabilities 302553 160329 257055 advances construction 131706 2960 404 net cash provided operating activities 8827505 6680276 8922037 cash flows investing activities capital expenditures 8795653 7982143 11193613 net cash used investing activities 8795653 7982143 11193613 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 2000 1999 1998 cash flows financing activities dividends common stock 2777372 2728997 2690233 issuance common stock net 697926 679916 574686 issuance debentures net 23837795 repayment longterm debt 1735000 339000 10822559 issuance notes payable 27810000 21615000 26200000 repayment notes payable 23880000 17795000 35190000 net cash provided financing activities 115554 1431919 1909689 net increase decrease cash equivalents 147406 130052 361887 cash equivalents beginning year 248588 118536 480423 cash equivalents end year 395994 248588 118536 supplemental disclosures cash flow information cash paid year interest 4626542 4685458 4291005 income taxes net refunds 533908 712023 1642964 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 2000 1999 assets gas utility plant cost 141986856 133804954 less accumulated provision depreciation 42067229 38308798 net gas plant 99919627 95496156 current assets cash equivalents 395994 248588 accounts receivable less accumulated provisions doubtful accounts 144380 138514 2000 1999 respectively 2790840 1629883 gas storage average cost 2963137 3501177 materials supplies firstin firstout cost 464141 664830 prepayments 240053 188089 total current assets 6854165 6232567 assets cash surrender value officers life insurance face amount 1236009 356753 339450 note receivable officer 152000 122000 unamortized debt expense note 6 5636374 5282944 total assets 6145127 5744394 total assets 112918919 107473117 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 2000 1999 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 31297418 29912007 longterm debt notes 6 7 50723795 51699700 total capitalization 82021213 81611707 current liabilities notes payable note 5 9625000 5695000 current portion longterm debt notes 6 7 1750000 2450000 accounts payable 3955143 2324383 accrued taxes 1239566 954675 refunds due customers 44028 41349 advance recovery gas costs 74246 1198465 customers deposits 421900 524263 accrued interest debt 1192932 1225903 accrued vacation 519066 584014 accrued liabilities 391247 493518 total current liabilities 19213128 15491570 deferred credits deferred income taxes 10403299 8826655 investment tax credits 504400 567800 regulatory liability note 2 693825 760625 advances construction 83054 214760 total deferred credits 11684578 10369840 commitments contingencies note 8 total liabilities shareholders equity 112918919 107473117 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements changes shareholders equity years ended june 30 2000 1999 1998 common shares balance beginning year 2413942 2375093 2342223 100 par value 45125 38849 32870 shares issued 2000 1999 1998 respectively dividend reinvestment stock purchase plan 37499 32551 27124 employee stock purchase plan 7626 6298 5746 balance end year 2459067 2413942 2375093 premium common shares balance beginning year 28386194 27745127 27203311 premium issuance common shares dividend reinvestment stock purchase plan 533760 536520 446432 employee stock purchase plan 119041 104547 95384 balance end year 29038995 28386194 27745127 capital stock expense balance beginning end year 1917020 retained earnings balance beginning year 1028891 1607094 1846055 net income 3464857 2150794 2451272 cash dividends declared common shares see consolidated statements income rates 2777372 2728997 2690233 balance end year 1716376 1028891 1607094 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 2000 1999 common shareholders equity common shares par value 100 per share notes 3 4 authorized 6000000 shares issued outstanding 2459067 2413942 shares 2000 1999 respectively 2459067 2413942 premium common shares 29038995 28386194 capital stock expense 1917020 retained earnings note 6 1716376 1028891 total common shareholders equity 31297418 29912007 longterm debt notes 6 7 debentures 83 due 2026 14925000 15000000 debentures 6 58 due 2023 12243000 12886000 debentures 715 due 2018 24668000 24985000 promissory note acquisition ground storage noninterest bearing due 2001 less unamortized discount 62205 121300 2000 1999 respectively 637795 1278700 total longterm debt 52473795 54149700 less amounts due within one year included current liabilities 1750000 2450000 net longterm debt 50723795 51699700 total capitalization 82021213 81611707 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system delta system supply enpro inc owns operates production properties undeveloped acreage deltran inc operated underground natural gas storage field leased delta december 31 1999 dissolved february 2000 subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 31 32 31 average depreciable plant 2000 1999 1998 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements delta adopted sfas 128 earnings per share fiscal 1998 adoption standard effect upon current prior period earnings per common share delta adopted sfas 130 comprehensive income fiscal 1999 sfas 130 establishes standards reporting display comprehensive income components full set general purpose financial statements adoption statement impact financial statements company delta adopted sfas 131 disclosures segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits fiscal 1999 statements affect accounting recognition measurements transactions rather require expanded disclosures regarding financial results june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 standardizes accounting derivative instruments including certain derivative instruments embedded contracts requiring entity recognize items assets liabilities statement financial position measure fair value statement subsequently amended sfas 137 issued june 1999 sfas 138 issued june 2000 statement amended effective fiscal years beginning june 15 2000 thus companys fiscal year 2001 delta currently party derivatives hedging purposes delta concluded contracts purchase sale transportation storage natural gas constitute normal purchases sales sfas 133 subject accounting requirements new standard therefore company believes adoption standard material effect financial position results operations 2 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 2000 1999 deferred tax liabilities accelerated depreciation 11521999 10546000 accrued pension 988000 789700 debt expense 447100 467200 total 12957099 11802900 deferred tax assets alternative minimum tax credits 1400800 1521100 regulatory liabilities 273700 193445 deferred gas costunbilled revenue 309300 718400 investment tax credit 199000 224000 371000 319300 total 2553800 2976245 net accumulated deferred income tax liability 10403299 8826655 components income tax provision comprised following years ended june 30 2000 1999 1998 components income tax expense payable currently federal 568100 563400 1164800 state 137500 63000 265600 total 705600 626400 1430400 deferred 1362900 612700 29400 income tax expense 2068500 1239100 1401000 reconciliation statutory federal income tax rate effective income tax rate shown table 2000 1999 1998 statutory federal income tax rate 340 state income taxes net federal benefit 52 50 amortization investment tax credit 11 20 18 differences net 04 02 effective income tax rate 377 368 370 3 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately following table provides reconciliation changes plans benefit obligations fair value assets twoyear period ended march 31 2000 statement funded status march 31 years recognized companys consolidated balance sheets june 30 2000 1999 change benefit obligation benefit obligation beginning year 8286366 6745269 service cost 535681 467417 interest cost 538400 471939 actuarial loss 91615 711063 effect curtailment 2834 benefits paid 1260867 109322 benefit obligation end year 8188361 8286366 change plan assets fair value plan assets beginning year 9188450 8637638 actual return plan assets 1507558 44213 employer contribution 740908 615921 benefits paid 1260867 109322 fair value plan assets end year 10176049 9188450 funded status 1987688 902084 unrecognized net actuarial loss gain 117267 512737 net transition asset 71656 127183 prepaid benefit cost included assets accompanying balance sheet 1798765 1287638 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 2000 1999 1998 components net periodic benefit cost service cost 535681 467417 445288 interest cost 538400 471939 443955 expected return plan assets 764449 715795 575394 amortization net transition asset 42394 net periodic benefit cost 267238 181167 271455 weightedaverage assumptions discount rate 775 650 700 expected return plan assets 800 rate compensation increase 400 plan year ended march 31 2000 delta eliminated 16 positions conjunction workforce reduction plan subsequently 7 additional positions eliminated result reorganization deltas branch offices completed june 30 2000 events resulted curtailment treatment pension plan accordance sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits combined impact curtailment gain savings salary expense cost one time payments made severed employees material current year results operations sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement post employment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 2000 1999 1998 deltas savings plan expense 170800 169300 156000 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent market value 100300 issued july 2000 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 2001 4 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan company issued 37499 32551 27124 shares 2000 1999 1998 respectively delta reserved 200000 shares issuance reinvestment plan december 1994 june 30 2000 26430 shares still available issuance company plans reserve additional shares plan fiscal 2001 5 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 2000 1999 available line credit 25000000 9625000 5695000 borrowed interest rate 651 551 2000 1999 respectively maximum amount borrowed 2000 1999 16700000 9435000 respectively interest line option delta either daily prime rate based upon certificate deposit rates current line credit must renewed november 2000 shortterm borrowings repaid march 1998 net proceeds 24100000 sale 25000000 debentures net proceeds also used redeem companys 9 debentures would matured april 2011 redemption debt outstanding principal amount 10000000 completed april 1998 6 longterm debt march 1998 delta issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed company april 1 2003 restrictions indenture agreement covering 715 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 21500000 retained earnings restricted provisions indenture july 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 october 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 company may assume additional mortgage indebtedness excess 2 million without effectively securing 6 58 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1998 300000 loss extinguishment debt 332000 deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 1995 amount 1800000 remaining installment 700000 due note payable 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas promissory note installment secured escrow 40000 shares deltas common stock shares issued holder promissory note event default payment delta 7 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 2000 1999 estimated 47152000 49810000 respectively carrying amount accompanying consolidated financial statements june 30 2000 1999 51836000 52871000 respectively carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 8 commitments contingencies company entered individual employment agreements six officers agreement chairman board agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 9 rates reference made regulatory matters herein respect rate matters 10 operating segments delta adopted sfas 131 disclosures segments enterprise related information fiscal 1999 sfas 131 established standards reporting information operating segments annual financial statements requires selected information operating segments interim financial reports issued stockholders also established standards related disclosures products services geographic areas operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker decision making group deciding allocate resources assessing performance deltas chief operating decision making group companys officers company two segments regulated natural gas distribution transmission storage segment ii unregulated segment participates related ventures consisting natural gas marketing production company operates single geographic area central southeastern kentucky segments follow accounting policies described summary significant accounting policies principles consolidation note 1 notes consolidated financial statements company earns revenues transportation natural gas regulated segment management evaluates performance unregulated natural gas marketing subsidiaries based additional margin added sales ability maintain contact customers choose transport regulated system intersegment transportation revenue expense recorded deltas tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated unregulated segment information shown periods 000 2000 1999 1998 revenues regulated external customers 33314 30000 34550 intersegment 4606 5496 5187 total regulated 37920 35496 39737 nonregulated external customers 12613 8672 9708 intersegment 16249 15881 14467 total nonregulated 28862 24553 24175 eliminations intersegment 20855 21377 19654 total operating revenues 45927 38672 44258 000 2000 1999 1998 expenses operating expenses regulated depreciation 3940 3804 3399 income taxes 1657 1001 1089 24792 24398 28984 total regulated 30389 29203 33472 nonregulated depreciation 49 37 46 income taxes 412 238 312 27755 23838 23277 total nonregulated 28216 24113 23635 eliminations intersegment 20855 21296 19581 total operating expenses 37750 32020 37526 income deductions regulated 43 25 37 nonregulated 9 31 total income deductions 43 34 68 interest charges regulated 4766 4552 4380 nonregulated 41 64 42 eliminations intersegment 52 81 73 total interest charges 4755 4535 4349 net income regulated 2808 1766 1922 nonregulated 658 385 529 total net income 3465 2151 2451 assets regulated 108876 105716 101016 nonregulated 4043 1757 1851 total assets 112919 107473 102867 capital expenditures regulated 8796 7981 11192 nonregulated 1 2 total capital expenditures 8796 7982 11194 11 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods quarter operating net basic diluted ended revenues income loss earningsloss per common sharea fiscal 2000 september 30 4753043 344622 801859 33 december 31 9964446 1869292 633318 26 march 31 20708156 4609595 3400687 139 june 30 10501130 1353213 232711 09 fiscal 1999 september 30 4938135 431693 693777 29 december 31 8630074 1415274 252775 11 march 31 16890711 3651078 2515336 105 june 30 8213318 1154025 76460 03 quarterly earnings per share may equal annual earnings per share due changes shares outstanding schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 2000 1999 1998 column b column c column e additions deductions balance charged amounts balance beginning costs accounts charged end description period expenses recoveries paid period deducted asset applies allowance doubtful accounts years ended june 30 2000 138514 213000 39086 246220 144380 june 30 1999 120001 213385 48888 243760 138514 june 30 1998 113945 369870 46013 409827 120001 delta natural gas company inc subsidiary companies computation consolidated ratio earnings fixed charges 2000 1999 1998 1997 1996 earnings net income 3464858 2150794 2451272 1724265 2661349 provisions income taxes 2068500 1239100 1401000 964800 1559500 fixed charges 4754731 4534936 4348498 3632191 2808209 total 10288089 7924830 8200770 6321256 7029058 fixed charges interest debt 4593571 4373776 4223946 3516825 2719409 amortization debt expense 161160 124552 115366 88800 total 4754731 4534936 4348498 3632191 2808209 ratio earnings fixed charges 216x 175x 189x 174x 250x exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent public accountants independent public accountants hereby consent incorporation report dated august 15 2000 included form 10k companys previously filed registration statement 3356689 relating dividend reinvestment stock purchase plan company arthur andersen llp louisville kentucky september 6 2000 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 except language item 10 report 11 12 13 14 incorporated herein reference definitive proxy statement report executive compensation included company’s definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement annual meeting shareholders filed securities exchange commission later 120 days june 30 2011 incorporate information document reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 4a indenture dated april 1 1991 respect 9 debentures due april 30 2011 incorporated herein reference exhibit 4e deltas form s2 dated april 23 1991 4b indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4c indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta sale gas tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10e contract tennessee delta sale gas tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta sale gas tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta sale gas tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta sale gas columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser incorporated herein reference exhibit 10j deltas form 10k period ended june 30 1994 10k employment agreement delta alan l heath officer incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement dated may 31 1995 delta glenn r jennings officer incorporated herein reference exhibit 10m deltas form 10k period ended june 30 1995 10n employment agreement dated june 19 1995 delta johnny l caudill officer incorporated herein reference exhibit 10n deltas form 10k period ended june 30 1995 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant incorporated herein reference exhibit 22 deltas form 10k period ended june 30 1986 23 consent independent public accountants b reports 8k reports form 8k filed three months ended june 30 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 11th day september 1996 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer glenn r jennings president chief september 11 1996 glenn r jennings executive officer director ii principal financial officer principal accounting officer john f hall vice president finance september 11 1996 john f hall secretary treasurer iii majority board directors h peet chairman board september 11 1996 h peet donald r crowe director september 11 1996 donald r crowe jane hylton green director september 11 1996 jane hylton green billy joe hall director september 11 1996 billy joe hall virgil e scott director september 11 1996 virgil e scott henry c thompson director september 11 1996 henry c thompson arthur e walker jr director september 11 1996 arthur e walker jr managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity generally accepted accounting principles management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1996 1995 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1996 financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1996 1995 results operations cash flows three years period ended june 30 1996 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 16 1996 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1996 1995 1994 operating revenues 36576055 31844339 34846941 operating expenses purchased gas 17389755 15497156 17250556 operation maintenance note 1 8642511 8002797 8382767 depreciation depletion note 1 2510952 2183558 1977868 taxes income taxes 1036282 863340 875477 income taxes note 1 1559500 1042400 1509600 total operating expenses 31139000 27589251 29996268 operating income 5437055 4255088 4850673 income deductions net 32503 50582 34987 income interest charges 5469558 4305670 4885660 interest charges interest longterm debt 1851768 1879442 1879526 interest 867641 419693 243729 amortization debt expense 88800 91404 total interest charges 2808209 2387935 2214659 net income 2661349 1917735 2671001 weighted average number common shares outstanding 1886629 1850986 1775068 earnings per common share 141 104 150 dividends declared per common share 112 111 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1996 1995 1994 cash flows operating activities net income 2661349 1917735 2671001 adjustments reconcile net income net cash operating activities depreciation depletion amortization 2663475 2272358 2069013 deferred income taxes investment tax credits 1762500 77000 874800 net 484474 602180 446969 increase decrease assets accounts receivable 860255 118237 802197 materials supplies 124697 173319 229275 prepayments 53702 105903 25701 assets 31823 209225 780 increase decrease liabilities accounts payable 871207 178609 513265 refunds due customers 456283 83572 358270 accrued taxes 270394 72210 34543 current liabilities 56951 69742 38675 deferred advance recovery gas cost 3788143 2583128 1372030 advances construction 9100 2333 8756 net cash provided operating activities 3094809 6943183 6172019 cash flows investing activities capital expenditures 13373416 8122838 7374747 net cash used investing activities 13373416 8122838 7374747 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1996 1995 1994 cash flows financing activities note 5 dividends common stock 2113414 2073374 1972368 issuance common stock net 568875 502361 3965113 issuance debentures net 14246937 repayment longterm debt 561000 240100 11330286 issuance notes payable 25955000 19495000 20180000 repayment notes payable 13555000 16525000 23945000 net cash provided financing activities 10294461 1158887 1144396 net increase decrease cash equivalents 15854 20768 58332 cash equivalents beginning year 135779 156547 214879 cash equivalents end year 151633 135779 156547 supplemental disclosures cash flow information cash paid year interest 2491091 2253472 2141705 income taxes 193560 1264942 715000 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1996 1995 assets gas utility plant cost 98795623 84944969 less accumulated provision depreciation 26749774 24588203 net gas plant 72045849 60356766 current assets cash equivalents 151633 135779 accounts receivable less accumulated provisions doubtful accounts 105756 81608 1996 1995 respectively 2096454 1236199 gas storage average cost 427164 490710 deferred gas costs note 1 2676357 materials supplies firstin firstout cost 652139 527442 prepayments 369544 423246 total current assets 6373291 2813376 assets cash surrender value officers life insurance face amount 1036009 1044355 1996 1995 respectively 304339 293116 note receivable officer 126000 130000 unamortized debt expense note 5 2291158 2355458 total assets 2721497 2778574 total assets 81140637 65948716 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1996 1995 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 23628323 22511513 longterm debt notes 5 6 24488916 23702200 notes payable refinanced subsequent yearend note 4 18075000 total capitalization 66192239 46213713 current liabilities notes payable note 4 5675000 current portion longterm debt notes 5 6 1084800 1057700 accounts payable 2826438 1955231 accrued taxes 93554 363948 refunds due customers 23354 479637 advance recovery gas cost 1111786 customers deposits 304246 331708 accrued interest debt 637596 473001 accrued vacation 485847 454728 accrued liabilities 238571 349872 total current liabilities 5694406 12252611 deferred credits deferred income taxes 7318500 5510400 investment tax credits 779400 850400 regulatory liability note 1 938300 912900 advances construction 217792 208692 total deferred credits 9253992 7482392 commitments contingencies note 7 total liabilities shareholders equity 81140637 65948716 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1996 1995 common shareholders equity common shares par value 100 per share notes 2 3 authorized 6000000 shares issued outstanding 1903580 1868734 shares 1996 1995 respectively 1903580 1868734 premium common shares 20572132 20022643 capital stock expense 1620252 1604792 retained earnings note 5 2772863 2224928 total common shareholders equity 23628323 22511513 longterm debt notes 5 6 debentures 6 58 due 2023 14000000 14561000 debentures 9 due 2011 10000000 promissory note acquisition ground storage noninterest bearing due 2001 less 398419 unamor tized discount 1401581 172135 198900 total longterm debt 25573716 24759900 less amounts due within one year included current liabilities 1084800 1057700 net longterm debt 24488916 23702200 notes payable refinanced subsequent yearend note 4 18075000 total capitalization 66192239 46213713 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company four whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc operates underground natural gas storage facilities leases delta enpro inc owns operates production properties subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 29 28 27 average depreciable plant 1996 1995 1994 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company supplies natural gas approximately 34000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates longlived assets march 1995 financial accounting standards board issued statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 effective fiscal years beginning december 15 1995 company plans adopt provisions sfas 121 first quarter 1997 new standard requires longlived assets certain identified intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable performing impairment reviews companies required estimate sum future cash flows asset compare amount assets carrying amount excess carrying amount expected cash flows result possible writedown asset fair value based current operating conditions legal requirements regulatory environment company expect adoption sfas 121 material adverse impact financial position results operations j income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 1996 1995 deferred tax liabilities accelerated depreciation 8091500 7186700 deferred gas cost 1055700 debt expense 399200 413500 252900 178900 total 9799300 7779100 1996 1995 deferred tax assets unamortized investment tax 307400 335400 credit regulatory liabilities 370000 360100 alternative minimum tax credits 1305600 724300 deferred gas cost 438500 497800 410400 total 2480800 2268700 net accumulated deferred income tax liability 7318500 5510400 components income tax provision comprised following years ended june 30 1996 1995 1994 components income tax expense payable currently federal 52100 453900 306300 state 255100 194500 100800 total 203000 648400 407100 deferred 1762500 394000 1102500 income tax expense 1559500 1042400 1509600 reconciliation statutory federal income tax rate effective income tax rate shown table 1996 1995 1994 statutory federal income tax rate 340 state income taxes net federal benefit 52 amortization investment tax credit 17 24 18 differences net 9 effective income tax rate 375 359 365 2 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately funded status pension plan march 31 plan year end amounts recognized companys consolidated balance sheets june 30 follows 1996 1995 1994 plan assets fair value 6058458 5358108 5251296 actuarial present value benefit obligation vested benefits 2789736 3605363 4114517 nonvested benefits 9346 21742 30562 accumulated benefit obligation 2799082 3627105 4145079 additional amounts related projected salary increases 2811907 1638014 1734413 total projected benefit obligation 5610989 5265119 5879492 plan assets excess less projected benefit obligation 447469 92989 628196 unrecognized net assets date initial application amortized 15 years 254365 296759 339153 unrecognized net gain loss 13481 286557 950735 accrued pension asset liability 179623 82787 16614 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 1996 1995 1994 service cost benefits earned 382751 432546 455097 year interest cost projected benefit 356897 382167 357372 obligation actual return plan assets 886211 623972 45100 net amortization deferral 444044 185660 353530 net periodic pension cost 297481 376401 413839 weighted average discount rates assumed rates increase future compensation levels used determining actuarial present values projected benefit obligation june 30 1996 1995 1994 70 65 respectively discount rates 4 rates increase expected longterm rates return plan assets 8 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 2 employees annual compensation june 30 1996 maximum company contribution increased 25 effective july 1 1996 1995 1994 deltas savings plan expense approximately 111000 112000 107000 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent approximately 100900 issued july 1996 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 1997 3 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 28024 shares issued 1996 delta reserved 200000 shares reinvestment plan december 1994 june 30 1996 154791 shares still available issuance 4 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1996 available line credit 20000000 15000000 june 30 1995 18075000 5675000 borrowed interest rate 6285 6935 1996 1995 respectively maximum amount borrowed 1996 1995 18075000 8430000 respectively interest line option delta either daily prime rate based upon certificate deposit rates current line credit expires november 15 1996 shortterm borrowings repaid july 1996 net proceeds approximately 20400000 sale 15000000 debentures 400000 shares common stock 5 longterm debt july 19 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 restrictions indenture agreement covering 83 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 18000000 retained earnings restricted provisions indenture october 18 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 may 1 1991 delta issued 10000000 9 debentures mature april 2011 holder may require redemption 25000 95 debentures annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 9 debentures redeemed company beginning april 1996 5 premium declining ratably ceases april 2001 company may assume additional mortgage indebtedness excess 1 million without effectively securing 9 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1994 approximately 475000 deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 10 1995 amount 1800000 payable installments 400000 1998 700000 2000 700000 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas delta secured promissory note escrow 102858 shares deltas common stock shares issued holder promissory note event default payment delta underground natural gas storage field located canada mountain bell county kentucky estimated working capacity 4000000 mcf anticipated storage capability permit delta purchase store gas nonheating season withdraw sell gas peak usage winter months storage project capital expenditures estimated approximately 6000000 fiscal 1997 delta currently recovering return storage field investments rates longterm debt requires principal payments approximately 85000 1997 67000 1998 6 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 1996 estimated 22073000 carrying amount accompanying consolidated financial statements 24000000 carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 7 commitments contingencies company entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 8 rates reference made regulatory matters herein respect rate matters 9 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods earnings operating net loss per operating income common quarter ended revenues loss sharea fiscal 1996 september 30 3774849 147522 760662 41 december 31 8406787 1331803 649089 34 march 31 16023581 3421608 2725444 144 june 30 8370838 831166 47478 03 fiscal 1995 september 30 3634262 45141 633058 34 december 31 7131698 822241 228119 12 march 31 14903281 2842418 2255994 122 june 30 6175098 635570 66680 04 quarterly earnings per share may equal annual earnings per share due changes shares outstanding exhibit index exhibit 3b amended restated bylaws exhibit 12 computation consolidated ratio earnings fixed charges exhibit 23 consent independent certified public accountants exhibit 27 financial data schedule item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incorporated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4b indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 4c indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 dated march 11 1998 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10 q period ended september 30 1990 10e contract tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser incorporated herein reference exhibit 10j deltas form 10k period ended june 30 1994 10k employment agreement delta alan l heath officer incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement delta glenn r jennings officer incorporated herein reference exhibit 10m deltas form 10k period ended june 30 1995 10n employment agreement delta johnny l caudill officer incorporated herein reference exhibit 10n deltas form 10k period ended june 30 1995 10o employment agreement dated march 1 1999 delta john b brown officer 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent public accountants 27 financial data schedule b reports 8k reports form 8k filed three months ended june 30 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 10th day september 1999 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer glenn r jennings president chief executive september 10 1999 glenn r jennings officer director ii principal financial officer principal accounting officer john f hall vice president finance september 10 1999 john f hall secretary treasurer iii majority board directors h peet chairman board september 10 1999 h peet donald r crowe director september 10 1999 donald r crowe jane hylton green director september 10 1999 jane hylton green billy joe hall director september 10 1999 billy joe hall john harrison director september 10 1999 john harrison virgil e scott director september 10 1999 virgil e scott henry c thompson director september 10 1999 henry c thompson arthur e walker jr director september 10 1999 arthur e walker jr managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity generally accepted accounting principles management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall president chief executive officer vice president finance secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1999 1998 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1999 financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1999 1998 results operations cash flows three years period ended june 30 1999 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commission rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 16 1999 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1999 1998 1997 operating revenues 38672238 44258000 42169185 operating expenses purchased gas 16467988 22499488 23265222 operation maintenance note 1 9137107 8968213 8631635 depreciation depletion note 1 3840996 3445382 2935257 taxes income taxes 1334977 1212058 1056689 income taxes note 2 1239100 1401000 964800 total operating expenses 32020168 37526141 36853603 operating income 6652070 6731859 5315582 income deductions net 33660 67911 40874 income interest charges 6685730 6799770 5356456 interest charges interest longterm debt 3912826 3326681 2997393 interest 460950 897265 519432 amortization debt expense 161160 124552 115366 total interest charges 4534936 4348498 3632191 net income 2150794 2451272 1724265 weighted average number common shares outstanding 2394181 2359598 2294134 basic diluted earnings per common share 90 104 75 dividends declared per common share 114 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1999 1998 1997 cash flows operating activities net income 2150794 2451272 1724265 adjustments reconcile net income net cash operating activities depreciation depletion amortization 3941370 3755929 3049229 deferred income taxes investment tax credits 662880 29400 485400 net 730601 698584 666798 increase decrease assets accounts receivable 908917 124168 318178 gas storage 1451177 840829 782007 materials supplies 144468 252746 120969 prepayments 53642 70648 346532 assets 446988 55440 541669 increase decrease liabilities accounts payable 273755 336089 439721 refunds due customers 75774 460751 554520 advance recovery gas cost 50446 3328625 495751 accrued taxes 131091 46549 1038761 current liabilities 160329 257055 744054 advances construction 2960 404 476 net cash provided operating activities 6680276 8922037 6209226 cash flows investing activities capital expenditures 7982143 11193613 16648994 net cash used investing activities 7982143 11193613 16648994 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1999 1998 1997 cash flows financing activities note 6 dividends common stock 2728997 2690233 2651073 issuance common stock net 679916 574686 6773054 issuance debentures net 23837795 14334833 repayment longterm debt 339000 10822559 478256 issuance notes payable 21615000 26200000 30975000 repayment notes payable 17795000 35190000 38185000 net cash provided financing activities 1431919 1909689 10768558 net increase decrease cash equivalents 130052 361887 328790 cash equivalents beginning year 118536 480423 151633 cash equivalents end year 248588 118536 480423 supplemental disclosures cash flow information cash paid year interest 4685458 4291005 3019881 income taxes net refunds 712023 1642964 432163 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1999 1998 assets gas utility plant cost 133804954 127028159 less accumulated provision depreciation 38308798 34929481 net gas plant 95496156 92098678 current assets cash equivalents 248588 118536 accounts receivable less accumulated provisions doubtful accounts 138514 120001 1999 1998 respectively 1629883 2538800 gas storage average cost 3501177 2050000 materials supplies firstin firstout cost 664830 520362 prepayments 188089 241731 total current assets 6232567 5469429 assets cash surrender value officers life insurance face amount 1236009 339450 339215 note receivable officer 122000 110000 unamortized debt expense note 6 5282944 4849291 total assets 5744394 5298506 total assets 107473117 102866613 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1999 1998 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 29912007 29810294 longterm debt notes 6 7 51699700 52612494 total capitalization 81611707 82422788 current liabilities notes payable note 5 5695000 1875000 current portion longterm debt notes 6 7 2450000 1790000 accounts payable 2324383 2050628 accrued taxes 954675 1085766 refunds due customers 41349 117123 advance recovery gas costs note 1 1198465 1148019 customers deposits 524263 438134 accrued interest debt 1225903 1215265 accrued vacation 584014 528952 accrued liabilities 493518 485018 total current liabilities 15491570 10733905 deferred credits deferred income taxes 8826655 8023475 investment tax credits 567800 637300 regulatory liability note 2 760625 831425 advances construction 214760 217720 total deferred credits 10369840 9709920 commitments contingencies note 8 total liabilities shareholders equity 107473117 102866613 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements changes shareholders equity years ended june 30 1999 1998 1997 common shares balance beginning year 2375093 2342223 1903580 100 par value 38849 32870 438643 shares issued 1999 1998 1997 respectively public issuance common shares 400000 dividend reinvestment stock purchase plan 32551 27124 31187 employee stock purchase plan 6298 5746 7456 balance end year 2413942 2375093 2342223 premium common shares balance beginning year 27745127 27203311 20572132 premium issuance common shares public issuance common shares 6000000 dividend reinvestment stock purchase plan 536520 446432 519478 employee stock purchase plan 104547 95384 111701 balance end year 28386194 27745127 27203311 capital stock expense balance beginning year 1917020 1620252 issuance common shares 296768 balance end year 1917020 retained earnings balance beginning year 1607094 1846055 2772863 net income 2150794 2451272 1724265 cash dividends declared common shares see consolidated statements income rates 2728997 2690233 2651073 balance end year 1028891 1607094 1846055 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1999 1998 common shareholders equity common shares par value 100 per share notes 3 4 authorized 6000000 shares issued outstanding 2413942 2375093 shares 1999 1998 respectively 2413942 2375093 premium common shares 28386194 27745127 capital stock expense 1917020 retained earnings note 6 1028891 1607094 total common shareholders equity 29912007 29810294 longterm debt notes 6 7 debentures 83 due 2026 15000000 debentures 6 58 due 2023 12886000 13170000 debentures 715 due 2018 24985000 25000000 promissory note acquisition ground storage noninterest bearing due 2001 less unamortized discount 121300 207506 1999 1998 respectively 1278700 1192494 40000 total longterm debt 54149700 54402494 less amounts due within one year included current liabilities 2450000 1790000 net longterm debt 51699700 52612494 total capitalization 81611707 82422788 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company four whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc operates underground natural gas storage facilities leases delta enpro inc owns operates production properties subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 32 31 30 average depreciable plant 1999 1998 1997 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company 39000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements delta adopted sfas 128 earnings per share fiscal 1998 adoption standard effect upon current prior period earnings per common share delta adopted sfas 130 comprehensive income fiscal 1999 sfas 130 establishes standards reporting display comprehensive income components full set general purpose financial statements adoption statement impact financial statements company delta adopted sfas 131 disclosures segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits fiscal 1999 statements affect accounting recognition measurements transactions rather require expanded disclosures regarding financial results june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 standardizes accounting derivative instruments including certain derivative instruments embedded contracts requiring entity recognize items assets liabilities statement financial position measure fair value statement effective fiscal years beginning june 15 2000 effective companys fiscal year 2001 delta currently party financial derivatives hedging purposes however delta currently evaluating terms commodity contracts ie primarily gas purchase sale transportation contracts determine whether contracts meet definition derivative instruments subject requirements new standard company still evaluating impact standard financial statements 2 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 1999 1998 deferred tax liabilities accelerated depreciation 10546000 9933400 accrued pension 789700 568900 debt expense 467200 487400 total 11802900 10989700 deferred tax assets alternative minimum tax credits 1521100 1274100 regulatory liabilities 193445 486245 deferred gas costunbilled revenue 718400 670100 investment tax credit 224000 251400 319300 284380 total 2976245 2966225 net accumulated deferred income tax liability 8826655 8023475 components income tax provision comprised following years ended june 30 1999 1998 1997 components income tax expense payable currently federal 563400 1164800 242200 state 63000 265600 31300 total 626400 1430400 210900 deferred 612700 29400 753900 income tax expense 1239100 1401000 964800 reconciliation statutory federal income tax rate effective income tax rate shown table 1999 1998 1997 statutory federal income tax rate 340 state income taxes net federal benefit 52 50 amortization investment tax credit 20 18 26 differences net 04 2 effective income tax rate 368 370 364 3 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately following table provides reconciliation changes plans benefit obligations fair value assets twoyear period ended march 31 1999 statement funded status march 31 years recognized companys consolidated balance sheets june 30 1999 1998 change benefit obligation benefit obligation beginning year 6745269 6345500 service cost 467417 445288 interest cost 471939 443955 actuarial loss gain 711063 6677 benefits paid 109322 482797 benefit obligation end year 8286366 6745269 change plan assets fair value plan assets beginning year 8637638 6835393 actual return plan assets 44213 1564402 employer contribution 615921 720640 benefits paid 109322 482797 fair value plan assets end year 9188450 8637638 funded status 902084 1892369 unrecognized net actuarial loss gain 512737 869909 unrecognized prior service cost 127183 169577 prepaid benefit cost included assets accompanying balance sheet 1287638 852883 assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 1999 1998 1997 components net periodic benefit cost service cost 467417 445288 405386 interest cost 471939 443955 392539 expected return plan assets 715385 575394 502414 amortization prior service cost 42804 42394 net periodic benefit cost 181167 271455 253117 weightedaverage assumptions march 31 discount rate 65 7 expected return plan assets 8 rate compensation increase 4 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits post retirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 1999 1998 1997 deltas savings plan expense 169300 156000 151000 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june matches shares purchased therefore stock equivalent 113000 issued july 1999 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 2000 4 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 32551 27124 31187 shares issued 1999 1998 1997 respectively delta reserved 200000 shares reinvestment plan december 1994 june 30 1999 63929 shares still available issuance 5 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1999 1998 available line credit 25000000 5695000 1875000 borrowed interest rate 551 6885 1999 1998 respectively maximum amount borrowed 1999 1998 9435000 20160000 respectively interest line option delta either daily prime rate based upon certificate deposit rates current line credit must renewed november 1999 shortterm borrowings repaid march 1998 net proceeds 24100000 sale 25000000 debentures net proceeds also used redeem companys 9 debentures would matured april 2011 redemption debt outstanding principal amount 10000000 completed april 1998 6 longterm debt march 1998 delta issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed company april 1 2003 restrictions indenture agreement covering 715 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 21500000 retained earnings restricted provisions indenture july 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 october 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 company may assume additional mortgage indebtedness excess 2 million without effectively securing 6 58 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1998 300000 loss extinguishment debt 332000 deferred amortized term related debt consistent regulatory treatment noninterest bearing promissory note issued delta november 1995 amount 1800000 remaining installments due amounts 700000 2000 700000 2002 note issued delta purchased leases depleted gas wells develop underground storage natural gas promissory note installments secured escrow 80000 shares deltas common stock shares issued holder promissory note event default payment delta 7 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 1999 1998 estimated 49810000 54387000 respectively carrying amount accompanying consolidated financial statements june 30 1999 1998 52871000 53170000 respectively carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 8 commitments contingencies company entered individual employment agreements six officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 9 rates reference made regulatory matters herein respect rate matters 10 operating segments delta adopted sfas 131 disclosures segments enterprise related information fiscal 1999 sfas 131 established standards reporting information operating segments annual financial statements requires selected information operating segments interim financial reports issued stockholders also established standards related disclosures products services geographic areas operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker decision making group deciding allocate resources assessing performance deltas chief operating decision making group companys officers company two segments regulated natural gas distribution transmission storage segment ii unregulated segment participates related ventures consisting natural gas marketing production company operates single geographic area central southeastern kentucky segments follow accounting policies described summary significant accounting policies principles consolidation note 1 notes consolidated financial statements company earns revenues transportation natural gas regulated segment management evaluates performance unregulated natural gas marketing subsidiaries based additional margin added sales ability maintain contact customers choose transport regulated system intersegment transportation revenueexpense recorded deltas tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated unregulated segment information shown periods 000 1999 1998 1997 revenues regulated external customers 30000 34550 34567 intersegment 5496 5187 3602 total regulated 35496 39737 38169 nonregulated external customers 8672 9708 7602 intersegment 15881 14467 13999 total nonregulated 24553 24175 21601 eliminations intersegment 21377 19654 17601 total operating revenues 38672 44258 42169 expenses operating expenses regulated depreciation 3804 3399 2896 income taxes 1001 1089 772 24398 28984 29438 total regulated 29203 33472 33106 nonregulated depreciation 37 46 39 income taxes 238 312 193 23838 23277 21043 total nonregulated 24113 23635 21275 eliminations intersegment 21296 19581 17527 total operating expenses 32020 37526 36854 income deductions regulated 25 37 41 nonregulated 9 31 total income deductions 34 68 41 interest charges regulated 4552 4380 3695 nonregulated 64 42 11 eliminations intersegment 81 73 74 total interest charges 4535 4349 3632 net income regulated 1766 1922 1409 nonregulated 385 529 315 total net income 2151 2452 1724 assets regulated 105716 101016 94407 nonregulated 1757 1851 2274 total assets 107473 102867 96681 capital expenditures regulated 7981 11192 16648 nonregulated 1 2 total capital expenditures 7982 11194 16648 11 quarterly financial data quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earnings quarter operating net income loss per ended revenues income loss common sharea fiscal 1999 september 30 4938135 431693 693777 29 december 31 8630074 1415274 252775 11 march 31 16890711 3651078 2515336 105 june 30 8213318 1154025 76460 03 fiscal 1998 september 30 5215272 181905 813982 35 december 31 11787820 1726169 591812 25 march 31 18305458 3442234 2366329 100 june 30 8949450 1381551 307113 14 quarterly earnings per share may equal annual earnings per share due changes shares outstanding schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 1999 1998 1997 column b column c column e additions deductions balance charged amounts balance beginning costs accounts charged end description period expenses recoveries paid period deducted sset applies allowance doubtful accounts years ended june 30 1999 120001 213385 48888 243760 138514 june 30 1998 113945 369870 46013 409827 120001 june 30 1997 105756 220000 27402 239213 113945 delta natural gas company inc subsidiary companies computation consolidated ratio earnings fixed charges 1999 1998 1997 1996 1995 earnings net income 2150794 2451272 1724265 2661349 1917735 provisions income taxes 1239100 1401000 964800 1559500 1042400 fixed charges 4534936 4348498 3632191 2808209 2387935 total 7924830 8200770 6321256 7029058 5348070 fixed charges interest debt 4373776 4223946 3516825 2719409 2299135 amortization debt expense 161160 124552 115366 88800 total 4534936 4348498 3632191 2808209 2387935 ratio earnings fixed charges 175x 189x 174x 250x 224x exhibit 21 subsidiaries registrant delgasco inc deltran inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent public accountants independent public accountants hereby consent incorporation report dated august 16 1999 included form 10k companys previously filed registration statement 33 56689 relating dividend reinvestment stock purchase plan company arthur andersen llp louisville kentucky september 10 1999 item 14 principal accountant fees services information required item contained caption audit committee report definitive proxy statement annual meeting shareholders filed securities exchange commission later 120 days june 30 2010 incorporate information document reference part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement 2015 annual meeting shareholders filed securities exchange commission later 120 days june 30 2015 incorporate information document reference part iv item 15 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 except language item 10 report 11 12 13 14 incorporated herein reference definitive proxy statement report executive compensation included companys definitive proxy statement shall deemed incorporated herein reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 19 1993 incorporated herein reference exhibit 3b deltas form 10k year ended june 30 1993 4a indenture dated april 1 1991 respect 9 debentures due april 30 2011 incorporated herein reference exhibit 4e deltas form s2 dated april 23 1991 4b indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b gas purchase contract delta wiser incorporated herein reference exhibit 2c deltas form 8k dated february 9 1981 10c assignment delta wiser columbia service agreement including copy said service agreement incorporated herein reference exhibit 2d deltas form 8k dated february 9 1981 10d contract tennessee delta sale gas tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10e contract tennessee delta sale gas tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10f contract tennessee delta sale gas tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10g contract tennessee delta sale gas tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10h service agreements columbia delta sale gas columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10i amendment gas purchase contract delta wiser incorporated herein reference exhibit 10c deltas form 10q period ended december 31 1988 10j second amendment gas purchase contract delta wiser dated august 20 1993 10k employment agreements delta three officers alan l heath jane w hylton thomas kohnle incorporated herein reference exhibit 10k deltas form 10q period ended december 31 1985 10l employment agreements delta two officers john f hall robert c hazelrigg incorporated herein reference exhibit 10m deltas form 10q period ended december 31 1988 10m employment agreement dated june 1 1992 delta glenn r jennings officer incorporated herein reference exhibit 10l deltas form 10k period ended june 30 1992 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant incorporated herein reference exhibit 22 deltas form 10k period ended june 30 1986 24 consent independent public accountants b reports 8k reports form 8k filed three months ended june 30 1994 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day august 1994 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief august 26 1994 glenn r jennings executive officer director ii principal financial officer sjohn f hall vice president august 26 1994 john f hall regulatory matters treasurer iii principal accounting officer sthomas kohnle vice president august 26 1994 thomas kohnle controller iv majority board directors sh peet chairman august 26 1994 h peet board sdonald r crowe director august 26 1994 donald r crowe sbilly joe hall director august 26 1994 billy joe hall sjane w hylton vice president august 26 1994 jane w hylton human resources secretary director svirgil e scott director august 26 1994 virgil e scott shenry c thompson director august 26 1994 henry c thompson sarthur e walker jr director august 26 1994 arthur e walker jr srobert watt iii director august 26 1994 robert watt iii managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report statements prepared accordance generally accepted accounting principles include amounts based managements best estimates judgments company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists three outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well arthur andersen llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 1994 1993 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 1994 consolidated financial statements schedules referred responsibility companys management responsibility express opinion consolidated financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 1994 1993 results operations cash flows three years period ended june 30 1994 conformity generally accepted accounting principles discussed note 1 consolidated financial statements effective july 1 1993 company changed method accounting income taxes audit made purpose forming opinion basic financial statements taken whole schedules listed index consolidated financial statements schedules presented purposes complying securities exchange commission rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 12 1994 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 1994 1993 1992 operating revenues 34846941 31221410 29200834 operating expenses purchased gas 17250556 14234258 12564947 operation maintenance note 1 8382767 8020622 8173070 depreciation depletion note 1 1977868 1833072 1675540 taxes income taxes 875477 797942 759354 income taxes note 1 1509600 1543700 1441600 total operating expenses 29996268 26429594 24614511 operating income 4850673 4791816 4586323 income deductions net 34987 39681 34087 income interest charges 4885660 4831497 4620410 interest charges interest longterm debt 1879526 1875901 1938389 interest 243729 258405 152728 amortization debt expense 91404 76527 75480 total interest charges 2214659 2210833 2166597 net income 2671001 2620664 2453813 weighted average number common shares outstanding 1775068 1635945 1612437 earnings per common share 150 160 152 dividends declared per common share 1105 1085 108 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 1994 1993 1992 cash flows operating activities net income 2671001 2620664 2453813 adjustments reconcile net income net cash operating activities depreciation depletion amortization 2069013 1922102 1751020 deferred income taxes investment tax credits 874800 839100 467600 net 446969 493848 565756 increase decrease assets accounts receivable 802197 707605 343423 unamortized debt expense 1616 160401 materials supplies 229275 155358 122092 prepayments 25701 8096 39997 assets 780 93948 119703 increase decrease liabilities accounts payable 513265 438897 424898 refunds due customers 358270 37226 20752 accrued taxes 34543 162982 297368 current liabilities 38675 16435 213594 advance deferred recovery gas cost 1372030 993136 463870 advances construction 8756 5416 35292 net cash provided operating activities 6172019 4567023 6370685 cash flows investing activities capital expenditures 7374747 6289508 5074483 net cash used investing activities 7374747 6289508 5074483 delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 1994 1993 1992 cash flows financing activities dividends common stock 1972368 1775411 1741661 issuance common stocknet 3965113 428634 367455 issuance debenturesnet 14246937 repayment longterm debt 11330286 591425 787605 increase decrease notes payable 3765000 3700000 915000 net cash provided used financing activities 1144396 1761798 1246811 net increase decrease cash equivalents 58332 39313 49391 cash equivalents beginning year 214879 175566 126175 cash equivalents end year 156547 214879 175566 supplemental disclosures cash flow information cash paid year interest 2141705 2107168 2154055 income taxes 715000 952851 867382 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 1994 1993 assets gas utility plant cost 77882135 71187860 less accumulated provision depreciation 22862469 21118363 net gas plant 55019666 50069497 current assets cash equivalents 156547 214879 accounts receivable less accumulated provisions doubtful accounts 131324 208182 1994 1993 respectively 1117962 1920159 gas storage average cost 352572 364508 deferred gas costs note 1 1471342 99312 materials supplies firstin firstout cost 700761 471486 prepayments 317343 343044 total current assets 4116527 3413388 assets cash surrender value officers life insurance face amount 1031000 1020000 1994 1993 respectively 269029 244313 note receivable officer 83000 95000 unamortized debt expense note 5 2444258 1307714 total assets 2796287 1647027 total assets 61932480 55129912 delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 1994 1993 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 22164791 17501045 longterm debt note 5 24500000 19596401 total capitalization 46664791 37097446 current liabilities notes payable note 4 2705000 6470000 current portion longterm debt note 5 500000 1259000 accounts payable 2133840 1620575 accrued taxes 436158 470701 refunds due customers 396065 37795 customers deposits 342979 377402 accrued interest debt 427338 445788 accrued vacation 454362 420675 accrued liabilities 314888 257027 total current liabilities 7710630 11358963 deferred credits deferred income taxes 5116400 5482600 investment tax credits 921800 993300 regulatory liability note 1 1312500 advances construction 206359 197603 total deferred credits 7557059 6673503 commitments contingencies note 6 total liabilities shareholders equity 61932480 55129912 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements changes shareholders equity years ended june 30 1994 1993 1992 common shares balance beginning year 1648485 1624878 1600033 100 par value 190855 23607 24845 shares issued 1994 1993 1992 respectively public issuance common shares 170000 dividend reinvestment stock purchase plan 15355 16265 18067 employee stock purchase plan 5500 7342 6778 balance end year 1839340 1648485 1624878 premium common shares balance beginning year 15562427 15157400 14814790 premium issuance common shares public issuance common shares 3570000 dividend reinvestment stock purchase plan 293782 281074 245801 employee stock purchase plan 106700 123953 96809 balance end year 19532909 15562427 15157400 capital stock expense balance beginning year 1391801 public issuance common shares 196224 balance end year 1588025 1391801 retained earnings balance beginning year 1681934 836681 124529 net income 2671001 2620664 2453813 cash dividends declared common shares see consolidated statements income rates 1972368 1775411 1741661 balance end year 2380567 1681934 836681 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 1994 1993 common shareholders equity common shares par value 100 per share notes 2 3 authorized 6000000 shares issued outstanding 1839340 1648485 shares 1994 1993 respectively 1839340 1648485 premium common shares 19532909 15562427 capital stock expense 1588025 1391801 retained earnings note 5 2380567 1681934 total common shareholders equity 22164791 17501045 longterm debt note 5 debentures 6 58 due 2023 15000000 debentures 9 due 2011 10000000 debentures 8 58 due 2007 10553000 first mortgage loan payable bank 9 14 due monthly installments 1997 secured first mortgage corporate office building 177401 sinking fund debentures 9 12 due annual installments 1996 125000 25000000 20855401 less amounts due within one year included current liabilities 500000 1259000 total longterm debt 24500000 19596401 total capitalization 46664791 37097446 accompanying notes consolidated financial statements integral part statements notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company four whollyowned subsidiaries delta resources inc resources buys gas resells industrial customers deltas system delta system supply delgasco inc buys gas resells resources customers deltas system deltran inc formed engage potential pipeline projects consideration inactive enpro inc owns operates existing production properties subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 27 average depreciable plant maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas cost recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company supplies natural gas approximately 32000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h income taxes company provides income taxes timing differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company adopted statement financial accounting standard sfas 109 accounting income taxes effective july 1 1993 required sfas 109 replaces sfas 96 adopts liability method accounting income taxes requiring deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse regulated companies change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes result adoption sfas 109 material impact results operations financial position company temporary differences gave rise following net deferred tax liability june 30 1994 follows deferred tax assets unamortized investment tax credit 363600 regulatory liabilities 517700 alternative minimum tax credits 667200 402100 1950600 deferred tax liabilities accelerated depreciation 6257200 deferred gas cost 580400 229400 7067000 net accumulated deferred income tax liability 5116400 components income tax provision comprised following years ended june 30 1994 1993 1992 components income tax expense payable currently federal 306300 432300 968300 state 100800 121900 260100 total 407100 554200 1228400 deferred future years use accelerated depreciation 675000 660300 575000 deferred advance recovery 541200 418000 238600 gas cost amortization investment tax credits net 71500 71800 72100 deferred tax effects net 42200 17000 51100 income tax expense 1509600 1543700 1441600 reconciliation statutory federal income tax rate shown table 1994 1993 1992 statutory federal income tax rate 340 state income taxes net federal benefit 52 amortization investment tax credit 18 17 19 differences net 9 effective income tax rate 365 375 373 2 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary adequately fund plan funded status pension plan amounts recognized companys consolidated balance sheets june 30 follows 1994 1993 1992 plan assets fair value 5251296 4931658 4357255 actuarial present value benefit obligation vested benefits 4114517 4042029 3335604 nonvested benefits 30562 37777 32019 accumulated benefit obligation 4145079 4079806 3367623 additional amounts related projected salary increases 1734413 1881303 1528180 total projected benefit obligation 5879492 5961109 4895803 projected benefit obligation excess plan assets 628196 1029451 538548 unrecognized net assets date initial application amortized 15 years 339153 381547 423941 unrecognized net loss 950735 1407072 873813 accrued pension liability 16614 3926 88676 assets plan consist primarily common stock bonds certificates deposit net pension costs years ended june 30 include following 1994 1993 1992 benefits earned year service cost 455097 401054 339359 interest cost projected benefit obligation 357372 317897 271382 actual return plan assets 45100 356971 442461 net amortization deferral 353530 24856 123892 net periodic pension cost 413839 337124 292172 weighted average discount rates assumed rates increase future compensation levels used determining actuarial present values projected benefit obligation june 30 1994 1993 1992 60 65 70 respectively discount rates 4 rates increase expected longterm rates return plan assets 8 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement post employment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 2 employees annual compensation years ended june 30 1994 1993 1992 deltas savings plan expense 106863 93749 87966 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock june 30 company issue delta common stock based upon fiscal year contributions using average last sale price deltas stock quoted nasdaqs national market system close business last five business days june match shares purchased therefore stock equivalent 47653 issued july 1994 continuation terms stock plan subject approval deltas board directors annual basis 3 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 3000 per quarter shares common stock company shares purchased reinvestment plan authorized unissued shares common stock company 15355 shares issued 1994 delta reserved 200000 shares reinvestment plan 1989 june 30 1994 122020 shares still available issuance 4 notes payable line credit substantially cash balances delta maintained compensate respective banks banking services obtain lines credit however specific amounts designated compensating balances delta right withdrawal funds june 30 1994 line credit 15000000 2705000 borrowed interest rate 55 maximum amount borrowed 1994 9065000 interest line either daily prime rate based upon certificate deposit rates current line credit expires november 15 1994 5 longterm debt october 18 1993 delta issued 15000000 6 58 debentures mature october 2023 commencing october 1995 holder may require redemption 25000 6 58 debentures annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within sixty days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 restrictions indenture agreement covering 6 58 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 12 million june 30 1994 retained earnings restricted provisions indenture may 1 1991 delta issued 10000000 9 debentures mature april 2011 holder may require redemption 25000 9 debentures annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within sixty days notice subject annual aggregate 500000 limitation 9 debentures redeemed company beginning april 1996 5 premium declining ratably ceases april 2001 company may assume additional mortgage indebtedness excess 1 million without effectively securing 9 debentures equally additional indebtedness debt issuance expenses deferred amortized terms related debt call premium 1994 approximately 475000 deferred amortized term related debt consistent regulatory treatment 6 commitments contingencies company entered individual employment agreements six officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation certain benefits varying periods event employment altered terminated following certain changes ownership company 7 rates reference made regulatory matters herein respect rate matters 8 quarterly financial data unaudited earnings net loss per operating income common quarter ended revenues income loss sharea fiscal 1994 september 30 3585499 11056 542285 33 december 31 7814638 1117871 578448 32 march 31 16494674 3270274 2713563 148 june 30 6952130 451472 78725 04 fiscal 1993 september 30 3466378 46208 475979 29 december 31 7712590 1269509 716010 44 march 31 13479132 2786379 2228909 140 june 30 6563310 689720 151724 09 quarterly earnings per share may equal annual earnings per share due changes shares outstanding schedule x delta natural gas company inc subsidiary companies supplementary income statement information years ended june 30 1994 1993 1992 column b charged income year ended june 30 1994 1993 1992 item maintenance repairs 408498 436455 524976 property taxes 408361 360745 356061 items omitted exceed one percent total consoli dated revenues reported related consolidated statements income reported separately consolidated financial statements exhibit index exhibit 12 computation consolidated ratio earnings fixed charges exhibit 23 consent independent public accountants exhibit 27 financial data schedule item 14 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3a deltas amended restated articles incorporation incorporated herein reference exhibit 3a deltas form 10q period ended march 31 1990 3b deltas bylaws amended august 21 1996 incorporated herein reference exhibit 3b deltas form 10k period ended june 30 1996 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 dated september 2 1993 4b indenture dated july 1 1996 respect 83 debentures due august 1 2026 incorporated herein reference exhibit 4c deltas form s2 dated june 21 1996 4c indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 dated march 11 1998 10a certain deltas material natural gas supply contracts incorporated herein reference exhibit 10 deltas form 10 year ended june 30 1978 reference exhibits c deltas form 10k year ended june 30 1980 10b assignment delta wiser columbia service agreement including copy said service agreement incorporated reference exhibit 2d deltas form 8k dated february 9 1981 10c contract tennessee delta amends earlier contract nicholasville wilmore service areas incorporated herein reference exhibit 10d deltas form 10q period ended september 30 1990 10d contract tennessee delta amends earlier contract jeffersonville service area incorporated herein reference exhibit 10e deltas form 10q period ended september 30 1990 10e contract tennessee delta amends earlier contract salt lick service area incorporated herein reference exhibit 10f deltas form 10q period ended september 30 1990 10f contract tennessee delta amends earlier contract berea service area incorporated herein reference exhibit 10g deltas form 10q period ended september 30 1990 10g service agreements columbia delta amends earlier service agreements cumberland stanton owingsville service areas incorporated herein reference exhibit 10h deltas form 10q period ended september 30 1990 10h employment agreements delta five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k deltas form 10q period ended march 31 2000 10i agreement delta harrison peet chairman board incorporated herein reference exhibit 10l deltas form 10q period ended march 31 2000 12 computation consolidated ratio earnings fixed charges 16 letter dated may 22 2002 securities exchange commission incorporated herein reference exhibit 16 deltas form 8k dated may 22 2002 21 subsidiaries registrant 23 consent independent public accountants b reports 8k may 22 2002 company filed form 8k reporting change companys auditor signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 9th day september 2002 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 9 2002 glenn r jennings officer vice chairman board ii principal financial officer sjohn f hall vicepresident finance september 9 2002 john f hall secretary treasurer iii principal accounting officer sjohn b brown controller september 9 2002 john b brown iv majority board directors sh peet chairman board september 9 2002 h peet sdonald r crowe director september 9 2002 donald r crowe sjane hylton green director september 9 2002 jane hylton green slanny greer director september 9 2002 lanny greer sbilly joe hall director september 9 2002 billy joe hall slewis n melton director september 9 2002 lewis n melton sarthur e walker jr director september 9 2002 arthur e walker jr smichael r whitley director september 9 2002 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well deloitte touche llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief vice president finance controller executive officer secretary treasurer report independent public accountants board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheet delta natural gas company inc subsidiary companies company june 30 2002 related consolidated statements capitalization income cash flows changes shareholders equity year ended june 30 2002 audit also included 2002 financial statement schedule listed index item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audit conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america also opinion 2002 financial statement schedule considered relation basic 2002 consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp cincinnati ohio august 19 2002 report previous independent public accountants following report copy report previously issued arthur andersen llp reissued arthur andersen llp board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 2001 2000 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 2001 financial statements schedule referred responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 2001 2000 results operations cash flows three years period ended june 30 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 10 2001 delta natural gas company inc subsidiary companies consolidated statements income years ended june 30 2002 2001 2000 operating revenues 55929780 70770156 45926775 operating expenses purchased gas 30157225 44707739 21214834 operation maintenance 9685746 9844728 9139143 depreciation depletion 4080944 3840450 3989090 taxes income taxes 1354913 1423020 1338486 income taxes note 3 2249500 2232500 2068500 total operating expenses 47528328 62048437 37750053 operating income 8401452 8721719 8176722 income deductions net 17018 31141 42866 income interest charges 8418470 8752860 8219588 interest charges interest longterm debt 3728847 3775856 3845565 interest 891750 1179949 748006 amortization debt expense 161160 total interest charges 4781757 5116965 4754731 net income 3636713 3635895 3464857 weighted average number common shares outstanding basic diluted 2513804 2477983 2433397 basic diluted earnings per common share 145 147 142 dividends declared per common share 116 114 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows years ended june 30 2002 2001 2000 cash flows operating activities net income 3636713 3635895 3464857 adjustments reconcile net income net cash operating activities depreciation depletion amortization 4354396 4047715 4240595 deferred income taxes investment tax credits 1110916 2332458 1446444 net 595894 700091 841877 increase decrease assets accounts receivable 1767741 1860926 1160957 gas storage 556871 1665124 48005 deferred advance recovery gas cost 368648 4518953 1124219 materials supplies 69663 129278 200689 prepayments 681195 690662 51964 assets 1551055 333402 561893 increase decrease liabilities accounts payable 1524216 1647056 1630760 refunds due customers 35653 5708 2679 accrued taxes 44503 521190 284891 current liabilities 128283 11340 302553 liabilities 1439439 3260 131706 net cash provided operating activities 10511896 2652572 8827505 cash flows investing activities capital expenditures 9421765 7069713 8795653 net cash used investing activities 9421765 7069713 8795653 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements cash flows continued years ended june 30 2002 2001 2000 cash flows financing activities dividends common stock 2916418 2825267 2777372 issuance common stock net 707422 646514 697926 repayment longterm debt 1375000 810999 1735000 issuance notes payable 36860000 52415000 27810000 repayment notes payable 34305000 45240000 23880000 net cash provided financing activities 1028996 4185248 115554 net increase decrease cash equivalents 61135 231893 147406 cash equivalents beginning year 164101 395994 248588 cash equivalents end year 225236 164101 395994 supplemental disclosures cash flow information cash paid year interest 4636051 4970327 4626542 income taxes net refunds 1130566 395737 533908 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets june 30 2002 2001 assets gas utility plant cost 156305063 147792390 less accumulated provision depreciation 49142976 45375230 net gas plant 107162087 102417160 current assets cash equivalents 225236 164101 accounts receivable less accumulated provisions doubtful accounts 165000 575000 2002 2001 respectively 2884025 4651766 gas storage average cost 5216772 4659901 deferred gas costs 4076059 4444707 materials supplies firstin firstout cost 523756 593419 prepayments 388794 1090515 total current assets 13314642 15604409 assets cash surrender value officers life insurance face amount 1236009 344687 354891 note receivable officer 158000 128000 prepaid pension unamortized debt expense notes 4 7 6969109 5674678 total assets 7471796 6157569 total assets 127948525 124179138 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated balance sheets continued june 30 2002 2001 liabilities shareholders equity capitalization see consolidated statements capitalization common shareholders equity 34182277 32754560 longterm debt notes 7 8 48600000 49258902 total capitalization 82782277 82013462 current liabilities notes payable note 6 19355000 16800000 current portion longterm debt notes 7 8 1750000 2450000 accounts payable 4077983 5602199 accrued taxes 673873 718376 refunds due customers 73973 38320 customers deposits 440568 418582 accrued interest debt 1162956 1178410 accrued vacation 558066 538595 accrued liabilities 503178 400898 total current liabilities 28595597 28145380 deferred credits deferred income taxes 14078273 12851457 investment tax credits 404600 449800 regulatory liability note 3 562025 632725 additional minimum pension liability note 4 1461440 advances construction 64313 86314 total deferred credits 16570651 14020296 commitments contingencies note 9 total liabilities shareholders equity 127948525 124179138 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 2002 2001 common shareholders equity common shares par value 100 per share notes 4 5 authorized 6000000 shares issued outstanding 2530079 2495679 shares 2002 2001 respectively 2530079 2495679 premium common shares 30330330 29657308 capital stock expense 1925431 retained earnings note 7 3247299 2527004 total common shareholders equity 34182277 32754560 longterm debt notes 7 8 debentures 83 due 2026 14816000 14821000 debentures 6 58 due 2023 11445000 11933000 debentures 715 due 2018 24089000 24271000 promissory note acquisition ground storage noninterest bearing due 2001 less unamortized discount 16098 2001 683902 total longterm debt 50350000 51708902 less amounts due within one year included current liabilities 1750000 2450000 net longterm debt 48600000 49258902 total capitalization 82782277 82013462 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation company determines provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 29 28 31 average depreciable plant 2002 2001 2000 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery delta gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred company expenses gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition company records revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled g revenues customer receivables company serves 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates rate regulated basis accounting companys regulated operations follow accounting reporting requirements sfas 71 accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheet regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded company regulatory assets regulatory liabilities follows regulatory assets 000 2002 2001 deferred gas cost 4076 4445 loss extinguishment debt 1337 1395 rate case gas audit expense 116 142 total regulatory assets 5529 5982 regulatory liabilities 000 refunds suppliers due customers 74 38 regulatory liability deferred income taxes 562 633 total regulatory liabilities 636 671 company currently earning return loss extinguishment debt rate case expenses deferred gas costs presented every three months psc recovery accordance gas cost recovery rate mechanism 2 new accounting pronouncements effective june 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 eliminates poolingofinterests method requires business combinations initiated june 30 2001 accounted using purchase method also requires intangible assets acquired business combination recognized separately goodwill sfas 141 impact companys financial position results operations respect business combination transactions occurred prior june 30 2001 sfas 142 addresses goodwill intangible assets accounted upon acquisition afterwards primary impact sfas 142 future goodwill intangible assets indefinite lives longer amortized beginning 2002 instead amortization goodwill subject assessment impairment applying fairvaluebased test annually frequently circumstances indicate possible impairment carrying amount goodwill exceeds fair value goodwill impairment loss recognized amount equal excess company recorded goodwill intangible assets accordingly new accounting rules presently significant impact company june 2001 fasb issued sfas 143 accounting asset retirement obligations required adopted july 1 2002 sfas 143 addresses asset retirement obligations result acquisition construction normal operation longlived assets requires companies recognize asset retirement obligations liability incurred fair value adoption sfas 143 expected significant impact company august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets required adopted july 1 2002 sfas 144 supercedes sfas 121 accounting impairment longlived assets longlived assets disposed apb opinion 30 reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions combines two accounting models single model based framework established sfas 121 adoption sfas 144 significant impact company american institute certified public accountants issued exposure draft statement position sop accounting certain costs activities related property plant equipment proposed sop applies nongovernmental entities acquire construct replace tangible property plant equipment ppe including lessors lessees significant element sop requires entities use component accounting ppe extent future component replacement capitalized adoption entities would option apply component accounting retroactively ppe assets extent applicable apply component accounting entity incurs capitalizable costs replace portion ppe proposed effective date sop january 1 2003 company currently analyzing impact proposed sop 3 income taxes company provides income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties company utilizes asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 2002 2001 deferred tax liabilities accelerated depreciation 13436373 12440957 deferred gas cost 1364800 1444200 accrued pension 1104200 1157200 debt expense 406300 426900 total 16311673 15469257 deferred tax assets alternative minimum tax credits 1365200 1701100 regulatory liabilities 221700 249600 investment tax credits 159600 177400 486900 489700 total 2233400 2617800 net accumulated deferred income tax liability 14078273 12851457 components income tax provision comprised following years ended june 30 2002 2001 2000 components income tax expense current federal 776200 77000 568100 state 296100 71700 137500 total 1072300 148700 705600 deferred 1177200 2381200 1362900 income tax expense 2249500 2232500 2068500 reconciliation statutory federal income tax rate effective income tax rate shown table 2002 2001 2000 statutory federal income tax rate 340 state income taxes net federal benefit 53 54 52 amortization investment tax credits 08 09 11 differences net 02 03 04 effective income tax rate 383 382 377 4 employee benefit plans defined benefit retirement plan delta trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately following table provides reconciliation changes plans benefit obligations fair value assets twoyear period ended march 31 2002 statement funded status march 31 years recognized companys consolidated balance sheets june 30 2002 2001 change benefit obligation benefit obligation beginning year 8486103 8188361 service cost 518496 487392 interest cost 657126 592537 amendments 1514620 actuarial loss 84009 332610 benefits paid 411217 1114797 benefit obligation end year 10681119 8486103 change plan assets fair value plan assets beginning year 9073398 10176049 actual return loss plan assets 14243 636591 employer contribution 543255 648737 benefits paid 411217 1114797 fair value plan assets end year 9219679 9073398 funded status 1461440 587295 unrecognized net actuarial loss 2272764 1652236 unrecognized prior service cost 1514620 net transition asset 29262 net pension asset 2325944 2210269 addition company recognized additional minimum pension liability 1461440 corresponding intangible pension asset accompanying balance sheet june 30 2002 effective april 1 2002 company adopted plan amendment enhanced formula benefits paid plan assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 2002 2001 2000 components net periodic benefit cost service cost 518496 487392 535681 interest cost 657125 592537 538400 expected return plan assets 755307 800303 764449 amortization unrecognized net loss 36528 amortization net transition asset 29262 42394 net periodic benefit cost 427580 237232 267238 weightedaverage assumptions discount rate 750 775 expected return plan assets 800 rate compensation increase 400 plan year ended march 31 2000 delta eliminated 16 positions conjunction workforce reduction plan subsequently 7 additional positions eliminated result reorganization deltas branch offices completed june 30 2000 events constituted curtailment sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits combined impact curtailment gain savings salary expense cost one time payments made severed employees material results operations 2000 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees b employee savings plan company employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 2002 2001 2000 deltas savings plan expense 165500 154600 170800 respectively c employee stock purchase plan company employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock company issues delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs national market system last business day june matches shares purchased therefore stock equivalent market value 96300 issued july 2002 continuation terms stock plan subject approval deltas board directors annual basis deltas board continued stock plan june 30 2003 5 dividend reinvestment stock purchase plan companys dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan company issued 28506 28958 37499 shares 2002 2001 2000 respectively delta reserved 150000 shares issuance reinvestment plan december 2000 june 30 2002 106266 shares still available issuance 6 notes payable line credit current available line credit 40000000 19355000 16800000 borrowed weighted average interest rate 367 697 june 30 2002 2001 respectively maximum amount borrowed 2002 2001 29005000 21445000 respectively interest line determined monthly london interbank offered rate plus 1 used line credit cost unused line credit 030 current line credit must renewed october 2002 7 longterm debt march 1998 delta issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed company april 1 2003 restrictions indenture agreement covering 715 debentures include among things restriction whereby dividend payments cannot made unless consolidated shareholders equity company exceeds 21500000 retained earnings restricted provisions indenture july 1996 delta issued 15000000 83 debentures mature july 2026 redemption behalf deceased holders within 60 days notice 25000 per holder made annually subject annual aggregate limitation 500000 83 debentures redeemed company beginning august 2001 5 premium declining ratably ceases august 2006 october 1993 delta issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed company beginning october 1998 5 premium declining ratably ceases october 2003 company may assume additional mortgage indebtedness excess 2 million without effectively securing 6 58 debentures equally additional indebtedness company amortizes debt issuance expenses life related debt straightline basis approximates effective yield method 8 fair values financial instruments fair value companys debentures estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements fair value companys debentures june 30 2002 2001 estimated 47479000 48429000 respectively carrying amount accompanying consolidated financial statements june 30 2002 2001 50350000 51025000 respectively carrying amount companys financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 9 commitments contingencies company entered individual employment agreements five officers agreement chairman board agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company 10 rates deltas retail natural gas distribution transportation services subject regulatory authority public service commission kentucky psc respect various aspects deltas business including rates service retail transportation customers delta monitors need file general rate case way adjust sales prices december 27 1999 delta received approval psc annual revenue increase 420000 resulted deltas last rate case filed delta july 1999 approval included weather normalization provision permits delta adjust base rates billing months december april reflect variations normal winter weather deltas rates include gas cost recovery gcr clause permits changes deltas gas supply costs reflected rates charged customers gcr requires delta make quarterly filings psc procedure require general rate case july 2001 psc required independent audit gas procurement activities delta four gas distribution companies part investigation increases wholesale natural gas prices impacts customers psc indicated kentucky distributors generally developed sound planning procurement procedures meeting customers natural gas requirements procedures provided customers reliable supply natural gas reasonable costs psc noted events prior year including changes natural gas wholesale markets required audits evaluate distributors gas planning procurement strategies light recent volatile wholesale markets primary focus balanced portfolio gas supply balances cost issues price risk reliability consultants selected psc currently completing audit delta received draft consultants report process reviewing commenting draft report contains procedural reportingrelated recommendations areas gas supply planning organization staffing controls gas supply management gas transportation gas balancing response regulatory change affiliate relations report also addresses several general areas five gas distribution companies involved audit including kentucky natural gas price issues hedging gcr mechanisms budget billing uncollectible accounts forecasting delta cannot predict psc interpret act audit recommendations result delta cannot predict impact regulatory proceeding companys financial position results operations addition psc regulation delta may obtain nonexclusive franchises cities communities operates authorizing place facilities streets public grounds utility may obtain franchise obtained approval psc bid local franchise delta holds franchises four cities seven communities serves cities communities served delta either deltas franchises expired communities governmental organizations authorized grant franchises local governments required want offer franchise delta attempts acquire reacquire franchises whenever feasible without franchise local government could require delta cease occupation streets public grounds prohibit delta extending facilities new area city community date absence franchise adverse effect deltas operations 11 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment represents delta nonregulated segment consists resources delgasco enpro company operates single geographic area central southeastern kentucky segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses sale purchase gas well intercompany gas transportation services effective january 1 2002 nonregulated segment discontinued practice selling gas regulated segment led decline intersegment revenues expenses 2002 intersegment transportation revenue expense recorded deltas tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated nonregulated segment information shown periods 000 2002 2001 2000 revenues regulated external customers 40370 48887 33314 intersegment 3050 3244 4606 total regulated 43420 52131 37920 nonregulated external customers 15560 21883 12613 intersegment 1688 27609 16249 total nonregulated 17248 49492 28862 eliminations intersegment 4738 30853 20855 total operating revenues 55930 70770 45927 operating expenses regulated depreciation 3964 3797 3940 income taxes 1599 1696 1657 30485 38662 24792 total regulated 36048 44155 30389 nonregulated depreciation 117 43 49 income taxes 651 536 412 15450 48167 27755 total nonregulated 16218 48746 28216 eliminations intersegment 4738 30853 20855 total operating expenses 47528 62048 37750 000 2002 2001 2000 income deductions regulated 17 31 43 nonregulated total income 17 31 43 deductions interest charges regulated 4768 5191 4766 nonregulated 25 42 41 eliminations intersegment 11 116 52 total interest charges 4782 5117 4755 net income regulated 2621 2817 2808 nonregulated 1016 819 657 total net income 3637 3636 3465 assets regulated 124764 120710 108876 nonregulated 1723 3469 4043 total assets 126487 124179 112919 capital expenditures regulated 9415 7070 8796 nonregulated 7 total capital expenditures 9422 7070 8796 12 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earningsloss operating net income per common revenues income loss sharea quarter ended fiscal 2002 september 30 7258892 479305 778325 31 december 31 12580389 1880382 591751 24 march 31 25158025 4843984 3745226 149 june 30 10932474 1197781 78061 03 fiscal 2001 september 30 6722188 152070 1055810 43 december 31 16941117 2081843 765633 31 march 31 32330755 5315853 3983175 160 june 30 14776096 1171953 57103 02 quarterly earnings per share may equal annual earnings per share due changes shares outstanding exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent public accountants consent incorporation reference registration statement 33352542 delta natural gas company inc form s3 report dated august 19 2002 appearing form 10k delta natural gas company inc year ended june 30 2002 deloitte touche llp cincinnati ohio september 6 2002 item 14 principal accountant fees services registrant intends file definitive proxy statement commission pursuant regulation 14a 17 cfr 24014a later 120 days close fiscal year accordance general instruction g3 form 10k information called items 10 except language item 10 report 11 12 13 14 incorporated herein reference definitive proxy statement part iv item 15 item 14 principal accountant fees services information required item contained caption “audit committee report” definitive proxy statement 2016 annual meeting shareholders filed securities exchange commission later 120 days june 30 2016 incorporate information document reference part iv item 15 item 7 managements discussion analysis financial condition results operations overview 2012 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2012 company two segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing natural gas production sale liquids extracted natural gas earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced given ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate normal nonregulated segment markets natural gas largeuse customers regulated system endeavor enter sales agreements match estimated demand supply provide acceptable margin nonregulated segment also produces natural gas sells liquids extracted natural gas consolidated earnings per common share 2012 decreased 10 per common share 2012 accrued interest expense relating tax assessment issued delta resources kentucky department revenue discussed note 13 notes consolidated financial statements additionally experienced winter significantly warmer preceding year historically low prices natural gas also adversely impacted earnings offset factors improved earnings warmer normal weather resulted decreased volumes natural gas sold regulated segment partially offset ability weather normalization tariff adjust regulated rates winter months although decline market price natural gas reduced gross margin earned nonregulated segments sale natural gas reduction offset revenue derived sale natural gas liquids extracted liquids extraction facility completed 2012 future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers kentucky public service commission sets rates monitor need file rate cases kentucky public service commission general rate increase regulated services regulated segments largest expense gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial large use customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2013 natural gas prices increase would expect experience corresponding increase nonregulated segment margins related natural gas production marketing activities however natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities anticipate selling additional natural gas liquids 2013 profitability sales dependent amount liquids extracted pricing liquids determined national unregulated market liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes changes working capital sales cash requirements seasonal largest portion sales occurs heating months whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company permits borrowings 40000000 borrowings outstanding bank line credit june 30 2012 june 30 2011 longterm debt decreased 56500000 june 30 2012 compared 56751000 june 30 2011 decrease resulted increase current portion longterm debt result refinancing 575 insured quarterly notes 7 debentures discussed note 10 notes consolidated financial statements cash equivalents 9741000 june 30 2012 compared 7340000 june 30 2011 4639000 june 30 2010 changes cash equivalents summarized following table 000 provided operating activities 13514 14467 17600 used investing activities 7012 7520 5052 used financing activities 4102 4246 8031 increase cash equivalents 2400 2701 4517 2012 significant change cash provided operating activities 2011 3133000 less cash provided operating activities compared 2010 cash contributed defined benefit pension plan increased 1500000 made elective contribution 2011 increase funded status plan cash paid natural gas increased 6164000 due increased volumes purchased 2011 meet customers gas requirements well increased volumes purchased injection storage field cash paid operation maintenance expenses increased 434000 increases partially offset 5464000 increase cash received customers due increased rates regulated segment increased volumes sold changes cash used investing activities result primarily changes level capital expenditures years 2012 significant change cash used financing activities 2011 cash used financing activities decreased 3785000 due decreased repayments bank line credit cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2013 approximately 75 million following provided summarize contractual cash obligations indicated periods june 30 2012 longterm debt notes payable customers deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2012 interest payments underlying obligation satisfied june 30 2012 accrued 877000 interest related tax assessment issued delta resources kentucky department revenue discussed note 13 notes consolidated financial statements june 30 2012 also accrued 10000 interest related uncertain tax positions amounts excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit plan 2025 recommended actuary 2300000 discretionary contribution made defined benefit plan august 2012 june 30 2012 three contracts minimum purchase obligations contracts various terms last contract expiring december 2012 remainder gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 37732000 regulatory liabilities 1381000 asset retirement obligations 3824000 deferred compensation 590000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers expect cash provided operations coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy seasonal operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit branch banking trust company permits borrowings 40000000 borrowings outstanding bank line credit june 30 2012 december 2011 refinanced 575 insured quarterly notes 7 debentures proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount proceeds sale series notes used fund redemption 575 insured quarterly notes due april 1 2021 outstanding principal balance 38450000 7 debentures due february 1 2023 outstanding principal balance 19410000 series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 beginning december 2012 required make annual 1500000 principal payment series notes refinance series notes additional prepayments principal may subject prepayment penalty agreement series notes contains private shelf facility extends december 2013 may mutual agreement us purchasers affiliates issue additional longterm unsecured promissory notes company aggregate principal amount 17000000 bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligation immediately due payable agreed following financial covenants · company must times maintain tangible net worth least 25800000 · company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt · company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense · company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2012 426 series notes restrict us · limited exceptions granting permitting liens security interests properties · selling subsidiary except limited circumstances · incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth · changing general nature business · merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger · selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit paying terminating bank line credit may · merge another entity · sell material portion assets ordinary course business · issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock · permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank default bank line credit 426 series notes longterm debt redeemed 2012 period presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension trusteed noncontributory defined benefit pension plan covering eligible employees hired prior may 9 2008 net periodic benefit costs pension costs defined benefit plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2012 2011 2010 recorded pension costs defined benefit pension plan 481000 1129000 1040000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants june 30 2012 9537000 net losses deferred amortization pension costs future periods pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2012 based targeted asset allocation assumption approximately 70 equity investments approximately 30 fixed income investments target investment allocation equity investments includes allocations domestic global real estate markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 7 discount rate 4 various assumptions estimate pension costs associated defined benefit pension plan increase 481000 2012 980000 2013 modifying expected longterm rate return pension plan assets 25 would change pension costs 2013 approximately 56000 increasing discount rate assumption 25 would decrease pension costs approximately 82000 decreasing discount rate assumption 25 would increase pension costs approximately 87000 provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible regulated segment risk noncollection accounts receivable partially mitigated ability recover portion bad debt expense relates customers gas cost gas cost recovery mechanism began recovery uncollectible gas cost method january 2011 order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customers meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words estimates attempts expects monitors plans anticipates intends continues could strives seeks rely believes similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · pension plan costs management · contractual obligations cash requirements · management gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale natural gas provision natural gas transportation services define gross margins gas sales less corresponding purchased gas expenses plus transportation revenues view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses gross margin derived directly consolidated statements income follows 000 operating revenues 74078 83040 76422 regulated purchased gas 15703 21077 20518 nonregulated purchased gas 23380 26762 23582 consolidated gross margin 34995 35201 32322 amounts consolidated statements income included item 8 financial statements supplemental data operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin nongaap financial measure defined accordance sec rules natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview 2006 future outlook overview following discussion segments compete corporate strategy conduct business within segments significant events occurred 2006 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact unusual winter temperatures revenues reduced given ability adjust winter rates residential small nonresidential customers response unusual winter temperatures kentucky public service commission sets rates permitted charge customers regulated segment monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases seek approval kentucky public service commission adjust rates charge customers regulated segments largest expense gas supply permitted pass customers control remaining expenses budgeting approval review nonregulated segment markets natural gas largeuse customers deltas regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin earnings per share remained 2006 2005 155 per share due fact increased sales volumes higher gas prices nonregulated segment offset lower retail sales volumes regulated segment lower sales volumes resulted reduced usage per customer due conservation efforts decline number customers 2005 net income per share included 12 nonrecurring increase due recording 58000 mcf unbilled sales june 30 2005 discussed note 1g notes consolidated financial statements future outlook 2007 beyond success depend part ability maintain reasonable rate return regulated segment light higher gas prices resultant conservation customers additional loss customers switching alternate energy sources expect nonregulated segment continue contribute consolidated net income 2007 extent contribution affected fluctuations natural gas prices liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation depletion amortization deferred income taxes changes working capital ability maintain liquidity depends shortterm line bank credit shown notes payable accompanying consolidated balance sheets notes payable increased 7046000 june 30 2006 compared 5959000 june 30 2005 1087000 increase attributable fact generate internally portion cash necessary capital expenditure requirements made capital expenditures 7781000 5338000 8959000 fiscal years ended 2006 2005 2004 respectively finance balance capital expenditures interim basis shortterm line bank credit periodically repay shortterm borrowings line credit using net proceeds sale longterm debt equity securities done 2006 3830000 repayment connection issuance 575 insured quarterly notes longterm debt increased 58790000 june 30 2006 compared 52707000 june 30 2005 6083000 increase resulted issuance 575 insured quarterly notes discussed note 9 notes consolidated financial statements increase partially offset redemption 715 6 58 debentures discussed note 9 notes consolidated financial statements provisions debentures allowing limited redemptions made certain holders beneficiaries cash equivalents increased 150000 june 30 2006 compared 128000 june 30 2005 22000 increase cash equivalents year ended june 30 2006 compared 41000 decrease 1251000 increase cash equivalents years ended june 30 2005 june 30 2004 respectively shown following table year ended june 30 2006 cash provided operating activities decreased 949000 compared 2005 due increased income tax payments 1738000 attributable higher taxes payable result expiration bonus depreciation allowed job creation worker assistance act 2002 expired 2005 increase partially offset 793000 decreased gas costs relating deferred gas cost gas payable accounts year ended june 30 2005 cash provided operating activities increased 96000 compared 2004 due favorable working capital fluctuations changes cash used investing activities result primarily changes level capital expenditures years year ended june 30 2006 cash provided financing activities increased 3327000 compared 2005 primarily due issuance 40000000 575 insured quarterly notes offset partially 2300000 issuance costs 33900000 redemption 715 6 58 debentures limited redemptions made certain holders beneficiaries outstanding debentures cash used financing activities increased 2582000 year ended june 30 2005 primarily due decreased net borrowings shortterm line credit compared 2004 cash requirements capital expenditures result continued need capital expect capital expenditures fiscal 2007 10421000 2640000 increase fiscal 2006 capital expenditures major reason increase potential 10mile transmission project extend transmission facilities connect interstate gas pipeline following provided summarize contractual cash obligations indicated periods june 30 2006 see note 12 notes consolidated financial statements commitments contingencies sufficiency future cash flows extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely shortterm line credit current available line credit 40000000 7046000 borrowed june 30 2006 classified notes payable accompanying consolidated balance sheets line credit branch banking trust company extends october 31 2007 expect internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices continuously monitor need file rate requests kentucky public service commission general rate increase regulated services april 5 2004 delta filed request increased rates kentucky public service commission general rate case 200400067 requested annual revenue increase 4277000 increase 741 test year case december 31 2003 kentucky public service commission approved new base rates effective october 7 2004 approved rates based upon return equity 105 provided additional annual revenues approximately 2756000 critical accounting estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions times difficult subjective complex judgments changes estimates assumptions judgments could materially impact financial statements following accounting estimates believe critical nature see note 1 notes consolidated financial statements discussion significant accounting policies regulatory accounting policies historically reflect effects ratemaking process accordance statement financial accounting standards 71 accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 5a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs accordance statement financial accounting standards 87 employers accounting pensions changes pension obligations associated factors may immediately recognized pension costs income statement may deferred amortized future average remaining service period active plan participants accordance statement 87 years ended june 30 2006 2005 2004 recorded pension costs defined benefit pension plan 717000 556000 725000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 8 percent based targeted asset allocation assumption approximately 65 percent equity investments approximately 35 percent fixed income investments approximately 65 percent equity investment target includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 8 percent discount rate 58 percent various assumptions estimate pension costs associated defined benefits pension plan decrease 717000 2006 567000 2007 modifying expected longterm rate return pension plan assets 25 percent would change pension costs 2007 approximately 31000 increasing discount rate assumption 25 percent would decrease pension costs approximately 44000 decreasing discount rate assumption 25 percent would increase pension costs approximately 47000 accumulated provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical accounts receivable writeoff amounts quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated income statement working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered latest date cycle meter reading monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations adopted statement financial accounting standards 143 accounting asset retirement obligations fiscal year 2003 primary impact change method accruing gas well plugging abandonment costs adopted financial accounting standards board interpretation 47 accounting conditional asset retirement obligations june 30 2006 recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain pronouncements require fair value retirement obligations recorded time obligations incurred pronouncements require recognition asset retirement obligations indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value charges depreciation depletion amortization initial capitalized costs depreciated depleted useful lives related assets must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligation related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed notes 2 3 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words estimates attempts expects monitors plans anticipates intends continues strives seeks rely believes similar expressions forwardlooking statements include limited statements operational plans cost availability natural gas supplies capital expenditures sources availability funding operations expansion anticipated growth opportunities system expansion acquisition competitive conditions face production storage gathering transportation activities acquisition service franchises local governments pension fund costs management contractual obligations cash requirements regulatory legislative matters dividends factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty capital expenditure requirements changes economic conditions demographic patterns weather conditions retail service areas changes affecting costs providing gas service including changes gas supply costs interest rates availability external sources financing operations tax laws environmental laws general rate inflation conservation customers loss customers due higher gas prices changes affecting costs competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws us matters described item 1a risk factors results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses thus gross margins represent operating revenues less purchased gas expense natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview 2013 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2013 company two segments regulated natural gas distribution transmission segment ii nonregulated segment participates related activities consisting natural gas marketing natural gas production sale liquids extracted natural gas earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced given ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate normal nonregulated segment markets natural gas largeuse customers regulated system endeavor enter sales agreements matching supply estimated demand providing acceptable gross margin nonregulated segment also produces natural gas sells liquids extracted natural gas consolidated earnings per common share 2013 increased 020 per common share compared 2012 experienced winter significantly colder preceding year resulting increased volumes natural gas sold well increased volumes transported regulated segment also decreased interest expense resulting resolution tax assessment issued delta resources discussed note 13 notes consolidated financial statements positive impact earnings factors influenced 2013 consolidated earnings per common share discussed results operations future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers kentucky public service commission sets rates monitor need file rate cases kentucky public service commission general rate increase regulated services regulated segments largest expense gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial large use customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2014 natural gas prices increase would expect experience corresponding increase nonregulated segment margins related natural gas production marketing activities however natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities profitability selling natural gas liquids dependent amount liquids extracted pricing liquids determined national unregulated market liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes changes working capital sales cash requirements seasonal largest portion sales occurs heating months whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company permits borrowings 40000000 borrowings outstanding bank line credit june 30 2013 june 30 2012 draw bank line credit 2013 cash equivalents 10360000 june 30 2013 compared 9741000 june 30 2012 7340000 june 30 2011 changes cash equivalents summarized following table 2013 significant change cash provided operating activities compared 2012 significant change cash provided operating activities compared 2011 changes cash used investing activities result primarily changes level capital expenditures years 2013 cash used financing activities increased 1727000 42 compared 2012 due 1500000 repayment 426 series notes 2012 significant change cash used financing activities compared 2011 cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2014 approximately 78 million following provided summarize contractual cash obligations indicated periods june 30 2013 longterm debt notes payable customers deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2013 interest payments underlying obligation satisfied june 30 2013 also accrued 9000 interest related uncertain tax positions amounts excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit plan 2026 recommended actuary june 30 2013 three contracts minimum purchase obligations contracts various terms last contract expiring december 2013 remainder gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 39624000 regulatory liabilities 1253000 asset retirement obligations 3547000 deferred compensation 739000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers kentucky public service commission sets rates monitor need file rate increases regulated segment regulated base rates recently adjusted 2010 rate case became effective october 2010 expect cash provided operations sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy seasonal operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit branch banking trust company extends june 30 2015 permits borrowings 40000000 borrowings outstanding bank line credit 2013 draw upon bank line credit 2013 december 2011 refinanced 575 insured quarterly notes 7 debentures proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount proceeds sale series notes used fund redemption 575 insured quarterly notes due april 1 2021 outstanding principal balance 38450000 7 debentures due february 1 2023 outstanding principal balance 19410000 series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december refinance series notes additional prepayments principal may subject prepayment penalty agreement series notes contains private shelf facility extends december 2013 may mutual agreement us purchasers affiliates issue additional longterm unsecured promissory notes company aggregate principal amount 17000000 bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligation immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2013 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment appropriate result change circumstances determined regulated segment longer meets criteria regulatory accounting segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension trusteed noncontributory defined benefit pension plan covering eligible employees hired prior may 9 2008 net periodic benefit costs “pension costs” defined benefit plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2013 2012 2011 recorded pension costs defined benefit pension plan 980000 481000 1129000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants june 30 2013 6369000 net losses deferred amortization pension costs future periods pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2013 based targeted asset allocation assumption 2013 approximately 70 equity investments approximately 30 fixed income investments target investment allocation equity investments includes allocations domestic global real estate markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 6 discount rate 45 various assumptions estimate pension costs associated defined benefit pension plan decrease 980000 2013 750000 2014 modifying expected longterm rate return pension plan assets 25 would change pension costs 2014 approximately 65000 increasing discount rate assumption 25 would decrease pension costs approximately 82000 decreasing discount rate assumption 25 would increase pension costs approximately 86000 provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible regulated segment risk noncollection accounts receivable partially mitigated ability recover portion bad debt expense relates customers gas cost gas cost recovery mechanism order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance additionally specifically review significant account balances collectibility underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customers meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accrete change present value initial capitalized costs depreciate useful lives related assets asset retirement obligations attributable assets regulated operations accretion depreciation deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · pension plan costs management · contractual obligations cash requirements · management gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale natural gas provision natural gas transportation services define “gross margins” gas sales less corresponding purchased gas expenses plus transportation natural gas liquids revenues view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses gross margin derived directly consolidated statements income follows amounts consolidated statements income included item 8 financial statements supplemental data operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin “nongaap financial measure” defined accordance sec rules natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview kentucky public service commission regulates utility operations part regulation kentucky public service commission sets rates permitted charge customers rates significant impact annual revenues profits see business regulatory matters rates approved kentucky public service commission allow us specified rate return regulated investment rates allowed charge customers also permit us pass customers changes cost gas supply see business regulatory matters regulated business temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes anticipate sensitivity seasonal weather conditions continue reflected sales volumes future periods impact unusual winter temperatures revenues ameliorated extent kentucky public service commission permitted us start adjusting winter rates response unusual winter temperatures year 2000 weather normalization tariff permitted increase rates residential small nonresidential customers based 30year average temperatures winter weather warmer normal required decrease rates winter weather colder normal permitted adjust rates billing months december april liquidity capital resources seasonal nature regulated sales generate smallest proportion cash operations warmer months sales volumes decrease considerably construction activity takes place warmer months result meet cash needs operations construction warmer nonheating months partially shortterm borrowings made capital expenditures 9195000 9422000 7070000 fiscal years ended 2003 2002 2001 respectively capital expenditures system extensions replacement improvement existing transmission distribution gathering storage general facilities generate internally portion cash necessary capital expenditure requirements finance balance capital expenditures interim basis shortterm line bank credit current available line credit 40000000 1031000 borrowed june 30 2003 line credit branch banking trust company extends october 31 2003 intend pursue renewal enter new agreement seek substantially terms existing agreement periodically repay shortterm borrowings line credit using net proceeds sale longterm debt equity securities example february 2003 issued 20000000 aggregate principal amount 700 debentures due 2023 net proceeds offering 19181000 used net proceeds redeem 14806000 aggregate principal amount 830 debentures due 2026 pay shortterm notes payable may 2003 used net proceeds 12493000 sale 600000 shares common stock pay shortterm notes payable use additional borrowings existing line credit help meet working capital expenditure needs required summarize primary cash flows last three fiscal years indicated 2003 2002 2001 provided operating activities 15542077 10511896 2652572 used investing activities 9195099 9421765 7069713 provided used infinancing activities 5152200 1028996 4185248 increase decrease cash equivalents 1194778 61135 231893 year ended june 30 2003 1195000 increase cash equivalents compared 61000 increase cash equivalents year ended june 30 2002 variation resulted increase cash provided operating activities decrease cash used investing activities partially offset increases cash used financing activities increase cash provided operating activities largely due changes accounts payable deferred income taxes gas storage offset changes accounts receivable prepayments deferred gas costs decrease cash used investing activities resulted decreased capital expenditures increase cash used financing activities primarily attributable repayment shortterm debt offset issuance additional longterm debt equity year ended june 30 2002 61000 increase cash equivalents compared 232000 decrease cash equivalents year ended june 30 2001 variation resulted increase cash provided operating activities offset increases cash used investing financing activities increase cash provided operating activities largely due changes deferred recovery gas costs accounts receivable accounts payable deferred income taxes increase cash used investing activities resulted increased capital expenditures cash used financing activities 2002 since dividends paid common stock repayments longterm debt exceeded borrowings shortterm line credit cash provided financing activities 2001 since borrowings shortterm line credit exceeded dividends paid common stock repayments longterm debt cash provided operating activities primarily consists net income adjusted noncash items including depreciation depletion amortization deferred income taxes changes working capital expect internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future results operations meaningful analysis revenue expense variations variation amounts percentages presented regulated nonregulated revenues expenses include intersegment transactions intersegment revenues expenses whose variations also disclosed following tables eliminated consolidated statements income operating revenues following table set forth variations revenues last two fiscal years heating degree days billed 106 normal thirty year average temperatures fiscal 2003 compared 89 normal temperatures 2002 107 normal 2001 heating degree day results day average high low temperature least one degree less 65 degrees fahrenheit increase operating revenues 2003 12510000 primarily due 153 increase regulated volumes significantly colder weather 2003 well 237 increases gas costs reflected higher sales prices increase however offset extent unusually cold temperatures caused us adjust rates downward authorized weather normalization tariff decrease nonregulated sales volumes intersegment revenues result nonregulated segment discontinuing practice selling gas regulated segment effective january 1 2002 decrease 14900000 operating revenues 2002 primarily attributable decreased sales volumes decreased gas rates sales volumes decreased due warmer winter weather 2002 gas rates decreased due lower gas prices increase however offset extent unusually warm temperatures enabled us adjust rates upward authorized weather normalization tariff operating expenses following table set forth variations purchased gas expense last two fiscal years 2003 compared 2002 compared 2002 2001 increase decrease regulated gas expense gas rates 3068000 2607000 purchase volumes 3784000 5157000 total 6852000 7764000 increase decrease nonregulated gas expense gas rates 3273000 8169000 purchase volumes 922000 5400000 transportation expense 81000 194000 total 2432000 13763000 decrease increase intersegment gas expense 1610000 6917000 increase decrease consolidated gas expense 10894000 14610000 increase purchased gas expense 2003 10894000 due primarily 237 increase cost gas purchased regulated sales 153 increase regulated volumes sold decrease purchased gas expense 2002 14610000 due primarily 242 decrease cost gas purchased regulated sales 201 decrease nonregulated volumes sold increase operation maintenance expense 972000 year ended june 30 2003 primarily due increase bad debt expense resulting higher gas prices colder winter weather well increase employee benefit costs increase taxes income taxes year ended june 30 2003 155000 primarily due increased property taxes basic diluted earnings per common share fiscal years ended june 30 2003 2002 2001 basic earnings per common share changed result changes net income increase number common shares outstanding increased number common shares outstanding result shares issued dividend reinvestment stock purchase plan employee stock purchase plan may 2003 common stock offering potentially dilutive securities result basic earnings per common share diluted earnings per common share pension benefits reported costs providing pension benefits described note 4a notes financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs accordance statement financial accounting standards 87 employers accounting pensions changes pension obligations associated factors may immediately recognized pension costs income statement may deferred amortized future average remaining service period active plan participants extent statement 87 recognition provisions triggered years ended june 30 2003 2002 2001 recorded pension costs defined benefit pension plan 535000 428000 237000 respectively effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking lumpsum distributions plan pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits establishing expected longterm rate return assumption utilize analysis prepared investment manager expected longterm rate return pension plan assets 80 based targeted asset allocation assumption approximately 60 percent equity investments approximately 40 percent fixed income investments approximately 60 percent equity investment target includes allocations domestic international emerging markets managers asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension cost based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 8 percent discount rate 625 percent various assumptions estimate pension costs associated defined benefits pension plan increase 535000 2003 approximately 725000 2004 modifying expected longterm rate return pension plan assets 25 percent would change pension costs 2004 approximately 20000 modifying discount rate assumption 25 percent would change 2004 pension costs approximately 65000 factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts attempted identify statements using words estimates attempts expects monitors plans anticipates intends continues believes seeks strives similar expressions forwardlooking statements include limited statements operational plans strategies cost availability natural gas supplies capital expenditures sources availability funding operations expansion anticipated growth opportunities system expansion acquisition competitive conditions face production storage gathering transportation activities regulatory legislative matters dividends factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty capital expenditure requirements changes economic conditions demographic patterns weather conditions retail service areas changes affecting cost providing gas service including changes gas supply costs cost availability interstate pipeline capacity interest rates availability external sources financing operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws us contractual obligations following provided summarize contractual cash obligations periods june 30 2003 payments due period new accounting pronouncements june 2002 financial accounting standards board issued statement financial accounting standards 146 entitled accounting costs associated exit disposal activities statement requires liability cost associated exit disposal activity recognized liability incurred effective exit disposal activities initiated december 31 2002 committed exit disposal plan accordingly new statement presently impact us june 2001 financial accounting standards board issued statement financial accounting standards 143 entitled accounting asset retirement obligations delta adopted statement effective july 1 2002 statement 143 addresses financial accounting legal obligations associated retirement longlived assets upon adoption statement recorded 178000 asset retirement obligations balance sheet primarily representing current estimated fair value obligation plug oil gas wells time abandonment amount 47000 recorded incremental cost underlying property plant equipment cumulative effect earnings adopting new statement charge earnings 88000 net income taxes 55000 representing cumulative amounts depreciation depletion expenses changes asset retirement obligation due passage time historical accounting periods adoption new standard significant impact income cumulative effect change accounting principle year ended june 30 2003 pro forma net income earnings per share presented years ended june 30 2002 2001 pro forma application statement 143 prior periods would result pro forma net income earnings per share materially different actual amounts reported periods accompanying consolidated statements income also asset retirement obligations indeterminate settlement dates obligations relating gas wells lines storage facility compressor station sites recorded estimated range potential settlement dates known according statement 143 allowed ratemaking purposes statement financial accounting standards 71 entitled accounting effects certain types regulation accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely approximately 700000 accrued cost removal recorded accumulated provision depreciation accompanying balance sheet june 30 2003 august 2001 financial accounting standards board issued statement financial accounting standards 144 entitled accounting impairment disposal longlived assets statement 144 addresses accounting reporting impairment disposal longlived assets statement 144 effective july 1 2002 impact implementation financial position results operations december 2002 financial accounting standards board issued statement financial accounting standards 148 entitled accounting stockbased compensation statement 148 effective june 30 2003 fiscal year impact implementation financial position results operations item 7a item 7 managements discussion analysis financial condition results operations overview 2014 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2014 company two segments regulated natural gas distribution transmission segment ii nonregulated segment participates related activities consisting natural gas marketing natural gas production sale liquids extracted natural gas earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate historical average temperatures nonregulated segment markets natural gas largevolume customers endeavor enter sales agreements matching supply estimated demand providing acceptable gross margin nonregulated segment also produces natural gas sells liquids extracted natural gas consolidated earnings per common share 2014 increased 014 per common share compared 2013 experienced winter colder preceding year resulting increased volumes natural gas sold additionally sales natural gas liquids increased compared prior year factors influenced 2014 consolidated earnings per common share discussed results operations future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers kentucky public service commission sets rates monitor need file rate cases kentucky public service commission general rate increase regulated services regulated segments largest expense natural gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial largevolume customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2015 natural gas prices increase would expect experience corresponding increase nonregulated segment gross margins related natural gas production marketing activities however natural gas prices decrease would expect decrease nonregulated gross margins related natural gas production marketing activities profitability selling natural gas liquids dependent amount liquids extracted pricing liquids determined national unregulated market liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes sharebased compensation changes working capital sales cash requirements seasonal largest portion sales occurs heating months december april whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company extends june 30 2015 permits borrowings 40000000 borrowings outstanding bank line credit june 30 2014 june 30 2013 cash equivalents 13676000 june 30 2014 compared 10360000 june 30 2013 9741000 june 30 2012 changes cash equivalents summarized following table 2014 cash provided operating activities increased 3783000 28 compared 2013 due increased cash received customers result increased sales partially offset increased amounts paid natural gas 2013 significant change cash provided operating activities compared 2012 changes cash used investing activities result primarily changes level capital expenditures years 2014 significant change cash used financing activities compared 2013 cash used financing activities increased 1727000 42 compared 2012 due first annual 1500000 repayment 426 series notes cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2015 approximately 108 million following provided summarize contractual cash obligations indicated periods june 30 2014 longterm debt notes payable customers deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2014 interest payments underlying obligation satisfied june 30 2014 also accrued 5000 interest related uncertain tax positions amounts excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit plan 2028 recommended actuary june 30 2014 contract minimum purchase obligation contract term expires december 2014 remainder natural gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 40538000 regulatory liabilities 1165000 asset retirement obligations 3261000 deferred compensation 907000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers kentucky public service commission sets rates monitor need file rate increases regulated segment regulated base rates recently adjusted 2010 rate case became effective october 2010 expect cash provided operations sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy seasonal operating capital expenditure requirements pay dividends rely bank line credit december 2011 refinanced 575 insured quarterly notes 7 debentures proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount proceeds sale series notes used fund redemption 575 insured quarterly notes due april 1 2021 outstanding principal balance 38450000 7 debentures due february 1 2023 outstanding principal balance 19410000 series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december refinance series notes additional prepayments principal may subject prepayment penalty bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2014 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment appropriate result change circumstances determined regulated segment longer meets criteria regulatory accounting segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 net periodic benefit costs “pension costs” defined benefit plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2014 2013 2012 recorded pension costs defined benefit pension plan 750000 980000 481000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants june 30 2014 5824000 net losses deferred amortization pension costs future periods pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 6 2014 based targeted asset allocation assumption 2014 approximately 70 equity investments approximately 30 fixed income investments targeted investment allocation equity investments includes allocations domestic global real estate markets additional diversification also invest absolute return strategy mutual funds include equity fixed income securities asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 6 discount rate 425 various assumptions estimate pension costs associated defined benefit pension plan decrease 750000 2014 493000 2015 modifying expected longterm rate return pension plan assets 25 would change pension costs 2015 approximately 71000 increasing discount rate assumption 25 would decrease pension costs approximately 100000 decreasing discount rate assumption 25 would increase pension costs approximately 106000 unbilled revenues gas costs monthend estimate natural gas service rendered date customers meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues natural gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accrete change present value initial capitalized costs depreciate useful lives related assets asset retirement obligations attributable assets regulated operations accretion depreciation deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement dates assumed creditadjusted riskfree interest rates asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · pension plan costs management · contractual obligations cash requirements · management natural gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale natural gas natural gas liquids provision natural gas transportation services define “gross margins” natural gas sales less corresponding purchased natural gas expenses plus transportation natural gas liquids revenues view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses gross margin derived directly consolidated statements income included item 8 financial statements supplemental data follows operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin “nongaap financial measure” defined accordance sec rules natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations liquidity capital resources companys utility operations subject regulation psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see regulatory matters deltas business temperaturesensitive accordingly companys operating results given period reflect addition factors impact weather colder temperatures resulting increased sales company anticipates sensitivity seasonal weather conditions continue reflected companys operating results future periods seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions therefore warmer nonheating months cash needs operations construction partially met shortterm borrowings capital expenditures delta fiscal 1998 expected approximately 104 million delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 20000000 approximately 109 million borrowed june 30 1997 line credit bank one kentucky na expires november 1997 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done july 1996 net proceeds approximately 20400000 sale 15000000 debentures 400000 shares common stock used repay shortterm notes payable working capital primary cash flows last three years summarized 1997 1996 1995 provided operating 6209226 3094809 6943183 activities used investing activities 16648994 13373416 8122838 provided financing 10768558 10294461 1158887 activities net increase decrease cash 328790 15854 20768 equivalents cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled seasonal shortterm borrowings continue sufficient satisfy operating capital expenditure requirements results operations operating revenues increase operating revenues 1997 approximately 5593000 due primarily increases cost gas purchased reflected rates billed customers deltas gas cost recovery clause partially offset decrease retail sales volumes approximately 406000 mcf result warmer winter weather 1997 billed degree days approximately 103 normal degree days 1997 compared approximately 112 1996 addition onsystem transportation volumes 1997 increased approximately 293000 mcf 114 increase operating revenues 1996 approximately 4732000 due primarily increase retail sales volumes approximately 980000 mcf result colder winter weather 1996 billed degree days approximately 112 normal 1996 compared approximately 89 1995 addition onsystem transportation volumes 1996 increased approximately 180000 mcf 8 increases partially offset decreases cost gas purchased reflected rates billed customers deltas gas cost recovery clause decrease system transportation volumes approximately 318000 mcf 22 due primarily reduced deliveries local producers operating expenses increase purchased gas expense 1997 approximately 5875000 due primarily increases cost gas purchased retail sales increase partially offset decreased gas purchases retail sales resulting warmer winter weather 1997 increase purchased gas expense approximately 1893000 1996 due primarily increased gas purchases retail sales resulting colder winter weather 1996 increase partially offset decreases cost gas purchased retail sales increase operation maintenance expenses 1996 approximately 640000 due primarily increases payroll related benefit costs increases depreciation expense 1997 1996 approximately 424000 327000 respectively due primarily additional depreciable plant increase taxes income taxes 1996 approximately 173000 primarily due increased property taxes resulted increased plant property valuations increased payroll taxes resulted increased wages changes income taxes 1997 1996 approximately 595000 517000 respectively primarily due changes net income interest charges increases interest longterm debt amortization debt expense 1997 approximately 1146000 27000 respectively due primarily issuance 15 million 83 debentures july 1996 decrease interest charges 1997 approximately 348000 due primarily decreased average shortterm borrowings shortterm debt repaid net proceeds sale longterm debt equity securities july 1996 increase interest charges 1996 approximately 448000 due primarily increased average shortterm borrowings increased average interest rates earnings per common share year ended june 30 1997 earnings per common share diluted increased average common shares outstanding resulted additional 400000 shares common stock issued july 1996 well common shares issued deltas dividend reinvestment plan shares issued employees 1997 periods item 8 item 7 managements discussion analysis financial condition results operations overview companys utility operations subject regulation psc plays significant role determining companys return equity psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see business regulatory matters companys business temperaturesensitive accordingly companys operating results given period reflect addition factors impact weather colder temperatures generally resulting increased sales company anticipates sensitivity seasonal weather conditions continue reflected companys operating results future periods liquidity capital resources seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions warmer nonheating months therefore cash needs operations construction partially met short term borrowings capital expenditures delta fiscal 1999 expected 68 million delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 25000000 1875000 borrowed june 30 1998 line credit bank one kentucky na requires renewal november 1998 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done march 1998 net proceeds 24100000 sale 25000000 debentures used repay shortterm debt redeem companys 9 debentures would matured 2011 amount 10000000 primary cash flows last three years summarized 1998 1997 1996 provided operating activities 8922037 6209226 3094809 used investing activities 11193613 16648994 13373416 provided financing activities 1909689 10768558 10294461 net increase decrease cash equivalents 361887 328790 15854 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure dividend requirements results operations operating revenues increase operating revenues 2089000 1998 due primarily general rate increase effective november 30 1997 increases onsystem offsystem transportation volumes 604000 mcf 284000 mcf respectively increase operating revenues includes 200000 additional revenue caused nonrecurring change increases partially offet decrease retail sales volumes 187000 mcf result warmer winter weather 1998 billed degree days 935 normal degree days 1998 compared 1035 1997 increase operating revenues 5593000 1997 due primarily increases cost gas purchased reflected rates billed customers deltas gas cost recovery clause partially offset decrease retail sales volumes 406000 mcf result warmer winter weather 1997 billed degree days 1035 normal degree days 1997 compared 1123 1996 addition onsystem transportation volumes 1997 increased 293000 mcf 114 operating expenses decrease purchased gas expense 1998 766000 due primarily decreased gas purchases retail sales resulting warmer winter weather 1998 increase purchased gas expense 5875000 1997 due primarily increases cost gas purchased retail sales increase partially offset decreased gas purchased retail sales resulting warmer winter weather 1997 increases depreciation expense 1998 1997 510000 424000 respectively due primarily additional depreciable plant increase taxes income taxes 1998 155000 primarily due increased property taxes resulted increased plant property valuations increased payroll taxes resulted increased wages changes income taxes 1998 1997 436000 595000 respectively primarily due changes net income interest charges increase interest longterm debt 1998 329000 due primarily issuance 25 million 715 debentures march 1998 increase interest 1998 378000 due primarily increased average shortterm debt borrowings increases interest longterm debt amortization debt expense 1997 1146000 27000 respectively due primarily issuance 15 million 83 debentures july 1996 decrease interest 1997 348000 due primarily decreased average shortterm borrowings shortterm debt repaid net proceeds sale longterm debt equity securities july 1996 earnings per common share years ended june 30 1998 1997 basic earnings per common share declined compared previous periods result increased average common shares outstanding resulted additional 400000 shares common stock issued july 1996 well common shares issued deltas dividend reinvestment plan shares issued employees periods deltas outstanding common shares potentially dilutive securities therefore basic diluted earnings per common share factors may affect future results managements discussion analysis financial condition results operations sections report including letter shareholders contain forwardlooking statements historical facts forwardlooking statements identified language may cases include words estimates expects plans anticipates intends continue believes similar expressions forwardlooking statements may concern among things impact changes cost gas projected capital expenditures sources cash fund expenditures regulatory recovery mechanisms regulatory matters expansion deltas gas distribution system acquisitions gas customers systems activity gas production transportation acquisition management gas supply statements accordingly subject important risks uncertainties could cause companys actual results differ materially expressed forwardlooking statements uncertainties include limited ongoing restructuring gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally uncertainty regulatory allowance recovery changes cost gas uncertain demands capital expenditures availability cash various sources uncertainty regulatory approval full recovery costs regulatory assets year 2000 issue company working resolve potential impact year 2000 ability companys computerized information systems accurately process information may datesensitive companys programs recognize date using 00 year 1900 rather year 2000 could result errors system failures company utilizes number computer programs across entire operation company completed assessment currently believes costs addressing issue material adverse impact companys financial position however company third parties upon relies unable address issue timely manner could result material financial risk company intends use best efforts resolve significant year 2000 issues timely manner new accounting pronouncements 1997 delta adopted statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed adoption sfas 121 material impact companys financial position results operations companies june 30 fiscal yearends sfas 123 accounting stockbased compensation required adopted june 30 1997 standard currently inapplicable delta company stockbased compensation arrangements delta adopted sfas 128 earnings per share second quarter fiscal 1998 adoption standard effect upon current prior period earnings per common share june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information effective periods beginning december 15 1997 statements affect accounting recognition measurement transactions rather require expanded disclosures regarding financial results company adopt standards 1999 required fasb item 7a item 7 managements discussion analysis financial condition results operations overview companys utility operations subject regulation psc significant role determining companys return equity psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see business regulatory matters companys business temperaturesensitive accordingly companys sales volumes given period reflect addition factors impact weather colder temperatures generally resulting increased sales volumes company anticipates sensitivity seasonal weather conditions continue reflected companys sales volumes future periods however deltas current tariffs approved psc effective january 1 2000 provide adjustment gas rates weather normalization tariff see business regulatory matters weather normalization tariff deltas rates residential small nonresidential customers generally increased winter weather warmer normal decreased winter weather colder normal delta permitted adjust rates classes customers billing months december april tariff liquidity capital resources seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions warmer nonheating months therefore cash needs operations construction partially met shortterm borrowings capital expenditures delta fiscal 2002 expected 89 million capital expenditures made system extensions well replacement improvement existing transmission distribution gathering general facilities delta generating internally portion cash necessary capital expenditure requirements thus finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 40000000 16800000 borrowed june 30 2001 line credit bank one kentucky na requires renewal october 2002 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done march 1998 net proceeds 24100000 sale 25000000 debentures used repay shortterm debt redeem companys 9 debentures would matured 2011 amount 10000000 primary cash flows last three years summarized cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure dividend requirements results operations operating revenues increase operating revenues 2001 24843000 primarily attributable increased gas rates increased sales volumes gas rates increased due higher gas prices net decreases impact weather normalization tariff sales volumes increased due colder winter weather 2001 increase operating revenues 2000 7254600 primarily attributable increased gas rates increased nonregulated sales volumes gas rates increased due higher gas prices coupled increases impact weather normalization tariff nonregulated revenues increased due 1092000 mcf 526 increase nonregulated sales volumes heating degree days billed 2001 1068 normal compared 896 normal 2000 901 normal 1999 following table sets forth certain comparisons variations revenues last two fiscal years 2001 compared 2000 compared increase decrease 2000 1999 variations regulated revenues gas rates 11364800 2307700 weather normalization adjustment 1634000 679200 sales volumes 5715700 199500 transportation 130700 109100 57400 20100 total 15634600 3315600 variations nonregulated revenues gas rates 8607400 595000 sales volumes 601000 3344000 total 9208400 3939000 total variations revenues 24843000 7254600 variations regulated volumes gas sales 180 06 transportation 168 142 variations nonregulated volumes gas sales 77 526 operating expenses increase purchased gas expense 2001 23493000 due primarily 73 increase cost gas purchased retail sales 13 increase volumes sold related detailed revenue variations increase purchased gas expense 2000 4747000 due primarily increased gas purchases nonregulated sales increases cost gas purchased retail sales changes income taxes 2001 2000 164000 829000 respectively primarily due changes net income basic diluted earnings per common share years ended june 30 2001 2000 1999 basic earnings per common share changed result changes net income increased average common shares outstanding resulted common shares issued deltas dividend reinvestment plan shares issued employees periods potentially dilutive securities therefore basic diluted earnings per common share factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts forwardlooking statements identified language may cases include words estimates attempts expects monitors plans anticipates intends continues continue believes similar expressions forwardlooking statements may concern future matters among matters deltas cost availability natural gas supplies deltas capital expenditures sources availability funding operation expansion deltas anticipated growth opportunities system expansion acquisition competitive conditions deltas production storage gathering transportation activities regulatory legislative matters dividends external internal funding sources forwardlooking statements accordingly subject important risks uncertainties could cause companys actual results differ materially expressed forwardlooking statements factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty deltas capital expenditure requirements changes economic conditions demographic patterns weather conditions deltas retail service areas changes affecting deltas cost providing gas service including changes interest rates changes availability external sources financing deltas operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles application principles delta new accounting pronouncements delta adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities subsequently amended sfas 137 sfas 138 effective july 1 2000 adoption standard impact companys financial position results operations june 2001 financial accounting standards board issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 currently applies business combinations initiated sfas 142 effective july 1 2002 delta adoption standards expected significant impact companys financial position results operations however new standards applied future acquisitions extent delta completes transactions item 7a item 7 managements discussion analysis financial condition results operations overview 2004 future outlook overview following discussion segments compete corporate strategy conduct business within segments significant events occurred 2004 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact unusual winter temperatures revenues reduced given ability adjust winter rates residential small nonresidential customers response unusual winter temperatures kentucky public service commission sets rates permitted charge customers regulated segment monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases seek approval kentucky public service commission adjust rates charge customers regulated segments largest expense gas supply permitted pass customers control remaining expenses budgeting approval review weather warmer 2004 2003 resulting decreased retail onsystem transportation volumes rates charged customers changed 2004 reflect increases gas costs gas cost recovery clause reflect warmer winter weather normalization tariff gas supply expense increased response increase natural gas prices determined unregulated national market nonregulated segment markets natural gas largeuse customers deltas regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin net income per share declined primarily due increase number common shares outstanding resulting dividend reinvestment plan stock purchase plan employee stock purchase plan may 2003 common stock offering 600000 shares future outlook 2005 beyond success dependent part ability maintain reasonable rate return regulated segment april 2004 filed request increased base rates kentucky public service commission general rate case requested annual revenue increase 74 although cannot predict outcome proceeding hearing kentucky public service commission held august 18 2004 expect implement new rates october 2004 expect nonregulated segment continue contribute consolidated net income 2005 liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation depletion amortization deferred income taxes changes working capital ability maintain liquidity depends shortterm line bank credit shown notes payable accompanying balance sheet notes payable increased 4738000 june 30 2004 compared 1031000 june 30 2003 3707000 increase reflects fact generate internally portion cash necessary capital expenditure requirements made capital expenditures 8959000 8839000 9748000 fiscal years ended 2004 2003 2002 respectively finance balance capital expenditures interim basis shortterm line bank credit periodically repay shortterm borrowings line credit using net proceeds sale longterm debt equity securities longterm debt decreased 53049000 june 30 2004 compared 53373000 june 30 2003 324000 decrease resulted provisions debentures allowing limited redemptions made certain holders andor beneficiaries cash equivalents decreased 169000 june 30 2004 compared 1420000 june 30 2003 1251000 decrease cash equivalents year ended june 30 2004 compared 1195000 61000 increases cash equivalents years ended june 30 2003 june 30 2002 respectively following table 000 2004 2003 2002 provided operating activities 7276 15186 10838 used investing activities 8959 8839 9748 provided used financing activities 432 5152 1029 increase decrease cash equivalents 1251 1195 61 year ended june 30 2004 1251000 decrease cash equivalents compared 1195000 increase cash equivalents year ended june 30 2003 additional 2446000 cash used resulted primarily increased cash needs 7712000 gas stored underground gas accounts payable deferred gas cost due increase volumes stored increase gas prices periods addition used 1561000 cash trade payables increased cash needs partially met 1478000 increased customer payments accounts receivable 5584000 increase cash provided financing activities year ended june 30 2003 1195000 increase cash equivalents compared 61000 increase cash equivalents year ended june 30 2002 additional 1134000 cash provided resulted primarily reduced cash use 6723000 gas stored underground gas accounts payable deferred gas cost due primarily higher gas payable balance june 30 2003 909000 less used capital expenditures 880000 income taxes deferred increases cash provided offset 3450000 decreased customer payments accounts receivable 4123000 increase cash used financing activities cash requirements capital expenditures drive continued need capital expenditures fiscal 2005 expected 48 million 42 million decrease fiscal 2004 capital expenditures major reason decrease completion 2004 certain multiyear transmission line storage improvement projects capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities following provided summarize contractual cash obligations indicated periods june 30 2004 july 2002 us congress passed sarbanesoxley act 2002 although act substantively change corporate governance internal control practices formalized many governance internal control related procedures working order position issue required statement management responsibility must attested external auditors conjunction june 30 2005 annual report form 10k estimate external expenses complying act june 30 2005 total range approximately 400000 450000 approximately 349000 recorded june 30 2004 see note 11 notes consolidated financial statements commitments contingencies sufficiency future cash flows extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely shortterm line credit current available line credit 40000000 4738000 borrowed june 30 2004 classified notes payable accompanying balance sheet line credit branch banking trust company extends october 31 2004 intend pursue renewal enter new agreement seek similar terms existing agreement expect internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future foresee defaulting line credit debenture agreements ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices continuously monitor need file rate requests kentucky public service commission general rate increase regulated services april 5 2004 delta filed request increased rates kentucky public service commission general rate case 200400067 requested annual revenue increase 4277000 increase 74 test year case december 31 2003 rates suspended including october 4 2004 kentucky public service commission order dated april 23 2004 could investigate determine reasonableness proposed rates hearing held august 18 2004 cannot predict outcome proceeding critical accounting estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions times difficult subjective complex judgments changes estimates assumptions judgments could materially impact financial statements following accounting estimates believe critical nature regulatory accounting policies historically reflect effects ratemaking process accordance statement financial accounting standards 71 accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 4a notes financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs accordance statement financial accounting standards 87 employers accounting pensions changes pension obligations associated factors may immediately recognized pension costs income statement may deferred amortized future average remaining service period active plan participants accordance statement 87 years ended june 30 2004 2003 2002 recorded pension costs defined benefit pension plan 725000 535000 428000 respectively effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking benefits paid service rendered subsequent november 1 2002 form lumpsum distributions plan pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 8 percent based targeted asset allocation assumption approximately 60 percent equity investments approximately 40 percent fixed income investments approximately 60 percent equity investment target includes allocations domestic international emerging markets managers asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension cost based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 8 percent discount rate 6 percent various assumptions estimate pension costs associated defined benefits pension plan decrease 725000 2004 556000 2005 modifying expected longterm rate return pension plan assets 25 percent would change pension costs 2005 approximately 27000 modifying discount rate assumption 25 percent would change 2005 pension costs approximately 45000 accumulated provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical accounts receivable writeoff amounts quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact income statement working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income asset retirement obligations adopted statement financial accounting standards 143 accounting asset retirement obligations fiscal year 2003 primary impact change method accruing oil gas well plugging abandonment costs statement 143 requires fair value retirement obligations recorded time obligations incurred statement 143 require recognition asset retirement obligations indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value charges depreciation depletion amortization initial capitalized costs depleted useful lives related assets must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligation related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted risk free interest rate new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts attempted identify statements using words estimates attempts expects monitors plans anticipates intends continues believes seeks strives similar expressions forwardlooking statements include limited statements operational plans strategies cost availability natural gas supplies capital expenditures sources availability funding operations expansion anticipated growth opportunities system expansion acquisition competitive conditions face production storage gathering transportation activities regulatory legislative matters dividends factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty capital expenditure requirements changes economic conditions demographic patterns weather conditions retail service areas changes affecting cost providing gas service including changes gas supply costs cost availability interstate pipeline capacity interest rates availability external sources financing operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws us results operations meaningful analysis revenue expense variations variation amounts percentages presented regulated nonregulated revenues expenses include intersegment transactions intersegment revenues expenses whose variations also disclosed following tables eliminated consolidated statements income operating revenues following table set forth variations revenues last two fiscal years 000 2004 compared 2003 compared 2003 2002 increase decrease regulated revenues gas rates 6801 3030 weather normalization adjustment 690 1619 sales volumes 3576 5685 onsystem transportation 19 47 offsystem transportation 544 340 10 3 total 4450 7480 increase decrease nonregulated revenues gas rates 4349 4519 sales volumes 2100 1106 31 7 total 6480 3420 increase decrease intersegment revenues 116 1610 increase decrease consolidated revenues 10814 12510 percentage increase decrease regulated volumes gas sales 78 153 onsystem transportation 25 89 offsystem transportation 332 280 percentage increase decrease non regulated gas sales volumes 102 75 heating degree days billed 96 normal thirty year average temperatures fiscal 2004 compared 106 normal temperatures 2003 89 normal 2002 heating degree day results day average high low temperature least one degree less 65 degrees fahrenheit increase operating revenues 2004 10814000 primarily due 261 increase gas costs reflected higher sales prices 102 increase nonregulated sales volumes due increases volumes purchased offsystem customers increases offset 78 decrease regulated volumes due 86 warmer weather 2004 period increase operating revenues 2003 12510000 primarily due 153 increase regulated volumes significantly colder weather 2003 well 237 increase gas costs reflected higher sales prices increase however offset extent unusually cold temperatures caused us adjust rates downward authorized weather normalization tariff decrease nonregulated sales volumes intersegment revenues result nonregulated segment discontinuing practice selling gas regulated segment effective january 1 2002 operating expenses following table set forth variations purchased gas expense last two fiscal years 000 2004 compared 2003 compared 2003 2002 increase decrease regulated gas expense gas rates 6423 3068 purchase volumes 2071 3784 total 4352 6852 increase decrease nonregulated gas expense gas rates 5070 3273 purchase volumes 1559 922 transportation expense 116 81 total 6745 2432 decrease increase intersegment gas expense 116 1610 increase consolidated gas expense 10981 10894 natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand increase purchased gas expense 2004 10981000 primarily due 261 increase gas costs higher prices 102 increase nonregulated sales volumes offset 78 decrease regulated volumes sold increase purchased gas expense 2003 10894000 due primarily 237 increase cost gas purchased regulated sales 153 increase regulated volumes sold increase operation maintenance expense 972000 year ended june 30 2003 primarily due increase bad debt expense resulting higher gas prices colder winter weather well increase employee benefit costs increase taxes income taxes year ended june 30 2003 155000 primarily due increased property taxes decrease interest 2004 260000 result lower shortterm borrowings basic diluted earnings per common share fiscal years ended june 30 2004 2003 2002 basic earnings per common share changed result changes net income increase number common shares outstanding increased number common shares outstanding result shares issued dividend reinvestment stock purchase plan employee stock purchase plan may 2003 common stock offering 600000 shares potentially dilutive securities result basic earnings per common share diluted earnings per common share item 7a item 7 managements discussion analysis financial condition results operations overview 2017 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2017 company two segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marketing activities sales natural gas liquids earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperature sensitive period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate historical average temperatures nonregulated segment markets natural gas largevolume customers endeavor enter sales agreements matching supply estimated demand providing acceptable gross margin nonregulated segment produces portion natural gas supply stored sold favorable market conditions arise nonregulated segment also sells liquids extracted natural gas consolidated income per common share 077 2017 decreased compared consolidated income 078 2016 due incurring 1612000 mergerrelated costs partially offset increased nonregulated revenues net natural gas costs discussed results operations nonregulated segment experienced increased revenues net natural gas costs due increased sales prices natural gas natural gas liquids sale production inventory nonregulated segment produces stores natural gas sells favorable market conditions arise future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers ability earn allowed return kentucky public service commission approves rates monitor need file general rate increase regulated services kentucky public service commission historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive natural gas costs reasonable rate return rate base rate base consists primarily regulated segments property plant equipment natural gas storage unamortized debt expense offset accumulated depreciation certain deferred income taxes kentucky public service commission determines constitutes reasonable rates customers proceeding may disallow limit recovery certain costs ultimate discretion determining constitutes reasonable return may earn allowed return experience warmer normal temperatures infrequent nonrecurring expenses increased expenses amounts included test period capital debt equity exceeds rate base regulated segments largest expense natural gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial largevolume customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2018 natural gas prices increase would expect experience corresponding increase nonregulated revenues net natural gas costs related natural gas marketing activities however natural gas prices decrease would expect decrease nonregulated revenues net natural gas costs related natural gas marketing activities process portion natural gas distribution transmission storage system extract liquids enhancing reliability efficiency system profitability sales natural gas liquids dependent amounts liquids extracted prices liquids determined national nonregulated market proposed merger february 20 2017 entered agreement plan merger “merger agreement” png companies llc “png” hereinafter referred “merger” information see note 18 notes consolidated financial statements liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes sharebased compensation changes working capital sales cash requirements seasonal largest portion sales occurs heating months december april whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company extends june 30 2019 permits borrowings 40000000 borrowings outstanding bank line credit june 30 2017 june 30 2016 cash equivalents 13279000 june 30 2017 compared 18607000 june 30 2016 16924000 june 30 2015 changes cash equivalents summarized following table 2017 cash provided operating activities decreased 4487000 30 compared 2016 due 4597000 increase cash paid natural gas partially offset 2234000 increase cash received customers discussed results operations additionally discretionary contributions deferred benefit retirement plan increased 1000000 compared prior year incurred 1612000 mergerrelated costs 2016 cash provided operating activities decreased 4025000 21 compared 2015 due 22074000 decrease cash received customers partially offset 16192000 decrease cash paid natural gas discussed results operations additionally cash paid income taxes decreased 1249000 result decreased earnings changes cash used investing activities result primarily changes level capital expenditures years 2017 2016 significant changes cash used financing activities compared 2016 2015 respectively cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering production storage systems well general facilities expect capital expenditures fiscal 2018 approximately 78 million following provided summarize contractual cash obligations indicated periods june 30 2017 longterm debt notes payable customers deposits require interest payments interest payments projected based fiscal 2017 interest payments underlying obligation satisfied b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit retirement plan 2031 recommended actuary june 30 2017 nonregulated segment forward purchase contracts natural gas minimum purchase obligations expire june 2019 remainder natural gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 44815000 regulatory liabilities 1135000 asset retirement obligations 4031000 deferred compensation 1219000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers kentucky public service commission approves rates monitor need file rate increases regulated segment regulated base rates recently adjusted 2010 rate case became effective october 2010 expect cash provided operations combined bank line credit sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december refinance series notes additional prepayments principal may subject prepayment penalty bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2017 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment appropriate result change circumstances determined regulated segment longer meets criteria apply regulatory accounting regulated segment would discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded defined benefit retirement plan noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 net periodic benefit costs “pension costs” defined benefit retirement plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2017 2016 2015 recorded pension costs defined benefit retirement plan 1312000 812000 493000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized average remaining service period active plan participants june 30 2017 7126000 accumulated net losses deferred amortization pension costs future periods defined benefit retirement plans assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return defined benefit retirement plans assets 55 2017 based targeted asset allocation assumption 2017 approximately 65 equity investments approximately 35 fixed income investments targeted investment allocation equity investments includes allocations domestic global real estate markets additional diversification also invest absolute return strategy mutual funds include equity fixed income securities asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective plan amended investment policy allow liability driven investments time match portion plans liability underlying assets regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 55 discount rate 375 various assumptions estimate pension costs associated defined benefit retirement plan decrease 1312000 2017 729000 2018 modifying expected longterm rate return defined benefit retirement plan assets 25 would change pension costs 2018 approximately 81000 increasing discount rate assumption 25 would decrease pension costs approximately 143000 decreasing discount rate assumption 25 would increase pension costs approximately 151000 unbilled revenues natural gas costs monthend estimate volumes natural gas used date customers meter last read monthend estimate unbilled usage based projected base load nonweathersensitive usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues natural gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · retirement plan costs management · contractual obligations cash requirements · management natural gas system risks due potential fluctuation price natural gas natural gas liquids · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale delivery natural gas sale natural gas liquids provision natural gas transportation services operating revenues significantly impacted prices pay natural gas therefore view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses define “gross margins” natural gas sales less corresponding purchased natural gas expenses plus transportation natural gas liquids revenues gross margins derived directly consolidated statements income included item 8 follows operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states “gaap” gross margin “nongaap financial measure” defined accordance sec rules natural gas prices determined nonregulated national market therefore prices pay natural gas fluctuate national supply demand see item 7a item 7 managements discussion analysis financial condition results operations liquidity capital resources capital expenditures delta 1996 expected approximately 124 million delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability short term line credit current available line credit 15 million approximately 57 million borrowed june 30 1995 interest rate 69 maximum amount borrowed 1995 8430000 delta average interest rate 65 1995 current line credit extends november 1995 short term borrowings periodically repaid proceeds issuance longterm debt equity securities done october 1993 net proceeds approximately 178 million sale 15 million debentures 170000 shares common stock used repay shortterm debt refinance certain longterm debt amounts types future longterm debt equity financings depend upon companys capital needs market conditions deltas sales seasonal nature largest proportion cash received winter heating months sales volumes increase considerably nonheating months cash needs operations construction partially met shortterm borrowings additionally construction activity takes place nonheating season favorable weather conditions thus increasing seasonal cash needs primary sources uses cash last three years summarized sourcesuses 1995 1994 1993 provided operat ing activities 6943183 6172019 4567023 capital expenditures 8122838 7374747 6289508 dividends common stock 2073374 1972368 1775411 issuance common stock net 502361 3965113 428634 issuance deben tures net 14246937 repayment long term debt 240100 11330286 591425 increase decrease notes payable 2970000 3765000 3700000 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled seasonal shortterm borrowings continue sufficient satisfy operating capital expenditure dividend requirements next year results operations operating revenues decrease operating revenues 1995 approximately 3003000 due primarily decrease retail sales volumes approximately 609000 mcf result warmer winter weather 1995 896 thirty year average weather compared 1062 1994 approximate 162000 545000 mcf decrease offsystem transportation due reduced deliveries local production decrease partially offset increase onsystem transportation 278000 due 204000 mcf increase volumes transported increase customers served approximately 1100 35 increase operating revenues 1994 approximately 3626000 due primarily increase retail sales volumes approximately 343000 mcf result colder winter weather 1994 1062 thirty year average weather compared 996 1993 increase customers served 796 25 increase operating revenues partially offset approximate 213000 decrease transportation revenues offsystem customers resulting decreased volumes approximately 671000 mcf due primarily reduced volumes shipped others leased pipeline inactive since october 1992 due certain producers shipped gas markets require use deltas system operating expenses decrease purchased gas expense approximately 1753000 1995 due primarily decreased retail sales volumes increase purchased gas expense approximately 3016000 1994 due primarily increases cost gas purchased retail sales increase retail sales volumes decrease operation maintenance expenses 1995 approximately 380000 due primarily decreases payroll related benefit costs increases depreciation expense 1995 1994 approximately 206000 145000 respectively due primarily additional depreciable plant increase taxes income taxes 1994 approximately 78000 primarily due increased property taxes resulted increased plant increased payroll taxes resulted increased wages payroll tax rates changes income taxes periods approximately 467000 34000 1995 1994 respectively primarily due changes net income omnibus budget reconciliation act 1993 result additional income taxes delta company adopted statement financial accounting standards sfas 109 accounting income taxes effective july 1 1993 required sfas 109 adopts liability method accounting income taxes requiring deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse regulated companies change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes result adoption sfas 109 material impact results operations financial position company interest charges increase interest charges 1995 approximately 176000 due primarily increased average shortterm borrowings increased average interest rates period item 8 item 7 managements discussion analysis financial condition results operations overview 2005 future outlook overview following discussion segments compete corporate strategy conduct business within segments significant events occurred 2005 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact unusual winter temperatures revenues reduced given ability adjust winter rates residential small nonresidential customers response unusual winter temperatures kentucky public service commission sets rates permitted charge customers regulated segment monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases seek approval kentucky public service commission adjust rates charge customers regulated segments largest expense gas supply permitted pass customers control remaining expenses budgeting approval review weather warmer 2005 2004 resulting decreased retail volumes rates charged customers increased 2005 reflect implementation new base rates effective october 7 2004 new base rates approved kentucky public service commission general rate case filed april 2004 rates charged customers also increased reflect increases gas costs gas cost recovery clause reflect warmer winter weather normalization tariff gas supply expense increased response increase natural gas prices determined unregulated national market nonregulated segment markets natural gas largeuse customers deltas regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin net income per share increased 2005 primarily due implementation new base rates regulated segment increased margins nonregulated segment 2005 net income per share also includes 12 nonrecurring increase due recording 58000 mcf unbilled sales june 30 2005 future outlook 2006 beyond success depend part ability maintain reasonable rate return regulated segment expect nonregulated segment continue contribute consolidated net income 2006 extent contribution affected fluctuations natural gas prices liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation depletion amortization deferred income taxes changes working capital ability maintain liquidity depends shortterm line bank credit shown notes payable accompanying balance sheet notes payable increased 5959000 june 30 2005 compared 4738000 june 30 2004 1221000 increase reflects fact generate internally portion cash necessary capital expenditure requirements made capital expenditures 5338000 8959000 8839000 fiscal years ended 2005 2004 2003 respectively finance balance capital expenditures interim basis shortterm line bank credit periodically repay shortterm borrowings line credit using net proceeds sale longterm debt equity securities longterm debt decreased 52707000 june 30 2005 compared 53049000 june 30 2004 342000 decrease resulted provisions debentures allowing limited redemptions made certain holders beneficiaries cash equivalents decreased 128000 june 30 2005 compared 169000 june 30 2004 41000 decrease cash equivalents year ended june 30 2005 compared 1251000 decrease 1195000 increase cash equivalents years ended june 30 2004 june 30 2003 respectively shown following table 000 2005 2004 2003 provided operating activities 7372 7276 15186 used investing activities 5263 8959 8839 used provided financing activities 2150 432 5152 decrease increase cash equivalents 41 1251 1195 year ended june 30 2005 cash provided operating activities increased 96000 compared 2004 due favorable working capital fluctuations year ended june 30 2004 cash provided operating activities decreased 7910000 compared 2003 due unfavorable working capital fluctuations including increased cash needs gas stored underground gas accounts payable deferred gas cost due increase volumes stored increase gas prices periods changes cash used investing activities result primarily changes level capital expenditures years year ended june 30 2005 cash used financing activities increased 2582000 compared 2004 primarily due decreased net borrowings shortterm line credit years cash provided financing activities increased 5584000 year ended june 30 2004 primarily due increased net borrowings shortterm line credit compared 2003 cash requirements capital expenditures drive continued need capital expect capital expenditures fiscal 2006 83 million 3 million increase fiscal 2005 capital expenditures major reason increase 13 mile transmission pipeline project started 2005 completed 2006 estimated total cost 4 million replaces existing pipeline facility also accesses additional gas production areas enhance transportation opportunities future following provided summarize contractual cash obligations indicated periods june 30 2005 payments due period 000 2006 20072008 20092010 2010 total interest payments 4230 8460 48572 69722 longterm debt b 1650 3300 46107 54357 operating leases c 78 129 127 763 1097 pension contributions 1500 2000 12948 18448 gas purchase obligations e 12770 5098 1032 18900 total contractual obligations 20228 18987 14919 108390 162524 longterm debt notes payable customers deposits require interest payments interest payments projected based fiscal 2005 interest payments underlying debt matures assumed 40 year maturity notes payable b see note 8 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date c operating lease amount june 2011 includes present value leases indeterminate life leases relate primarily storage well compressor station site leases purpose calculation assumed 40 year life agreements although may cancel leases option extent leases extend beyond 2045 annual lease payments 53000 purpose calculation assumed 40 year life pension plan extent plan extends beyond 2045 annual contribution estimated 1000000 e gas purchase obligations represent annual commitments suppliers periods extending four years costs recoverable customer rates see note 11 notes consolidated financial statements commitments contingencies sufficiency future cash flows extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely shortterm line credit current available line credit 40000000 5959000 borrowed june 30 2005 classified notes payable accompanying balance sheet line credit branch banking trust company extends october 31 2007 expect internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices continuously monitor need file rate requests kentucky public service commission general rate increase regulated services april 5 2004 delta filed request increased rates kentucky public service commission general rate case 200400067 requested annual revenue increase 4277000 increase 741 test year case december 31 2003 public service commission approved new base rates effective october 7 2004 approved rates based upon return equity 105 provide additional annual revenues approximately 2756000 critical accounting estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions times difficult subjective complex judgments changes estimates assumptions judgments could materially impact financial statements following accounting estimates believe critical nature see note 1 notes consolidated financial statements discussion significant accounting policies regulatory accounting policies historically reflect effects ratemaking process accordance statement financial accounting standards 71 accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 4a notes financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs accordance statement financial accounting standards 87 employers accounting pensions changes pension obligations associated factors may immediately recognized pension costs income statement may deferred amortized future average remaining service period active plan participants accordance statement 87 years ended june 30 2005 2004 2003 recorded pension costs defined benefit pension plan 556000 725000 535000 respectively effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking benefits paid service rendered subsequent november 1 2002 form lumpsum distributions plan pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 8 percent based targeted asset allocation assumption approximately 65 percent equity investments approximately 35 percent fixed income investments approximately 65 percent equity investment target includes allocations domestic international emerging markets managers asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension cost based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 8 percent discount rate 58 percent various assumptions estimate pension costs associated defined benefits pension plan increase 556000 2005 717000 2006 modifying expected longterm rate return pension plan assets 25 percent would change pension costs 2006 approximately 27000 modifying discount rate assumption 25 percent would change 2006 pension costs approximately 30000 accumulated provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical accounts receivable writeoff amounts quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact income statement working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered latest date cycle meter reading monthend estimate unbilled usage based projected base load usage day unbilled plus projected weather sensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations adopted statement financial accounting standards 143 accounting asset retirement obligations fiscal year 2003 primary impact change method accruing gas well plugging abandonment costs statement 143 requires fair value retirement obligations recorded time obligations incurred statement 143 require recognition asset retirement obligations indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value charges depreciation depletion amortization initial capitalized costs depleted useful lives related assets must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligation related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted risk free interest rate new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts attempted identify statements using words estimates attempts expects foresees monitors plans anticipates intends continues believes seeks strives depend similar expressions forwardlooking statements include limited statements operational plans strategies cost availability natural gas supplies capital expenditures sources availability funding operations expansion anticipated growth opportunities system expansion acquisition competitive conditions face production storage gathering transportation activities regulatory legislative matters dividends factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets changes capital expenditure requirements changes economic conditions demographic patterns weather conditions retail service areas changes affecting cost providing gas service including changes gas supply costs cost availability interstate pipeline capacity interest rates availability external sources financing operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws us results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses thus gross margins represent operating revenues less purchased gas expense natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview companys utility operations subject regulation psc plays significant role determining companys return equity psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see business regulatory matters companys business temperaturesensitive accordingly companys sales volumes given period reflect addition factors impact weather colder temperatures generally resulting increased sales volumes company anticipates sensitivity seasonal weather conditions continue reflected companys sales volumes future periods however deltas current tariffs approved psc effective january 1 2000 provide adjustment gas rates weather normalization tariff weather normalization tariff deltas rates residential small non residential customers generally increased winter weather warmer normal decreased winter weather colder normal delta permitted adjust rates classes customers billing months december april tariff liquidity capital resources seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions warmer nonheating months therefore cash needs operations construction partially met shortterm borrowings capital expenditures delta fiscal 2001 expected 55 million delta generating internally portion cash necessary capital expenditure requirements thus finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 25000000 9625000 borrowed june 30 2000 line credit bank one kentucky na requires renewal november 2000 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done march 1998 net proceeds 24100000 sale 25000000 debentures used repay shortterm debt redeem companys 9 debentures would matured 2011 amount 10000000 primary cash flows last three years summarized 2000 1999 1998 provided operating activities 8827505 6680276 8922037 used investing activities 8795653 7982143 11193613 provided financing activities 115554 1431919 1909689 net increase decrease cash equivalents 147406 130052 361887 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure dividend requirements results operations operating revenues increase operating revenues 2000 7254600 primarily attributable increased gas rates increased nonregulated sales volumes gas rates increased due higher gas prices coupled increases impact weather normalization tariff nonregulated revenues increased due 1092000 mcf 526 increase nonregulated sales volumes decrease operating revenues 1999 5585800 primarily attributable lower gas rates lower sales volumes gas rates decreased due lower gas prices sales volumes declined primarily due milder winter weather heating degree days billed 2000 883 normal compared 888 normal 1999 933 normal 1998 following table sets forth certain comparisons variations revenues last two fiscal years increase decrease 2000 compared 1999 compared 1998 variations regulated revenues gas rates 2307700 2656100 weather normalization adjustment 679200 sales volumes 199500 2237400 transportation 109100 110200 20100 41700 total 3315600 4741600 variations nonregulated revenues gas rates 595000 80600 sales volumes 3344000 763600 total 3939000 844200 total variations revenues 7254600 5585800 variations regulated volumes gas sales 06 73 transportation 142 126 variations nonregulated volumes gas sales 526 119 operating expenses increase purchased gas expense 2000 4747000 due primarily increased gas purchases nonregulated sales increases cost gas purchased retail sales decrease purchased gas expense 1999 6032000 due primarily decreases cost gas purchased retail sales decreased gas purchases retail sales resulting warmer winter weather 1999 increases depreciation expense 2000 1999 148000 396000 respectively due primarily additional depreciable plant changes income taxes 2000 1999 829000 162000 respectively primarily due changes net income interest charges increase interest charges 2000 due primarily increased average shortterm borrowings increase interest longterm debt 1999 due primarily issuance 25 million 715 debentures march 1998 decrease interest 1999 due primarily decreased average short term borrowings basic diluted earnings per common share years ended june 30 2000 1999 1998 basic earnings per common share changed result changes net income increased average common shares outstanding resulted common shares issued deltas dividend reinvestment plan shares issued employees periods potentially dilutive securities therefore basic diluted earnings per common share factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts forward looking statements identified language may cases include words estimates expects plans anticipates intends continue believes similar expressions forwardlooking statements may concern future matters among matters deltas cost availability natural gas supplies deltas capital expenditures sources availability funding operation expansion deltas anticipated growth opportunities system expansion acquisition competitive conditions deltas productive transportation activities regulatory legislative matters dividends external internal funding sources forwardlooking statements accordingly subject important risks uncertainties could cause companys actual results differ materially expressed forwardlooking statements factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change right present regulatory rules recover rates changes costs gas supply uncertainty regulatory approval full recovery deltas costs expenditures regulatory assets uncertainty deltas capital expenditure requirements changes economic conditions demographic patterns weather conditions deltas retail service areas changes affecting deltas cost providing gas service including changes interest rates changes availability external sources financing deltas operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles application principles delta new accounting pronouncements delta adopted sfas 128 earnings per share fiscal 1998 adoption standard effect upon current prior period earnings per common share delta adopted sfas 130 comprehensive income fiscal 1999 sfas 130 establishes standards reporting display comprehensive income components full set general purpose financial statements adoption statement impact financial statements company delta adopted sfas 131 disclosure segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits fiscal 1999 statements affect accounting recognition measurements transactions rather require expanded disclosures regarding financial results june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 standardizes accounting derivative instruments including certain derivative instruments embedded contracts requiring entity recognize items assets liabilities statement financial position measure fair value statement subsequently amended sfas 137 issued june 1999 sfas 138 issued june 2000 statement amended effective fiscal years beginning june 15 2000 thus companys fiscal year 2001 delta currently party derivatives hedging purposes delta concluded contracts purchase sale transportation storage natural gas constitute normal purchases sales sfas 133 subject accounting requirements new standard therefore company believes adoption standard material effect financial position results operation item 7a item 7 management’s discussion analysis financial condition results operations overview 2008 future outlook overview following discussion segments compete corporate strategy conduct business within segments significant events occurred 2008 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact unusual winter temperatures revenues reduced given ability adjust winter rates residential small nonresidential customers response unusual winter temperatures 2008 received order kentucky public service commission granted us increase base rates charge customers order result settlement agreement reached kentucky attorney general rate case increased rates became effective october 2007 designed annually generate additional 3920000 revenue nonregulated segment markets natural gas largeuse customers delta’s regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin earnings per share increased 2008 2007 46 per share due performance regulated nonregulated segments regulated segment experienced increased profitability due increased base rates implemented october 2007 well increased offsystem volumes transported additionally nonregulated segment experienced increased profitability due increase volumes sold future outlook 2009 beyond success depend part ability maintain reasonable rate return regulated segment light higher gas prices resultant conservation customers additional loss customers switching alternate energy sources 2009 implementing conservation efficiency program designed encourage residential customers efficiently use natural gas lessen impact us conservation kentucky public service commission sets rates permitted charge customers regulated segment monitor need file requests kentucky public service commission general rate increase regulated services general rate cases seek approval kentucky public service commission adjust rates charge customers regulated segment’s largest expense gas supply permitted pass customers control remaining expenses budgeting approval review expect nonregulated segment continue contribute consolidated net income 2009 future profitability nonregulated segment though dependent business plans large customers market prices natural gas control natural gas prices continue increase expect experience corresponding increase nonregulated margins related production activities natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes changes working capital ability maintain liquidity depends bank line credit shown notes payable accompanying consolidated balance sheets notes payable increased 6829000 june 30 2008 compared 4190000 june 30 2007 2639000 increase attributable decreased cash provided operations made capital expenditures 5564000 8083000 7781000 fiscal years ended 2008 2007 2006 respectively finance seasonal cash needs bank line credit periodically repay shortterm borrowings bank line credit using net proceeds sale longterm debt equity securities done 2006 3830000 repayment connection issuance 575 insured quarterly notes longterm debt decreased 58318000 june 30 2008 compared 58625000 june 30 2007 307000 decrease resulted provisions debentures insured quarterly notes allowing limited redemptions made certain holders beneficiaries cash equivalents increased 250000 june 30 2008 compared 188000 june 30 2007 62000 increase cash equivalents year ended june 30 2008 compared 38000 23000 increases cash equivalents years ended june 30 2007 june 30 2006 respectively shown following table 000 provided operating activities 6592 14486 6423 used investing activities 5266 7936 7577 provided used financing activities 1264 6512 1177 increase cash equivalents 2008 7894000 less cash provided operating activities compared 2007 2008 paid 15288000 gas due increased commodity prices increased volumes purchased timing gas payables increase partially offset due 7120000 cash received customers due increased prices volumes sold see related discussion results operations 2007 cash provided operating activities increased 8063000 compared 2006 2007 paid 24909000 less gas partially offset 16052000 less cash received customers result decreased sales volumes cost gas time period see related discussion results operations changes cash used investing activities result primarily changes level capital expenditures years 2008 5248000 less cash used financing activities due increased net borrowings bank line credit due corresponding decrease cash provided operating activities 2007 7689000 cash used financing activities due net repayments bank line credit amount 3944000 increase cash used 2007 financing activities resulted 3480000 provided financing activities 2006 refinancing 715 6 58 debentures refinancing took place 2007 cash requirements capital expenditures result continued need capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2009 79 million following provided summarize contractual cash obligations indicated periods june 30 2008 longterm debt notes payable customers’ deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2008 interest payments underlying obligation satisifed interest notes payable represents interest payments expected bank line credit extends october 31 2009 june 30 2008 accrued 116000 interest related uncertain tax positions amount excluded table contractual obligations timing payments uncertain b see note 9 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date longterm debt sinking fund requirements c represents currently projected contributions defined benefit plan 2018 recommended actuary june 30 2008 three contracts minimum purchase obligations whose terms extend december 2008 remainder gas purchase contracts requirementbased contracts minimum purchase obligation exists thee contract extend time period greater one month operating leases yeartoyear cancelable option see note 12 notes consolidated financial statements commitments contingencies sufficiency future cash flows expect cash provided operations coupled shortterm longterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent cash provided operations sufficient satisfy seasonal operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit 40000000 6829000 borrowed june 30 2008 classified notes payable accompanying consolidated balance sheet current bank line credit branch banking trust company extends october 31 2009 ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices monitor need file rate requests kentucky public service commission general rate increase regulated services april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 rate case requested return common equity 121 october 2007 negotiated settlement kentucky attorney general regarding rate case settlement agreement provided 3920000 additional annual revenues stipulated settlement purposes 105 return common shareholders’ equity increase rates allocated primarily monthly customer charge partially decouple revenues volumes gas sold order kentucky public service commission received october 19 2007 approving terms settlement rates effective october 20 2007 critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction “notes consolidated financial statements” “item 8 financial statements supplementary data” accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies historically reflect effects ratemaking process accordance financial accounting standards board statement 71 entitled accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 5a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants years ended june 30 2008 2007 2006 recorded pension costs defined benefit pension plan 670000 567000 717000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2008 based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments target investment allocation equity investments includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 7 discount rate 65 various assumptions estimate pension costs associated defined benefit pension plan decrease 670000 2008 608000 2009 modifying expected longterm rate return pension plan assets 25 would change pension costs 2009 approximately 36000 increasing discount rate assumption 25 would decrease pension costs approximately 41000 decreasing discount rate assumption 25 would increase pension costs approximately 43000 effective may 9 2008 employees hired date eligible participate defined benefit pension plan employees hired may 9 2008 receive 4 employer contribution employee savings plan account contribution discretionary subject change approval board directors freezing plan new entrants impact level benefits existing participants effective july 1 2008 adopted measurement date provision financial accounting standards board statement 158 entitled employers’ accounting defined benefit pension postretirement plans require us change measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 expected 760000 amount 152000 attributable change measurement dates charged directly retained earnings july 1 2008 thus fiscal 2009 pension costs amount 608000 expected recognized consolidated statement income provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customer’s meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value charges depreciation initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 3 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements management’s discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements • operational plans • cost availability natural gas supplies • capital expenditures • sources availability funding operations expansion • anticipated growth opportunities system expansion acquisition • competitive conditions face • production storage gathering transportation activities • acquisition service franchises local governments • pension fund costs management • contractual obligations cash requirements • management gas supply risks due potential fluctuation price natural gas • revenues income margins profitability • efforts purchase transport locally produced natural gas • recovery regulatory assets • regulatory legislative matters • dividends forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome • ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring • general changes regulatory environment • change rights present regulatory rules recover costs gas supply expenses investments capital assets • uncertainty capital expenditure requirements • changes economic conditions demographic patterns weather conditions retail service areas • changes affecting costs providing gas service including changes gas supply costs interest rates availability external sources financing operations tax laws environmental laws general rate inflation • conservation customers loss customers due higher gas prices • changes affecting costs competing energy alternatives competing gas distributors • changes accounting principles tax laws application principles laws us • matters described item 1a risk factors results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses therefore throughout following results operations refer “gross margin” respect regulated nonregulated segments gross margin refers operating revenues less purchased gas expense derived directly consolidated statements income operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap “gross margin” “nongaap financial measure” defined accordance sec rules view gross margin important performance measure core profitability operations measure key component internal financial reporting used management analyzing business segments believe investors benefit access financial measures management uses natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 management’s discussion analysis financial condition results operations overview 2011 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2011 company two segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced given ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate normal nonregulated segment produces natural gas markets natural gas largeuse customers regulated system endeavor enter sales agreements match estimated demand supply provide acceptable margin consolidated earnings per common share increased 2011 compared 2010 20 per common share primarily due new base rates approved kentucky public service commission discussed note 14 notes consolidated financial statements new base rates effective october 22 2010 designed annually generate additional 3513000 revenues accompanying increase annual depreciation expense 1770000 future outlook results 2012 continue impacted new base rates approved kentucky public service commission regulated segment’s largest expense gas supply permitted pass customers control remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial large use customers market prices natural gas control anticipate nonregulated segment continue contribute consolidated net income fiscal 2012 natural gas prices increase would expect experience corresponding increase nonregulated segment margins related natural gas production marketing activities however natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes changes working capital sales cash requirements seasonal largest portion sales occurs heating months whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore ability maintain liquidity depends bank line credit cash provided operating activities sufficient meet capital requirements borrowings outstanding bank line credit june 30 2011 june 30 2010 borrowings outstanding bank line credit excess cash invested overnight repurchase agreements branch banking trust company purchase us treasury federal agency securities contractual agreement sell back securities next day longterm debt decreased 56751000 june 30 2011 compared 57112000 june 30 2010 361000 decrease resulted redemption debentures insured quarterly notes allows limited redemptions made certain holders beneficiaries cash equivalents 7340000 june 30 2011 compared 4639000 june 30 2010 123000 june 30 2009 changes cash equivalents summarized following table 000 provided operating activities 14467 17600 15434 used investing activities 7520 5052 7956 used financing activities 4246 8031 7605 increase decrease cash equivalents 2701 4517 127 2011 3133000 less cash provided operating activities compared 2010 cash contributed defined benefit pension plan increased 1500000 made elective contribution current year increase funded status plan cash paid natural gas increased 6164000 due increased volumes purchased current year meet customers’ gas requirements well increased volumes purchased injection storage field cash paid operation maintenance expenses increased 434000 increases partially offset 5464000 increase cash received customers due increased rates regulated segment increased volumes sold 2010 2166000 cash provided operating activities compared 2009 cash paid natural gas decreased 32397000 due decrease cost gas purchased cash paid taxes decreased 2307000 due income tax refund resulting method change reduced capitalization expenses income tax purposes cash contributed defined benefit pension plan decreased 2177000 made elective contribution prior year maintain funded status plan additionally cash paid taxes income taxes cash paid interest decreased 694000 decreases amounts paid partially offset 36159000 decrease cash received customers due decreased sales prices changes cash used investing activities result primarily changes level capital expenditures years 2011 cash used financing activities decreased 3785000 due decreased repayments bank line credit 2010 significant changes cash used financing activities compared 2009 cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2012 approximately 65 million following provided summarize contractual cash obligations indicated periods june 30 2011 longterm debt notes payable customers’ deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2011 interest payments underlying obligation satisfied interest notes payable represents interest payments expected bank line credit extends june 30 2013 june 30 2011 accrued 56000 interest related uncertain tax positions amount excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date longterm debt sinking fund requirements c represents currently projected contributions defined benefit plan 2025 recommended actuary june 30 2011 one contract minimum purchase obligation contract expires december 2011 remainder gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 35114000 regulatory liabilities 1508000 asset retirement obligations 2561000 deferred compensation 511000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows expect cash provided operations coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit branch banking trust company 40000000 available june 30 2011 current bank line credit extends june 30 2013 ability borrow bank line credit dependent compliance covenants bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined events default among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made capital stock repurchased unless giving effect dividend payments repurchases consolidated shareholders equity minus value company’s intangible assets exceeds 25800000 thus retained earnings restricted · may assume secured indebtedness excess 5000000 unless secure 700 debentures 575 insured quarterly notes equally additional secured indebtedness · without consent bank extended us bank line credit paying terminating bank line credit may · merge another entity · sell material portion assets ordinary course business · issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock · permit person group related persons hold twenty percent 20 company’s outstanding shares common stock furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented consolidated financial statements aware events would cause us default fiscal 2012 ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices monitor need file rate requests kentucky public service commission general rate increases regulated services august 2011 standard poor downgraded longterm us sovereign debt aaa aa negative outlook although downgrade longterm sovereign credit ratings unprecedented downgrade us credit rating potential impact uncertain us treasuries continue trade active markets yield curve us treasuries remains appropriate basis determining riskfree rates downgrade could materially affect global domestic financial markets economic conditions may affect results operations financial position cash flows future periods critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension trusteed noncontributory defined benefit pension plan covering eligible employees hired prior may 9 2008 reported costs providing retirement benefits described note 6a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants years ended june 30 2011 2010 2009 recorded pension costs defined benefit pension plan 1129000 1040000 608000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2011 based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments target investment allocation equity investments includes allocations domestic global real estate markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 7 discount rate 525 various assumptions estimate pension costs associated defined benefit pension plan decrease 1129000 2011 481000 2012 modifying expected longterm rate return pension plan assets 25 would change pension costs 2012 approximately 53000 increasing discount rate assumption 25 would decrease pension costs approximately 65000 decreasing discount rate assumption 25 would increase pension costs approximately 66000 provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible regulated segment risk collection accounts receivable partially mitigated ability recover portion monthly provision relates customers’ gas cost effective january 2011 began recover uncollectible gas cost portion gas cost recovery clause order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customer’s meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements management’s discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing activities · acquisition service franchises local governments · pension fund costs management · contractual obligations cash requirements · management gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation · regulatory legislative matters · dividends forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale natural gas provision natural gas transportation services throughout following discussion results operations show revenue gas sales net corresponding purchased gas expenses define “gross margin” gas sales less purchased gas expenses plus transportation revenues gross margin therefore refers operating revenues less purchased gas expenses derived directly consolidated statements income follows 000 operating revenues 83040 76422 105637 less purchased gas 47839 44100 72078 gross margin 35201 32322 33559 amounts derived consolidated statements income included item 8 financial statements supplemental data operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin “nongaap financial measure” defined accordance sec rules view gross margin important performance measure core profitability operations measure key component internal financial reporting used management analyzing business segments believe investors benefit access financial measures management uses natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations liquidity capital resources companys utility operations subject regulation psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers deltas business temperaturesensitive accordingly companys operating results given period reflect addition factors impact weather colder temperatures resulting increased sales company anticipates sensitivity seasonal weather conditions continue reflected companys operating results future periods capital expenditures delta fiscal 1997 expected approximately 16400000 delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 20000000 approximately 18075000 borrowed june 30 1996 line credit bank one kentucky na expires november 1996 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done july 1996 net proceeds approximately 20400000 sale 15000000 debentures 400000 shares common stock used repay shortterm debt working capital seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions therefore warmer non heating months cash needs operations construction partially met shortterm borrowings primary cash flows last three years summarized 1996 1995 1994 provided operating activities 3094809 6943183 6172019 used investing activities 13373416 8122838 7374747 provided financing 10294461 1158887 1144396 activities net increase decrease cash equivalents 15854 20768 58332 results operations operating revenues increase operating revenues 1996 approximately 4732000 due primarily increase retail sales volumes approximately 980000 mcf result colder winter weather 1996 billed degree days approximately 112 thirtyyear average normal degree days 1996 compared approximately 90 1995 addition system transportation volumes 1996 increased approximately 180000 mcf 8 increases partially offset decreases cost gas purchased reflected rates billed customers deltas gas cost recovery clause decrease offsystem transportation volumes approximately 318000 mcf 22 due primarily reduced deliveries local producers decrease operating revenues 1995 approximately 3003000 due primarily decrease retail sales volumes approximately 609000 mcf result warmer winter weather 1995 approximately 90 normal weather compared approximately 106 1994 approximate 162000 545000 mcf decrease offsystem transportation due reduced deliveries local production decrease partially offset increase onsystem transportation approximately 278000 due 204000 mcf increase volumes transported increase customers served approximately 1100 35 operating expenses increase purchased gas expense 1996 approximately 1893000 due primarily increased gas purchases retail sales resulting colder winter weather 1996 increase partially offset decreases cost gas purchased retail sales decrease purchased gas expense 1996 approximately 1753000 due primarily decreased retail sales volumes resulting warmer winter weather 1995 increase operation maintenance expenses 1996 approximately 640000 due primarily increases payroll related benefit costs decrease operation maintenance expenses 1995 approximately 380000 due primarily decreases payroll related benefit costs increases depreciation expense 1996 1995 approximately 327000 206000 respectively due primarily additional depreciable plant increases taxes income taxes 1996 1995 approximately 173000 78000 respectively primarily due increased property taxes resulted increased plant property valuations increased payroll taxes resulted increased wages changes income taxes 1996 1995 approximately 517000 467000 respectively primarily due changes net income interest charges increases interest charges 1996 1995 approximately 448000 176000 respectively due primarily increased average shortterm borrowings increased average interest rates item 8 item 7 managements discussion analysis financial condition results operations overview companys utility operations subject regulation psc plays significant role determining companys return equity psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see business regulatory matters companys business temperaturesensitive accordingly companys operating results given period reflect addition factors impact weather colder temperatures generally resulting increased sales company anticipates sensitivity seasonal weather conditions continue reflected companys operating results future periods delta filed general rate case see business regulatory matters weather normalization tariff whereby would permitted adjust rates billing months november march reflect variations normal weather delta also proposed alternative regulatory tariffs would provide annual adjustments companys rates reflect budgeted plans adjust target rate return liquidity capital resources seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions warmer nonheating months therefore cash needs operations construction partially met shortterm borrowings capital expenditures delta fiscal 2000 expected 99 million delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 25000000 5695000 borrowed june 30 1999 line credit bank one kentucky na requires renewal november 1999 shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done march 1998 net proceeds 24100000 sale 25000000 debentures used repay shortterm debt redeem companys 9 debentures would matured 2011 amount 10000000 primary cash flows last three years summarized 1999 1998 1997 provided operating activities 6680276 8922037 6209226 used investing activities 7982143 11193613 16648994 provided financing activities 1431919 1909689 10768558 net increase decrease cash equivalents 130052 361887 328790 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure dividend requirements results operations operating revenues decrease operating revenues 5586000 1999 due primarily decreases cost gas purchased reflected rates billed customers deltas gas cost recovery clause decreases sales volumes mcf sales decreased 299000 mcf 7 compared 1998 resulting warmer winter weather 1999 heating degree days billed 89 normal 1999 compared 94 1998 increase operating revenues 2089000 1998 due primarily general rate increase effective november 30 1997 increases onsystem offsystem transportation volumes 604000 mcf 284000 mcf respectively increase operating revenues includes 200000 additional revenue caused nonrecurring change increases partially offset decrease retail sales volumes 187000 mcf result warmer winter weather 1998 billed degree days 94 normal 1998 compared 104 1997 operating expenses decrease purchased gas expense 1999 6032000 due primarily decreases cost gas purchased retail sales decreased gas purchases retail sales resulting warmer winter weather 1999 decrease purchased gas expense 1998 766000 due primarily decreased gas purchases retail sales resulting warmer winter weather 1998 increases depreciation expense 1999 1998 396000 510000 respectively due primarily additional depreciable plant increases taxes income taxes 1999 1998 123000 155000 respectively primarily due increased property taxes resulted increased plant property valuations increased payroll taxes resulted increased wages changes income taxes 1999 1998 162000 436000 respectively primarily due changes net income interest charges increases interest longterm debt 1999 1998 586000 329000 respectively due primarily issuance 25 million 715 debentures march 1998 decrease interest 1999 436000 due primarily decreased average shortterm debt borrowings increase interest 1998 378000 due primarily increased average shortterm debt borrowings basic diluted earnings per common share years ended june 30 1999 1998 basic earnings per common share declined compared previous periods result lower net income increased average common shares outstanding resulted common shares issued deltas dividend reinvestment plan shares issued employees periods deltas outstanding common shares potentially dilutive securities therefore basic diluted earnings per common share factors may affect future results managements discussion analysis financial condition results operations sections report including letter shareholders contain forwardlooking statements historical facts forwardlooking statements identified language may cases include words estimates expects plans anticipates intends continue believes similar expressions forwardlooking statements may concern among things impact changes cost gas projected capital expenditures sources cash fund expenditures regulatory recovery mechanisms regulatory matters expansion deltas gas distribution system acquisitions gas customers systems activity gas production transportation acquisition management gas supply forwardlooking statements accordingly subject important risks uncertainties could cause companys actual results differ materially expressed forwardlooking statements factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change right present regulatory rules recover rates increased costs gas supply uncertainty regulatory approval full recovery deltas costs expenditures regulatory assets uncertainty outcome deltas pending general rate case uncertainty deltas capital expenditure requirements changes economic conditions demographic patterns weather conditions deltas retail service areas changes affecting deltas cost providing gas service including changes interest rates changes availability external sources financing deltas operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles application principles delta y2k disruptions resulting unidentified unremediated problems systems delta controls y2k disruptions resulting systems parties delta control year 2000 issue company working determine potential impact year 2000 ability deltas computerized information systems accurately process information may datesensitive deltas programs recognize date using 00 year 1900 rather year 2000 could result errors system failures company uses number computer programs across entire operation recent years delta replaced virtually financial computer systems hardware software systems third party vendors certify products year 2000 compliant company established year 2000 committee comprised members management coordinated extensive inventory operational systems including information technology hardware software well nonit embedded systems process controls gas delivery metering systems service providers committee assessing likelihood miscalculations system failures result items systems service providers company currently assessed deems compliant approximately 98 inventoried items systems service providers assessment compliance percentage items delta deems critical stands 98 company intends complete year 2000 remediation testing activities september 30 1999 costs incurred date related year 2000 activities material company based upon current estimates company believe total cost year 2000 readiness programs material adverse impact companys results operations financial position like businesses company relies upon various suppliers vendors order provide services supplies customers delta understands even though taking steps prepare could nevertheless adversely affected failures andor delays caused noncompliant equipment used suppliers vendors therefore delta currently gathering information regarding steps mission critical suppliers vendors taking become year 2000 compliant instance delta sent parties letter inquiring nature extent efforts although company initiated year 2000 communications significant customers key vendors service suppliers parties material companys operations third parties nonetheless represent risk cannot assessed precision controlled certainty major risks company implementation year 2000 compliance program successful gas delivery metering billing systems potential problems related systems include service interruptions customers interrupted revenue data gathering poor customer relations resulting delayed billing company prepared contingency plans address alternatives event year 2000 failures automatic systems equipment occur plans cover wide range possible scenarios include steps remediation also included contingency plans mitigating actions designed lessen chances problem scenarios realized new accounting pronouncements delta adopted sfas 128 earnings per share fiscal 1998 adoption standard effect upon current prior period earnings per common share delta adopted sfas 130 comprehensive income fiscal 1999 sfas 130 establishes standards reporting display comprehensive income components full set general purpose financial statements adoption statement impact financial statements company delta adopted sfas 131 disclosure segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits fiscal 1999 statements affect accounting recognition measurements transactions rather require expanded disclosures regarding financial results june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 standardizes accounting derivative instruments including certain derivative instruments embedded contracts requiring entity recognize items assets liabilities statement financial position measure fair value statement effective fiscal years beginning june 15 2000 effective companys fiscal year 2001 delta currently party financial derivatives hedging purposes however delta currently evaluating terms commodity contracts ie primarily gas purchase sale transportation contracts determine whether contracts meet definition derivative instruments subject requirements new standard company still evaluating impact standard financial statements item 7a item 7 management’s discussion analysis financial condition results operations overview 2010 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2010 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced given ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate normal nonregulated segment produces natural gas markets natural gas largeuse customers regulated system endeavor enter sales agreements match estimated demand supply provide acceptable margin earnings per share increased 2010 compared 2009 12 per share 2009 recorded nonrecurring inventory adjustment gas storage 1350000 838000 net income tax benefit discussed note 15 notes consolidated financial statements also nonregulated segments gross margins decreased result lower sales prices partially offset increased volumes sold future outlook 2011 beyond success depend part ability maintain reasonable rate return regulated segment filed general rate increase kentucky public service commission april 23 2010 recover rates increased operating costs reasonable return invested capital filing includes current usage patterns customers thus addresses impact margin reductions due customer conservation customer loss kentucky public service commission sets rates permitted charge customers regulated segment regulated segment’s largest expense gas supply permitted pass customers control remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial customers market prices natural gas control although fiscal 2010 experienced decline gross margins segment due decreased prices anticipate nonregulated segment continue contribute consolidated net income fiscal 2011 manner least similar fiscal 2010 natural gas prices increase would expect experience corresponding increase nonregulated segment margins related natural gas production activities however natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes gains sale assets changes working capital ability maintain liquidity depends bank line credit shown notes payable accompanying consolidated balance sheets borrowings outstanding bank line credit june 30 2010 compared 3653000 june 30 2009 3653000 decrease reflects decrease cost gas purchased gas storage liquidity also impacted fact sometimes generate internally portion cash necessary capital expenditure requirements made capital expenditures 5275000 8422000 5564000 fiscal years ended 2010 2009 2008 respectively longterm debt decreased 57112000 june 30 2010 compared 57599000 june 30 2009 487000 decrease resulted redemption debentures insured quarterly notes allow limited redemptions made certain holders beneficiaries cash equivalents 4639000 june 30 2010 compared 123000 june 30 2009 250000 june 30 2008 changes cash equivalents summarized following table 000 provided operating activities 17600 15434 6592 used investing activities 5052 7956 5266 used financing activities 8031 7605 1264 increase decrease cash equivalents 4517 127 2010 2166000 cash provided operating activities compared 2009 cash paid natural gas decreased 32397000 due decrease cost gas purchased cash paid taxes decreased 2307000 due income tax refund resulting method change reduced capitalization expenses income tax purposes cash contributed defined benefit pension plan decreased 2177000 made elective contribution prior year maintain funded status plan additionally cash paid taxes income taxes cash paid interest decreased 694000 decreases amounts paid partially offset 36159000 decrease cash received customers due decreases price natural gas 2009 cash provided operating activities increased 8842000 compared 2008 2009 8626000 less paid natural gas due lower natural gas prices 5202000 cash received customers due timing collections customer accounts receivable increases partially offset 1932000 increase contributions made pension plan 1473000 increase cash paid taxes changes cash used investing activities result primarily changes level capital expenditures years 2010 2009 cash used financing activities increased 426000 6431000 respectively due increased repayments bank line credit cash requirements capital expenditures result continued need capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities additionally 2011 plan construct facility process remove heavy liquids natural gas expect capital expenditures fiscal 2011 approximately 97 million following provided summarize contractual cash obligations indicated periods june 30 2010 longterm debt notes payable customers’ deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2010 interest payments underlying obligation satisfied interest notes payable represents interest payments expected bank line credit extends june 30 2011 june 30 2010 accrued 30000 interest related uncertain tax positions amount excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date longterm debt sinking fund requirements c represents currently projected contributions defined benefit plan 2020 recommended actuary june 30 2010 ten contracts minimum purchase obligations contracts various terms last contract expiring november 2010 remainder gas purchase contracts requirementsbased contracts minimum purchase obligation exists contract extend time period greater one month e longterm liabilities include deferred income taxes 32462000 regulatory liabilities 1664000 asset retirement obligations 2201000 deferred compensation 373000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 12 notes consolidated financial statements commitments contingencies sufficiency future cash flows expect cash provided operations coupled shortterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit branch banking trust company shown notes payable accompanying consolidated balance sheets 40000000 available june 30 2010 current bank line credit extends june 30 2011 ability borrow bank line credit dependent compliance covenants bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined events default among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted · may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes fiscal 2010 aware events would cause us default fiscal 2011 ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices monitor need file rate requests kentucky public service commission general rate increases regulated services rates currently charge regulated customers implemented october 2007 april 23 2010 filed increased rates kentucky public service commission discussed note 13 notes consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies historically reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension trusteed noncontributory defined benefit pension plan covering eligible employees hired prior may 9 2008 reported costs providing pension benefits described note 6a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants years ended june 30 2010 2009 2008 recorded pension costs defined benefit pension plan 1040000 608000 670000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2010 based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments target investment allocation equity investments includes allocations domestic global real estate markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 7 discount rate 525 various assumptions estimate pension costs associated defined benefit pension plan increase 1040000 2010 1129000 2011 modifying expected longterm rate return pension plan assets 25 would change pension costs 2011 approximately 39000 increasing discount rate assumption 25 would decrease pension costs approximately 60000 decreasing discount rate assumption 25 would increase pension costs approximately 64000 effective july 1 2008 adopted new accounting guidance required us change measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 760000 amount 152000 attributable change measurement dates net tax effects 58000 charged directly retained earnings july 1 2008 provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customer’s meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value depreciation initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements management’s discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing activities · acquisition service franchises local governments · pension fund costs management · contractual obligations cash requirements · management gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · regulatory legislative matters · dividends forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses therefore throughout following results operations refer “gross margin” respect regulated nonregulated segments gross margin refers operating revenues less purchased gas expense derived directly consolidated statements income operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap “gross margin” “nongaap financial measure” defined accordance sec rules view gross margin important performance measure core profitability operations measure key component internal financial reporting used management analyzing business segments believe investors benefit access financial measures management uses natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview 2015 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2015 company two segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marketing activities sales natural gas liquids earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate historical average temperatures nonregulated segment markets natural gas largevolume customers endeavor enter sales agreements matching supply estimated demand providing acceptable gross margin nonregulated segment produces portion natural gas supply stored sold favorable market conditions arise nonregulated segment also produces natural gas sells liquids extracted natural gas consolidated income per common share 092 2015 decreased compared consolidated income 119 2014 due decreased revenue net gas costs sale natural gas natural gas liquids nonregulated segment discussed results operations future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers kentucky public service commission sets rates monitor need file rate cases kentucky public service commission general rate increase regulated services regulated segments largest expense natural gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial largevolume customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2016 natural gas prices increase would expect experience corresponding increase nonregulated gross margins related natural gas marketing activities however natural gas prices decrease would expect decrease nonregulated gross margins related natural gas marketing activities process portion natural gas distribution transmission storage system extract liquids enhancing reliability efficiency system profitability sales natural gas liquids dependent amounts liquids extracted prices liquids determined national unregulated market experienced 46 decline past year average sales price natural gas liquids reduced consolidated net income 008 per common share 2015 compared 2014 liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes sharebased compensation changes working capital sales cash requirements seasonal largest portion sales occurs heating months december april whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company extends june 30 2017 permits borrowings 40000000 borrowings outstanding bank line credit june 30 2015 june 30 2014 cash equivalents 16924000 june 30 2015 compared 13676000 june 30 2014 10360000 june 30 2013 changes cash equivalents summarized following table 2015 cash provided operating activities increased 1406000 8 compared 2014 due decreased cash paid income taxes result decreased earnings current year partially offset decreased cash received sale natural gas liquids 2014 cash provided operating activities increased 3783000 28 compared 2013 due increased cash received customers result increased sales partially offset increased amounts paid natural gas changes cash used investing activities result primarily changes level capital expenditures years 2015 2014 significant changes cash used financing activities compared 2014 2013 respectively cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2016 approximately 75 million following provided summarize contractual cash obligations indicated periods june 30 2015 longterm debt notes payable customers deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2015 interest payments underlying obligation satisfied june 30 2015 also accrued 5000 interest related uncertain tax positions amounts excluded table contractual obligations timing payments uncertain b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit plan 2029 recommended actuary june 30 2015 nonregulated segment forward purchase contracts natural gas minimum purchase obligations expire december 2016 remainder natural gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 41989000 regulatory liabilities 1138000 asset retirement obligations 3796000 deferred compensation 977000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers kentucky public service commission sets rates monitor need file rate increases regulated segment regulated base rates recently adjusted 2010 rate case became effective october 2010 expect cash provided operations combined bank line credit sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december refinance series notes additional prepayments principal may subject prepayment penalty bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2015 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment appropriate result change circumstances determined regulated segment longer meets criteria apply regulatory accounting regulated segment would discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 net periodic benefit costs “pension costs” defined benefit retirement plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2015 2014 2013 recorded pension costs defined benefit retirement plan 493000 750000 980000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized average remaining service period active plan participants june 30 2015 7391000 accumulated net losses deferred amortization pension costs future periods defined benefit retirement plans assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return defined benefit retirement plans assets 6 2015 based targeted asset allocation assumption 2015 approximately 70 equity investments approximately 30 fixed income investments targeted investment allocation equity investments includes allocations domestic global real estate markets additional diversification also invest absolute return strategy mutual funds include equity fixed income securities asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 55 discount rate 425 various assumptions estimate pension costs associated defined benefit retirement plan increase 493000 2015 812000 2016 modifying expected longterm rate return pension plan assets 25 would change pension costs 2016 approximately 74000 increasing discount rate assumption 25 would decrease pension costs approximately 107000 decreasing discount rate assumption 25 would increase pension costs approximately 113000 unbilled revenues gas costs monthend estimate volumes natural gas used date customers meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues natural gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accrete change present value initial capitalized costs depreciate useful lives related assets asset retirement obligations attributable assets regulated operations accretion depreciation deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement dates assumed creditadjusted riskfree interest rates asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · retirement plan costs management · contractual obligations cash requirements · management natural gas supply risks due potential fluctuation price natural gas natural gas liquids · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale delivery natural gas sale natural gas liquids provision natural gas transportation services operating revenues significantly impacted prices pay natural gas therefore view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses define “gross margins” natural gas sales less corresponding purchased natural gas expenses plus transportation natural gas liquids revenues gross margin derived directly consolidated statements income included item 8 financial statements supplemental data follows operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin “nongaap financial measure” defined accordance sec rules natural gas prices determined unregulated national market therefore prices pay natural gas fluctuate national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview 2007 future outlook overview following discussion segments compete corporate strategy conduct business within segments significant events occurred 2007 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact unusual winter temperatures revenues reduced given ability adjust winter rates residential small nonresidential customers response unusual winter temperatures kentucky public service commission sets rates permitted charge customers regulated segment monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases seek approval kentucky public service commission adjust rates charge customers regulated segments largest expense gas supply permitted pass customers control remaining expenses budgeting approval review nonregulated segment markets natural gas largeuse customers deltas regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin earnings per share increased 2007 2006 07 per share due increased sales volumes nonregulated segment increased retail sales transportation volumes regulated segment despite decline number regulated customers future outlook 2008 beyond success depend part ability maintain reasonable rate return regulated segment light higher gas prices resultant conservation customers additional loss customers switching alternate energy sources filed general rate increase kentucky public service commission april 20 2007 recover rates increased operating costs reasonable return invested capital filing included current usage patterns customers thus addressed impacts margin reductions experienced due customer conservation well loss customers expect nonregulated segment continue contribute consolidated net income 2008 recent years based contracts currently place future profitability nonregulated segment though dependent business plans large customers market prices natural gas control natural gas prices continue decrease considerably expect experience corresponding decrease nonregulated segment margins liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation deferred income taxes changes working capital ability maintain liquidity depends bank line credit shown notes payable accompanying consolidated balance sheets notes payable decreased 4190000 june 30 2007 compared 7046000 june 30 2006 2856000 decrease attributable increased internal cash flow generate internally portion cash necessary capital expenditure requirements made capital expenditures 8083000 7781000 5338000 fiscal years ended 2007 2006 2005 respectively finance balance capital expenditures interim basis bank line credit periodically repay shortterm borrowings bank line credit using net proceeds sale longterm debt equity securities done 2006 3830000 repayment connection issuance 575 insured quarterly notes longterm debt decreased 58625000 june 30 2007 compared 58790000 june 30 2006 165000 decrease resulted provisions debentures insured quarterly notes allowing limited redemptions made certain holders beneficiaries cash equivalents increased 188000 june 30 2007 compared 150000 june 30 2006 38000 increase cash equivalents year ended june 30 2007 compared 22000 increase 41000 decrease cash equivalents years ended june 30 2006 june 30 2005 respectively shown following table 000 2007 2006 2005 provided operating activities 14486 6423 7372 used investing activities 7936 7577 5263 provided used financing activities 6512 1177 2150 increase decrease cash equivalents 38 23 41 year ended june 30 2007 cash provided operating activities increased 8063000 compared 2006 increase attributable 24909000 decrease cash paid gas partially offset decrease cash received customers amount 16052000 result decreased sales volumes cost gas time period see related discussion results operations year ended june 30 2006 cash provided operating activities decreased 949000 compared 2005 due increased income tax payments 1738000 attributable higher taxes payable result expiration bonus depreciation allowed job creation worker assistance act 2002 expired 2005 increase partially offset 793000 decreased gas costs relating deferred gas cost gas payable accounts changes cash used investing activities result primarily changes level capital expenditures years year ended june 30 2007 cash used financing activities increased 7689000 increase attributable increased net repayments bank line credit amount 3944000 additional 3480000 provided financing activities 2006 refinancing 715 6 58 debentures 2007 borrowings longterm debt year ended june 30 2006 cash provided financing activities increased 3327000 compared 2005 primarily due issuance 40000000 575 insured quarterly notes offset partially 2300000 issuance costs 33900000 redemption 715 6 58 debentures limited redemptions made certain holders beneficiaries outstanding debentures cash requirements capital expenditures result continued need capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2008 57 million following provided summarize contractual cash obligations indicated periods june 30 2007 longterm debt notes payable customers deposits require interest payments interest payments projected based fiscal 2007 interest payments underlying debt matures interest notes payable represents interest payments expected bank line credit extends october 31 2007 b see note 9 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date longterm debt sinking fund requirements c represents currently projected contributions defined benefit plan 2017 calculated actuary contracts purchase gas requirements based contracts minimum purchase obligation contracts additionally operating leases year cancelable option see note 12 notes consolidated financial statements commitments contingencies sufficiency future cash flows extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit 40000000 4190000 borrowed june 30 2007 classified notes payable accompanying consolidated balance sheets current bank line credit branch banking trust company extends october 31 2007 process extending bank line credit october 31 2009 expect internally generated cash coupled shortterm longterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices continuously monitor need file rate requests kentucky public service commission general rate increase regulated services april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 test year case twelve months ended december 31 2006 increased rates requested become effective may 20 2007 rate case requests return common equity 121 request allocates component requested increase monthly customer charge thus helping decouple revenues volumes gas sold also seeks new conservationefficiency program cost recovery tariff help promote conservation efficient use natural gas residential customers additionally proposed experimental customer rate stabilization mechanism help provide future stable equitable rates customers adjusting rates annually without customers pay frequent costly rate cases kentucky public service commission suspended implementation proposed new rates october 20 2007 time filing reviewed reasonableness proposed rates considered public hearing set october 3 2007 purpose crossexamination witnesses although management opinion request reasonable unable predict outcome proceeding critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles gaap requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical 1 accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made 2 changes estimate reasonably likely occur period critical accounting estimates read conjunction notes financial statements item 8 financial statements supplementary data accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies historically reflect effects ratemaking process accordance statement financial accounting standards 71 accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 5a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs changes pension obligations associated factors may immediately recognized pension costs income statement may deferred amortized future average remaining service period active plan participants years ended june 30 2007 2006 2005 recorded pension costs defined benefit pension plan 567000 717000 556000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 8 percent 2007 based targeted asset allocation assumption approximately 65 percent equity investments approximately 35 percent fixed income investments approximately 65 percent equity investment target includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 7 percent discount rate 58 percent various assumptions estimate pension costs associated defined benefits pension plan increase 567000 2007 670000 2008 modifying expected longterm rate return pension plan assets 25 percent would change pension costs 2008 approximately 35000 increasing discount rate assumption 25 percent would decrease pension costs approximately 24000 decreasing discount rate assumption 25 percent would increase pension costs approximately 23000 accumulated provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated income statements working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered latest date cycle meter reading monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations adopted statement financial accounting standards 143 accounting asset retirement obligations fiscal year 2003 primary impact change method accruing gas well plugging abandonment costs adopted financial accounting standards board interpretation 47 accounting conditional asset retirement obligations june 30 2006 recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain pronouncements require fair value retirement obligations recorded time obligations incurred pronouncements require recognition asset retirement obligations indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value charges depreciation initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligation related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed notes 2 3 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words estimates attempts expects monitors plans anticipates intends continues strives seeks rely believes similar expressions forwardlooking statements include limited statements operational plans cost availability natural gas supplies capital expenditures sources availability funding operations expansion anticipated growth opportunities system expansion acquisition competitive conditions face production storage gathering transportation activities acquisition service franchises local governments pension fund costs management contractual obligations cash requirements management gas supply risks due potential fluctuation price natural gas revenues income margins profitability efforts purchase transport local produced natural gas recovery regulatory assets regulatory legislative matters dividends forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring natural gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty capital expenditure requirements changes economic conditions demographic patterns weather conditions retail service areas changes affecting costs providing gas service including changes gas supply costs interest rates availability external sources financing operations tax laws environmental laws general rate inflation conservation customers loss customers due higher gas prices changes affecting costs competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws us matters described item 1a risk factors results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses therefore throughout following results operations refer gross margin respect regulated nonregulated segments gross margin refers operating revenues less purchased gas derived directly consolidated statements income operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin nongaap financial measure defined accordance sec rules view gross margin important performance measure core profitability operations measure key component internal financial reporting used management analyzing business segments believe investors benefit access financial measures management uses natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations liquidity capital resources capital expenditures delta 1995 expected approximately 84 million delta generates internally portion cash necessary capital expenditure requirements finances balance capital expenditures interim basis use borrowing capability shortterm line credit current line credit 15 million approximately 27 million borrowed june 30 1994 interest rate 55 delta average interest rate 43 1994 line credit current line credit extends november 1994 shortterm borrowings periodically repaid proceeds issuance longterm debt equity securities done october 1993 net proceeds approximately 178 million sale 15 million debentures 170000 shares common stock used repay shortterm debt refinance certain longterm debt amounts types future longterm debt equity financings depend upon companys capital needs market conditions deltas sales seasonal nature largest proportion cash received winter heating months sales volumes increase considerably nonheating months cash needs operations construction partially met shortterm borrowings additionally construction activity takes place nonheating season favorable weather conditions thus increasing seasonal cash needs primary sources uses cash last three years summarized sourcesuses 1994 1993 1992 provided operat ing activities 6172019 4567023 6370685 capital expenditures 7374747 6289508 5074483 issuance deben tures net 14246937 repayment long term debt 11330286 591425 787605 net shortterm borrowings 3765000 3700000 915000 common stock dividends 1972368 1775411 1741661 issuance common stock net 3965113 428634 367455 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled seasonal shortterm borrowings continue sufficient satisfy operating capital expenditure dividend requirements next year results operations increase operating revenues 1994 approximately 3625000 due primarily increase retail sales volumes approximately 344000 mcf result colder winter weather 1994 1058 thirty year average weather compared 992 1993 increase customers served 796 25 increase operating revenues partially offset approximately 212000 decrease transportation revenues offsystem customers resulting decreased volumes approximately 671000 mcf due primarily reduced volumes shipped others leased pipeline inactive since october 1992 due certain producers shipped gas markets require use deltas system increase operating revenues 1993 approximately 2021000 due primarily increase retail sales volumes approximately 324000 mcf result colder winter weather 1993 992 thirty year average weather compared 925 1992 increase customers served 872 29 contributing increase operating revenues increase resources revenues resulting increased volumes cost gas resale onsystem customers increase transportation revenues resulting increased volumes approximately 187000 mcf transported onsystem customers increase operating revenues partially offset approximately 506000 decrease transportation revenues offsystem customers resulting decreased volumes approximately 1912000 mcf due reduced volumes shipped others leased pipeline inactive since october 1992 due certain producers shipped gas markets require use deltas system operating expenses increase purchased gas expense approximately 3016000 1994 due primarily increase cost gas retail sales due increase retail sales volumes increase purchased gas expense approximately 1669000 1993 due primarily increases cost gas purchased resources resale onsystem customers contributing increase cost gas retail sales due increase retail sales volumes increases depreciation expense 1994 1993 approximately 145000 158000 respectively due primarily additional depreciable plant increases taxes income taxes periods approximately 78000 39000 1994 1993 respectively primarily due increased property taxes resulted increased plant increased payroll taxes resulted increased wages payroll tax rates changes income taxes periods approximately 34100 102000 1994 1993 respectively primarily due changes net income omnibus budget reconciliation act 1993 result additional income taxes delta company adopted statement financial accounting standard sfas 109 accounting income taxes effective july 1 1993 required sfas 109 replaces sfas 96 adopts liability method accounting income taxes requiring deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse regulated companies change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes result adoption sfas 109 material impact results operations financial position company statement financial accounting standard sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect company delta provide benefits postretirement postemployment pension plan retired employees interest charges decrease longterm interest 1993 approximately 62000 due less longterm debt outstanding period increase interest charges 1993 approximately 106000 due primarily increased average shortterm borrowings partially offset lower interest rates period item 8 item 7 managements discussion analysis financial condition results operations overview companys utility operations subject regulation psc significant role determining companys return equity psc approves rates intended permit specified rate return investment companys rate tariffs allow cost gas passed customers see business regulatory matters companys business temperaturesensitive accordingly companys sales volumes given period reflect addition factors impact weather colder temperatures generally resulting increased sales volumes company anticipates sensitivity seasonal weather conditions continue reflected companys sales volumes future periods however deltas current tariffs approved psc effective january 1 2000 provide adjustment gas rates weather normalization tariff see business regulatory matters weather normalization tariff deltas rates residential small nonresidential customers generally increased winter weather warmer normal decreased winter weather colder normal delta permitted adjust rates classes customers billing months december april tariff liquidity capital resources seasonal nature deltas sales smallest proportion cash generated operations received warmer months sales volumes decrease considerably additionally construction activity takes place nonheating season favorable weather conditions warmer nonheating months therefore cash needs operations construction partially met shortterm borrowings capital expenditures delta fiscal 2003 expected 98 million capital expenditures made system extensions well replacement improvement existing transmission distribution gathering general facilities delta generating internally portion cash necessary capital expenditure requirements thus finances balance capital expenditures interim basis use borrowing capability shortterm line credit current available line credit 40000000 19355000 borrowed june 30 2002 line credit bank one kentucky na requires renewal october 2002 company intends pursue renewal enter new agreement seek substantially terms existing agreement shortterm borrowings periodically repaid net proceeds sale longterm debt equity securities done march 1998 net proceeds 24100000 sale 25000000 debentures used repay shortterm debt redeem companys 9 debentures would matured 2011 amount 10000000 primary cash flows last three years summarized 2002 2001 2000 provided operating activities 10511896 2652572 8827505 used investing activities 9421765 7069713 8795653 provided used infinancing activities 1028996 4185248 115554 net increase decrease cash equivalents 61135 231893 147406 cash provided operating activities consists net income noncash items including depreciation depletion amortization deferred income taxes additionally changes working capital also included cash provided operating activities company expects internally generated cash coupled shortterm borrowings sufficient satisfy operating normal capital expenditure dividend requirements results operations operating revenues decrease operating revenues 2002 14840000 primarily attributable decreased sales volumes decreased gas rates sales volumes decreased due warmer winter weather 2002 gas rates decreased due lower gas prices net increases impact weather normalization tariff increase operating revenues 2001 24843000 primarily attributable increased gas rates increased sales volumes gas rates increased due higher gas prices net decreases impact weather normalization tariff sales volumes increased due colder winter weather 2001 heating degree days billed 2002 890 normal compared 1068 normal 2001 896 normal 2000 following table sets forth certain variations revenues last two fiscal years 2002 compared 2001 compared increase decrease 2001 2000 variations regulated revenues gas rates 1930000 11364800 weather normalization adjustment 1935000 1634000 sales volumes 9002000 5715700 transportation 529000 69100 49000 57400 total 8517000 15573000 variations nonregulated revenues gas rates 6354000 8669000 sales volumes 32000 601000 1000 total 6323000 9270000 total variations revenues 14840000 24843000 percentage variations regulated volumes gas sales 191 180 transportation 136 168 percentage variations nonregulated gas 4 77 sales volumes operating expenses decrease purchased gas expense 2002 14551000 due primarily 213 decrease cost gas purchased retail sales 107 decrease volumes sold increase purchased gas expense 2001 23493000 due primarily 73 increase cost gas purchased retail sales 13 increase volumes sold related detailed revenue variations following table sets forth certain variations purchased gas expense last two fiscal years 2002 compared 2001 compared 2001 2000 variations regulated gas expense gas rates 2887000 11505000 purchase volumes 4877000 2967000 total 7764000 14472000 variations nonregulated gas expense gas rates 6651000 8308000 purchase volumes 136000 713000 total 6787000 9021000 total variations gas expense 14551000 23493000 basic diluted earnings per common share years ended june 30 2002 2001 2000 basic earnings per common share changed result changes net income increased average common shares outstanding resulted common shares issued deltas dividend reinvestment plan shares issued employees periods potentially dilutive securities therefore basic diluted earnings per common share factors may affect future results managements discussion analysis financial condition results operations sections report contain forwardlooking statements historical facts forwardlooking statements identified language may cases include words estimates attempts expects monitors plans anticipates intends continues continue believes similar expressions forwardlooking statements may concern future matters among matters deltas cost availability natural gas supplies deltas capital expenditures sources availability funding operation expansion deltas anticipated growth opportunities system expansion acquisition competitive conditions deltas production storage gathering transportation activities regulatory legislative matters dividends external internal funding sources forwardlooking statements accordingly subject important risks uncertainties could cause companys actual results differ materially expressed forwardlooking statements factors could cause future results differ materially expressed implied forwardlooking statements historical results include impact outcome ongoing restructuring gas industry outcome regulatory proceedings related restructuring changing regulatory environment generally change rights present regulatory rules recover costs gas supply expenses investments capital assets uncertainty deltas capital expenditure requirements changes economic conditions demographic patterns weather conditions deltas retail service areas changes affecting deltas cost providing gas service including changes gas supply costs interest rates availability external sources financing deltas operations tax laws environmental laws general rate inflation changes affecting cost competing energy alternatives competing gas distributors changes accounting principles tax laws application principles laws delta new accounting pronouncements effective june 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 eliminates poolingofinterests method requires business combinations initiated june 30 2001 accounted using purchase method also requires intangible assets acquired business combination recognized separately goodwill sfas 141 impact companys financial position results operations respect business combination transactions occurred prior june 30 2001 sfas 142 addresses goodwill intangible assets accounted upon acquisition afterwards primary impact sfas 142 future goodwill intangible assets indefinite lives longer amortized beginning 2002 instead amortization goodwill subject assessment impairment applying fairvaluebased test annually frequently circumstances indicate possible impairment carrying amount goodwill exceeds fair value goodwill impairment loss recognized amount equal excess company recorded goodwill intangible assets accordingly new accounting rules presently significant impact company june 2001 fasb issued sfas 143 accounting asset retirement obligations required adopted july 1 2002 sfas 143 addresses asset retirement obligations result acquisition construction normal operation longlived assets requires companies recognize asset retirement obligations liability incurred fair value adoption sfas 143 expected significant impact company august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets required adopted july 1 2002 sfas 144 supercedes sfas 121 accounting impairment longlived assets longlived assets disposed apb opinion 30 reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions combines two accounting models single model based framework established sfas 121 adoption sfas 144 significant impact company american institute certified public accountants issued exposure draft statement position sop accounting certain costs activities related property plant equipment proposed sop applies nongovernmental entities acquire construct replace tangible property plant equipment ppe including lessors lessees significant element sop requires entities use component accounting ppe extent future component replacement capitalized adoption entities would option apply component accounting retroactively ppe assets extent applicable apply component accounting entity incurs capitalizable costs replace portion ppe proposed effective date sop january 1 2003 company currently analyzing impact proposed sop item 7a item 7 management’s discussion analysis financial condition results operations overview 2009 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2009 company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperaturesensitive regulated sales volumes period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced given ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate normal nonregulated segment markets natural gas largeuse customers regulated system endeavor enter sales agreements match estimated demand supply provides acceptable margin earnings per share decreased 2009 2008 50 per share nonregulated segments contribution earnings decreased result decreased nonregulated sales volumes lower sales prices resulted 2800000 reduction gross margins additionally incurred nonrecurring inventory adjustment gas storage 1350000 838000 net income tax benefit discussed note 15 notes consolidated financial statements future outlook 2010 beyond success depend part regulated segments ability maintain reasonable rate return kentucky public service commission sets rates permitted charge customers regulated segment monitor need file general rate case kentucky public service commission seek approval adjust rates charge regulated customers regulated segment’s largest expense gas supply permitted pass customers control remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial large use customers market prices natural gas control although fiscal 2009 experienced decline gross margins segment due decreased prices decreases volumes sold nonregulated customers due decrease nonregulated customers gas requirements anticipate nonregulated segment continue contribute consolidated net income fiscal 2010 manner least similar fiscal 2009 natural gas prices increase would expect experience corresponding increase nonregulated segment margins related natural gas production activities however natural gas prices decrease would expect decrease nonregulated margins related natural gas production marketing activities liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes gains sale assets changes working capital ability maintain liquidity depends bank line credit shown notes payable accompanying consolidated balance sheets notes payable decreased 3653000 june 30 2009 compared 6829000 june 30 2008 3176000 decrease reflects decrease cost gas purchased gas storage liquidity impacted fact sometimes generate internally portion cash necessary capital expenditure requirements made capital expenditures 8422000 5564000 8803000 fiscal years ended 2009 2008 2007 respectively longterm debt decreased 57599000 june 30 2009 compared 58318000 june 30 2008 719000 decrease resulted redemption debentures insured quarterly notes allow limited redemptions made certain holders beneficiaries cash equivalents 123000 june 30 2009 compared 250000 june 30 2008 188000 june 30 2007 changes cash equivalents summarized following table 2009 cash provided operating activities increased 8842000 compared 2008 2009 8626000 less paid natural gas due lower natural gas prices 5202000 cash received customers due timing collections customer accounts receivable increases partially offset 1932000 increase contributions made pension plan 1473000 increase cash paid taxes 2008 cash provided operating activities decreased 7894000 compared 2007 2008 paid 15288000 gas due increased natural gas prices increased volumes purchased timing gas payables increase partially offset due 7120000 cash received customers due increased prices volumes sold changes cash used investing activities result primarily changes level capital expenditures years 2009 6341000 cash used financing activities due increased net repayments bank line credit 2008 5248000 less cash used financing activities due increased net borrowings bank line credit cash requirements capital expenditures result continued need capital expenditures made system extensions replacement improvement existing transmission distribution gathering storage general facilities expect capital expenditures fiscal 2010 approximately 63 million due conditions debt equity markets experienced decline value assets held defined benefit pension plan thus contributed 2677000 plan fiscal 2009 following provided summarize contractual cash obligations indicated periods june 30 2009 longterm debt notes payable customers’ deposits unrecognized tax positions require interest payments interest payments projected based fiscal 2009 interest payments underlying obligation satisfied interest notes payable represents interest payments expected bank line credit extends june 30 2011 june 30 2009 accrued 60000 interest related uncertain tax positions amount excluded table contractual obligations timing payments uncertain b see note 9 notes consolidated financial statements description debt cash obligations represent maximum annual amount redemptions made certain holders beneficiaries debt maturity date longterm debt sinking fund requirements c represents currently projected contributions defined benefit plan 2019 recommended actuary june 30 2009 ten contracts minimum purchase obligations contracts various terms last contract expiring november 1 2010 remainder gas purchase contracts requirementbased contracts minimum purchase obligation exists contract extend time period greater one month e longterm liabilities include deferred income taxes 27538000 regulatory liabilities 1711000 asset retirement obligations 1670000 deferred compensation 281000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 12 notes consolidated financial statements commitments contingencies sufficiency future cash flows current economic conditions resulted increased credit risk us due potential default customers twelve months ended june 30 2009 experienced increase customer accounts written net recoveries 42000 10 based current outstanding receivables expecting trend continue fiscal 2010 allowance doubtful accounts increased 819000 june 30 2009 compared 465000 june 30 2008 however unable estimate impact trend future earnings liquidity expect cash provided operations coupled shortterm longterm borrowings sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months foreseeable future extent internally generated cash sufficient satisfy operating capital expenditure requirements pay dividends rely bank line credit current available bank line credit branch banking trust company shown notes payable accompanying consolidated balance sheets 40000000 3653000 borrowed june 30 2009 current bank line credit extends june 30 2011 ability borrow bank line credit dependent compliance covenants bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined events default among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted · may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes fiscal 2009 aware events would cause us default fiscal 2010 ability sustain acceptable earnings levels finance capital expenditures pay dividends contingent adequate timely adjustment regulated sales transportation prices charge customers kentucky public service commission sets prices monitor need file rate requests kentucky public service commission general rate increase regulated services april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 rate case requested return common equity 121 october 2007 negotiated settlement kentucky attorney general regarding rate case settlement agreement provided 3920000 additional annual revenues stipulated settlement purposes 105 return common shareholders’ equity increase rates allocated primarily monthly customer charge therefore increase revenue occurred evenly throughout year dependent customer usage order kentucky public service commission received october 19 2007 approving terms settlement rates effective october 20 2007 critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies historically reflect effects ratemaking process accordance financial accounting standards board statement 71 entitled accounting effects certain types regulation regulated segment continues costofservice rate regulated believe application statement 71 segment continues appropriate must reaffirm conclusion balance sheet date result change circumstances determined regulated segment longer meets criteria regulatory accounting statement 71 segment discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application statement 71 results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued regulatory agencies status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded pension reported costs providing pension benefits described note 5a notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions future experience pension costs associated defined benefit pension plan example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized future average remaining service period active plan participants years ended june 30 2009 2008 2007 recorded pension costs defined benefit pension plan 608000 670000 567000 respectively pension plan assets principally comprised equity fixed income investments differences actual portfolio returns expected returns may result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease recorded pension costs selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return pension plan assets 7 2009 based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments target investment allocation equity investments includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate calculate expected return assets determination pension costs based market value assets measurement date using market value recognizes investment gains losses year occur based assumed longterm rate return 7 discount rate 625 various assumptions estimate pension costs associated defined benefit pension plan increase 608000 2009 1040000 2010 modifying expected longterm rate return pension plan assets 25 would change pension costs 2010 approximately 34000 increasing discount rate assumption 25 would decrease pension costs approximately 43000 decreasing discount rate assumption 25 would increase pension costs approximately 45000 effective may 9 2008 employees hired date eligible participate defined benefit pension plan freezing plan new entrants impact level benefits existing participants effective july 1 2008 adopted measurement date provision financial accounting standards board statement 158 entitled employers’ accounting defined benefit pension postretirement plans required us change measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 760000 amount 152000 attributable change measurement dates net tax effects 58000 charged directly retained earnings july 1 2008 provisions doubtful accounts encounter risks associated collection accounts receivable record monthly provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily utilize historical experience related accounts writtenoff quarterly minimum review reserve reasonableness based level revenue aging receivable balance underlying assumptions used allowance change period allowance could potentially cause material impact consolidated statements income working capital actual weather commodity prices internal external economic conditions mix customer base residential commercial industrial may vary significantly assumptions may impact operating income unbilled revenues gas costs monthend estimate gas service rendered date customer’s meter last read monthend estimate unbilled usage based projected base load usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accreted change present value depreciation initial capitalized costs depreciated useful lives related assets asset retirement obligations attributable assets regulated operations depreciation accretion deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement date assumed creditadjusted riskfree interest rate asset retirement obligations discussed note 3 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements management’s discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation activities · acquisition service franchises local governments · pension fund costs management · contractual obligations cash requirements · management gas supply risks due potential fluctuation price natural gas · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · regulatory legislative matters · dividends forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a risk factors lists factors could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins regulated nonregulated revenues transportation offsetting gas expenses therefore throughout following results operations refer “gross margin” respect regulated nonregulated segments gross margin refers operating revenues less purchased gas expense derived directly consolidated statements income operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap “gross margin” “nongaap financial measure” defined accordance sec rules view gross margin important performance measure core profitability operations measure key component internal financial reporting used management analyzing business segments believe investors benefit access financial measures management uses natural gas prices determined unregulated national market therefore price pay natural gas fluctuates national supply demand see item 7a item 7 managements discussion analysis financial condition results operations overview 2016 future outlook overview following discussion segments operate corporate strategy conduct business within segments significant events occurred 2016 company two segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marketing activities sales natural gas liquids earnings regulated segment primarily influenced sales transportation volumes rates charge customers expenses incur order us achieve strategy maintaining reasonable longterm earnings cash flow stock value must successfully manage factors regulated sales volumes temperature sensitive period reflect impact weather colder temperatures generally resulting increased sales volumes impact winter temperatures revenues partially reduced ability adjust winter rates residential small nonresidential customers based degree actual winter temperatures deviate historical average temperatures nonregulated segment markets natural gas largevolume customers endeavor enter sales agreements matching supply estimated demand providing acceptable gross margin nonregulated segment produces portion natural gas supply stored sold favorable market conditions arise nonregulated segment also sells liquids extracted natural gas consolidated income per common share 078 2016 decreased compared consolidated income 092 2015 due decreased revenue net natural gas costs sale natural gas natural gas liquids nonregulated segment discussed results operations nonregulated segment experienced decreased revenues net natural gas costs due decreased sales prices resulting decreased market prices natural gas natural gas liquids regulated segment exposed price risk market prices natural gas cost recovery tariff allows us pass cost natural gas regulated customers however regulated segment experienced decreased revenues net natural gas costs resulting decline volumes sold due weather 24 warmer prior year partially offset amounts recovered residential small nonresidential customers weather normalization tariff future outlook future profitability regulated segment contingent adequate timely adjustment rates charge regulated customers ability earn allowed return kentucky public service commission approves rates monitor need file general rate increase regulated services kentucky public service commission historically utilized costofservice rate making base rates established recover based normal operating expenses exclusive natural gas costs reasonable rate return rate base rate base consists primarily regulated segments property plant equipment natural gas storage unamortized debt expense offset accumulated depreciation certain deferred income taxes kentucky public service commission determines constitutes reasonable rates customers proceeding may disallow limit recovery certain costs ultimate discretion determining constitutes reasonable return may earn allowed return experience warmer normal temperatures infrequent nonrecurring expenses increased expenses amounts included test period capital debt equity differs rate base regulated segments largest expense natural gas supply permitted pass customers manage remaining expenses budgeting approval review future profitability nonregulated segment dependent business plans industrial largevolume customers market prices natural gas natural gas liquids control anticipate nonregulated segment continue contribute consolidated net income fiscal 2017 natural gas prices increase would expect experience corresponding increase nonregulated revenues net natural gas costs related natural gas marketing activities however natural gas prices decrease would expect decrease nonregulated revenues net natural gas costs related natural gas marketing activities process portion natural gas distribution transmission storage system extract liquids enhancing reliability efficiency system profitability sales natural gas liquids dependent amounts liquids extracted prices liquids determined national nonregulated market liquidity capital resources sources uses cash operating activities provide primary source cash provided operating activities consists net income adjusted noncash items including depreciation amortization deferred income taxes sharebased compensation changes working capital sales cash requirements seasonal largest portion sales occurs heating months december april whereas significant cash requirements purchase natural gas injection storage field capital expenditures occur nonheating months therefore cash provided operating activities sufficient meet capital requirements ability maintain liquidity depends bank line credit current bank line credit branch banking trust company extends june 30 2017 permits borrowings 40000000 borrowings outstanding bank line credit june 30 2016 june 30 2015 cash equivalents 18607000 june 30 2016 compared 16924000 june 30 2015 13676000 june 30 2014 changes cash equivalents summarized following table 2016 cash provided operating activities decreased 4008000 21 due 22074000 decrease cash received customers partially offset 16192000 decrease cash paid natural gas discussed results operations additionally cash paid income taxes decreased 1249000 result decreased earnings current year 2015 cash provided operating activities increased 1406000 8 compared 2014 due decreased cash paid income taxes result decreased earnings current year partially offset decreased cash received sale natural gas liquids changes cash used investing activities result primarily changes level capital expenditures years 2016 2015 significant changes cash used financing activities compared 2015 2014 respectively cash requirements capital expenditures result continued need cash capital expenditures made system extensions replacement improvement existing transmission distribution gathering production storage systems well general facilities expect capital expenditures fiscal 2017 approximately 85 million following provided summarize contractual cash obligations indicated periods june 30 2016 longterm debt notes payable customers deposits require interest payments interest payments projected based fiscal 2016 interest payments underlying obligation satisfied b see note 10 notes consolidated financial statements description debt c represents currently projected contributions defined benefit retirement plan 2030 recommended actuary june 30 2016 nonregulated segment forward purchase contracts natural gas minimum purchase obligations expire may 2017 remainder natural gas purchase contracts either requirementsbased contracts minimum purchase obligation extending time period exceeding one month e longterm liabilities include deferred income taxes 43405000 regulatory liabilities 1138000 asset retirement obligations 3918000 deferred compensation 1034000 based nature items expected settlement dates cannot estimated operating leases yeartoyear cancelable option see note 13 notes consolidated financial statements commitments contingencies sufficiency future cash flows ability maintain liquidity finance capital expenditures pay dividends contingent adequate timely adjustment regulated rates charge customers kentucky public service commission approves rates monitor need file rate increases regulated segment regulated base rates recently adjusted 2010 rate case became effective october 2010 expect cash provided operations combined bank line credit sufficient satisfy operating normal capital expenditure requirements pay dividends next twelve months series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december refinance series notes additional prepayments principal may subject prepayment penalty bank line credit agreement series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items following table shows required actual financial covenants series notes june 30 2016 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements critical accounting policies estimates preparation financial statements related disclosures compliance generally accepted accounting principles requires use assumptions estimates regarding future events including likelihood success particular investments initiatives estimates future prices rates legal regulatory challenges anticipated recovery costs therefore possibility exists materially different reported amounts different conditions assumptions consider accounting estimate critical accounting estimate requires us make assumptions matters reasonably uncertain time accounting estimate made ii changes estimate reasonably likely occur period critical accounting estimates read conjunction notes consolidated financial statements accounting policies consider significant however policies meet definition critical accounting estimates generally require us make estimates judgments particularly difficult subjective regulatory accounting policies reflect effects ratemaking process accordance regulatory accounting standards regulated segment continues costofservice rate regulated believe application regulatory accounting standards segment appropriate result change circumstances determined regulated segment longer meets criteria apply regulatory accounting regulated segment would discontinue regulatory accounting writeoff respective regulatory assets liabilities writeoff could material impact consolidated financial statements application regulatory accounting standards results recording regulatory assets liabilities regulatory assets represent deferral incurred costs probable future recovery customer rates cases record regulatory assets approval recovery received kentucky public service commission must use judgment conclude costs deferred regulatory assets probable future recovery base conclusion certain factors including changes regulatory environment recent rate orders issued kentucky public service commission status potential new legislation regulatory liabilities represent revenues received customers fund expected costs yet incurred represent probable future refunds customers use best judgment recording regulatory assets liabilities however regulatory commissions reach different conclusions recovery costs conclusions could material impact consolidated financial statements believe probable recover regulatory assets recorded defined benefit retirement plan noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 net periodic benefit costs “pension costs” defined benefit retirement plan described note 6 notes consolidated financial statements dependent upon numerous factors resulting actual plan experience assumptions concerning future experience costs example impacted employee demographics including age compensation levels employment periods level contributions make plan earnings plan assets additionally changes made provisions plan may impact current future pension costs pension costs may also significantly affected changes key actuarial assumptions including anticipated rates return plan assets discount rates used determining projected benefit obligation pension costs years ended june 30 2016 2015 2014 recorded pension costs defined benefit retirement plan 812000 493000 750000 respectively changes pension obligations associated factors may immediately recognized pension costs consolidated statements income may deferred amortized average remaining service period active plan participants june 30 2016 10972000 accumulated net losses deferred amortization pension costs future periods defined benefit retirement plans assets principally comprised equity fixed income investments differences actual portfolio returns expected returns result increased decreased pension costs future periods likewise changes assumptions regarding current discount rates expected rates return plan assets could also increase decrease pension costs future periods selecting discount rate assumption considered rates return highquality fixedincome investments expected available maturity dates pension benefits expected longterm rate return defined benefit retirement plans assets 55 2016 based targeted asset allocation assumption 2016 approximately 70 equity investments approximately 30 fixed income investments targeted investment allocation equity investments includes allocations domestic global real estate markets additional diversification also invest absolute return strategy mutual funds include equity fixed income securities asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective plan amended investment policy allow liability driven investments time match portion plans liability underlying assets regularly review asset allocation periodically rebalance investments targeted allocation appropriate funded status plan reflects investment gains losses year occur based market value assets measurement date based assumed longterm rate return 55 discount rate 350 various assumptions estimate pension costs associated defined benefit retirement plan increase 812000 2016 1312000 2017 modifying expected longterm rate return defined benefit retirement plan assets 25 would change pension costs 2017 approximately 74000 increasing discount rate assumption 25 would decrease pension costs approximately 128000 decreasing discount rate assumption 25 would increase pension costs approximately 135000 unbilled revenues natural gas costs monthend estimate volumes natural gas used date customers meter last read monthend estimate unbilled usage based projected base load nonweather sensitive usage day unbilled plus projected weathersensitive usage degree day unbilled period unbilled revenues natural gas costs calculated estimate unbilled usage multiplied rates effect monthend actual usage patterns may vary assumptions may impact operating income asset retirement obligations accrued asset retirement obligations natural gas well plugging abandonment costs additionally recorded asset retirement obligations required pursuant regulations related retirement service lines mains although timing retirements uncertain fair value retirement obligations recorded time obligations incurred recognize asset retirement obligations relating assets indeterminate useful lives upon initial recognition asset retirement obligation increase carrying amount longlived asset amount liability time liabilities accrete change present value initial capitalized costs depreciate useful lives related assets asset retirement obligations attributable assets regulated segment accretion depreciation deferred regulatory asset must use judgment identify appropriate asset retirement obligations underlying assumptions used value retirement obligations related capitalized costs change period assumptions include estimated future retirement costs estimated retirement dates assumed creditadjusted riskfree interest rates asset retirement obligations discussed note 4 notes consolidated financial statements new accounting pronouncements significant management judgment generally required process adopting new accounting pronouncements see note 2 notes consolidated financial statements discussion pronouncements forwardlooking statements managements discussion analysis financial condition results operations sections report contain forwardlooking statements relate future events future performance attempted identify statements using words “estimates” “attempts” “expects” “monitors” “plans” “anticipates” “intends” “continues” “could” “strives” ”seeks” “will rely” “believes” similar expressions forwardlooking statements include limited statements · operational plans · cost availability natural gas supplies · capital expenditures · sources availability funding operations expansion · anticipated growth opportunities system expansion acquisition · competitive conditions face · production storage gathering transportation marketing natural gas liquids activities · acquisition service franchises local governments · retirement plan costs management · contractual obligations cash requirements · management natural gas system risks due potential fluctuation price natural gas natural gas liquids · revenues income margins profitability · efforts purchase transport locally produced natural gas · recovery regulatory assets · litigation contingencies · regulatory legislative matters · dividends statements “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements guarantees future performance based upon currently available competitive financial economic data along operating plans item 1a lists factors among others could cause future results differ materially expressed implied forwardlooking statements historical results operations gross margins operating revenues derived primarily sale delivery natural gas sale natural gas liquids provision natural gas transportation services operating revenues significantly impacted prices pay natural gas therefore view gross margins important performance measure core profitability operations believe investors benefit access financial measures management uses define “gross margins” natural gas sales less corresponding purchased natural gas expenses plus transportation natural gas liquids revenues gross margin derived directly consolidated statements income included item 8 follows operating income presented consolidated statements income directly comparable financial measure calculated presented accordance accounting principles generally accepted united states gaap gross margin “nongaap financial measure” defined accordance sec rules natural gas prices determined nonregulated national market therefore prices pay natural gas fluctuate national supply demand see item 7a item 7a quantitative qualitative disclosures market risk purchase natural gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward natural gas purchase contracts however fixed prior delivery gas additionally inject natural gas purchases gas storage facilities nonheating months withdraw natural gas storage delivery customers heating months regulated segment minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated companies none gas contracts accounted using fair value method accounting gas purchase gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2012 forward purchase contracts totaling 391000 various terms last contract expiring december 2012 forward purchase contracts fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2012 june 30 2011 weighted average interest rate bank line credit 14 18 june 30 2012 june 30 2011 respectively based average borrowings bank line credit 2012 1 one hundred basis points increase average interest rate would resulted 21000 decrease annual pretax net income item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts normal purchases normal sales statement financial accounting standards 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate notes payable interest rate current shortterm line credit branch banking trust company benchmarked monthly london interbank offered rate balance shortterm line credit 7046000 5959000 june 30 2006 2005 respectively weighted average interest rate shortterm line credit 613 414 june 30 2006 2005 respectively based amount outstanding shortterm line credit june 30 2006 2005 one percent one hundred basis point increase average interest rate would result decrease annual pretax net income 70000 60000 respectively item 8 item 7a quantitative qualitative disclosures market risk purchase natural gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward natural gas purchase contracts however fixed prior delivery gas additionally inject natural gas purchases gas storage facility nonheating months withdraw natural gas storage delivery customers heating months regulated segment minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated companies none gas contracts accounted using fair value method accounting gas purchase gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2013 forward purchase contracts totaling 328000 various terms last contract expiring december 2013 forward purchase contracts fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2013 june 30 2012 weighted average interest rate bank line credit 13 14 june 30 2013 june 30 2012 respectively borrowings bank line credit 2013 item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed months prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism part unregulated transportation activities periodically contract transportation customers acquire gas transport customers time make sales commitment one customers attempt cover position immediately gas purchase commitments match terms related sales contract order minimize price volatility risk none gas contracts accounted using fair value method accounting gas purchase contracts meet definition derivative designated contracts normal purchases statement financial accounting standards 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate notes payable interest rate current shortterm line credit branch banking trust company benchmarked monthly london interbank offered rate balance shortterm line credit 1031099 june 30 2003 19355000 june 30 2002 based amount outstanding shortterm line credit june 30 2003 one percent one hundred basis point increase average interest rate would result decrease annual pretax net income 10000 item 8 item 7a quantitative qualitative disclosures market risk purchase natural gas supply primarily forward natural gas contracts price pay natural gas supply acquired purchase contracts fixed prior delivery natural gas additionally inject natural gas purchases underground natural gas storage facility nonheating months withdraw natural gas storage delivery customers heating months regulated segment minimal price risk resulting forward purchase storage natural gas permitted pass natural gas costs regulated customers natural gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated segment pricing natural gas liquids sold nonregulated segment determined national unregulated market none natural gas contracts accounted using fair value method accounting natural gas purchase natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2014 forward purchase contract totaling 140000 expires december 2014 forward purchase contract fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2014 june 30 2013 weighted average interest rate bank line credit 13 june 30 2014 june 30 2013 respectively 2014 borrowed repaid 691000 bank line credit weighted average interest rate 14 one percent one hundred basis point increase average interest rate would significant impact annual pretax net income borrowings bank line credit 2013 item 8 item 7a quantitative qualitative disclosures market risk discussed gas operations supply item 1 company party longterm fixedprice gas purchase transportation contracts therefore prices company pays contracts differs current market prices however company minimal price risk resulting contracts costs passed customers either deltas gas cost recovery mechanism specific contracts customers company currently party hedge instruments agreements represent financial derivatives item 8 item 7a quantitative qualitative disclosures market risk discussed gas operations supply item 1 company party longterm fixedprice gas purchase transportation contracts therefore prices company pays contracts may differ current market prices however company minimal price risk resulting contracts costs passed customers either deltas gas cost recovery mechanism specific contracts customers consider costs supply customers contracts qualify normal purchases sales sfas 133 company currently party hedge instruments agreements represent derivatives require marktomarket accounting deltas exposure changes interest rates limited interest companys notes payable interest rate benchmarked london interbank offered rate libor item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase contracts meet definition derivative designated contracts normal purchases statement financial accounting standards 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate notes payable interest rate current shortterm line credit branch banking trust company benchmarked monthly london interbank offered rate balance shortterm line credit 4738000 1031000 june 30 2004 2003 respectively based amount outstanding shortterm line credit june 30 2004 2003 one percent one hundred basis point increase average interest rate would result decrease annual pretax net income 47000 10000 respectively item 8 item 7a quantitative qualitative disclosures market risk purchase natural gas supply primarily combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts price pay natural gas acquired forward purchase contracts fixed prior delivery natural gas additionally inject natural gas purchases underground natural gas storage facility nonheating months withdraw natural gas storage delivery customers heating months regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated segment pricing natural gas liquids sold nonregulated segment determined national nonregulated market none natural gas contracts accounted using fair value method accounting natural gas purchase natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2017 forward purchase contracts june 2019 totaling 549000 fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2017 june 30 2016 june 30 2017 june 30 2016 weighted average interest rate bank line credit 23 15 respectively 2017 2016 borrowings bank line credit one percent one hundred basis point increase average interest rate would impacted annual pretax net income item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts normal purchases normal sales statement financial accounting standards 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate notes payable interest rate current shortterm line credit branch banking trust company benchmarked monthly london interbank offered rate balance shortterm line credit 5959000 4738000 june 30 2005 2004 respectively weighted average interest rate shortterm line credit 421 314 june 30 2005 2004 respectively based amount outstanding shortterm line credit june 30 2005 2004 one percent one hundred basis point increase average interest rate would result decrease annual pretax net income 60000 47000 respectively item 8 item 7a quantitative qualitative disclosures market risk discussed gas operations supply item 1 company party longterm fixedprice gas purchase transportation contracts therefore prices company pays contracts may differ current market prices however company minimal price risk resulting contracts costs passed customers either deltas gas cost recovery mechanism specific contracts customers company currently party hedge instruments agreements represent derivatives item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts “normal purchases” “normal sales” financial accounting standards board statement 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate bank line credit interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate balance bank line credit 6829000 4190000 june 30 2008 2007 respectively weighted average interest rate bank line credit 32 63 june 30 2008 2007 respectively based amount outstanding bank line credit june 30 2008 2007 1 one hundred basis points increase average interest rate would result decrease annual pretax net income 68000 42000 respectively item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases storage facility nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase gas sales contracts meet definition derivative designated contracts normal purchases normal sales balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2011 june 30 2010 weighted average interest rate bank line credit 18 19 june 30 2011 june 30 2010 respectively based average borrowings bank line credit 2011 1 one hundred basis points increase average interest rate would result 35000 decrease annual pretax net income item 8 item 7a quantitative qualitative disclosures market risk discussed gas operations supply item 1 company party longterm fixedprice gas purchase transportation contracts therefore prices company pays contracts differs current market prices however company minimal price risk resulting contracts costs passed customers either deltas gas cost recovery mechanism specific contracts customers company currently party hedge instruments agreements represent financial derivatives item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase gas sales contracts meet definition derivative designated contracts normal purchases normal sales balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2010 compared 3653000 june 30 2009 weighted average interest rate bank line credit 19 18 june 30 2010 june 30 2009 respectively based amount outstanding bank line credit june 30 2009 1 one hundred basis points increase average interest rate would result decrease annual pretax net income 37000 item 8 item 7a quantitative qualitative disclosures market risk purchase natural gas supply primarily combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts price pay natural gas acquired forward purchase contracts fixed prior delivery natural gas additionally inject natural gas purchases underground natural gas storage facility nonheating months withdraw natural gas storage delivery customers heating months regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated segment pricing natural gas liquids sold nonregulated segment determined national unregulated market none natural gas contracts accounted using fair value method accounting natural gas purchase natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2015 forward purchase contracts totaling 590000 expire december 2016 fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2015 june 30 2014 june 30 2015 june 30 2014 weighted average interest rate bank line credit 14 13 respectively 2015 2014 borrowed repaid 126000 691000 respectively bank line credit weighted average interest rate 13 14 respectively one percent one hundred basis point increase average interest rate would significant impact annual pretax net income item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts normal purchases normal sales statement financial accounting standards 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate bank line credit interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate balance bank line credit 4190000 7046000 june 30 2007 2006 respectively weighted average interest rate bank line credit 632 613 june 30 2007 2006 respectively based amount outstanding bank line credit june 30 2007 2006 one percent one hundred basis points increase average interest rate would result decrease annual pretax net income 42000 70000 respectively item 8 item 7a quantitative qualitative disclosures market risk delta serves regulated customers using combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price forward purchase fixed months prior delivery gas deltas gas purchases injected gas storage facilities nonheating months withdrawn storage delivery customers heating season company minimal price risk resulting gas purchase storage arrangements gas costs passed deltas regulated customers gas cost recovery rate mechanism deltas nonregulated subsidiaries actively pursue gas sales opportunities customers within outside companys service area time company makes sales commitment one customers company attempts cover position immediately gas purchase commitments matched terms related sales contract nonregulated subsidiaries attempt minimize exposure price volatility predetermining gross profit sales time sales commitment none companys gas contracts accounted using fair value method accounting companys gas purchase contracts meet definition derivative company designated contracts normal purchases sfas 133 accounting derivatives delta exposed risk resulting changes interest rates variable rate notes payable interest rate notes payable benchmarked monthly london interbank offered rate deltas outstanding notes payable amounted 19355000 16800000 june 30 2002 2001 respectively based amount outstanding notes payable june 30 2002 one percent increase decrease average interest rates would result decrease increase annual pretax net income 194000 see 6 notes consolidated financial statements item 8 item 7a quantitative qualitative disclosures market risk purchase gas supply combination spot market gas purchases forward gas purchases price spot market gas based market price time delivery price pay natural gas supply acquired forward gas purchase contracts however fixed prior delivery gas additionally inject gas purchases gas storage facilities nonheating months withdraw gas storage delivery customers heating season regulated business minimal price risk resulting forward gas purchase storage arrangements permitted pass gas costs regulated customers gas cost recovery rate mechanism approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies none gas contracts accounted using fair value method accounting gas purchase gas sales contracts meet definition derivative designated contracts “normal purchases” “normal sales” financial accounting standards board statement 133 entitled accounting derivative instruments hedging activities exposed risk resulting changes interest rates variable rate bank line credit interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate balance bank line credit 3653000 6829000 june 30 2009 2008 respectively weighted average interest rate bank line credit 18 32 june 30 2009 2008 respectively based amount outstanding bank line credit june 30 2009 2008 1 one hundred basis points increase average interest rate would result decrease annual pretax net income 37000 68000 respectively effective june 30 2009 bank line credit extended june 30 2011 extension increased interest rate used bank line credit london interbank offered rate plus 75 london interbank offered rate plus 15 item 8 item 7a quantitative qualitative disclosures market risk purchase natural gas supply primarily combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts price pay natural gas acquired forward purchase contracts fixed prior delivery natural gas additionally inject natural gas purchases underground natural gas storage facility nonheating months withdraw natural gas storage delivery customers heating months regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price natural gas uncommitted natural gas inventory nonregulated segment pricing natural gas liquids sold nonregulated segment determined national nonregulated market none natural gas contracts accounted using fair value method accounting natural gas purchase natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales june 30 2016 forward purchase contracts may 2017 totaling 612000 fixed price impacted changes market price natural gas balance outstanding variable rate bank line credit exposed risk resulting changes interest rates interest rate bank line credit branch banking trust company benchmarked monthly london interbank offered rate borrowings outstanding bank line credit june 30 2016 june 30 2015 june 30 2016 june 30 2015 weighted average interest rate bank line credit 15 14 respectively 2016 borrowings bank line credit 2015 borrowed repaid 126000 bank line credit weighted average interest rate 13 one percent one hundred basis point increase average interest rate would significant impact annual pretax net income item 8 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm consolidated statements income years ended june 30 2012 2011 2010 consolidated statements cash flows years ended june 30 2012 2011 2010 consolidated balance sheets june 30 2012 2011 consolidated statements changes shareholders equity years ended june 30 2012 2011 2010 notes consolidated financial statements schedule ii valuation qualifying accounts years ended june 30 2012 2011 2010 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 28 report independent registered public accounting firm 29 consolidated statements income years ended june 30 2006 2005 2004 30 consolidated statements cash flows years ended june 30 2006 2005 2004 31 consolidated balance sheets june 30 2006 2005 33 consolidated statements changes shareholders equity years ended june 30 2006 2005 2004 35 consolidated statements capitalization june 30 2006 2005 37 notes consolidated financial statements 38 schedule ii valuation qualifying accounts years ended june 30 2006 2005 2004 51 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 24 independent auditors report 25 report previous independent public accountants 26 consolidated statements income years ended june 30 2003 2002 2001 27 consolidated statements cash flows years ended june 30 2003 2002 2001 28 consolidated balance sheets june 30 2003 2002 30 consolidated statements changes shareholders equity years ended june 30 2003 2002 2001 32 consolidated statements capitalization june 30 2003 2002 34 notes consolidated financial statements 35 schedule ii valuation qualifying accounts years ended june 30 2003 2002 2001 45 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 22 report independent public accountants 23 consolidated statements income years ended june 30 1997 1996 1995 24 consolidated statements cash flows years ended june 30 1997 1996 1995 25 consolidated balance sheets june 30 1997 1996 27 consolidated statements changes shareholders equity years ended june 30 1997 1996 1995 29 consolidated statements capitalization june 30 1997 1996 30 notes consolidated financial statements 31 schedule ii valuation qualifying accounts years ended june 30 1997 1996 1995 39 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 24 report independent public accountants 25 consolidated statements income years ended june 30 1998 1997 1996 26 consolidated statements cash flows years ended june 30 1998 1997 1996 27 consolidated balance sheets june 30 1998 1997 29 consolidated statements changes shareholders equity years ended june 30 1998 1997 1996 31 consolidated statements capitalization june 30 1998 1997 32 notes consolidated financial statements 33 schedule ii valuation qualifying accounts years ended june 30 1998 1997 1996 41 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 22 report independent public accountants 23 consolidated statements income years ended june 30 2001 2000 1999 24 consolidated statements cash flows years ended june 30 2001 2000 1999 25 consolidated balance sheets june 30 2001 2000 27 consolidated statements changes shareholders equity years ended june 30 2001 2000 1999 29 consolidated statements capitalization june 30 2001 2000 30 notes consolidated financial statements 31 schedule ii valuation qualifying accounts years ended june 30 2001 2000 1999 40 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 27 report independent registered public accounting firm 28 consolidated statements income years ended june 30 2004 2003 2002 29 consolidated statements cash flows years ended june 30 2004 2003 2002 30 consolidated balance sheets june 30 2004 2003 32 consolidated statements changes shareholders equity years ended june 30 2004 2003 2002 34 consolidated statements capitalization june 30 2004 2003 36 notes consolidated financial statements 37 schedule ii valuation qualifying accounts years ended june 30 2004 2003 2002 49 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 22 report independent public accountants 23 consolidated statements income years ended june 30 1995 1994 1993 24 consolidated statements cash flows years ended june 30 1995 1994 1993 25 consolidated balance sheets june 30 1995 1994 27 consolidated statements changes shareholders equity years ended june 30 1995 1994 1993 29 consolidated statements capitalization june 30 1995 1994 30 notes consolidated financial statements 31 schedule ii valuation qualifying accounts years ended june 30 1995 1994 1993 40 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 26 report independent registered public accounting firm 27 consolidated statements income years ended june 30 2005 2004 2003 28 consolidated statements cash flows years ended june 30 2005 2004 2003 29 consolidated balance sheets june 30 2005 2004 31 consolidated statements changes shareholders equity years ended june 30 2005 2004 2003 33 consolidated statements capitalization june 30 2005 2004 35 notes consolidated financial statements 36 schedule ii valuation qualifying accounts years ended june 30 2005 2004 2003 47 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 23 report independent public accountants 24 consolidated statements income years ended june 30 2000 1999 1998 25 consolidated statements cash flows years ended june 30 2000 1999 1998 26 consolidated balance sheets june 30 2000 1999 28 consolidated statements changes shareholders equity years ended june 30 2000 1999 1998 30 consolidated statements capitalization june 30 2000 1999 31 notes consolidated financial statements 32 schedule ii valuation qualifying accounts years ended june 30 2000 1999 1998 42 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm consolidated statements income years ended june 30 2008 2007 2006 consolidated statements cash flows years ended june 30 2008 2007 2006 consolidated balance sheets june 30 2008 2007 consolidated statements changes shareholders’ equity years ended june 30 2008 2007 2006 notes consolidated financial statements schedule ii valuation qualifying accounts years ended june 30 2008 2007 2006 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm consolidated statements income years ended june 30 2011 2010 2009 consolidated statements cash flows years ended june 30 2011 2010 2009 consolidated balance sheets june 30 2011 2010 consolidated statements changes shareholders’ equity years ended june 30 2011 2010 2009 notes consolidated financial statements schedule ii valuation qualifying accounts years ended june 30 2011 2010 2009 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 21 report independent public accountants 22 consolidated statements income years ended june 30 1996 1995 1994 23 consolidated statements cash flows years ended june 30 1996 1995 1994 24 consolidated balance sheets june 30 1996 1995 26 consolidated statements changes shareholders equity years ended june 30 1996 1995 1994 28 consolidated statements capitalization june 30 1996 1995 29 notes consolidated financial statements 30 schedule ii valuation qualifying accounts years ended june 30 1996 1995 1994 38 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 25 report independent public accountants 26 consolidated statements income years ended june 30 1999 1998 1997 27 consolidated statements cash flows years ended june 30 1999 1998 1997 28 consolidated balance sheets june 30 1999 1998 29 consolidated statements changes shareholders equity th years ended june 30 1999 1998 1997 32 consolidated statements capitalization june 30 1999 1998 33 notes consolidated financial statements 34 schedule ii valuation qualifying accounts years ended june 30 1999 1998 1997 42 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm consolidated statements income years ended june 30 2010 2009 2008 consolidated statements cash flows years ended june 30 2010 2009 2008 consolidated balance sheets june 30 2010 2009 consolidated statements changes shareholders’ equity years ended june 30 2010 2009 2008 notes consolidated financial statements schedule ii valuation qualifying accounts years ended june 30 2010 2009 2008 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm 30 consolidated statements income years ended june 30 2007 2006 2005 31 consolidated statements cash flows years ended june 30 2007 2006 2005 32 consolidated balance sheets june 30 2007 2006 34 consolidated statements changes shareholders equity years ended june 30 2007 2006 2005 36 consolidated statements capitalization june 30 2007 2006 37 notes consolidated financial statements 38 schedule ii valuation qualifying accounts years ended june 30 2007 2006 2005 52 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedules page managements statement responsibility financial reporting accounting 24 report independent public accountants 25 consolidated statements income years ended june 30 1994 1993 1992 26 consolidated statements cash flows years ended june 30 1994 1993 1992 27 consolidated balance sheets june 30 1994 1993 29 consolidated statements changes shareholders equity years ended june 30 1994 1993 1992 31 consolidated statements capitalization june 30 1994 1993 32 notes consolidated financial statements 33 schedule ii amounts receivable related parties underwriters promoters employees related parties years ended june 30 1994 1993 1992 41 schedule v property plant equipment years ended june 30 1994 1993 1992 42 schedule vi accumulated depreciation depletion amortization property plant equipment years ended june 30 1994 1993 1992 45 schedule viii valuation qualifying accounts years ended june 30 1994 1993 1992 48 schedule ix shortterm borrowings years ended june 30 1994 1993 1992 49 schedule x supplementary income statement information years ended june 30 1994 1993 1992 50 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page managements statement responsibility financial reporting accounting 24 report independent public accountants 25 consolidated statements income years ended june 30 2002 2001 2000 27 consolidated statements cash flows years ended june 30 2002 2001 2000 28 consolidated balance sheets june 30 2002 2001 30 consolidated statements changes shareholders equity years ended june 30 2002 2001 2000 32 consolidated statements capitalization june 30 2002 2001 33 notes consolidated financial statements 34 schedule ii valuation qualifying accounts years ended june 30 2002 2001 2000 46 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data index consolidated financial statements schedule page report independent registered public accounting firm consolidated statements income years ended june 30 2009 2008 2007 consolidated statements cash flows years ended june 30 2009 2008 2007 consolidated balance sheets june 30 2009 2008 consolidated statements changes shareholders’ equity years ended june 30 2009 2008 2007 notes consolidated financial statements schedule ii valuation qualifying accounts years ended june 30 2009 2008 2007 schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 8 financial statements supplementary data schedules listed omitted required applicable required information shown financial statements notes thereto item 9 item 15 exhibits financial statement schedules 31 registrants amended restated articles incorporation dated november 16 2006 incorporated herein reference exhibit 3i registrants form 10ka file 00008788 period ended june 30 2007 32 registrants amended restated bylaws dated september 24 2010 incorporated herein reference exhibit 31 registrants form 8k file 0008788 dated september 27 2010 note purchase private shelf agreement dated december 8 2011 respect 426 senior notes series due december 20 2031 incorporated herein reference exhibit 1001 registrants form 8k file 00008788 dated december 13 2011 1001 gas sales agreement dated may 1 2000 atmos energy marketing llc registrant incorporated herein reference exhibit 10c registrants form s2a reg 333100852 dated december 13 2002 1002 base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 1003 gas sales agreement dated may 1 2003 atmos energy marketing llc registrant incorporated herein reference exhibit 10d registrants form 10k file 00008788 period ended june 30 2003 1004 gas sales agreement dated may 1 2010 atmos energy marketing llc registrant filed herein 1005 gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2a reg 333100852 dated december 13 2002 1006 agreement transport natural gas nami resources company llc registrant dated march 10 2005 incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated march 23 2005 1007 amendment dated july 22 2010 agreement transport natural gas nami resources company llc registrant incorporated herein reference exhibit 10f registrants form 10k file 00008788 period ended june 30 2010 1008 gts service agreements dated november 1 1993 service agreement nos 37813 37814 37815 appendix respective service agreements effective november 1 2010 columbia gas transmission corporation registrant incorporated herein reference exhibit 10g registrants form 10k file 00008788 period ended june 30 2010 1009 fts1 service agreements dated october 4 1994 service agreement nos 43827 43828 43829 appendix respective service agreements effective november 1 2010 columbia gulf transmission corporation registrant incorporated herein reference exhibit 10h registrants form 10k file 00008788 period ended june 30 2010 1010 underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 1011 oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 1012 gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 1013 gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 dated april 4 2003 1014 deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 1015 loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2a reg 333100852 dated december 13 2002 1016 promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 1017 modification agreement extending october 31 2004 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2003 1018 modification agreement extending october 31 2005 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2004 1019 modification agreement extending october 31 2007 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated august 19 2005 1020 modification agreement extending october 31 2009 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2007 1021 modification agreement extending june 30 2011 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated june 30 2009 1022 modification agreement extending june 30 2013 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated june 30 2011 1023 employment agreement dated march 1 2000 glenn r jennings registrants chairman board president chief executive officer registrant incorporated herein reference exhibit k registrants form 10q file 00008788 dated march 31 2000 1024 officer agreements dated march 1 2000 two officers john b brown johnny l caudill registrant incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 1025 officer agreement dated november 20 2008 brian ramsey registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated november 21 2008 1026 officer agreement dated november 19 2010 matthew wesolosky registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated november 24 2010 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day august 2012 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board president august 28 2012 glenn r jennings chief executive officer ii principal financial officer sjohn b brown chief financial officer august 28 2012 john b brown treasurer secretary iii principal accounting officer matthew wesolosky vice president controller august 28 2012 matthew wesolosky iv majority board directors sglenn r jennings chairman board president august 28 2012 glenn r jennings chief executive officer slanny greer director august 28 2012 lanny greer sedward j holmes director august 28 2012 edward j holmes smichael j kistner director august 28 2012 michael j kistner slewis n melton director august 28 2012 lewis n melton sarthur e walker jr director august 28 2012 arthur e walker jr smichael r whitley director august 28 2012 michael r whitley report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2012 2011 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2012 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2012 2011 results operations cash flows three years period ended june 30 2012 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 28 2012 expressed unqualified opinion companys internal control financial reporting deloitte touche llp indianapolis indiana august 28 2012 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market transport natural gas behalf local producers customers distribution system also sell liquids extracted natural gas storage field distribution system three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources inc customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates c cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets 000 regulated segment distribution transmission storage 192107 182041 general miscellaneous intangibles 21963 21847 construction work progress 5142 total regulated segment 214794 209030 nonregulated segment 2379 total property plant equipment 217173 211409 pipe replacement program approved kentucky public service commission allows us adjust rates annually earn return capital expenditures replacement pipe related facilities incurred subsequent test year recent rate case pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities e depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 29 26 21 average depreciable plant 2012 2011 2010 respectively effective october 2010 implemented new depreciation rates approved kentucky public service commission 2010 rate case decreased remaining depreciable lives depreciable assets approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheet depreciable utility plant equipment retired related removal costs incurred charged regulatory liability f maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred g gas cost recovery regulated gas rates include gas cost recovery clause approved kentucky public service commission provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment expense gas costs based amount gas costs recovered revenue differences actual gas costs gas costs billed deferred reflected computation future billings customers using gas cost recovery mechanism effective january 2011 uncollectible gas cost portion bad debt expense included component gas cost recovery clause h revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customers meter last read monthend unbilled revenues gas costs include following 000 unbilled revenues 1358 1437 unbilled gas costs unbilled volumes mcf unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income j revenues accounts receivable revenues accounts receivable arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue k rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows 000 regulatory assets current assets deferred gas costs 3386 3379 assets conservationefficiency program expenses loss extinguishment debt 3636 1967 asset retirement obligations 3001 2391 accrued pension 9537 4069 regulatory case expenses total assets 16518 8823 total regulatory assets 19904 12202 regulatory liabilities longterm liabilities accrued cost removal longlived assets regulatory liability deferred income taxes 1043 1162 total regulatory liabilities 1381 1508 regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 19 years l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2012 2011 2010 derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards p gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks gas escaping field periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records gas storage inventory recorded average cost 2 new accounting pronouncements may 2011 financial accounting standards board issued guidance fair value measurement disclosure guidance issued part joint effort financial accounting standards board international accounting standards board converge two sets standards single conceptual framework would change fair value measurement guidance applied future periods guidance adopted march 31 2012 material impact results operations financial position cash flows 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded mutual funds mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fair value trust assets follows 000 trust assets money market us equity securities us fixed income securities carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes debentures insured quarterly notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost debentures insured quarterly notes refinanced redeemed 2012 fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date credit adjusted riskfree rate 7 debentures 575 insured quarterly notes based trades 7 debentures measurement date fair value longterm debt categorized level 2 fair value hierarchy insured quarterly notes contained insurance provided continuing payment principal interest holders event defaulted insured quarterly notes upon default insurer would paid interest principal holders maturity insured quarterly notes obligation would transferred insurer therefore insurance considered determination fair value insured quarterly notes 4 asset retirement obligations legal obligations june 30 2012 2011 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services fiscal year ended 2012 recognized asset retirement obligations mains services placed service amount 16000 2012 asset retirement obligations increased reflect revisions estimated cost retire certain services 2011 asset retirement obligations increased reflect revisions estimated cost retire certain mains wells asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown asset retirement obligations accompanying consolidated balance sheets 000 asset retirement obligations balance beginning period 2561 2201 liabilities incurred liabilities settled 552 434 accretion revisions estimated cash flows 1592 balance end period 3824 2561 additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted regulator even though costs represent legal obligations accordance regulatory accounting standards 338000 346000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2012 2011 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 000 deferred tax liabilities current deferred gas cost 1170 1282 prepaid expenses 319 346 1489 1628 noncurrent accelerated depreciation 34955 32827 1077 506 pension 1035 regulatory assets asset retirement obligations 640 589 regulatory assets loss extinguishment debt 1380 747 regulatory assets unrecognized accrued pension 3620 1545 regulatory liabilities 1268 1269 42940 38518 total deferred tax liabilities 44429 40146 deferred tax assets current accrued employee benefits bad debt reserve state net operating loss carryforward noncurrent accrued employee benefits alternative minimum tax credits asset retirement obligations 1389 investment tax credits pension regulatory liabilities 1650 1689 section 263 capitalized costs 5208 3404 total deferred tax assets 5566 3940 net accumulated deferred income tax liability 38863 36206 components income tax provision comprised following years ended june 30 000 components income tax expense current federal 1709 state 115 total 1232 1824 deferred 2513 2528 5016 income tax expense 3258 3760 3192 reconciliation statutory federal income tax rate effective income tax rate shown table statutory federal income tax rate 340 state income taxes net federal benefit 40 amortization investment tax credits 03 differences net 17 06 16 effective income tax rate 360 371 361 recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented asset retirement obligations consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 38000 80000 june 30 2012 2011 respectively june 30 2012 accrued interest 10000 unrecognized tax positions 3000 26000 recognized 2012 2011 consolidated statements income respectively recognized interest income 49000 unrecognized tax positions 2012 following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2010 june 30 2008 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions equal amounts necessary fund plan adequately generally accepted accounting principles gaap require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2012 june 30 2011 respectively follows 000 change benefit obligation benefit obligation beginning year 17915 16506 service cost interest cost actuarial loss 3994 benefits paid 473 448 benefit obligation end year 23278 17915 change plan assets fair value plan assets beginning year 21056 15288 actual return plan assets 112 4216 employer contributions 2000 benefits paid 473 448 fair value plan assets end year 20971 21056 recognized amounts projected benefit obligation 23278 17915 plan assets fair value 20971 21056 funded status 2307 3141 net amount recognized prepaid accrued benefit costs consolidated balance sheets 2307 3141 items yet recognized component net periodic benefit costs prior service cost 489 576 net loss 10026 4645 amounts recognized regulatory assets 9537 4069 accumulated benefit obligation 20125000 15721000 2012 2011 respectively 000 components net periodic benefit cost service cost interest cost expected return plan assets 1474 1079 953 amortization unrecognized net loss amortization prior service cost 87 86 net periodic benefit cost 1129 1040 weightedaverage assumptions used determine benefit obligations discount rate 40 525 rate compensation increase 40 weightedaverage assumptions used determine net periodic benefit cost discount rate 525 625 expected longterm return plan assets 70 rate compensation increase 40 plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 70 equity investments 30 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations real estate equity securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities regularly review asset allocation periodically rebalance investments targeted allocation appropriate assets plan comprised investments mutual funds common collective trusts individual mutual fund common collective trust selected based investment strategy approximates specific asset class within target allocation mutual fund common collective trust categorized based primary investment strategy mutual funds categorized level 1 fair value hierarchy fair value mutual funds determined based quoted market price fund commoncollective trusts categorized level 2 fair value hierarchy fair value commoncollective trusts determined based net asset value published respective fund manager multiplied number units held trust investments commoncollective trusts restrictions ability sell investments respective level within fair value hierarchy determined described note 1 notes consolidated financial statements following represents fair value plan assets 000 level 1 level 2 level 3 asset class cash exchange traded mutual funds us equity securities fixed income securities 1115 foreign equity securities 1062 domestic real estate securities 2737 5610 common collective trusts shortterm income fund us fixed income fund 2202 global equity growth fund 2472 global equity value fund 1136 us equity index fund 2098 foreign equity index fund 1694 blended fund b 5580 15330 total 20971 5641 15330 000 level 1 level 2 level 3 asset class cash exchange traded mutual funds us equity securities fixed income securities 1098 foreign equity securities 1263 domestic real estate securities 2442 5520 common collective trusts shortterm income fund us fixed income fund 2179 global equity growth fund 2559 global equity value fund 1150 us equity index fund 2000 foreign equity index fund 2039 blended fund b 5520 15515 total 21056 5541 15515 mutual fund common collective trust categorized based primary investment strategy b blended fund combination us equity securities 65 us fixed income securities 35 determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations made 500000 discretionary contributions defined benefit plan fiscal 2012 made additional 2300000 discretionary contribution defined benefit plan august 2012 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2012 2011 2010 deltas savings plan expense 325000 301000 293000 respectively c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2012 2011 irrevocable trust assets 590000 511000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 38929 44632 33620 shares 2012 2011 2010 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2012 71000 shares available issuance number shares registered available issuance june 30 2012 reflect stock split distributed may 1 2012 intend simultaneous filing report form 10k year ended june 30 2012 amend registration statement reinvestment plan include additional shares reflective stock split upon amending registration statement would 150000 shares registered available issuance reinvestment plan 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase gas supply combination spot market natural gas purchases forward natural gas purchases mitigate price risk efforts balance supply demand none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2012 june 30 2011 maximum amount borrowed 2012 2011 6491000 7709000 respectively bank line credit extends june 30 2013 interest rate used line credit london interbank offered rate plus 115 annual cost unused bank line credit 125 default bank line credit period presented consolidated financial statements 10 longterm debt december 2011 refinanced redeemed 575 insured quarterly notes 38450000 7 debentures 19410000 proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount unamortized debt expense 1896000 related 575 insured quarterly notes 7 debentures reclassified unamortized debt expense regulatory assets accompanying consolidated balance sheet 1896000 regulatory asset representing loss extinguishment 575 insured quarterly notes 7 debentures combined 1872000 unamortized loss extinguishment debt recognized prior refinancings amortized life 426 series notes consistent treatment approved kentucky public service commission series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 beginning december 2012 required make annual 1500000 principal payment series notes following table summarizes contractual maturities series notes fiscal year 000 1500 thereafter 52000 total longterm debt 58000 additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes april 2006 issued 40000000 575 insured quarterly notes scheduled mature april 2021 redeemed december 2012 redemption 25000 annually made behalf individual deceased holders aggregate 800000 annually deceased beneficial owners event default insured quarterly notes holders insured principal interest payments insurer would continued pay interest principal maturity insured quarterly notes february 2003 issued 20000000 700 debentures scheduled mature february 2023 redeemed december 2012 redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners amortize debt issuance expenses life related debt using effective interest method june 30 2012 2011 unamortized balance 3740000 3961000 respectively loss extinguishment debt 3636000 1967000 included deferred regulatory asset amortized term related debt consistent regulatory accounting discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligation immediately due payable agreed following financial covenants · company must times maintain tangible net worth least 25800000 · company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt · company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense · company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items june 30 2012 compliance financial covenants following table shows required actual financial covenants series notes june 30 2012 426 series notes restrict us · limited exceptions granting permitting liens security interests properties · selling subsidiary except limited circumstances · incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth · changing general nature business · merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger · selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit paying terminating bank line credit may · merge another entity · sell material portion assets ordinary course business · issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock · permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank default bank line credit 426 series notes longterm debt redeemed 2012 period presented consolidated financial statements 11 earnings per share following table sets forth computation basic diluted earnings per share percentage allocated common shares weighted average common shares outstanding b 6777186 6707224 6652320 unvested participating shares bd 28082 8000 total 6805268 6715224 6652320 percentage allocated common shares 996 999 1000 b accordance provisions incentive compensation plan unvested shares adjusted twoforone stock split distributed may 2012 discussed note 17 notes consolidated financial statements c incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 18 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive certain awards shareholder approved incentive compensation plan discussed note 18 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive 48000 32000 unvested participating shares outstanding june 30 2012 2011 respectively unvested participating shares june 30 2010 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 70000 72000 74000 years ended june 30 2012 2011 2010 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 36 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 18 notes consolidated financial statements would immediately vest kentucky department revenue assessed delta resources 5565000 includes 3013000 taxes 1963000 penalties 589000 interest failure collect remit 3 utility gross receipts license tax period july 2005 june 2011 tax 3 license tax levied gross receipts derived furnishing utility services passed customers kentucky department revenue asserted claim tax periods june 2011 interest accrued subsequent initial assessments regarding penalties kentucky law provides assessment penalties failure pay tax unless shown satisfaction kentucky department revenue failure pay due reasonable cause applicable regulatory authority provides reasonable cause exists tax position based advice tax advisor taxpayer reasonable right rely substantial legal authority done matter therefore june 30 2012 estimate total liability including original assessment plus unasserted claims taxes interest date excluding penalties 3932000 includes 3055000 taxes 877000 interest protested assessment kentucky department revenue position department utility gross receipts license tax applies utilities regulated kentucky public service commission delta resources natural gas marketer regulated kentucky public service commission thus contend exempt utility tax position based case law longstanding opinions issued state attorney general upheld opinion commonwealth kentucky fayette circuit court may 2010 case styled commonwealth kentucky finance administration cabinet department revenue v saint joseph health system inc constellation new energygas division llc board education fayette county kentucky however october 7 2011 kentucky court appeals reversed may 2010 fayette circuit court opinion held utility gross receipts license tax apply sales gas constellation gas marketer utility opinion kentucky court appeals held constellation furnishes natural gas saint joseph constellation subject imposition utility gross receipts license tax saint joseph health system inc filed petition rehearing october 27 2011 grounds courts opinion direct conflict kentucky department revenues longstanding statutory interpretation kentucky court appeals decided january 30 2012 deny petition saint joseph health system inc filed motion discretionary review opinion kentucky supreme court neither predict whether review granted review granted outcome review may therefore cannot predict final judicial outcome case result uncertainty created october 7 2011 opinion issued kentucky court appeals accrued total liability 3932000 began billing utility gross receipts license tax delta resources customers prospectively october 2011 billings since october 2011 delta resources billed customers 154000 utility gross receipts license tax substantially collected event unsuccessful resolving protest kentucky department revenue 3932000 total liability delta resources would right seek reimbursement customers 3055000 taxes leaving delta resources liable 877000 interest addition uncollectible amounts estimate delta resources potential liability interest taxes deemed uncollectible delta resources customers range 884000 3932000 estimate based assumption held liable penalties june 30 2012 recorded total liability 3932000 unbilled receivable net allowance uncollectible amounts 3048000 884000 expense related interest uncollectibles included receivable 196000 due delta resources customer whollyowned director delta natural gas company inc immediate family june 30 2012 consolidated balance sheet liability taxes included accrued taxes receivable delta resources customers included accounts receivable less accumulated allowances doubtful accounts liability interest included accrued interest debt june 30 2012 consolidated statement income interest accrued included interest charges uncollectible amounts included operation maintenance party material pending legal proceedings entered forward purchase agreements beginning november 2011 expiring various dates january 2013 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate gas supply meet customers gas requirements agreements aggregate remaining minimum purchase obligations 391000 fiscal year ending june 30 2013 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services regulation business includes setting rates permitted charge regulated customers monitor need file requests general rate increase natural gas transportation services historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive gas costs reasonable rate return april 2010 filed request increased rates kentucky public service commission general rate case 201000116 requested annual revenue increase approximately 5315000 rate case utilized test year twelve months ended december 31 2009 requested return common equity 12 kentucky public service commission approved increased base rates general rate case provide additional 3513000 annual revenues based upon 104 allowed return common equity 1770000 increase annual depreciation expense majority increase allocated fixed monthly customer charge opposed volumetric rate therefore increase revenues less dependent customer usage occurs evenly throughout year increased base rates effective service rendered october 22 2010 addition increased rates pipe replacement program approved 2010 general rate case pipe replacement program allows us adjust rates annually earn return capital expenditures incurred subsequent test year associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities kentucky public service commission allows us gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred 2010 general rate case kentucky public service commission approved change gas cost recovery clause effective january 2011 provides recovery portion bad debt expense related gas cost component gas cost recovery adjustment additionally weather normalization provision tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts kentucky public service commission allows us conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 15 segment information company two reportable segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing production sales natural gas liquids virtually revenues recorded segments come sale transportation natural gas related sales natural gas liquids regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky price risk regulated segment mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price natural gas natural gas liquids uncommitted natural gas inventory nonregulated companies nonregulated segment two customers provided 5 operating revenues largest customer provided approximately 12450000 11461000 6722000 nonregulated revenues 2012 2011 2010 respectively second largest customer provided approximately 6815000 8067000 5097000 nonregulated revenues 2012 2011 2010 respectively assurance revenues customers continue levels 2012 2011 2010 purchased approximately 99 natural gas atmos energy marketing b gas services reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 000 operating revenues regulated external customers 42655 48697 45676 intersegment 3704 3777 3441 total regulated 46359 52474 49117 nonregulated external customers 31423 34343 30746 eliminations intersegment 3704 3777 3441 total operating revenues 74078 83040 76422 operating expenses regulated purchased gas 15703 21078 20518 depreciation 5871 5037 3823 13909 14318 15105 total regulated 35483 40433 39446 nonregulated purchased gas 23380 26762 23582 depreciation 5601 5440 3813 total nonregulated 29034 32322 27513 eliminations intersegment 3704 3777 3441 total operating expenses 60813 68978 63518 income deductions net regulated nonregulated 2 1 total income deductions interest charges regulated 3366 4029 4055 nonregulated total interest charges 4298 4089 4169 income tax expense regulated 2772 3012 2008 nonregulated 1184 total income tax expense 3258 3760 3192 net income regulated 4990 5153 3717 nonregulated 1212 1935 total net income 5784 6365 5652 assets regulated 174454 168997 164871 nonregulated 8441 5899 3761 total assets 182895 174896 168632 capital expenditures regulated 7163 8120 5275 nonregulated total capital expenditures 7337 8123 5275 16 insurance proceeds september 2011 received 300000 insurance proceeds relating gas inventory adjustment recorded fiscal 2009 companys underground storage field proceeds included operation maintenance 2012 consolidated statement income 17 twoforone stock split february 17 2012 companys board directors declared twoforone stock split companys issued outstanding common stock par value 100 per share stock split distributed may 1 2012 shareholders record april 17 2012 result stock split amounts related shares share prices earnings per share dividends per share retroactively restated appropriate throughout form 10k 18 sharebased compensation shareholder approved incentive compensation plan provides incentive compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan accordance provisions plan number shares may issued plan unvested shares adjusted twoforone stock split distributed may 1 2012 discussed note 17 notes consolidated financial statements number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2012 901000 shares common stock available issuance plan shares common stock may issued authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded operation maintenance expense consolidated statement income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met 2012 22000 tax benefit recognized premium common shares consolidated balance sheet decreased taxes payable deduction income tax purposes exceeds compensation expense recognized sharebased compensation excess tax benefit utilized offset tax deficiencies related sharebased compensation subsequent periods 2011 immaterial tax deficiency recognized income tax expense stock awards 2012 2011 common stock awarded virtually delta employees directors grant date fair values 337000 22000 shares 264000 18000 shares respectively recipients vested awards shortly awards granted time vesting dates grant dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares performance shares awarded 2012 2011 companys executive officers grant date fair values 552000 36000 shares 469000 32000 shares respectively performance share awards vest performance objectives awards met based companys earnings per common share cash bonuses sharebased compensation fiscal year performance shares awarded upon satisfaction performance objectives unvested shares issued recipients vest equally threeyear period beginning august 31 subsequent achieving performance objectives long recipients employees throughout service period recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest june 30 2012 performance objectives 2012 performance shares satisfied subject limitations plan 27000 unvested shares issued recipients contain service condition whereby recipient award shall vest onethird increments year beginning august 31 2012 annually august 31 thereafter fully vested long recipient employee throughout service period performance objectives 2011 performance shares met 32000 unvested shares issued august 31 2011 21000 shares remain unvested june 30 2012 2011 compensation expense related performance shares 375000 263000 respectively compensation expense 245000 expected recognized 2013 2015 unvested shares performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2012 17 years holders performance shares may sell transfer pledge shares vest following summarizes activity performance shares 1 represents maximum number shares could issued based achieving performance criteria 2 adjusts maximum number shares could issued 1 actual number shares issued based actual performance criteria achieved 19 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 20 subsequent events august 2012 12000 shares awarded stock bonus employees officers equity compensation members board directors grant date fair value 264000 additionally august 2012 performance shares awarded companys executive officers performance share awards vest performance objective awards met based companys fiscal 2013 audited earnings per share cash bonuses sharebased compensation subject limitations described incentive compensation plan notice performance share awards performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2013 annually august 31 thereafter fully vested long recipient employee throughout service period maximum number shares could issued performance awards 39000 grant date fair value 844000 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2012 2011 2010 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrants amended restated articles incorporation incorporated herein reference exhibit 4a deltas registration statement form s2 reg 3330431 dated april 4 2003 3iiregistrants amended restated bylaws dated may 2 2003 incorporated herein reference exhibit 3ii registrants form 10k file 0008788 period ended june 30 2005 4a indenture dated march 1 2006 respect 575 insured quarterly notes due april 1 2021 incorporated herein reference exhibit 4d deltas form s3 reg 333132322 dated march 31 2006 4b indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d deltas form s2 reg 333100852 dated october 30 2002 10aemployment agreements registrant five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 10bsupplemental retirement benefit agreement trust agreement registrant glenn r jennings incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated february 25 2005 10cgas sales agreement dated may 1 2005 registrant atmos energy marketing llc filed herewith 10dgas sales agreement dated may 1 2003 registrant atmos energy marketing llc filed herewith 10egas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2 reg 333100852 dated february 7 2003 10fgts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrants form s2 reg 333100852 dated february 7 2003 10gfts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrants form s2 reg 333100852 dated february 7 2003 10hloan agreement october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2 reg 333100852 dated february 7 2003 10ipromissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 10jgas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 10kgas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 april 4 2003 10ldeed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 10munderground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 10nbase contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 10ooil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 10pagreement transport natural gas registrant nami resources company llc incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated march 23 2005 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day september 2006 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board september 1 2006 president chief glenn r jennings executive officer ii principal financial officer sjohn f hall vice president finance september 1 2006 secretary treasurer john f hall iii principal accounting officer sjohn b brown vice president controller september 1 2006 john b brown iv majority board directors sdonald r crowe director september 1 2006 donald r crowe sjane hylton green director september 1 2006 jane hylton green slanny greer director september 1 2006 lanny greer sbilly joe hall director september 1 2006 billy joe hall smichael j kistner director september 1 2006 michael j kistner slewis n melton director september 1 2006 lewis n melton sh peet director september 1 2006 h peet sarthur e walker jr director september 1 2006 arthur e walker jr smichael r whitley director september 1 2006 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities revenues expenses disclosure contingent assets liabilities date financial statements reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists five outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well representatives deloitte touche llp companys independent registered public accounting firm full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown chairman board vice president finance vice president chief secretary treasurer controller executive officer report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc subsidiaries june 30 2006 2005 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2006 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2006 2005 results operations cash flows three years period ended june 30 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements effective june 30 2006 company adopted financial accounting standards board interpretation 47 accounting conditional asset retirement obligations also audited accordance standards public company accounting oversight board united states effectiveness companys internal control financial reporting june 30 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated august 31 2006 expressed unqualified opinion managements assessment effectiveness companys internal control financial reporting deloitte touche llp cincinnati ohio august 31 2006 delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company sells natural gas approximately 38000 customers distribution system central southeastern kentucky three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c gas utility plant gas utility plant stated original cost includes materials labor related costs allocation general administrative costs construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost plus removal expense less salvage value charged accumulated provision depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 25 26 28 average depreciable plant 2006 2005 2004 respectively e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired f gas cost recovery gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism g revenue recognition bill customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled prior november 2004 accordance ratemaking treatment followed kentucky public service commission recorded regulated revenues gas costs billed basis financial reporting regulatory purposes connection receiving rate order october 2004 discussed note 13 began estimating regulated unbilled revenues gas costs end month reflecting amounts financial statements unbilled revenues gas costs include following 000 june 30 2006 june 30 2005 unbilled revenues 1188 1246 unbilled gas costs 594 630 unbilled volumes mcf 50 58 unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets reflecting sales unbilled volumes accompanying financial statements beginning november 2004 resulted nonrecurring increase operating income 617000 net income 379000 year ended june 30 2005 h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 38000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting regulated operations follow accounting reporting requirements statement financial accounting standards 71 entitled accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows regulatory assets 000 2006 2005 deferred gas costs 1827 2647 loss extinguishment debt 2920 2128 asset retirement costs 1126 rate case expenses 145 218 total regulatory assets 6018 4993 regulatory liabilities 000 accrued cost removal longlived assets 880 850 regulatory liability deferred income taxes 1696 1731 total regulatory liabilities 2576 2581 currently earning return loss extinguishment debt rate case expenses classified assets accompanying consolidated balance sheets deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism asset retirement costs recovered customer rates included depreciation rates l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change opinion management longlived assets appropriately valued accompanying financial statements derivatives purchase sell natural gas certain gas purchase sale contracts qualify derivative statement financial accounting standards 133 entitled accounting derivative instruments hedging activities contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying financial statements 2 new accounting pronouncements march 2005 financial accounting standards board issued interpretation 47 entitled accounting conditional asset retirement obligations clarify scope timing liability recognition fasb statement 143 entitled accounting asset retirement obligations interpretation 47 requires liability recognized asset retirement obligation conditional based occurrence future event even timing method settlement uncertain adopted interpretation 47 june 30 2006 recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain upon adoption interpretation recorded asset retirement obligations amount 1349000 amount 350000 recorded incremental cost underlying property plant equipment less 127000 accumulated depreciation cumulative effect related accretion liability depreciation asset 1126000 recorded regulatory asset pursuant financial accounting standards 71 entitled accounting effects certain types regulation recover cost removing regulated assets depreciation rates additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire asset pursuant interpretation 47 proforma impact financial statements interpretation 47 adopted june 30 2005 materially different amounts recorded upon adoption entered sharebased payment transactions therefore adoption statement financial accounting standards 123r entitled sharebased payment securities exchange commission staff accounting bulletin 107 entitled sharebased payment impact us june 2006 financial accounting standards board issued interpretation 48 accounting uncertainty income taxes clarify accounting uncertainty income taxes recognized enterprises financial statements accordance financial accounting standards board statement 109 accounting income taxes expect interpretation 48 shall effective 2008 fiscal year material impact results operations statement position 3 asset retirement obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement financial accounting standards 71 entitled accounting effects certain types regulation recorded approximately 880000 850000 accrued cost removal regulatory liabilities accompanying consolidated balance sheets june 30 2006 2005 respectively required financial accounting standards 143 entitled accounting asset retirement obligations june 30 2006 2005 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells june 30 2006 adopted financial accounting standards board interpretation 47 entitled accounting conditional asset retirement obligations upon adoption interpretation recorded asset retirement obligations amount 1349000 discussed note 2 notes consolidated financial statements summary asset retirement obligations related assets net accumulated depreciation established interpretation 47 statement 143 follows 000 asset retirement net obligations assets june 30 2004 230 18 accretion 15 depreciation 2 obligations settled 32 4 additional obligations 1 june 30 2005 214 13 fin 47 adoption 1349 223 accretion 14 depreciation 2 additional obligations 1 june 30 2006 1578 235 4 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse deferred income tax balances june 30 2006 reflect 225 decrease state kentucky corporate income tax rate phased fiscal 2008 changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 2006 2005 deferred tax liabilities accelerated depreciation 19913300 18726500 deferred gas costs 705600 1022200 pension 2064000 1766800 debt issuance expense 1109700 711100 regulatory assets asset retirement obligations 427500 344200 310200 total 24564300 22536800 deferred tax assets alternative minimum tax credits 1003600 1462400 regulatory liabilities 979200 981600 investment tax credits 95400 109900 asset retirement obligations 536100 18900 569500 471000 total 3183800 3043800 net accumulated deferred income tax liability 21380500 19493000 components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table 2006 2005 2004 statutory federal income tax rate 340 state income taxes net federal benefit 46 53 amortization investment tax credits 05 06 differences net 08 01 03 effective income tax rate 373 387 384 5 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately obligations funded status plan measured march 31 follows expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 65 percent equity investments approximately 35 percent fixed income investments plan assets pension plan weightedaverage asset allocations plans measurement date march 31 asset category follows 2006 2005 equity securities 54 66 debt securities 34 25 12 9 100 equity investment target approximately 65 percent includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 1500000 pension plan 2007 following benefit payments reflect expected future service appropriate expected paid 2007 1279000 2008 468000 2009 896000 2010 506000 2011 910000 years 2012 2016 8411000 statement financial accounting standards 106 entitled employers accounting postretirement benefits statement financial accounting standards 112 entitled employers accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law june 30 2004 company matched 50 employees contribution maximum company contribution 25 employees annual compensation july 1 2004 company matched 100 employees contribution maximum company contribution 35 employees annual compensation 2006 2005 2004 deltas savings plan expense 240000 234000 167800 respectively c employee stock purchase plan employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees could contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock issued delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs global market last business day june matched shares purchased expenses matching shares granted stock plan 59000 53000 years ended june 30 2004 2003 respectively therefore stock equivalent market value 118000 issued july 2004 board discontinued stock plan july 1 2004 supplemental retirement agreement february 24 2005 deltas board directors adopted nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta contribute 60000 annually irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2006 2005 irrevocable trust assets 124000 60000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 6 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 26055 24447 29129 shares 2006 2005 2004 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2006 195814 shares available issuance 7 note receivable officer deltas note receivable officer accompanying consolidated balance sheets relates 160000 loan made glenn r jennings chairman board president chief executive officer loan secured real estate owned mr jennings bears interest 6 mr jennings pays monthly delta forgives 2000 principal amount month service mr jennings completes outstanding balance loan 62000 86000 june 30 2006 2005 respectively event mr jennings terminates employment delta due change control mr jennings employment terminated cause result disability death loan become immediately due payable 8 notes payable line credit current available line credit branch banking trust company 40000000 7046000 5959000 borrowed weighted average interest rate 613 414 june 30 2006 2005 respectively maximum amount borrowed 2006 2005 33833000 18574000 respectively interest line determined monthly london interbank offered rate plus 1 used line credit effective august 12 2005 annual cost unused line credit changed 30 125 line credit extended october 31 2007 9 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 redemption 25000 annually made behalf deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us beginning april 2009 premium february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us beginning february 2007 2 premium declining ratably ceases february 2009 may 2006 redeemed 23672000 aggregate principal amount 715 debentures due 2018 may 2006 redeemed 10169000 aggregate principal amount 6 58 debentures due 2023 amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2006 2005 unamortized balance 5887000 3831000 respectively loss extinguishment debt 2920000 2128000 included deferred amortized term related debt consistent regulatory treatment current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined events default among things make obligations immediately due payable consider following covenants restrictive dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default line credit debentures insured quarterly notes default line credit debentures insured quarterly notes agreements period presented 10 fair values financial instruments fair value debentures estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value debentures june 30 2006 2005 estimated 56389000 60750000 respectively carrying amounts accompanying consolidated financial statements june 30 2006 2005 59990000 54357000 respectively carrying amount financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 11 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 88000 87000 three years ending june 30 2006 2005 2004 respectively 12 commitments contingencies entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 34 million would paid addition continuation specified benefits five years 13 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission regulation business includes setting rates permitted charge retail customers transportation customers monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases able adjust sales prices retail gas sell transport customers april 5 2004 filed request increased base rates kentucky public service commission general rate case 200400067 requested annual increase revenues 4277000 increase 741 test year case twelve months ended december 31 2003 kentucky public service commission approved new base rates effective october 7 2004 approved rates based upon return equity 105 provide additional annual revenues approximately 2756000 evaluating considering options including filing kentucky public service commission recover rates margin reductions experienced due customer conservation well loss customers resulting customers reactions higher gas prices kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather november march billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises five cities serve cities areas serve either franchises expired areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 14 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies single customer citizens gas utility district provided 15422000 10620000 nonregulated revenues 2006 2005 respectively segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation services intersegment transportation revenue expense recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown periods 15 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earnings loss operating net income per common quarter ended revenues income loss share fiscal 2006 september 30 14224340 537297 574469 18 december 31 42060769 4163739 2893164 89 march 31 46535375 4610709 3339992 103 june 30 14426660 550662 634052 19 fiscal 2005 september 30 9811632 40449 1120749 35 december 31 25778315 3895809 2789051 87 march 31 33382247 4851919 3725855 116 june 30 15209039 679648 395538 13 exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent registered public accounting firm consent incorporation reference registration statement 33104301 1 report dated august 31 2006 relating financial statements financial statement schedule delta natural gas company inc subsidiaries report expressed unqualified opinion companys consolidated financial statements financial statement schedule included explanatory paragraph regarding companys adoption financial accounting standards board interpretation 47 accounting conditional asset retirement obligations effective june 30 2006 2 report dated august 31 2006 relating managements report effectiveness internal control financial reporting appearing annual report form 10k delta natural gas company inc year ended june 30 2006 deloitte touche llp cincinnati ohio august 31 2006 exhibit 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 1 2006 sglenn r jennings glenn r jennings chairman board president chief executive officer exhibit 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 john f hall certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 1 2006 sjohn f hall john f hall vice president finance secretary treasurer exhibit 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2006 filed securities exchange commission date hereof report glenn r jennings president chief executive officer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer september 1 2006 exhibit 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2006 filed securities exchange commission date hereof report john f hall vice president finance secretary treasurer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sjohn f hall john f hall vice president finance secretary treasurer september 1 2006 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day august 2013 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2013 2012 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2013 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2013 2012 results operations cash flows three years period ended june 30 2013 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission report dated august 27 2013 expressed unqualified opinion companys internal control financial reporting deloitte touche llp indianapolis indiana august 27 2013 delta natural gas company inc consolidated statements income accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system sell liquids extracted natural gas storage field pipeline systems three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources inc customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates c cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets pipe replacement program approved kentucky public service commission allows us adjust rates annually earn return capital expenditures replacement pipe related facilities incurred subsequent test year recent rate case pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities e depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 29 26 average depreciable plant 2013 2012 2011 respectively effective october 2010 implemented new depreciation rates approved kentucky public service commission 2010 rate case decreased remaining depreciable lives depreciable assets approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheet depreciable utility plant equipment retired related removal costs incurred charged regulatory liability f maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred g gas cost recovery regulated gas rates include gas cost recovery clause approved kentucky public service commission provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment recovery uncollectible gas cost portion bad debt expense gas costs based amount gas costs recovered revenue differences actual gas costs gas costs billed deferred reflected computation future billings customers using gas cost recovery mechanism h revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customers meter last read monthend unbilled revenues gas costs include following unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income j revenues accounts receivable revenues accounts receivable arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue k rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 21 years l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2013 2012 2011 derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards p gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks gas escaping field periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records gas storage inventory recorded average cost 2 new accounting pronouncements may 2011 financial accounting standards board issued guidance fair value measurement disclosure guidance issued part joint effort financial accounting standards board international accounting standards board converge two sets standards single conceptual framework would change fair value measurement guidance applied future periods guidance adopted march 31 2012 material impact results operations financial position cash flows december 2011 financial accounting standards board issued guidance requiring additional disclosure effect potential effect rights setoff associated entitys financial instruments derivative instruments guidance effective quarter ending september 30 2013 expected material impact results operations financial position cash flows 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded mutual funds mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fair value trust assets follows carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date fair value longterm debt categorized level 2 fair value hierarchy 4 asset retirement obligations legal obligations june 30 2013 2012 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services 2012 asset retirement obligations increased reflect revisions estimated cost retire certain mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown asset retirement obligations accompanying consolidated balance sheets additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted regulator even though costs represent legal obligations accordance regulatory accounting standards 328000 338000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2013 2012 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included longterm liabilities accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented longterm liabilities consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 31000 38000 june 30 2013 2012 respectively june 30 2013 accrued interest 9000 unrecognized tax positions recognized interest income 1000 unrecognized tax positions 2013 consolidated statements income accrued 3000 interest 2012 consolidated statements income following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2011 june 30 2010 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions equal amounts necessary fund plan adequately generally accepted accounting principles “gaap” require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2013 june 30 2012 respectively follows accumulated benefit obligation 20508000 20125000 2013 2012 respectively plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 70 equity investments 30 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations domestic real estate securities inflation indexed securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities regularly review asset allocation periodically rebalance investments targeted allocation appropriate assets plan comprised investments mutual funds june 2013 upon changing investment advisors defined benefit plan adopted new asset allocation model resulted changes target allocation plan assets reallocation investment common collective trusts exchange traded mutual funds individual mutual fund common collective trust selected based investment strategy approximates specific asset class within target allocation mutual fund common collective trust categorized based primary investment strategy mutual funds categorized level 1 fair value hierarchy fair value mutual funds determined based quoted market price fund commoncollective trusts categorized level 2 fair value hierarchy fair value commoncollective trusts determined based net asset value published respective fund manager multiplied number units held trust investments commoncollective trusts restrictions ability sell investments respective level within fair value hierarchy determined described note 1 notes consolidated financial statements following represents fair value plan assets mutual fund common collective trust categorized based primary investment strategy b blended fund combination us equity securities 65 us fixed income securities 35 determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations made 2800000 discretionary contributions defined benefit plan fiscal 2013 expect contribute 500000 defined benefit plan fiscal 2014 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2013 2012 2011 deltas savings plan expense 313000 325000 301000 respectively c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2013 2012 irrevocable trust assets 739000 590000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 28436 38929 44632 shares 2013 2012 2011 respectively registered 400000 shares issuance reinvestment plan 2006 june 30 2013 122000 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase gas supply combination spot market natural gas purchases forward natural gas purchases mitigate price risk efforts balance supply demand none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2013 june 30 2012 borrow bank line credit 2013 maximum amount borrowed 2012 6491000 bank line credit extends june 30 2015 interest rate used line credit london interbank offered rate plus 115 annual cost unused bank line credit 125 compliance covenants bank line credit discussed note 10 notes consolidated financial statements periods presented consolidated financial statements 10 longterm debt december 2011 refinanced redeemed 575 insured quarterly notes 38450000 7 debentures 19410000 proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount unamortized debt expense 1896000 related 575 insured quarterly notes 7 debentures reclassified unamortized debt expense regulatory assets accompanying consolidated balance sheet 1896000 regulatory asset representing loss extinguishment 575 insured quarterly notes 7 debentures combined 1872000 unamortized loss extinguishment debt recognized prior refinancings amortized life 426 series notes consistent treatment approved kentucky public service commission series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december following table summarizes contractual maturities series notes fiscal year additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes amortize debt issuance expenses life related debt using effective interest method june 30 2013 2012 unamortized balance 3486000 3740000 respectively loss extinguishment debt 3389000 3636000 included deferred regulatory asset amortized term related debt consistent regulatory accounting discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligation immediately due payable agreed following financial covenants • company must times maintain tangible net worth least 25800000 • company must end fiscal quarter maintain total debt capitalization ratio 70 total debt capitalization ratio calculated ratio companys total debt ii sum companys shareholders equity plus total debt • company must maintain fixed charge coverage ratio twelve months ending quarter less 120x fixed charge coverage ratio calculated ratio companys earnings adjusted certain unusual nonrecurring items interest taxes depreciation amortization plus rental expense ii companys interest rental expense • company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items june 30 2013 compliance financial covenants following table shows required actual financial covenants series notes june 30 2013 426 series notes restrict us • limited exceptions granting permitting liens security interests properties • selling subsidiary except limited circumstances • incurring secured debt permitting subsidiary incur debt issue preferred stock third party aggregate amount exceeds 10 tangible net worth • changing general nature business • merging another company unless survivor merger survivor merger another domestic company assumes 426 series notes ii event default 426 series notes iii continuing company tangible net worth least high tangible net worth immediately prior merger • selling transferring assets sale inventory ordinary course business ii transfer obsolete equipment iii transfer assets 12 month period assets constitute 5 value tangible assets period time cumulative value assets transferred may exceed 15 tangible assets without consent bank extended us bank line credit terminating bank line credit may • merge another entity • sell material portion assets ordinary course business • issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock • permit person group related persons hold twenty percent 20 companys outstanding shares stock furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank compliance covenants bank line credit 426 series notes periods presented consolidated financial statements 11 earnings per share following table sets forth computation basic diluted earnings per share b incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 17 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed c weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive shares 2013 2012 2011 c certain awards shareholder approved incentive compensation plan discussed note 17 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive shares 2013 2012 2011 68000 48000 unvested participating shares outstanding june 30 2013 2012 respectively 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 71000 70000 72000 years ended june 30 2013 2012 2011 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 42 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 17 notes consolidated financial statements would immediately vest june 30 2012 consolidated balance sheet includes 3055000 accrued taxes 877000 interest related assessment license tax levied gross receipts delta resources customers period july 2005 september 2011 assessment resolved february 2013 previously accrued interest reversed delta resources billed customers 2546000 represents proportionate share assessment delta resources contractual right seek reimbursement customers june 30 2013 net receivable delta resources customers 1016000 continue pursue collection taxes customers monitor amount receivable realized consolidated balance sheets receivable delta resources customers included accounts receivable june 30 2012 consolidated balance sheet liability taxes included accrued taxes liability interest included accrued interest debt consolidated statements income change interest accrued included interest income expense party material pending legal proceedings entered forward purchase agreements beginning july 2013 expiring various dates december 2013 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate gas supply meet customers gas requirements agreements aggregate remaining minimum purchase obligations 328000 fiscal year ending june 30 2014 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services regulation business includes setting rates permitted charge regulated customers monitor need file requests general rate increase natural gas transportation services historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive gas costs reasonable rate return regulated rates recently adjusted 2010 rate case became effective october 2010 case kentucky public service commission approved increased base rates provide additional 3513000 annual revenues based upon 104 allowed return common equity 1770000 increase annual depreciation expense majority increase allocated fixed monthly customer charge opposed volumetric rate therefore increase revenues less dependent customer usage occurs evenly throughout year matters kentucky public service commission would material impact results operations financial position cash flows pipe replacement program allows us adjust rates annually earn return capital expenditures incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities kentucky public service commission allows us gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs bad debt expense related gas cost although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization provision tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts kentucky public service commission allows us conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise adversely affected operations 15 segment information company two reportable segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing natural gas production sales natural gas liquids virtually revenues recorded segments come sale transportation natural gas related sales natural gas liquids regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky price risk regulated segment mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price natural gas natural gas liquids uncommitted natural gas inventory nonregulated companies nonregulated segment two customers provided 5 operating revenues largest customer provided approximately 17866000 12450000 11461000 nonregulated revenues 2013 2012 2011 respectively second largest customer provided approximately 5390000 6815000 8067000 nonregulated revenues 2013 2012 2011 respectively assurance revenues customers continue levels 2013 purchased approximately 98 natural gas atmos energy marketing b gas services midwest energy services 2012 2011 purchased approximately 99 natural gas atmos energy marketing b gas services reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 16 insurance proceeds september 2011 received 300000 insurance proceeds relating gas inventory adjustment recorded fiscal 2009 companys underground storage field proceeds included operation maintenance 2012 consolidated statement income 17 sharebased compensation shareholder approved incentive compensation plan “plan” provides compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2013 850000 shares common stock available issuance plan shares common stock may issued authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded nonregulated segment included operation maintenance expense consolidated statements income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met sharebased compensation expense 922000 712000 527000 2013 2012 2011 respectively tax benefits 26000 22000 recognized premium common shares 2013 2012 consolidated balance sheets respectively decreased taxes payable deduction income tax purposes exceeds compensation expense recognized sharebased compensation excess tax benefits utilized offset tax deficiencies related sharebased compensation subsequent periods stock awards 2013 2012 common stock awarded virtually delta employees directors grant date fair values 264000 12000 shares 337000 22000 shares respectively recipients vested awards shortly awards granted time grant dates vesting dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares 2013 2012 performance shares awarded companys executive officers grant date fair values 844000 39000 shares 552000 36000 shares respectively performance share awards vest performance objectives awards met based companys earnings per common share fiscal year performance shares awarded cash bonuses sharebased compensation upon satisfaction performance objectives unvested shares issued recipients vest equally threeyear period beginning august 31 subsequent achieving performance objectives long recipients employees throughout service period recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest june 30 2013 performance objectives performance shares awarded 2013 satisfied subject limitations plan 39000 unvested shares issued recipients subject service condition whereby recipient award shall vest onethird increments year beginning august 31 2013 annually august 31 thereafter fully vested long recipient employee throughout service period performance objectives performance shares awarded 2012 met 27000 unvested shares issued august 31 2012 18000 shares remain unvested june 30 2013 2012 compensation expense related performance shares 658000 375000 respectively compensation expense 431000 expected recognized 2014 2016 unvested shares performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2013 16 years following summarizes activity performance shares 1 represents maximum number shares could issued based achieving performance criteria 2 represents number shares awarded earned based actual performance criteria achieved 18 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 19 subsequent events august 2013 17000 shares common stock awarded virtually delta employees directors grant date fair value 350000 additionally august 2013 performance shares awarded companys executive officers performance share awards vest performance objective awards met based companys fiscal 2014 audited earnings per share cash bonuses sharebased compensation subject limitations described plan performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2014 annually august 31 thereafter fully vested long recipient employee throughout service period maximum number shares could issued performance awards 39000 grant date fair value 801000 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2013 2012 2011 item 15 exhibits financial statement schedules reports form 8k financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrants amended restated articles incorporation incorporated herein reference exhibit 4a deltas registration statement form s2 reg 3330431 dated april 4 2003 3ii registrants amended restated bylaws dated november 21 2002 incorporated herein reference exhibit 3a registrants form 10q file 00008788 period ended december 31 2002 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 reg 3368274 dated september 2 1993 4b indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 reg 33347791 dated march 11 1998 4c indenture dated january 1 1003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d deltas form s2 reg 333100852 dated october 30 2002 10a employment agreements registrant five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 10b agreement registrant harrison peet chairman board incorporated herein reference exhibit 10l registrants form 10q file 00008788 period ended march 31 2000 10c gas sales agreement dated may 1 2000 registrant woodward marketing llc incorporated herein reference exhibit 10d registrants form s2 reg 333100852 dated february 7 2003 10d gas sales agreement dated may 1 2003 registrant woodward marketing llc filed herewith 10e gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2 reg 333100852 dated february 7 2003 10f gts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrants form s2 reg 333100852dated february 7 2003 10g fts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrants form s2 reg 333100852 dated february 7 2003 10h loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2 reg 333100852 dated february 7 2003 10i promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 10j gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 10k gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 dated april 4 2003 10l deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 10m underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 10n base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 10o oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 12 computation consolidated ratio earnings fixed charges 16 letter dated may 22 2002 arthur andersen llp securities exchange commission incorporated herein reference exhibit 16 registrants form 8k file 00008788 dated may 22 2002 21 subsidiaries registrant 23 independent auditors consent 311 certification chief executive officer pursuant section 302 sarbanesoxley act 312 certification principal financial officer pursuant section 302 sarbanesoxley act 321 written statement chief executive officer pursuant 18 usc section 1350 322 written statement principal financial officer pursuant 18 usc section 1350 b reports 8k company file reports form 8k fourth quarter recently completed fiscal year signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 5th day september 2003 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 5 2003 glenn r jennings officer vice chairman board ii principal financial officer sjohn f hall vicepresident finance september 5 2003 john f hall secretary treasurer iii principal accounting officer sjohn b brown controller september 5 2003 john b brown iv majority board directors sh peet chairman board september 5 2003 h peet sdonald r crowe director september 5 2003 donald r crowe sjane hylton green director september 5 2003 jane hylton green director september 5 2003 lanny greer sbilly joe hall director september 5 2003 billy joe hall smichael j kistner director september 5 2003 michael j kistner slewis n melton director september 5 2003 lewis n melton director september 5 2003 arthur e walker jr smichael r whitley director september 5 2003 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well deloitte touche llp independent auditors full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief vice president finance controller executive officer secretary treasurer independent auditors report board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2003 2002 related consolidated statements capitalization income cash flows changes shareholders equity years ended financial statements responsibility companys management responsibility express opinion financial statements based audits financial statements company year ended june 30 2001 audited auditors ceased operations auditors expressed unqualified opinion financial statements report dated august 10 2001 conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2003 2002 results operations cash flows years ended conformity accounting principles generally accepted united states america audits conducted purpose forming opinion basic financial statements taken whole additional information listed schedule ii annual report form 10k delta natural gas company inc years ended june 30 2003 2002 presented purpose additional analysis required part 2003 2002 basic financial statements additional information responsibility companys management information subjected auditing procedures applied audits 2003 2002 basic financial statements opinion fairly stated material respects considered relation 2003 2002 basic financial statements taken whole additional information year ended june 30 2001 audited auditors ceased operations auditors expressed opinion report dated august 10 2001 additional information considered relation 2001 basic financial statements taken whole presented fairly material respects information set forth therein deloitte touche llp cincinnati ohio august 15 2003 report previous independent public accountants following report copy report previously issued arthur andersen llp reissued arthur andersen llp board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc kentucky corporation subsidiary companies june 30 2001 2000 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 2001 financial statements schedule referred responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position delta natural gas company inc subsidiary companies june 30 2001 2000 results operations cash flows three years period ended june 30 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp louisville kentucky august 10 2001 delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company sells natural gas approximately 40000 customers distribution system central southeastern kentucky three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated certain reclassifications made priorperiod amounts conform 2003 presentation b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 29 28 average depreciable plant 2003 2002 2001 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired also net cost removal e gas cost recovery gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery prudent gas costs incurred expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition record revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled revenue shown net excise taxes collected customers g revenues customer receivables serve 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates rate regulated basis accounting regulated operations follow accounting reporting requirements sfas 71 accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheet regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows regulatory assets 000 2003 2002 deferred gas cost 4292 4076 loss extinguishment debt 2386 1337 rate case gas audit expense 116 total regulatory assets 6678 5529 regulatory liabilities 000 refunds suppliers due customers 74 regulatory liability deferred income taxes 491 562 total regulatory liabilities 491 636 currently earning return loss extinguishment debt rate case expenses deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism j impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change 2 new accounting pronouncements june 2002 financial accounting standards board issued statement financial accounting standards 146 entitled accounting costs associated exit disposal activities statement requires liability cost associated exit disposal activity recognized liability incurred effective exit disposal activities initiated december 31 2002 committed exit disposal plan accordingly new statement presently impact us june 2001 financial accounting standards board issued statement financial accounting standards 143 entitled accounting asset retirement obligations delta adopted statement effective july 1 2002 statement 143 addresses financial accounting legal obligations associated retirement longlived assets upon adoption statement recorded 178000 asset retirement obligations balance sheet primarily representing current estimated fair value obligation plug oil gas wells time abandonment amount 47000 recorded incremental cost underlying property plant equipment cumulative effect earnings adopting new statement charge earnings 88000 net income taxes 55000 representing cumulative amounts depreciation depletion expenses changes asset retirement obligation due passage time historical accounting periods adoption new standard significant impact income cumulative effect change accounting principle year ended june 30 2003 pro forma net income earnings per share presented years ended june 30 2002 2001 pro forma application statement 143 prior periods would result pro forma net income earnings per share materially different actual amounts reported periods accompanying consolidated statements income also asset retirement obligations indeterminate settlement dates obligations relating gas wells lines storage facility compressor station sites recorded estimated range potential settlement dates known according statement 143 allowed ratemaking purposes statement financial accounting standards 71 entitled accounting effects certain types regulation accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely approximately 700000 accrued cost removal recorded accumulated provision depreciation accompanying balance sheet june 30 2003 august 2001 financial accounting standards board issued statement financial accounting standards 144 entitled accounting impairment disposal longlived assets statement 144 addresses accounting reporting impairment disposal longlived assets statement 144 effective july 1 2002 impact implementation financial position results operations december 2002 financial accounting standards board issued statement financial accounting standards 148 entitled accounting stockbased compensation statement 148 effective june 30 2003 fiscal year impact implementation financial position results operations 3 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas cost recoveries certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse change tax rates applied accumulated deferred income taxes may immediately recognized operating results ratemaking treatment regulatory liability established recognize future revenue requirement impact deferred taxes temporary differences gave rise net accumulated deferred income tax liability periods follows 2003 2002 deferred tax liabilities accelerated depreciation 14942631 13436373 deferred gas cost 1692900 1364800 accrued pension 2600 1104200 debt issuance expense 614500 406300 total 17252631 16311673 deferred tax assets alternative minimum tax credits 1408900 1365200 regulatory liabilities 193800 221700 investment tax credits 143800 159600 661700 486900 total 2408200 2233400 net accumulated deferred income tax liability 14844431 14078273 components income tax provision comprised following years ended june 30 2003 2002 2001 components income tax expense current federal 258700 776200 77000 state 64200 296100 71700 total 322900 1072300 148700 deferred 2090457 1177200 2381200 income tax expense 2413357 2249500 2232500 reconciliation statutory federal income tax rate effective income tax rate shown table 2003 2002 2001 statutory federal income tax rate 340 state income taxes net federal benefit 52 53 54 amortization investment tax credits 06 08 09 differences net 03 02 03 effective income tax rate 383 382 4 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately following table provides reconciliation changes plans benefit obligations fair value assets twoyear period ended march 31 2003 statement funded status march 31 years recognized companys consolidated balance sheets june 30 2003 2002 change benefit obligation benefit obligation beginning year 10681119 8486103 service cost 601607 518496 interest cost 636649 657126 amendments 2807300 1514620 actuarial gain loss 692436 84009 benefits paid 589586 411217 benefit obligation end year 9214925 10681119 2003 2002 change plan assets fair value plan assets beginning year 9219679 9073398 actual return loss plan assets 1198684 14243 employer contribution 878913 543255 benefits paid 589586 411217 fair value plan assets end year 8310322 9219679 funded status 904603 1461440 unrecognized net actuarial loss 4858741 2272764 unrecognized prior service cost 1284482 1514620 minimum pension liability adjustment 3386436 net minimum pension liability pension asset 716780 2325944 effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking lumpsum distributions plan assets plan consist primarily common stocks bonds certificates deposit net pension costs years ended june 30 include following 2003 2002 2001 components net periodic benefit cost service cost 601607 518496 487392 interest cost 636649 657125 592537 expected return plan assets 756731 755307 800303 amortization unrecognized net loss 61873 36528 amortization net transition asset 8198 29262 42394 net periodic benefit cost 535200 427580 237232 weightedaverage assumptions discount rate 625 750 775 expected return plan assets 800 rate compensation increase 400 sfas 106 employers accounting postretirement benefits sfas 112 employers accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute whole percentage 2 15 annual compensation company match 50 employees contribution maximum company contribution 25 employees annual compensation 2003 2002 2001 deltas savings plan expense 158900 165500 154600 respectively c employee stock purchase plan employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock issue delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs national market system last business day june matches shares purchased expenses stock plan 53000 52000 49000 three years ended june 30 2003 respectively therefore stock equivalent market value 106000 issued july 2003 continuation terms stock plan subject approval board directors annual basis board continued stock plan june 30 2004 rules approved securities exchange commission require future equity compensation plans approved shareholders 5 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 30821 28506 28958 shares 2003 2002 2001 respectively reserved 150000 shares issuance reinvestment plan december 2000 june 30 2003 75445 shares still available issuance 6 note receivable officer deltas note receivable officer accompanying balance sheet relates 160000 loan made glenn r jennings president chief executive officer loan secured real estate owned jennings bears interest 6 jennings pays monthly delta forgives 2000 principal amount month service jennings completes outstanding balance loan 134000 june 30 2003 event jennings terminates employment delta due change control jennings employment terminated cause result disability death loan become immediately due payable 7 notes payable line credit current available line credit branch banking trust company 40000000 1031000 19355000 borrowed weighted average interest rate 307 367 june 30 2003 2002 respectively maximum amount borrowed 2003 2002 30690000 29005000 respectively interest line determined monthly london interbank offered rate plus 1 used line credit cost unused line credit 030 current line credit must renewed october 2003 8 longterm debt february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed beginning march 2007 march 1998 issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed us april 1 2003 october 1993 issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed us beginning october 1998 5 premium declining ratably ceases october 2003 amortize debt issuance expenses life related debt straightline basis approximates effective yield method line credit agreement indentures relating publicly held debentures contain defined events default among things make obligation immediately due payable consider following covenants significant dividend payments cannot made unless consolidated shareholders equity company exceeds 258000000 thus retained earnings restricted may assume additional mortgage indebtedness excess 2000000 without effectively securing debentures equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default line credit debentures default line credit debenture agreements period presented 9 fair values financial instruments fair value debentures estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value debentures june 30 2003 2002 estimated 59596000 47479000 respectively carrying amount accompanying consolidated financial statements june 30 2003 2002 55023000 50350000 respectively carrying amount financial instruments including cash equivalents accounts receivable notes receivable accounts payable noninterest bearing promissory note approximate fair value 10 operating leases operating leases relate primarily noncancelable storage well compressor station site leases rental expense longterm operating leases 90000 74000 72000 three years ending june 30 2003 2002 2001 respectively june 30 2003 future rental commitments leases totaled 1099000 future rental commitments payable follows june 30 2003 year ending june 30 2004 75000 2005 71000 2006 70000 2007 70000 2008 61000 thereafter 752000 1099000 operating leases indeterminate life purpose disclosure assumed 40 year life agreements extent leases extend beyond 2043 annual lease payments 52000 11 commitments contingencies entered individual employment agreements five officers agreement chairman board agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 26 million would paid addition continuation specified benefits five years 12 rates kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission regulation business includes setting rates permitted charge retail customers transportation customers monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases able adjust sales prices retail gas sell transport customers december 27 1999 kentucky public service commission approved annual revenue increase us 420000 filed general rate case july 1999 recent filing rate case approval requests rate case included weather normalization provision permits us adjust rates billing months december april reflect variations 30year average winter temperatures kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission july 2001 kentucky public service commission required independent audit gas procurement activities gas procurement activities four gas distribution companies part investigation increases wholesale natural gas prices impact customers kentucky public service commission indicated kentucky distributors generally developed sound planning procurement procedures meeting customers natural gas requirements procedures provided customers reliable supplies natural gas reasonable costs kentucky public service commission noted events prior year including changes natural gas wholesale markets required auditors evaluate distributors gas planning procurement strategies light recent volatile wholesale markets primary focus balanced portfolio gas supply balances cost issues price risk reliability auditors selected kentucky public service commission final audit report dated november 15 2002 contains 16 procedural reportingrelated recommendations areas gas supply planning organization staffing controls gas supply management gas transportation gas balancing response regulatory change affiliate relations report also addresses several general areas five gas distribution companies involved audit including kentucky natural gas price issues hedging gas cost recovery mechanisms budget billing uncollectible accounts forecasting january 2003 responded auditors comments action plans drafted relating recommendations first status report action plans 16 recommendations due filed us kentucky public service commission september 30 2003 believe implementation recommendations result significant impact financial position results operations addition regulation kentucky public service commission may obtain nonexclusive franchises cities communities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid local franchise hold franchises four cities seven communities serve cities communities serve either franchises expired communities governmental organizations authorized grant franchises local governments required want offer franchise attempt acquire reacquire franchises whenever feasible without franchise local government could require us cease occupation streets public grounds prohibit us extending facilities new area city community date absence franchise caused adverse effect operations 13 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses sale purchase gas well intercompany gas transportation services effective january 1 2002 nonregulated segment discontinued practice selling gas regulated segment led decline intersegment revenues expenses 2002 2003 intersegment transportation revenue expense recorded tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated nonregulated segment information shown periods 000 2003 2002 2001 revenues regulated external customers 47769 40370 48887 intersegment 3131 3050 3244 total regulated 50900 43420 52131 nonregulated external customers 20611 15500 21883 intersegment 1691 27609 total nonregulated 20611 17191 49492 eliminations intersegment 3131 4741 30853 total operating revenues 68380 55870 70770 operating expenses regulated depreciation 4163 3964 3797 income taxes 1395 1599 1696 38409 30486 38662 total regulated 43967 36049 44155 nonregulated depreciation 150 117 43 income taxes 963 651 536 17905 15393 48167 total nonregulated 19018 16161 48746 eliminations intersegment 3131 4741 30853 total operating expenses 59854 47469 62048 income deductions regulated 48 17 31 nonregulated total income deductions 48 17 31 interest charges regulated 4624 4768 5191 nonregulated 11 25 42 eliminations intersegment 11 116 total interest charges 4635 4782 5117 2003 2002 2001 net income regulated 2348 2621 2817 nonregulated 1503 1016 819 total net income 3851 3637 3636 assets regulated 130224 124432 120710 nonregulated 2350 2055 3469 total assets 132574 126487 124179 capital expenditures regulated 9195 9415 7070 nonregulated 7 total capital expenditures 9195 9422 7070 14 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods exhibit 10d gas sales agreement delta natural gas company inc buyer woodward marketing llc seller gas sales agreement gas sales agreement made entered effective 1st day may 2003 delta natural gas company inc kentucky corporation hereinafter referred buyer woodward marketing llc delaware corporation hereinafter referred seller w n e h whereas buyer seller entered gas sales agreement effective may 1 2003 providing purchase buyer sale seller firm basis 100 natural gas requirements buyers residential small commercial customers specified service areas providing certain services seller buyer whereas buyer party fts1 service agreements columbia gulf transmission company columbia gulf party gts service agreements columbia gas transmission corporation columbia buyer holds firm pipeline transportation andor storage capacity two interstate pipelines whereas term agreement buyer desires assign seller pipeline storage capacities columbia gulf columbia service agreements whereas purpose setting forth terms said agreements buyer seller parties entered agreement therefore consideration covenants agreements set forth herein parties agree follows article definitions unless expressly stated otherwise following terms used agreement shall mean 11 term btu shall mean british thermal unit shall mean amount heat energy required raise temperature one avoirdupois pound water fiftyninedegrees fahrenheit 59 f sixtydegrees fahrenheit 60 f standard atmospheric pressure determined dry basis prices charges paid hereunder shall computed dry btu basis 12 term day shall mean period time beginning 900 central time zone calendar day ending 900 central time zone following calendar day definition day may change time set forth columbias tariff file federal energy regulatory commission successor agency 13 term delivery points defined article iv 14 term gas shall include casinghead gas natural gas wells residue gas resulting processing casinghead gas well gas 15 term liquefiable hydrocarbons means hydrocarbons except hydrocarbons separated gas stream conventional singlestage mechanical field separation methods mixture thereof may extracted gas sold hereunder methane except nominal quantities lost processing operations including limited natural gasolines butanes propane ethane 16 term liquid hydrocarbons means hydrocarbons natural state liquids shall include liquefiable hydrocarbons condense gas stream production transportation 17 term mcf shall mean one thousand 1000 cubic feet pressure fourteen seventythreehundredths 1473 pounds per square inch absolute temperature sixty degrees 60 f fahrenheit correction boyles law 18 term mmbtu shall mean one million 1000000 btus 19 term month shall mean period time beginning first calendar day calendar month ending first day following calendar month 110 term year shall mean period twelve 12 consecutive months commencing first day month following effective date defined article vi subsequent twelve 12 month period provided first year include period effective date first day following month effective date first day month article ii quantity nominations 21 purchase quantity subject terms conditions agreement buyer shall purchase receive seller shall sell deliver firm basis quantity gas equal 100 buyers columbiasupplied residential small commercial supply requirements deltastanton deltawinchester service areas 100000 dth annually deltacumberland service areas subject section 22 seller expressly acknowledges large percentage industriallarge commercial end users buyers systems purchase gas buyer arrange gas supplies volumes flowing delivery points end users shall first gas columbias meters buyers acceptance volumes behalf end users shall constitute violation sellers exclusive supplier provisions agreement 22 maximum quantity notwithstanding anything contrary herein maximum quantity gas seller obligated sell deliver delivery points agreement herein referred mdq shall equal lesser gts daily limitations set forth columbias ferc tariff indicated exhibit b maximum amount gas transported columbia redelivered delivery points firm transportation contracts columbia gulf transmission company columbia gulf released assigned seller accordance article v herein referred firm transportation contracts upon mutual agreement parties seller may sell buyer may purchase quantities excess mdq price terms excess sales mutually agreed upon parties prior delivery excess gas 23 remedies failure deliver receive 231 sellers failure deliver seller fails deliver buyer natural gas requirements mdq day reasons imbalances variations transportation agreements operational balancing agreements governed article v ii event force majeure event described section 55 seller shall reimburse credit buyer following 1 seller reimburse buyer sum difference positive price buyer pays substitute supply gas alternative fuel propane ii prices set forth section 311 agreement calculated based upon buyers actual load factor agreement multiplied quantity seller failed deliver accordance subsection b reasonable incremental costs expenses incurred transporting substitute supplies c reasonable incidental expenses incurred purchasing substitute supplies buyer agrees act good faith purchasing substitute supplies minimize sellers obligations buyer hereunder 2 buyer reasonable efforts unable obtain substitute supplies seller shall provide buyer difference highest commodity price paid buyer purchase gas alternative fuel propane last two years exceed 10 per mmbtu prices set forth section 311 agreement calculated based upon buyers actual load factor agreement multiplied quantity gas seller failed deliver accordance 232 curtailment addition remedies set forth section 231 reason including event force majeure seller unable meet firm sales obligations sellers available supplies columbia seller curtail deliveries sales customers prorata basis based upon actual nominations sellers firm sales customers made period curtailment actual nomination buyer exceed mdq extent curtailment sellers customers would useful maintaining deliveries buyer upon buyers request seller provide buyer information verify deliveries buyer curtailed accordance subsection 233 failure take buyer fails receive purchase full requirements accordance section 21 buyer pay seller 0035 per mmbtu times difference full requirements b quantities actually taken buyer applicable seasonal period 234 exclusive remedy parties agree actual losses incurred buyer result sellers failure deliver quantities incurred seller result buyers failure take quantities would uncertain impossible determine precision result payments seller buyer accordance subsections 231 233 respectively deliveries seller accordance subsection 232 shall sole exclusive remedy sellers failure deliver buyers failure take quantities set forth article payments seller buyer pursuant section 23 reasonable compensation failures 24 uniform takes unless permitted otherwise columbia buyer receive gas delivery points defined section 41 rates compliance terms firm transportation contract columbia released assigned seller accordance article v 25 alternate rate schedule prior seller submitting monthly nominations columbia hereunder buyer may direct seller cause gas sold hereunder delivered columbia gas rate schedule notwithstanding foregoing seller shall authority determine whether sufficient capacity exists permit delivery daily nominated quantities event seller reasonably determines sufficient capacity available permit delivery nominated quantities seller authorized cause buyers gas delivered columbia gas rate schedule gts volumes delivered buyer columbia gas alternate rate schedule shall assessed transportation charge buyer 025 mmbtu plus applicable fuel surcharges article iii price 31 commodity price quantities within mdq 311 citygate service price mmbtu gas sold delivered hereunder delivery points mdq shall priced columbia gulf mainline monthly index published inside fercs gas market report minus 007mmbtu plus applicable its2 transportation fuel charges pricing contract shall redetermined event buyers storage rights columbia contracts altered 312 fixed price alternative substitution commodity price parties may mutually agree utilization nymex natural gas futures otherwise lock fixed price part mdq one months parties agree fixed price buyer required purchase designated monthly quantities parties agreed fixed price notwithstanding provision contrary agreement 32 commodity price excess gas price mmbtu gas sold delivered hereunder excess mdq shall determined accordance section 22 agreement 33 transportation storage costs buyer shall responsible paying columbia gulf columbia transportation services rendered firm transportation agreements seller shall responsible charges incurred connection utilization capacity buyers firm transportation contracts purposes providing gas supply buyer seller shall credit buyer 90 revenue derived thirdparty release buyers firm capacity posted transporters electronic bulletin board article iv delivery points 41 delivery points delivery points gas sold delivered hereunder shall points specified exhibit hereto 42 adjustments delivery points recognized parties sellers ability deliver gas delivery points set forth section 41 dependent upon sellers ability utilize firm transportation contracts released buyer seller accordance article v provisions based columbias tariff provisions effect date execution agreement sellers ability utilize released assigned delegated contracts deliver gas sold hereunder delivery points set forth section 41 terms section shall revised reflect substantial change columbias tariff regard utilization contracts delivery point flexibility place parties relative position agreement substantially different position parties prior change tariffs article v transportation storage arrangements 51 transportation storage arrangements 511 transfer arrangements buyer firm transportation rights columbia gulf firm transportation storage rights columbia specified exhibit hereto recognized parties buyer holds firm transportation capacity columbia gulf transmission companys pipeline fts1 service agreements firm transportationstorage capacity columbia gts service agreements order provide delivered storage service buyer delivery points effective date agreement buyer execute blanket authorization agreement seller columbia seller shall full complete control utilization contracts including without limitation manner timing transportation injections withdrawals gas contracts provided seller may without buyers prior written consent amend primary delivery points firm transportation contracts change rate schedule level maximum entitlements services offered seller agrees amend modify buyers agreements transporting pipelines listed blanket authorization agreement manner diminishes buyers rights andor level service therein without buyers prior written consent buyer also appoint seller agent purposes administering firm transportation contracts transportation storage substitute gas supplies buyer purchases accordance section 231 b extent release assignments provided permitted pipelines tariffs releaseassignment agency arrangements shall accordance pipelines tariffs shall terminate upon expiration agreement prior release delegation rights elections receipt points delivery points supply leg capacity monthly maximum daily quantity elections similar elections must given columbia buyer cooperate seller make necessary elections designated seller similarly buyer cooperate seller make amendments contracts requested seller become effective date agreement extent said amendments adversely affect buyers sole opinion buyers costs buyers level quality service event supplementation contradiction blanket authorization agreement terms agreement shall control govern rights obligations liabilities seller buyer 52 responsibility firm transportation storage contracts 521 responsibility administration subject buyers obligation pay seller accordance section 33 upon transfer firm transportation contracts seller shall assume obligations rights contracts including without limitation obligation submit nominations columbia pay applicable scheduling imbalance charges provide fuel loss quantities 522 operational balancing agreements seller responsible correcting imbalances variations firm transportation understood seller shall correct imbalances variations pursuant rate schedule gts automatic storage injections withdrawals addition buyer agrees appoint seller agent enter maintain operational balancing agreement oba columbia accordance columbias tariff seller unable correct imbalances variations automatic injections withdrawals set forth due inventory levels storage buyers account otherwise variance actual deliveries confirmed nominations delivery points allocated oba seller shall responsible correcting variation imbalance oba resulting monthend cashout 523 penalty responsibility buyer required reimburse seller 1 unauthorized overrun penalties associated takes excess maximum daily quantities firm transportation storage contracts 2 penalties charges imposed transporters due buyers failure comply directive pipeline limiting quantities less buyers contracted maximum daily quantities 3 daily variance charges penalties imposed transporters pipeline imbalances related charges andor penalties resulting failure take dispatch agreed upon volumes shall responsibility party whose failure caused imbalance penalty 53 telemetry buyer shall authorize seller access columbia telemetry readings buyers behalf long buyer required give current access columbias telemetry readings 531 projected requirements buyer shall provide seller monthly projected requirements 23rd preceding month buyer cooperate seller ensure nominations including necessary adjustments thereto made timely columbia nominations reflect actual expected deliveries receipts storage withdrawal season year cumulative variances buyers projected monthly requirements actual monthly takes exceed cumulative maximum storage quantities set forth heading capacity exhibit hereto excess quantities shall priced applicable gas daily midpoint price 532 forecasts nominations based buyers projections set forth section 531 historical data weather forecasting seller forecast buyers daily natural gas requirements based forecast seller submit necessary nominations columbia accordance section 521 54 adjustments imbalance provisions purpose sections 51 53 establish parties responsibilities administering firm contracts oba releasedassigned delegated correcting imbalances receipts deliveries variations confirmed nominations actual deliveries delivery points provisions based tariff provisions approved columbias ferc tariff date agreement executed including right balance variation projected actual daily loads injections withdrawals storage firm storage contracts b existing load profile buyer terms section shall revised reflect substantial change either columbias tariff regard correction imbalances variations associated penalties b buyers load profile place parties relative position agreement substantially different position parties prior change columbias tariff buyers load profile parties unable agree appropriate revisions matter shall submitted arbitration accordance article xiv decision effective first day month following issuance arbitrators decision 55 transportation limitation either columbia gulf interrupts curtails otherwise fails receive transport deliver gas sold andor delivered hereunder interruption curtailment due sellers failure pay transporters unless extent sellers failure pay result buyers failure reimburse seller accordance section 33 sellers obligation deliver gas agreement shall suspended portion quantities interrupted curtailed transporters long interruption curtailment deliveries continues article 55 shall apply seller transporting gas columbia buyers gts contracts 56 displacement transportation seller acknowledges separate agreements buyer transports gas columbia behalf third parties address differences scheduled deliveries actual deliveries buyer columbia agreed underdeliveries third party transportation gas scheduled delivered buyer columbia made buyer gts storage withdrawals overdeliveries buyer third party transportation agreements result injections excess volumes deltacumberland gts storage account close month withdrawals injections due daily transportation underdeliveries overdeliveries balanced result net withdrawal buyer purchase volume gas seller addition purchases points delivery result net injection buyer credit volume volumes purchased seller month article vi term agreement 61 primary term agreement shall become effective may 1 2003 herein referred effective date shall continue full force effect primary term three years april 30 2006 expiration primary term agreement extended additional oneyear periods unless 60 days prior expiration primary term either party gives written notice party desire extend primary term 62 transfer gas storage gas remaining storage termination agreement injected march 31 year agreement terminates shall transferred sold seller buyer arithmetic average commodity prices applicable months november december january february march immediately preceded termination date agreement gas remaining storage termination agreement injected march 31 year agreement terminates shall transferred sold seller buyer price mutually agreed parties provided seller inject gas storage buyers account march 31 year unless buyer consents injections purposes determining quantities injected march 31 termination agreement quantities injected storage march 31 shall deemed withdrawn first prior quantities injected march 31 year article vii title taxes 71 transfer title possession control title gas sold hereunder shall pass seller buyer upon delivery said gas buyer applicable delivery points parties hereto seller shall deemed control possession gas delivered hereunder shall indemnify hold buyer harmless damage injury losses occur prior delivery buyer delivery points otherwise buyer shall deemed exclusive control possession thereof shall indemnify hold seller harmless injury damage losses 72 warranty title except set forth seller warrants title gas delivered hereunder seller right sell gas free liens adverse claims every kind seller indemnify save buyer harmless loss damage expense every character account adverse claims applicable gas title gas passes buyer indemnify save seller harmless loss damage expense every character account adverse claims applicable gas title passes buyer 73 taxes buyer shall reimburse seller taxes fees charges income taxes levied governmental regulatory body gas sold agreement gas held buyers storage accounts article viii quality pressure 81 quality pressure requirements seller deliver gas sold agreement receipt points firm transportation contracts columbia conditions meet quality pressure specifications set forth columbias tariff neither seller buyer shall obligated install operate compression facilities 82 remedy noncompliance gas sold agreement fails meet standards concerning quality pressure set forth section 81 b columbia fails receive transport gas c columbia deliver requirements buyer seller shall deemed failed deliver quantities nominated buyer shall subject remedies set forth section 23 article ix measurement tests 91 measurement point natural gas sold hereunder shall measured near delivery points columbias system pressures existence time shall corrected unit measurement shall one mmbtu 92 standards measurement tests unless specified herein contrary standards measurement tests shall governed standards set forth columbias tariff 93 operation measurement seller replacement shipper firm transportation contracts shall cause columbia operate measurement facilities involved metering receiving gas delivery points operation shall include changing charts calculation volumes calibration maintenance adjustments repair meter facilities accordance columbias tariff extent either party access rights delivery points including measurement facilities party provide similar access party extent permitted fulfill rights obligations agreement article x processing seller may process gas remove liquid hydrocarbons liquefiable hydrocarbons prior delivery gas buyer delivery points event seller elects process gas hydrocarbons removed shall sellers sole responsibility costs including associated transportation costs shall paid seller shall indemnify defend hold buyer harmless therefrom article xi billing payment 111 billing payment seller shall render buyer address indicated section 155 hereof fifteenth 15th day calendar month certified registered overnight mail invoice gas purchased preceding month according measurements computations prices provided herein buyer agrees make payment hereunder seller account available funds wire transfer mail location seller may time designate writing payment shall made buyer within later twentyfifth 25th month b ten 10 days date receipt sellers invoice provided columbias billing schedule changes either tariffs buyer pay seller earlier date coincide earlier payments due columbia firm transportation contracts invoiced amount paid due interest unpaid amount shall accrue current prime rate interest published money rates wall street journal exceed applicable maximum lawful rate together court costs attorneys fees costs collection seller may incur enforcing terms agreement default continues thirty 30 days written notice seller buyer seller may suspend gas deliveries hereunder without liability without prejudice remedies notwithstanding good faith dispute arises parties amounts due invoice matters buyer pay portion statement dispute due date parties continue perform obligations agreement dispute provided buyer required provide within 30 days written request seller good sufficient surety bond guaranteeing payment seller amount ultimately found due 112 credit standards sales hereunder term agreement shall subject appropriate review approval sellers credit department buyer agrees provide information reasonably required sellers credit department effect proper evaluation without limiting seller may suspend deliveries agreement buyer admits unable pay debts become due b applies agrees appointment receiver trustee liquidation properties c makes general assignment benefit creditors files voluntary petition bankruptcy petition seeking reorganization arrangement creditors bankruptcy law e party petition bankruptcy law filed party admits material allegations petition filed f adjudicated bankrupt bankruptcy law g fails meet credit standards set forth columbias tariff 113 adjustments payments overcharge undercharge form whatsoever shall time found bill therefor paid seller shall refund amount overcharge received seller buyer shall pay amount undercharge within thirty 30 days final determination thereof provided shall retroactive adjustment overcharge undercharge matter brought attention party writing within lesser twelve 12 months following date deliveries agreement made b period statements payments columbia become final 114 review books records buyer seller shall right inspect examine reasonable hours books records charts pertaining sale gas hereunder charge fee arising hereunder confidentiality agree maintain extent necessary verify accuracy invoice charge computation made pursuant agreement article xii regulatory bodies 121 laws regulations agreement shall subject valid applicable governmental laws orders regulatory authorizations directives rules regulations governmental body official jurisdiction parties facilities gas agreement provision thereof nothing contained herein shall construed waiver right question contest law order rule regulation forum jurisdiction 122 reliance law parties entitled act accordance law amended reversed otherwise disposed final nonappealable order 123 cooperation parties shall cooperate ensure compliance governmental regulation including obtaining maintaining necessary regulatory authorizations reasonable exchange provision information needed filing reporting requirements 124 changes law regulation federal state statute regulation order court law regulatory authority directly indirectly prohibits performance agreement b makes performance illegal impossible c effects change substantive provision agreement significant material adverse impact upon ability either party perform obligations agreement parties use reasonable efforts revise agreement performance agreement longer prohibited illegal impossible longer impacted material adverse fashion b agreement revised manner preserves maximum extent possible respective positions parties party provide reasonable prompt notice party proposed law regulations regulatory proceedings actions could affect rights obligations parties unable revise agreement accordance party whose performance rendered prohibited illegal impossible impacted material adverse manner shall right sole discretion suspend terminate agreement upon written notice party article xiii force majeure 131 force majeure buyer seller rendered unable wholly part force majeure perform obligations agreement obligation make payments due agreement agreed performance respective obligations seller buyer deliver purchase receive gas far affected force majeure shall excused suspended inception inability corrected longer period buyer seller whichever claiming inability shall give notice thereof soon practicable occurrence force majeure notice may given orally writing given orally shall promptly confirmed writing giving reasonably full particulars inability shall promptly corrected extent may corrected exercise reasonable diligence party claiming inability reason force majeure 132 liability force majeure neither buyer seller shall liable losses damages regardless nature thereof however occurring whether losses damages direct indirect immediate remote reason caused arising way attributable suspension performance obligation either party extent suspension occurs party rendered unable wholly part force majeure perform obligations unless force majeure event caused negligence willful misconduct party claiming force majeure 133 definition force majeure term force majeure used herein shall mean event restricts prevents performance agreement b reasonably within control party claiming suspension c exercise due diligence party unable prevent overcome remedy events may give rise claim force majeure include acts god epidemics landslides hurricanes floods washouts lightning earthquakes storm warnings perils sea acts court governmental regulatory authorities acts civil disorder acts industrial disorder accidents sellers buyers transporters facilities storage pipeline system freezing sellers suppliers wells lines pipe storage facilities equipment necessities making repairs alterations machinery wells platforms lines pipe storage facilities pumps compressors valves gauges similar equipment cratering blowout failure well wells produce similar event cause provided however settlement labor dispute prevent end act industrial disorder shall within sole discretion party agreement involved labor dispute requirement inability shall corrected reasonable diligence shall apply labor disputes notwithstanding expressly agreed failure inability make delivery single source supply shall constitute event force majeure beyond greater period necessary seller locate another supply gas exceed one day b period necessary adjust nominations applicable pipelines transport gas another supply gas 134 termination force majeure event continues period thirty 30 days party claim force majeure may time thereafter terminate agreement upon ten 10 days prior written notice extent force majeure event corrected prior expiration notice period article xiv arbitration 141 submission dispute arbitration controversy pertaining matters expressly made subject arbitration agreement shall determined board arbitration consisting three members upon notice submission given either party notice shall also name one 1 arbitrator party receiving notice shall notice party within ten 10 days thereafter name second arbitrator failing party giving notice submission shall name second arbitrator two 2 arbitrators appointed shall name third arbitrator failing within ten 10 days third arbitrator shall appointed person senior terms service activelysitting judge united states district court district buyers principal place business located 142 qualification arbitrators shall qualified education experience training natural gas industry decide upon particular question dispute 143 arbitration proceedings arbitrators appointed giving parties due notice date hearing reasonable opportunity heard shall promptly hear controversy location buyers principal place business located shall thereafter render decision determining said controversy later ninety 90 days board appointed decision requires support majority arbitrators board arbitration unable reach decision new arbitrators named shall act hereunder request either party like manner none previously named presentation evidence concluded party shall submit arbitrators final offer proposed resolution dispute arbitrators shall approve final offer one party without modification reject considering evidence deciding final offer approve arbitrators shall guided criteria described applicable section agreement 144 arbitrators decision arbitrators shall rendered writing supported written reasons decision arbitrators shall final binding upon parties decision arbitrators shall kept confidential accordance section 151 agreement party shall bear expenses chosen arbitrator expenses third arbitrator shall borne equally parties party shall bear compensation expenses legal counsel witnesses employees article xv miscellaneous 151 confidentiality except necessary obtain transportation gas agreement otherwise provided herein seller buyer agree maintain confidentiality agreement terms conditions hereof seller buyer agree divulge third party except extent required law court order regulation administrative agency jurisdiction buyer seller subject matter agreement required disclosed party subject disclosure requirement shall notify party immediately b cooperate fullest extent seeking whatever confidential status may available protect material disclosed 152 incidental consequential punitive damages except expressly provided agreement parties hereto waive rights claims causes action arising agreement incidental consequential punitive damages resulting breach agreement either party shall limited actual damages incurred party claiming damages 153 third party beneficiaries neither buyer seller intend provisions agreement benefit third party third party shall right enforce terms agreement buyer seller 154 waiver default waiver buyer seller default agreement shall operate waiver future default whether like different character 155 notices except otherwise expressly provided agreement every notice request statement invoice provided agreement shall writing directed party given made delivered partys address follows buyer delta natural gas company inc 3617 lexington road winchester ky 40391 attention mr brian ramsey phone 8597446171 ext158 fax 8597443623 email bramseydeltagascom seller nominations woodward marketing llc woodward marketing llc 377 riverside drive suite 109 11251 northwest freeway suite 400 franklin tn 37064 houston tx 77092 attention mr rob ellis attention mr rick sullivan phone 6155952878 phone 7136887771 fax 6157940947 fax 7136885124 either buyer seller may choose one addresses receiving invoices statements notices payments notifying manner provided written notices requests statements invoices shall considered transmitted time delivery hand delivered mail next working day mailing transmitted telephone oral means telecopy form electronic telegraphic communication notices shall considered transmitted time oral communication time telecopy form electronic telegraphic communication sent 156 choice law parties agree laws commonwealth kentucky shall control construction interpretation validity andor enforcement agreement 157 assignment provisions agreement shall extend binding successors assigns parties hereto insofar applicable rights obligations succeeded assigned succession assignment shall relieve assigning succeeded party obligations without written consent party consent shall unreasonably withheld provided either party may assign agreement affiliate without prior written consent party nothing section prevents either party pledging mortgaging part partys property security buyer shall require purchaser lessee buyers distribution system assume obligations agreement extent elected seller 158 interpretation construction agreement presumption shall made party grounds party drafted agreement provision thereof 159 headings article section subsection agreement purposes convenience shall interpreted meaning effect 1510 entire agreement terms conditions contained herein constitute full complete agreement parties change made must submitted writing agreed parties 1511 severability except otherwise stated herein article section declared rendered unlawful court law regulatory authority jurisdiction parties deemed unlawful statutory change otherwise affect lawful obligations arise agreement 1512 enforceability party represents necessary power authority enter perform obligations agreement constitutes legal valid binding obligation party enforceable accordance terms except enforceability may affected bankruptcy law application principles equity witness whereof agreement executed multiple counterparts original july 2003 delta natural gas company inc woodward marketing llc name title exhibit buyer delta natural gas company inc pursuant gas sales agreement seller buyer columbia gulf transmission companys fts1 contracts columbia gas transmission companys gts contracts follows volumes dth columbia gulf transmission pipeline capacity fts1 mdq deltawinchester contract 43829 1682 deltastanton contract 43827 860 deltacumberland contract 43828 1836 columbia gas transmission pipeline capacity gts deltawinchester contract 37815 4950 deltastanton contract 37814 2530 deltacumberland contract 37813 5400 columbia gas transmission storage capacity deltawinchester 162857 deltastanton 83254 deltacumberland 177662 columbia gas transmission delivery points delivery point meter deltawinchester contract kingstonterrill 800809 frenchburg 803544 owingsville 803545 camargo 803563 sharpsburg 803564 north middletown 803512 mt olivet 804148 deltastanton contract stanton 800803 deltacumberland contract manchester 805992 beattyville 832867 exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 independent auditors consent incorporation reference registration statement 333104301 delta natural gas company inc form s2 report dated august 15 2003 related consolidated financial statements delta natural gas company inc years ended june 30 2003 2002 appearing annual report form 10k delta natural gas company inc year ended june 30 2003 deloitte touche llp cincinnati ohio september 5 2003 exhibit 311 certifications glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date september 5 2003 sglenn r jennings glenn r jennings president chief executive officer exhibit 312 certifications john f hall certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date september 5 2003 sjohn f hall john f hall vice president finance secretary treasurer exhibit 321 written statement chief executive officer pursuant 18 usc section 1350 solely purposes complying 18 usc section 1350 undersigned president chief executive officer delta natural gas company inc company hereby certify based knowledge annual report form 10k company year ended june 30 2003 report fully complies requirements section 13a securities exchange act 1934 information contained report fairly presents material respects financial condition results operations company sglenn r jennings glenn r jennings september 5 2003 signed original written statement required section 906 document authenticating acknowledging otherwise adopting signature appears typed form within electronic version written statement required section 906 provided delta natural gas company inc retained delta natural gas company inc furnished securities exchange commission staff upon request exhibit 322 written statement principal financial officer pursuant 18 usc section 1350 solely purposes complying 18 usc section 1350 undersigned vice president finance secretary treasurer delta natural gas company inc company hereby certify based knowledge annual report form 10k company year ended june 30 2003 report fully complies requirements section 13a securities exchange act 1934 information contained report fairly presents material respects financial condition results operations company sjohn f hall john f hall september 5 2003 signed original written statement required section 906 document authenticating acknowledging otherwise adopting signature appears typed form within electronic version written statement required section 906 provided delta natural gas company inc retained delta natural gas company inc furnished securities exchange commission staff upon request item 15 exhibits financial statement schedule financial statements schedule exhibits 1 financial statements see index item 8 2 financial statement schedule see index item 8 3 exhibits exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day august 2014 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc winchester kentucky audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2014 2013 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2014 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2014 2013 results operations cash flows three years period ended june 30 2014 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2014 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission report dated august 26 2014 expressed unqualified opinion companys internal control financial reporting deloitte touche llp indianapolis indiana august 26 2014 delta natural gas company inc consolidated statements income accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system sell liquids extracted natural gas storage field pipeline systems three whollyowned subsidiaries delta resources inc buys natural gas resells industrial large use customers deltas system delgasco inc buys natural gas resells delta resources inc customers deltas system enpro inc owns operates natural gas production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment depreciation property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 29 average depreciable plant 2014 2013 2012 respectively approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheet depreciable utility plant equipment retired related removal costs incurred charged regulatory liability pipe replacement program approved kentucky public service commission allows us adjust rates annually earn return capital expenditures replacement pipe related facilities incurred subsequent test year recent rate case pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2014 2013 2012 natural gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks gas escaping field periodically analyze volumes pressure data relating storage field order substantiate natural gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records natural gas storage inventory recorded average cost revenue accounts receivable revenues accounts receivable arise primarily sales natural gas customers transportation services others bill customers monthly meter reading cycle end month natural gas service rendered date customers meter last read monthend unbilled revenues gas costs include following unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets provisions doubtful accounts recorded reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income regulated purchased natural gas expense regulated natural gas rates include gas cost recovery clause approved kentucky public service commission provides dollartracker matches revenues natural gas costs provides eventual dollarfordollar recovery natural gas costs incurred regulated segment recovery uncollectible natural gas cost portion bad debt expense natural gas costs based amount natural gas costs recovered revenue differences actual natural gas costs natural gas costs billed deferred reflected computation future billings customers using natural gas cost recovery mechanism rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated natural gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 32 years derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded securities exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards 2 new accounting pronouncements december 2011 financial accounting standards board issued guidance requiring additional disclosure effect potential effect financial instruments derivative instruments rights setoff entity offsets assets liabilities instruments guidance effective quarter ending december 31 2013 require additional disclosures respect results operations financial position cash flows financial instruments derivative instruments september 2013 internal revenue service irs issued final regulations regarding tax treatment amounts paid acquire produce improve tangible property update temporary regulations issued irs december 2011 2014 irs plans issue guidance specific industry sectors including natural gas final regulations effective tax year beginning july 1 2014 however expect compliance final regulations industry specific guidance material impact results operations financial position cash flows may 2014 financial accounting standards board issued guidance revising principles standards revenue recognition standard creates framework recognizing revenue improve comparability revenue recognition practices across entities industries guidance effective quarterly report ending september 30 2017 evaluating methods adoption allowed new standard effect standard expected results operations financial position cash flow june 2014 financial accounting standards board issued guidance sharebased payments performance targets achieved subsequent requisite service period guidance effective quarter ending september 30 2015 expected material impact results operations financial position cash flows 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded securities exchange traded mutual funds securities mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fiscal 2014 upon changing investment advisors supplemental retirement benefit trust adopted new asset allocation model resulted reallocation assets trust fair value trust assets follows carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date fair value longterm debt categorized level 3 fair value hierarchy 4 asset retirement obligations legal obligations june 30 2014 2013 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain natural gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown asset retirement obligations accompanying consolidated balance sheets additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted regulator even though costs represent legal obligations accordance regulatory accounting standards 355000 328000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2014 2013 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences capitalization thresholds tax reporting purposes versus financial reporting purposes differences recognition purchased natural gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included longterm liabilities accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented longterm liabilities consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income june 30 2014 unrecognized tax positions recognized would impact effective tax rate june 30 2013 amount unrecognized tax benefits net tax recognized would impact effective tax rate 31000 june 30 2014 accrued interest 5000 unrecognized tax positions recognized interest income 4000 1000 unrecognized tax positions consolidated statements income 2014 2013 respectively following reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2012 june 30 2011 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions fund plan adequately generally accepted accounting principles “gaap” require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2014 june 30 2013 respectively follows accumulated benefit obligation 22810000 20508000 2014 2013 respectively plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 70 equity investments 30 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations domestic real estate securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities additional diversification invest absolute return strategy mutual funds include equity fixed income securities objective providing return greater inflation regularly review asset allocation periodically rebalance investments targeted allocations appropriate assets plan comprised investments individual securities mutual funds june 2013 upon changing investment advisors defined benefit plan adopted new asset allocation model 2014 transitioned target allocations plan assets reallocated investments mutual funds individual securities previously individual mutual fund selected based investment strategy approximates specific asset class within target allocations individual exchange traded equity securities exchange traded mutual funds treasury securities categorized level 1 fair value hierarchy fair value investments determined based quoted market price investment mutual funds categorized based primary investment strategy respective level within fair value hierarchy determined described note 1 notes consolidated financial statements corporate bonds municipal bonds us agency securities valued based calculation using interest rate curves credit spreads applied terms debt maturity coupon rate supported observable transactions categorized level 2 fair value hierarchy following represents fair value plan assets determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations made 500000 discretionary contribution defined benefit plan fiscal 2014 expect contribute 500000 defined benefit plan fiscal 2015 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits defined benefit retirement plan retired employees supplemental retirement plan described employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2014 2013 2012 savings plan expense 350000 313000 325000 respectively supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta makes discretionary contributions irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted 2014 2013 2012 delta contributed 60000 year trust june 30 2014 2013 irrevocable trust assets 907000 739000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 28809 28436 38929 shares 2014 2013 2012 respectively registered 400000 shares issuance reinvestment plan 2006 june 30 2014 approximately 93000 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase natural gas supply primarily forward purchase contracts mitigate price risk efforts balance supply demand regulated segment minimal price risk resulting forward natural gas purchases permitted pass gas costs regulated customers natural gas cost recovery rate mechanism approved quarterly kentucky public service commission none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2014 june 30 2013 maximum amount borrowed 2014 691000 borrow bank line credit 2013 bank line credit extends june 30 2015 interest rate used line credit london interbank offered rate plus 115 annual cost unused bank line credit 0125 restrictive covenants discussed note 10 notes consolidated financial statements 10 longterm debt december 2011 refinanced redeemed 575 insured quarterly notes 38450000 7 debentures 19410000 proceeds private debt financing note purchase private shelf agreement issued 58000000 series notes purchasers paid 100 face principal amount unamortized debt expense 1896000 related 575 insured quarterly notes 7 debentures reclassified unamortized debt expense regulatory assets accompanying consolidated balance sheet 1896000 regulatory asset representing loss extinguishment 575 insured quarterly notes 7 debentures combined 1872000 unamortized loss extinguishment debt recognized prior refinancings amortized life 426 series notes consistent treatment approved kentucky public service commission series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december following table summarizes contractual maturities series notes fiscal year additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes amortize debt issuance expenses life related debt using effective interest method june 30 2014 2013 unamortized balance 3240000 3486000 respectively loss extinguishment debt 3149000 3389000 included deferred regulatory asset amortized term related debt consistent regulatory accounting discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable financial covenants include covenants related tangible net worth total debt capitalization ratio fixed charge ratio additionally company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items believe compliance financial covenants bank line credit 426 series notes periods presented consolidated financial statements furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank 11 earnings per share following table sets forth computation basic diluted earnings per share percentage allocated weighted average common shares outstanding b incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 17 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed c weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive unvested nonparticipating shares outstanding june 30 2014 2013 2012 c certain awards shareholder approved incentive compensation plan discussed note 17 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive shares 2014 2013 2012 74000 68000 48000 unvested participating shares outstanding june 30 2014 2013 2012 respectively 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 68000 71000 70000 years ended june 30 2014 2013 2012 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 42 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 17 notes consolidated financial statements would immediately vest june 30 2012 consolidated income statement included accrual 877000 interest expense related assessment license tax assessment resolved 2013 previously accrued interest reversed party material pending legal proceedings entered forward purchase agreement natural gas beginning july 2014 expiring december 2014 agreement requires us purchase minimum amounts natural gas throughout term agreements agreement established normal course business ensure adequate natural gas supply meet customers natural gas requirements agreement aggregate minimum purchase obligation 140000 fiscal year ending june 30 2015 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services regulation business includes setting rates permitted charge regulated customers monitor need file requests general rate increase natural gas transportation services historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive natural gas costs reasonable rate return regulated rates recently adjusted 2010 rate case became effective october 2010 matters kentucky public service commission would material impact results operations financial position cash flows pipe replacement program allows us adjust rates annually earn return capital expenditures incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities kentucky public service commission allows us natural gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs bad debt expense related natural gas cost although required file general rate case adjust rates pursuant natural gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered natural gas costs collected refunded adjustments customer bills beginning three months end quarter actual natural gas costs incurred additionally weather normalization provision tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts kentucky public service commission allows us conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise adversely affected operations 15 segment information company two reportable segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing natural gas production sales natural gas liquids virtually revenues recorded segments come sale transportation natural gas related sales natural gas liquids regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky price risk regulated segment mitigated natural gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price natural gas natural gas liquids uncommitted natural gas inventory nonregulated companies nonregulated segment three customers provided 5 operating revenues largest customer provided approximately 12569000 nonregulated revenues 2014 second largest customer provided approximately 9494000 17866000 12450000 nonregulated revenues 2014 2013 2012 respectively third largest customer provided approximately 5206000 5390000 6815000 nonregulated revenues 2014 2013 2012 respectively assurance revenues customers continue levels purchased approximately 96 98 natural gas atmos energy marketing b gas services midwest energy services 2014 2013 respectively 2012 purchased approximately 99 natural gas atmos energy marketing b gas services reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 16 insurance proceeds september 2011 received 300000 insurance proceeds relating natural gas inventory adjustment recorded fiscal 2009 companys underground natural gas storage field proceeds included operation maintenance 2012 consolidated statement income 17 sharebased compensation shareholder approved incentive compensation plan “plan” provides compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2014 approximately 794000 shares common stock available issuance plan shares common stock may issued authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded nonregulated segment included operation maintenance expense consolidated statements income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met sharebased compensation expense 1112000 922000 712000 2014 2013 2012 respectively tax benefits 31000 26000 recognized premium common shares 2014 2013 consolidated balance sheets respectively decreased taxes payable deduction income tax purposes exceeds compensation expense recognized financial reporting purposes excess tax benefits utilized offset tax deficiencies related sharebased compensation subsequent periods stock awards 2014 2013 2012 common stock awarded virtually delta employees directors grant date fair values 350000 17000 shares 264000 12000 shares 337000 22000 shares respectively recipients vested awards shortly awards granted time grant dates vesting dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares 2014 2013 2012 performance shares awarded companys executive officers grant date fair values 801000 39000 shares 844000 39000 shares 552000 36000 shares respectively performance share awards vest performance objectives awards met based companys earnings per common share fiscal year performance shares awarded cash bonuses sharebased compensation upon satisfaction performance objectives unvested shares issued recipients vest onethird increments august 31 subsequent achieving performance objectives long recipients employees throughout service period recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest june 30 2014 performance objectives performance shares awarded 2014 satisfied subject limitations plan 39000 unvested shares issued recipients subject service condition whereby recipient award shall vest onethird increments year beginning august 31 2013 annually august 31 thereafter fully vested long recipient employee throughout service period performance objectives performance shares awarded 2013 met 39000 unvested shares issued august 31 2013 26000 shares remain unvested june 30 2014 2013 2012 compensation expense related performance shares 762000 658000 375000 respectively compensation expense 469000 expected recognized 2015 2017 unvested shares performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2014 16 years following summarizes activity performance shares represents maximum number shares could issued based achieving performance criteria 18 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 19 subsequent events august 2014 22000 shares common stock awarded virtually delta employees directors grant date fair value 443000 additionally august 2014 performance shares awarded companys executive officers performance share awards vest performance objective awards met based companys fiscal 2015 audited earnings per share cash bonuses sharebased compensation subject limitations described plan performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2015 annually august 31 thereafter fully vested long recipient employee throughout service period maximum number shares could issued performance awards 39000 grant date fair value 772980 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2014 2013 2012 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrants amended restated articles incorporation incorporated herein reference exhibit 4a deltas registration statement form s2 reg 3330431 dated april 4 2003 3iiregistrants amended restated bylaws dated november 21 2002 incorporated herein reference exhibit 3a registrants form 10q file 00008788 period ended december 31 2002 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 reg 3368274 dated september 2 1993 4b indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 reg 33347791 dated march 11 1998 4c indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d deltas form s2 reg 333100852 dated october 30 2002 10aemployment agreements registrant five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 10bgas sales agreement dated may 1 2000 registrant woodward marketing llc incorporated herein reference exhibit 10d registrants form s2 reg 333100852 dated february 7 2003 10cgas sales agreement dated may 1 2003 registrant woodward marketing llc incorporated herein reference exhibit 10c registrants form 10k reg 00008788 dated september 5 2003 10dgas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2 reg 333100852 dated february 7 2003 10egts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrants form s2 reg 333100852 dated february 7 2003 10ffts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrants form s2 reg 333100852 dated february 7 2003 10gloan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2 reg 333100852 dated february 7 2003 10h promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 10igas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 10jgas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 dated april 4 2003 10kdeed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 10lunderground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 10mbase contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 10noil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 312 certification principal financial officer pursuant section 302 sarbanesoxley act 321 written statement chief executive officer pursuant 18 usc section 1350 322 written statement principal financial officer pursuant 18 usc section 1350 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 3rd day september 2004 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 3 2004 officer vice chairman glenn r jennings board ii principal financial officer sjohn f hall vicepresident finance september 3 2004 secretary treasurer john f hall iii principal accounting officer sjohn b brown controller september 3 2004 john b brown iv majority board directors sh peet chairman board september 3 2004 h peet sdonald r crowe director september 3 2004 donald r crowe sjane hylton green director september 3 2004 jane hylton green slanny greer director september 3 2004 lanny greer sbilly joe hall director september 3 2004 billy joe hall smichael j kistner director september 3 2004 michael j kistner slewis n melton director september 3 2004 lewis n melton sarthur e walker jr director september 3 2004 arthur e walker jr smichael r whitley director september 3 2004 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities revenues expenses disclosure contingent assets liabilities date financial statements reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well representatives deloitte touche llp companys independent registered public accounting firm full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief vice president finance controller executive officer secretary treasurer report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company subsidiaries company june 30 2004 2003 related consolidated statements income cash flows changes shareholders equity three years period ended june 30 2004 audit also included financial statement schedule included item 15a2 annual report financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2004 2003 results operations cash flows three years period ended june 30 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements 2003 company adopted statement financial accounting standards 143 accounting asset retirement obligations deloitte touche llp cincinnati ohio august 13 2004 delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company sells natural gas approximately 40000 customers distribution system central southeastern kentucky three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated certain reclassifications made priorperiod amounts conform 2004 presentation b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 29 average depreciable plant 2004 2003 2002 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired e gas cost recovery gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition record revenues billed customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled revenue shown net excise taxes collected customers g revenues customer receivables serve 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates rate regulated basis accounting regulated operations follow accounting reporting requirements sfas 71 accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheet regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows regulatory assets 000 2004 2003 deferred gas cost 1524 4292 loss extinguishment debt 2257 2386 rate case gas audit expense 152 total regulatory assets 3933 6678 regulatory liabilities 000 accrued cost removal longlived assets 784 715 regulatory liability deferred income taxes 648 714 1432 1429 currently earning return loss extinguishment debt rate case expenses deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism j impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change opinion management longlived assets appropriately valued accompanying financial statements 2 new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards 143 entitled accounting asset retirement obligations delta adopted statement effective july 1 2002 statement 143 addresses financial accounting legal obligations associated retirement longlived assets upon adoption statement july 2002 recorded 178000 asset retirement obligations balance sheet primarily representing current estimated fair value obligation plug oil gas wells time abandonment amount 47000 recorded incremental cost underlying property plant equipment cumulative effect earnings adopting new statement charge earnings 88000 net income taxes 55000 representing cumulative amounts depreciation depletion expenses changes asset retirement obligation due passage time historical accounting periods adoption new standard significant impact income cumulative effect change accounting principle years ended june 30 2004 2003 pro forma net income earnings per share presented year ended june 30 2002 pro forma application statement 143 prior periods would result pro forma net income earnings per share materially different actual amounts reported periods accompanying consolidated statements income also asset retirement obligations indeterminate settlement dates obligations relate gas wells oil lines storage facility compressor station sites recorded estimated range potential settlement dates known according statement 143 accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement financial accounting standards 71 entitled accounting effects certain types regulation recorded approximately 784000 714000 accrued cost removal regulatory liabilities accompanying balance sheets june 30 2004 2003 respectively january 2003 financial accounting standards board issued interpretation 46 entitled consolidation variable interest entities significantly changed consolidation requirements special purpose entities subject scope relationships variable interest entities defined interpretation 46 therefore adoption interpretation december 31 2003 impact financial position results operations may 2003 financial accounting standards board issued statement financial accounting standards 150 entitled accounting certain financial instruments characteristics liabilities equity statement 150 developed response concerns relating classification consolidated balance sheet certain financial instruments characteristics liabilities equity statement 150 effective july 1 2003 impact implementation financial position results operations december 2003 financial accounting standards board issued statement financial accounting standards 132 revised 2003 entitled employers disclosure pensions postretirement benefits statement revises employers disclosures pension plans postretirement benefit plans present information economic resources obligations plans also require certain disclosures financial statements interim periods adopted revised statement 132 effective january 1 2004 since statement addressed disclosure requirements impact implementation financial position results operations see note 4a revised disclosures 3 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas cost certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates temporary differences gave rise net accumulated deferred income tax liability periods follows 2004 2003 deferred tax liabilities accelerated depreciation 17646300 14841007 deferred gas cost 601000 1692900 pension 1365400 900 debt issuance expense 780400 582800 279900 total 20673000 17117607 deferred tax assets alternative minimum tax credits 1601789 1408945 regulatory liabilities 255600 282100 investment tax credits 128700 143800 719300 662131 total 2705389 2496976 net accumulated deferred income tax liability 17967611 14620631 reconciliation statutory federal income tax rate effective income tax rate shown table 2004 2003 2002 statutory federal income tax rate 340 state income taxes net federal benefit 53 52 53 amortization investment tax credits 06 08 differences net 03 02 effective income tax rate 384 383 4 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking lumpsum distributions plan obligations funded status plan measured march 31 follows expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 60 percent equity investments approximately 40 percent fixed income investments plan assets pension plan weightedaverage asset allocations plans measurement date march 31 asset category follows 2004 2003 equity securities 69 54 debt securities 24 35 7 11 100 equity investment target approximately 60 perccent includes allocations domestic international emerging markets managers asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 798000 pension plan 2005 following benefit payments reflect expected future service appropriate expected paid 2005 120000 2006 130000 2007 175000 2008 230000 2009 305000 years 2010 2014 2650000 statement financial accounting standards 106 entitled employers accounting postretirement benefits statement financial accounting standards 112 entitled employers accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law june 30 2004 company matched 50 employees contribution maximum company contribution 25 employees annual compensation 2004 2003 2002 deltas savings plan expense 167800 158900 165500 respectively effective july 1 2004 company match 100 employees contribution maximum company contribution 35 employees annual compensation c employee stock purchase plan employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees could contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock issued delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs national market system last business day june matched shares purchased expenses matching shares granted stock plan 59000 53000 52000 three years ended june 30 2004 respectively therefore stock equivalent market value 118000 issued july 2004 board discontinued stock plan july 1 2004 5 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 29129 30821 28506 shares 2004 2003 2002 respectively registered 150000 shares issuance reinvestment plan december 2000 june 30 2004 46316 shares still available issuance 6 note receivable officer deltas note receivable officer accompanying balance sheet relates 160000 loan made glenn r jennings president chief executive officer loan secured real estate owned jennings bears interest 6 jennings pays monthly delta forgives 2000 principal amount month service jennings completes outstanding balance loan 110000 june 30 2004 event jennings terminates employment delta due change control jennings employment terminated cause result disability death loan become immediately due payable 7 notes payable line credit current available line credit branch banking trust company 40000000 4738000 1031000 borrowed weighted average interest rate 314 307 june 30 2004 2003 respectively maximum amount borrowed 2004 2003 19034000 30690000 respectively interest line determined monthly london interbank offered rate plus 1 used line credit cost unused line credit 030 expect renew current line credit october 2004 8 longterm debt february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us beginning february 2007 2 premium declining ratably ceases february 2009 march 1998 issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed us premium october 1993 issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed us premium february 2003 redeemed 14806000 aggregate principal amount 830 debentures due 2026 debt issuance expenses deferred amortized terms related debt loss extinguishment debt 2257000 deferred amortized term related debt consistent regulatory treatment amortize debt issuance expenses life related debt straightline basis approximates effective yield method line credit agreement indentures relating publicly held debentures contain defined events default among things make obligation immediately due payable consider following covenants significant dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted may assume additional mortgage indebtedness excess 2000000 without effectively securing debentures equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default line credit debentures default line credit debenture agreements period presented 9 fair values financial instruments fair value debentures estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value debentures june 30 2004 2003 estimated 55758000 59596000 respectively carrying amount accompanying consolidated financial statements june 30 2004 2003 54699000 55023000 respectively carrying amount financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 10 operating leases operating leases relate primarily well compressor station site leases rental expense longterm operating leases 87000 90000 74000 three years ending june 30 2004 2003 2002 respectively 11 commitments contingencies entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 29 million would paid addition continuation specified benefits five years 12 rates kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission regulation business includes setting rates permitted charge retail customers transportation customers monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases able adjust sales prices retail gas sell transport customers april 5 2004 filed general rate case kentucky public service commission filing requested annual increase revenues 4277000 increase 74 accordance normal practices commission suspended proposed rates october 4 2004 hearing held august 18 2004 cannot predict outcome proceeding kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission july 2001 kentucky public service commission required independent audit gas procurement activities gas procurement activities four kentucky gas distribution companies part investigation increases wholesale natural gas prices impact customers kentucky public service commission indicated kentucky distributors generally developed sound planning procurement procedures meeting customers natural gas requirements procedures provided customers reliable supplies natural gas reasonable costs kentucky public service commission noted events 20002001 heating season including changes natural gas wholesale markets required auditors evaluate distributors gas planning procurement strategies light recent volatile wholesale markets primary focus balanced portfolio gas supply balances cost issues price risk reliability auditors selected kentucky public service commission final audit report dated november 15 2002 contains 16 procedural reportingrelated recommendations areas gas supply planning organization staffing controls gas supply management gas transportation gas balancing response regulatory change affiliate relations report also addresses several general areas five gas distribution companies involved audit including kentucky natural gas price issues hedging gas cost recovery mechanisms budget billing uncollectible accounts forecasting believe implementation recommendations result significant impact financial position results operations required file periodic reports status implementation recommendations july 26 2004 kentucky public service commission notified us fourteen sixteen recommendations considered completed next progress report filed october 22 2004 addition regulation kentucky public service commission may obtain nonexclusive franchises cities communities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid local franchise hold franchises four cities seven communities serve cities communities serve either franchises expired communities governmental organizations authorized grant franchises local governments required want offer franchise attempt acquire reacquire franchises whenever feasible without franchise local government could require us cease occupation streets public grounds prohibit us extending facilities new area city community date absence franchise caused adverse effect operations 13 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses sale purchase gas well intercompany gas transportation services effective january 1 2002 nonregulated segment discontinued practice selling gas regulated segment led decline intersegment revenues expenses 2003 intersegment transportation revenue expense recorded tariff rates transfer pricing sales gas segments cost operating expenses taxes interest allocated nonregulated segment information shown periods exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent registered public accounting firm consent incorporation reference registration statement 333104301 delta natural gas company inc form s2 report dated august 13 2004 expresses unqualified opinion companys consolidated financial statements includes explanatory paragraph referring companys change effective july 1 2002 accounting asset retirement obligations related consolidated financial statements delta natural gas company inc appearing annual report form 10k year ended june 30 2004 deloitte touche llp cincinnati ohio september 3 2004 exhibit 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrants periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation c disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 3 2004 sglenn r jennings glenn r jennings president chief executive officer exhibit 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 john f hall certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrants periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation c disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 3 2004 sjohn f hall john f hall vice president finance secretary treasurer exhibit 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2004 filed securities exchange commission date hereof report glenn r jennings president chief executive officer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer september 3 2004 exhibit 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2004 filed securities exchange commission date hereof report john f hall vice president finance secretary treasurer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sjohn f hall john f hall vice president finance secretary treasurer september 3 2004 item 15 exhibits financial statement schedule financial statements schedule exhibits 1 financial statements see index item 8 2 financial statement schedule see index item 8 3 exhibits exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day september 2017 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc winchester kentucky audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries “company” june 30 2017 2016 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2017 audits also included financial statement schedule listed index item 8 consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2017 2016 results operations cash flows three years period ended june 30 2017 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 18 financial statements company entered merger agreement peoples natural gas drake merger sub inc new whollyowned subsidiary peoples natural gas also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2017 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission report dated september 1 2017 expressed unqualified opinion companys internal control financial reporting deloitte touche llp cincinnati ohio september 1 2017 delta natural gas company inc consolidated statements income accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase natural gas open market also transport natural gas behalf local producers customers distribution system extract liquids natural gas storage field pipeline systems sold market prices three whollyowned subsidiaries delta resources inc buys natural gas resells industrial large use customers deltas system delgasco inc buys natural gas resells delta resources inc customers deltas system enpro inc owns operates natural gas production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated february 20 2017 entered agreement plan merger “merger agreement” png companies llc “png” hereinafter referred “merger” information see note 18 notes consolidated financial statements use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment depreciation property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 27 average depreciable plant 2017 28 2016 2015 approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheets depreciable utility plant equipment retired related removal costs incurred charged regulatory liability pipe replacement program tariff allows us adjust regulated rates annually earn return capital incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2017 2016 2015 natural gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks natural gas escaping field periodically analyze volumes pressure data relating storage field order substantiate natural gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records natural gas storage inventory recorded average cost regulated revenues bill regulated sales natural gas tariff rates approved kentucky public service commission customers billed monthly basis however billing cycle certain classes customers necessarily coincide calendar monthend customers apply unbilled method accounting estimate accrue revenues applicable customers yet billed related natural gas costs charged expense end month natural gas service rendered date customers meter last read monthend unbilled revenues included accounts receivable unbilled natural gas costs included deferred natural gas costs accompanying consolidated balance sheets unbilled amounts include following record onsystem transportation services period transport natural gas enduse customer within system onsystem transportation customers receive natural gas supply thirdparty shippers delivering natural gas delta’s system bill onsystem transportation services tariff rates approved kentucky public service commission include fixed monthly charges volumetric rates delta resources utilizes delta’s onsystem transportation service delta recognizes revenue delta resources tariff rates eliminates upon consolidation record offsystem transportation services period transport natural gas interstate pipeline behalf thirdparty shippers delivering natural gas delta’s system bill offsystem transportation services tariff rates approved kentucky public service commission volumetric rates delgasco utilizes delta‘s offsystem transportation service delta recognizes revenue delgasco tariff rates eliminates upon consolidation daily volumes natural gas delivered thirdparty shippers supplying transportation customers rarely equal daily volumes billed customers resulting periodic transportation imbalances shortterm duration delta monitors activity regularly notifies shippers imbalance transportation imbalances turn create imbalances natural gas supply delta’s system thus requiring delta purchase either less volumes natural gas meet customers’ natural gas requirements included consolidated balance sheets either accounts payable prepayments respectively consistent regulatory treatment natural gas cost recovery tariff discussed note 14 notes consolidated financial statements imbalances impact results operations net impact imbalances offset regulatory assetliability related natural gas cost recovery tariff nonregulated revenues delta resources enters contracts whereby obligated supply onehundred percent customers’ natural gas requirements either fixed indexbased rates delta resources recognizes revenue period actual metered volumes delivered customer delta resources utilizes delta’s onsystem transportation service records transportation expenses tariff rates eliminate upon consolidation delgasco enters contracts deliver fixed quantities natural gas customers either fixed indexbased rates delgasco recognizes revenue based upon period customer takes possession natural gas delgasco utilizes delta’s offsystem transportation service records transportation expenses tariff rates eliminate upon consolidation enpro produces natural gas supplies portion delgasco’s natural gas requirements recognizes sale natural gas period delgasco takes possession natural gas revenues related natural gas costs enpro delgasco within nonregulated segment eliminate upon consolidation recognize revenue natural gas liquids period customer takes possession natural gas liquids factors affect revenue sale natural gas liquids include hydrocarbon content liquids market price natural gas liquids volumes natural gas liquids sold regulated purchased natural gas expense regulated natural gas rates include natural gas cost recovery tariff approved kentucky public service commission provides dollartracker matches revenues natural gas costs provides eventual dollarfordollar recovery natural gas costs incurred regulated segment recovery uncollectible natural gas cost portion bad debt expense natural gas costs based amount natural gas costs recovered revenue differences actual natural gas costs natural gas costs billed deferred reflected computation future billings customers using natural gas cost recovery mechanism excise taxes delta collects certain excise taxes levied state local governments customers taxes accounted net basis therefore included revenues accompanying consolidated statements income accounts receivable allowance doubtful accounts record allowance doubtful accounts reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense nonregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated natural gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 28 years derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fund related deferred compensation liability assets trust consist exchange traded securities exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards 2 accounting pronouncements recently issued pronouncements may 2014 financial accounting standards board issued guidance revising principles standards revenue recognition guidance creates framework recognizing revenue improve comparability revenue recognition practices across entities industries focusing customer obtains control goods services rather current risks rewards model recognition core principle new standard entity recognizes revenue transfers goods services customers amount reflects consideration entity expects entitled goods services new disclosure requirements include information intended communicate nature amount timing uncertainty revenue cash flows applicable contracts including significant judgments entities generally required make estimates use judgment new standard guidance effective quarter ending september 30 2018 june 30 2017 evaluating sources revenue assessing effect new guidance financial position results operations cash flows conclusion assessment contingent part upon completion deliberations currently progress industry notably connection efforts produce accounting guide intended developed american institute certified public accountants association undertaking american institute certified public accountants formed number industry task forces including power utilities task force “task force” currently industry working task force address several items including 1 evaluation collectability customers utility regulatory mechanisms help assure recovery uncollected accounts ratepayers 2 accounting funds received third parties partially fully reimburse cost construction asset 3 accounting alternative revenue programs performancebased ratemaking existing alternative revenue program guidance though excluded financial accounting standards board updating specific guidance associated revenue contracts customers continued without substantial modification require separate presentation revenues subject abovenoted deliberations statement comprehensive income effective time updated guidance associated revenue contracts customers becomes effective currently timeline resolution deliberations established additionally actively working peers rateregulated natural gas industry determine accounting treatment several issues expected addressed task force given uncertainty respect conclusions might arise deliberations currently unable determine effect new guidance financial position results operations cash flows internal controls transition method utilize adopt new guidance july 2015 financial accounting standards board issued guidance simplifying measurement inventory guidance requires inventory measured lower cost net realizable value guidance effective quarter ending september 30 2017 expected material impact results operations financial position cash flows january 2016 financial accounting standards board issued guidance improve recognition measurement presentation disclosure financial instruments improvements include guidance estimating fair value financial instruments measured amortized cost balance sheet classification financial assets liabilities balance sheet reduced disclosure fair value financial instruments recognized balance sheet amortized cost guidance effective quarter ending september 30 2018 expected material impact results operations financial position cash flows disclosures february 2016 financial accounting standards board issued guidance revising principles standards recognizing leases guidance requires lessee recognize statement financial position liability lease payments rightofuse asset representing lessees right use underlying asset lease term recognition measurement lease expenses significantly changed previous guidance effective quarter ending september 30 2018 evaluating impact guidance expected results operations financial position cash flows disclosures march 2017 financial accounting standards board issued guidance improve recognition presentation net periodic pension cost guidance requires employers sponsor defined benefit pension plans disaggregate service cost component net periodic benefit cost components net periodic benefit cost income statement guidance also allows service cost component eligible capitalization departure current accounting guidance components net periodic benefit cost eligible capitalization guidance effective quarter ending september 30 2018 evaluating impact guidance expected results operations financial position cash flows disclosures internal controls recently adopted pronouncements march 2016 financial accounting standards board issued guidance simplifying accounting disclosure requirements sharebased compensation including income tax consequences classification awards equity liability classification statement cash flows guidance effective quarter ending september 30 2017 however elected early adoption guidance changed accounting excess tax benefits deficiencies previously difference compensation cost recognized financial reporting purposes versus deduction corporate tax return recognized additional paidin capital extent cumulative tax benefits exceeded tax deficiencies effective july 1 2016 prospective basis began recognizing effect vested awards discrete items period occur excess tax benefits deficiencies recognized consolidated statements income adjustment income tax expense previously unrecognized excess tax benefits require cumulative effect adjustment upon adoption guidance also requires classification excess tax benefits deficiencies operating activity consolidated statements cash flows adopted retrospectively resulted immaterial reclassification financing activities operating activities consolidated statements cash flows entities may elect accounting policy forfeitures either continue current method recognizing forfeitures based number awards expected vest forfeitures occur elected recognize forfeitures occur adoption accounting policy result cumulative effect adjustment threshold increased award qualify equity classification shares redeemed meet statutory withholding obligations shares redeemed maximum statutory tax rates applicable jurisdiction rather minimum statutory tax rates adoption guidance result change classification award requiring cumulative effect adjustment 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust consist exchange traded securities exchange traded mutual funds securities mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy trust assets follows carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost net unamortized debt issuance costs fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date fair value longterm debt categorized level 3 fair value hierarchy 4 asset retirement obligations legal obligations june 30 2017 2016 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain natural gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown accompanying consolidated balance sheets additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted kentucky public service commission even though costs represent legal obligations accordance regulatory accounting standards 549000 487000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2017 2016 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences capitalization thresholds tax reporting purposes versus financial reporting purposes differences recognition purchased natural gas costs certain accruals currently deductible income tax purposes utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates net deferred income tax liability presented noncurrent deferred income taxes accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented longterm liabilities consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income june 30 2017 2016 unrecognized tax positions recognized would impact effective tax rate file income tax returns federal kentucky jurisdictions tax years previous june 30 2014 june 30 2013 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions fund plan adequately generally accepted accounting principles “gaap” require employers sponsor defined benefit retirement plans recognize funded status defined benefit retirement plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit retirement plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2017 2016 respectively follows accumulated benefit obligation 28320000 28124000 2017 2016 respectively plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 65 equity investments 35 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations domestic real estate securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities additional diversification invest absolute return strategy mutual funds include equity fixed income securities objective providing return greater inflation plan amended investment policy allow liability driven investments time match portion plans liability underlying assets regularly review asset allocation periodically rebalance investments targeted allocations appropriate assets plan comprised investments individual securities mutual funds individual exchange traded equity securities exchange traded mutual funds treasury securities categorized level 1 fair value hierarchy fair value investments determined based quoted market price investment mutual funds categorized based primary investment strategy respective level within fair value hierarchy determined described note 1 notes consolidated financial statements corporate bonds municipal bonds us agency securities valued based calculation using interest rate curves credit spreads applied terms debt maturity coupon rate supported observable transactions categorized level 2 fair value hierarchy following represents fair value plan assets determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review highquality corporate bond yields maturities approximating remaining life projected benefit obligations made 1500000 discretionary contributions defined benefit retirement plan fiscal 2017 august 2017 made 500000 discretionary contribution defined benefit retirement plan following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit retirement plan freezing defined benefit retirement plan new entrants impact level benefits existing participants provide postretirement postemployment benefits defined benefit retirement plan retired employees supplemental retirement agreement described employee savings plan employee savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution employee savings plan account company contributions discretionary subject change approval board directors 2017 2016 2015 employee savings plan expense 396000 379000 359000 respectively supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta makes discretionary contributions irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted 2017 2016 2015 delta contributed 60000 year trust june 30 2017 2016 irrevocable trust assets 1219000 1034000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 22682 28437 26412 shares 2017 2016 2015 respectively registered 400000 shares issuance reinvestment plan 2006 june 30 2017 approximately 15000 shares available issuance reinvestment plan terminated effective june 30 2017 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase natural gas supply combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts mitigate price risk related sale natural gas efforts balance supply demand regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2017 june 30 2016 2017 2016 borrowing bank line credit bank line credit extends june 30 2019 terminated upon closing merger interest rate used line credit london interbank offered rate plus 1075 annual cost unused bank line credit 0125 restrictive covenants discussed note 10 notes consolidated financial statements 10 longterm debt series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december following table summarizes contractual maturities series notes fiscal year additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes amortize debt issuance expenses life related debt using effective interest method june 30 2017 2016 71000 77000 debt issuance costs respectively reflected adjustment carrying amount longterm debt accompanying consolidated balance sheets june 30 2017 2016 loss extinguishment debt 2468000 2689000 respectively deferred regulatory asset amortized term debt discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable financial covenants include covenants related tangible net worth total debt capitalization ratio fixed charge ratio additionally company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items believe compliance financial covenants bank line credit 426 series notes periods presented consolidated financial statements furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank 11 earnings per share following table sets forth computation basic diluted earnings per common share percentage allocated common shares b represents dividends paid common shares exclusive unvested participating shares c incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 16 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed note c weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive unvested nonparticipating shares outstanding june 30 2017 2016 2015 certain awards shareholder approved incentive compensation plan discussed note 16 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive june 30 2017 2016 4000 28000 participating shares outstanding respectively excluded computation earnings allocated common shares holders unvested participating shares contractual obligation share losses antidilutive shares 2015 4000 28000 65000 unvested participating shares outstanding june 30 2017 2016 2015 respectively 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 68000 78000 69000 years ended june 30 2017 2016 2015 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments continuation specified benefits varying periods following defined changes ownership company officer either terminated without cause term agreement officer terminates employment officer cannot good faith effectively carry duties event agreements exercised form lump sum payments approximately 47 million wages would paid addition continuation specified benefits five years additionally agreements provide reimbursement excise taxes levied payments grossup income taxes attributable reimbursement agreements exercised officers based 3050 per share price offered png approximately 147 million would paid includes wages benefits unvested shares awarded incentive compensation plan tax grossups jacob halberstam et al v delta natural gas company inc et al clark circuit court kentucky plaintiff filed complaint april 13 2017 behalf delta shareholders delta directors png merger sub plaintiff alleges defendants breached fiduciary duties delta shareholders aided abetted breaches fiduciary duties connection merger agreement terms delta would merged merger sub delta surviving corporation becoming wholly owned subsidiary png plaintiff seeks enjoin consummation proposed transaction proposed transaction closed damages delta’s directors paul parshall et al v delta natural gas company inc et al united states district court eastern district kentucky lexington plaintiff filed complaint april 28 2017 behalf delta shareholders delta directors png merger sub steelriver infrastructure fund north america lp plaintiff alleges defendants violated sections 14a 20a securities exchange act 1934 connection merger agreement complaint dismissed without prejudice judy cole et al v delta natural gas company inc et al clark circuit court kentucky plaintiff filed complaint may 5 2017 behalf delta shareholders delta directors plaintiff alleges defendants breached fiduciary duties delta shareholders connection merger agreement proxy statement sent delta shareholders describing transaction plaintiff seeks enjoin consummation proposed transaction counsel delta counsel png merger sub steelriver infrastructure fund north america lp counsel plaintiffs three lawsuits described entered confidential memorandum understanding dated may 25 2017 terms litigation settled subject court approval delta making additional disclosures shareholders done anticipated plaintiffs seek order clark circuit court requiring delta pay attorneys’ fees expenses plaintiffs amount anticipated fee request amount settlement unknown 2017 expense recognized related fee request settlement consolidated statement income delta insured litigation subject 1 million deductible party material pending legal proceedings expected materially adverse impact liquidity financial position results operations connection merger retained tudor pickering holt co advisors llc “tph” act financial advisors connection transaction contemplated merger agreement 1853000 payable tph upon closing merger additionally upon closing merger delta required purchase runoff insurance coverage six years cost estimated 158000 2017 none amounts recognized expense consolidated statement income entered forward purchase agreements portion nonregulated segments natural gas purchases june 2019 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate natural gas supply meet nonregulated customers natural gas requirements agreements aggregate minimum purchase obligations 350000 199000 fiscal years ending june 30 2018 2019 respectively 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services includes approval regulated rates tariffs monitor need file requests general rate increase natural gas distribution transportation services kentucky public service commission historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive natural gas costs reasonable rate return rate base rate base consists primarily regulated segments property plant equipment natural gas storage unamortized debt expense offset accumulated depreciation certain deferred income taxes regulated rates recently adjusted 2010 rate case became effective october 2010 matters kentucky public service commission would material impact results operations financial position cash flows pipe replacement program tariff allows us adjust rates annually earn return capital expenditures incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities natural gas cost recovery tariff permits us adjust rates charged customers reflect changes natural gas supply costs bad debt expense related natural gas cost although required file general rate case adjust rates pursuant natural gas cost recovery tariff required make quarterly filings kentucky public service commission overrecovered natural gas costs collected refunded adjustments customer bills beginning three months end quarter actual natural gas costs incurred weather normalization tariff provides adjustment rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts additionally conservation efficiency program tariff residential customers allows us adjust rates activities performed program perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us gross margins lost sales due operating program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises seven cities serve continue operate conditions expired franchises fifteen cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise adversely affected operations march 17 2017 png filed joint application kentucky public service commission seeking regulatory approval merger discussed note 18 notes consolidated financial statements august 15 2017 kentucky public service commission issued order granting unconditional approval merger anticipate closing occur september 30 2017 15 segment information company two reportable segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marking activities sales natural gas liquids nonregulated segment produces portion natural gas markets customers division segments separate revenue generating components based upon regulation products services segments operate single geographic area central southeastern kentucky chief operating decision maker chief executive officer evaluate performance based net income respective segment nonregulated segment two customers provided 5 operating revenues 2017 largest customer provided approximately 15889000 11555000 17852000 nonregulated revenues 2017 2016 2015 respectively second largest customer provided approximately 4744000 5656000 7127000 nonregulated revenues 2017 2016 2015 respectively assurance revenues customers continue levels regulated segment purchased approximately 99 natural gas centerpoint energy services midwest energy services 2017 2016 2015 nonregulated segment purchased approximately 95 natural gas centerpoint energy services midwest energy services 2017 purchased approximately 99 natural gas centerpoint energy services midwest energy services 2016 2015 reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 16 sharebased compensation shareholder approved incentive compensation plan “plan” provides compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2017 approximately 751000 shares common stock available issuance plan subject limitations imposed corporate governance guidelines shares common stock may available authorized unissued shares reacquired us shares purchase open market upon vesting plan allows withholding number shares equal fair value taxes required satisfy statutory withholding requirements following table sets forth number shares granted fiscal year compensation expense sharebased compensation recorded nonregulated segment operation maintenance expense consolidated statements income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met forfeitures awards recognized occur following table sets forth sharebased compensation expense fiscal year stock awards 2017 2016 2015 common stock awarded deltas outside directors equity component compensation 2015 common stock additionally awarded virtually delta employees recipients vested awards shortly awards granted time grant dates vesting dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares 2017 2016 2015 performance shares awarded companys executive officers performance shares vest performance objectives awards met based companys earnings per common share fiscal year performance shares awarded cash bonuses sharebased compensation upon satisfaction performance objectives unvested shares issued recipients vest onethird increments august 31 subsequent achieving performance objectives long recipients employees throughout service period unvested shares executive officers still employed company fully vest upon attaining age sixtyseven recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest performance objectives performance shares awarded 2017 2016 satisfied awards forfeited performance objectives performance shares awarded 2015 met 4000 shares remain unvested june 30 2017 company recognize remaining 4000 expense associated shares 2018 performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied shares granted 2015 holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2017 2 months following summarizes activity performance shares represents maximum number shares could issued based achieving performance criteria 17 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 18 merger png companies llc february 20 2017 entered merger agreement png drake merger sub inc “merger sub” new wholly owned subsidiary png special meeting shareholders held june 1 2017 shareholders voted approved merger august 15 2017 kentucky public service commission issued order granting unconditional approval merger agreement provides merger sub delta surviving wholly owned subsidiary png effective time merger subject customary closing conditions share delta common stock issued outstanding immediately prior closing converted automatically right receive 3050 cash per share without interest less applicable withholding taxes upon consummation merger delta common stock delisted nasdaq bank line credit terminated anticipate closing occur september 30 2017 subsequent closing merger stub period dividend paid delta’s shareholders record immediately prior closing prorated quarterly dividend calculated accordance terms merger agreement connection transaction 2017 incurred 1612000 mergerrelated expenses costs paid outside parties reflected operation maintenance consolidated statement income amount include cost company personnel participating mergerrelated activities refer note 13 notes consolidated financial statements discussion litigation related merger schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2017 2016 2015 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrants amended restated articles incorporation incorporated herein reference exhibit 4a deltas registration statement form s2 reg 3330431 dated april 4 2003 3iiregistrants amended restated bylaws dated may 2 2003 filed herewith 4a indenture dated september 1 1993 respect 6 58 debentures due october 1 2023 incorporated herein reference exhibit 4e deltas form s2 reg 3368274 dated september 2 1993 4b indenture dated march 1 1998 respect 715 debentures due april 1 2018 incorporated herein reference exhibit 4d deltas form s2 reg 33347791 dated march 11 1998 4c indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d deltas form s2 reg 333100852 dated october 30 2002 10aemployment agreements registrant five officers john b brown johnny l caudill john f hall alan l heath glenn r jennings incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 10bsupplemental retirement benefit agreement trust agreement registrant glenn r jennings incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated february 25 2005 10cgas sales agreement dated may 1 2005 registrant atmos energy marketing llc filed herewith 10dgas sales agreement dated may 1 2003 registrant atmos energy marketing llc filed herewith 10egas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2 reg 333100852 dated february 7 2003 10fgts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrants form s2 reg 333100852 dated february 7 2003 10gfts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrants form s2 reg 333100852 dated february 7 2003 10hloan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2 reg 333100852 dated february 7 2003 10ipromissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 10jgas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 10kgas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 dated april 4 2003 10ldeed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 10munderground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 10nbase contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 10ooil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 10pagreement transport natural gas registrant nami resources company llc incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated march 23 2005 12 computation consolidated ratio earnings fixed charges 14 registrants business code conduct ethics filed herewith 21 subsidiaries registrant 23 consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 312 certification principal financial officer pursuant section 302 sarbanesoxley act 321 certification chief executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 2nd day september 2005 delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings president chief executive september 2 2005 officer vice chairman glenn r jennings board ii principal financial officer sjohn f hall vice president finance september 2 2005 secretary treasurer john f hall iii principal accounting officer sjohn b brown vice president controller september 2 2005 john b brown iv majority board directors sh peet chairman board september 2 2005 h peet sdonald r crowe director september 2 2005 donald r crowe sjane hylton green director september 2 2005 jane hylton green slanny greer director september 2 2005 lanny greer sbilly joe hall director september 2 2005 billy joe hall smichael j kistner director september 2 2005 michael j kistner slewis n melton director september 2 2005 lewis n melton sarthur e walker jr director september 2 2005 arthur e walker jr smichael r whitley director september 2 2005 michael r whitley managements statement responsibility financial reporting accounting management responsible preparation presentation integrity financial statements financial information report preparing financial statements conformity accounting principles generally accepted united states management required make estimates assumptions affect reported amount assets liabilities revenues expenses disclosure contingent assets liabilities date financial statements reporting period actual results could differ estimates company maintains system accounting internal controls management believes provides reasonable assurance accounting records reliable purposes preparing financial statements assets properly accounted protected board directors pursues oversight role financial statements audit committee consists four outside directors audit committee meets periodically management review work monitor discharge responsibilities audit committee also meets periodically companys internal auditor well representatives deloitte touche llp companys independent registered public accounting firm full free access audit committee without management present discuss internal accounting control auditing financial reporting matters glenn r jennings john f hall john b brown president chief vice president finance vice president executive officer secretary treasurer controller report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc subsidiaries june 30 2005 2004 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2005 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2005 2004 results operations cash flows three years period ended june 30 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements effective july 1 2002 delta natural gas company inc adopted statement financial accounting standards 143 accounting asset retirement obligations also audited accordance standards public company accounting oversight board united states effectiveness companys internal control financial reporting june 30 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated august 31 2005 expressed unqualified opinion managements assessment effectiveness companys internal control financial reporting cincinnati ohio august 31 2005 delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company sells natural gas approximately 40000 customers distribution system central southeastern kentucky three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated certain reclassifications made priorperiod amounts conform 2005 presentation b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 26 28 29 average depreciable plant 2005 2004 2003 respectively maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired e gas cost recovery gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism f revenue recognition bill customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled prior november 2004 recorded regulated revenues gas costs billed basis accordance ratemaking treatment followed kentucky public service commission financial reporting regulatory purposes connection receiving rate order discussed note 12 began estimating regulated unbilled revenues gas costs end month reflecting amounts financial statements therefore june 30 2005 estimated 58000 mcf gas consumed customers june unbilled reflecting sales unbilled volumes accompanying financial statements resulted nonrecurring increase operating income 617000 net income 379000 twelve months ended june 30 2005 june 30 2005 unbilled revenues 1246000 unbilled gas costs 629000 included accounts receivable accounts payable respectively accompanying consolidated balance sheet g revenues customer receivables serve 40000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable h use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates rate regulated basis accounting regulated operations follow accounting reporting requirements statement financial accounting standards 71 accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheet regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows regulatory assets 000 2005 2004 deferred gas cost 2647 1524 loss extinguishment debt 2128 2257 rate case gas audit expense 218 152 total regulatory assets 4993 3933 regulatory liabilities 000 accrued cost removal longlived assets 850 784 regulatory liability deferred income taxes 1731 648 total regulatory liabilities 2581 1432 currently earning return loss extinguishment debt rate case expenses classified assets accompanying consolidated balance sheets deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism increase regulatory liability deferred income taxes result reduction kentucky corporate income tax rate discussed note 3 notes consolidated financial statements j impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change opinion management longlived assets appropriately valued accompanying financial statements k derivatives purchase sell natural gas many gas purchase sale contracts qualify derivative statement financial accounting standards 133 contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying financial statements 2 new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards 143 entitled accounting asset retirement obligations delta adopted statement effective july 1 2002 statement 143 addresses financial accounting legal obligations associated retirement longlived assets upon adoption statement july 2002 recorded 178000 asset retirement obligations balance sheet primarily representing current estimated fair value obligation plug oil gas wells time abandonment amount 47000 recorded incremental cost underlying property plant equipment cumulative effect earnings adopting new statement charge earnings 88000 net income taxes 55000 representing cumulative amounts depreciation depletion expenses changes asset retirement obligation due passage time historical accounting periods also asset retirement obligations indeterminate settlement dates obligations relate gas wells oil lines storage facility compressor station sites recorded estimated range potential settlement dates known according statement 143 accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement financial accounting standards 71 entitled accounting effects certain types regulation recorded approximately 850000 784000 accrued cost removal regulatory liabilities accompanying balance sheets june 30 2005 2004 respectively march 2005 financial accounting standards board issued interpretation 47 entitled accounting conditional asset retirement obligations asset retirement obligation conditional either timing method setting obligation conditioned future event currently evaluating asset retirement obligations light interpretation 47 impact adopting interpretation june 30 2006 financial position results operations 3 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas cost certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse deferred income tax balances june 30 2005 reflect 225 decrease state kentucky corporate income tax rate phased fiscal 2008 changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates increase deferred tax assets regulatory liabilities table primarily due establishing additional regulatory liability result kentucky corporate tax rate decrease current portion net accumulated deferred income tax liability shown liabilities longerm portion shown deferred income taxes accompanying balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 2005 2004 deferred tax liabilities accelerated depreciation 18724100 17646300 deferred gas cost 1022200 601000 pension 1766800 1365400 debt issuance expense 711100 780400 312600 279900 total 22536800 20673000 deferred tax assets alternative minimum tax credits 1462400 1601789 regulatory liabilities 981600 255600 investment tax credits 109900 128700 489900 719300 total 3043800 2705389 net accumulated deferred income tax liability 19493000 17967611 components income tax provision comprised following years ended june 30 2005 2004 2003 components income tax expense current federal 312800 149800 258700 state 156100 539800 64200 total 468900 349000 322900 deferred 2634300 1969600 2090457 income tax expense 3103200 2359600 2413357 reconciliation statutory federal income tax rate effective income tax rate shown table 2005 2004 2003 statutory federal income tax rate 340 state income taxes net federal benefit 53 52 amortization investment tax credits 05 06 differences net 01 03 effective income tax rate 387 384 383 4 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately effective april 1 2002 board directors adopted plan amendment enhanced formula benefits paid companys defined benefit retirement plan september 2002 board directors approved amendment plan effective november 1 2002 plan amendment reduced formula benefits paid plan future service restricted participants taking lumpsum distributions plan obligations funded status plan measured march 31 follows 2005 2004 change benefit obligation benefit obligation beginning year 10267056 9214925 service cost 714801 662770 interest cost 612370 557183 actuarial loss 1017431 87936 benefits paid 524826 255758 benefit obligation end year 12086832 10267056 change plan assets fair value plan assets beginning year 10450066 8310322 actual return plan assets 343517 1645573 employer contributions 1032656 749929 benefits paid 524826 255758 fair value plan assets end year 11301413 10450066 funded status 785419 183010 unrecognized net actuarial loss 5068790 3709444 unrecognized prior service cost 1112124 1198303 net amount recognized prepaid benefit costs statement financial position 3171247 2694151 projected benefit obligation 12086832 10267056 accumulated benefit obligation 10936279 9932355 fair value plan assets 11301413 10450066 2005 2004 2003 components net periodic benefit cost service cost 714801 662770 601607 interest cost 612370 557183 636649 expected return plan assets 863061 670823 756731 amortization unrecognized net loss 177629 262483 61873 amortization prior service cost 86179 8198 net periodic benefit cost 555560 725434 535200 weightedaverage assumptions used determine benefit obligations discount rate preretirement 580 600 625 discount rate postretirement 575 rate compensation increase 400 weightedaverage assumptions used determine net periodic benefit cost discount rate preretirement 600 625 750 discount rate postretirement 575 571 expected longterm return plan assets 800 rate compensation increase 400 expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 65 percent equity investments approximately 35 percent fixed income investments plan assets pension plan weightedaverage asset allocations plans measurement date march 31 asset category follows 2005 2004 equity securities 66 69 debt securities 25 24 9 7 100 equity investment target approximately 65 percent includes allocations domestic international emerging markets managers asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 1500000 pension plan 2006 following benefit payments reflect expected future service appropriate expected paid 2006 435000 2007 145000 2008 200000 2009 275000 2010 350000 years 2011 2015 2700000 statement financial accounting standards 106 entitled employers accounting postretirement benefits statement financial accounting standards 112 entitled employers accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law june 30 2004 company matched 50 employees contribution maximum company contribution 25 employees annual compensation july 1 2004 company matched 100 employees contribution maximum company contribution 35 employees annual compensation 2005 2004 2003 deltas savings plan expense 234000 167800 158900 respectively c employee stock purchase plan employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees could contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock issued delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs national market system last business day june matched shares purchased expenses matching shares granted stock plan 59000 53000 years ended june 30 2004 2003 respectively therefore stock equivalent market value 118000 issued july 2004 board discontinued stock plan july 1 2004 supplemental retirement agreement february 24 2005 deltas board directors adopted nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas president chief executive officer delta contribute 60000 annually irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted 5 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 24447 29129 30821 shares 2005 2004 2003 respectively registered 150000 shares issuance reinvestment plan december 2000 june 30 2005 21869 shares still available issuance 6 note receivable officer deltas note receivable officer accompanying balance sheet relates 160000 loan made glenn r jennings president chief executive officer loan secured real estate owned jennings bears interest 6 jennings pays monthly delta forgives 2000 principal amount month service jennings completes outstanding balance loan 86000 june 30 2005 event jennings terminates employment delta due change control jennings employment terminated cause result disability death loan become immediately due payable 7 notes payable line credit current available line credit branch banking trust company 40000000 5959000 4738000 borrowed weighted average interest rate 421 314 june 30 2005 2004 respectively maximum amount borrowed 2005 2004 18574000 19034000 respectively interest line determined monthly london interbank offered rate plus 1 used line credit cost unused line credit 30 fiscal 2005 effective august 12 2005 cost unused line credit changed 125 line credit extended october 31 2007 8 longterm debt february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us beginning february 2007 2 premium declining ratably ceases february 2009 march 1998 issued 25000000 715 debentures mature march 2018 redemption 25000 annually made behalf deceased holders within 60 days notice subject annual aggregate 750000 limitation 715 debentures redeemed us premium october 1993 issued 15000000 6 58 debentures mature october 2023 holder may require redemption 25000 annually subject annual aggregate limitation 500000 redemption also made behalf deceased holders within 60 days notice subject annual aggregate 500000 limitation 6 58 debentures redeemed us premium february 2003 redeemed 14806000 aggregate principal amount 830 debentures due 2026 amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2005 unamortized balance 3831000 loss extinguishment debt 2128000 included deferred amortized term related debt consistent regulatory treatment line credit agreement indentures relating publicly held debentures contain defined events default among things make obligation immediately due payable consider following covenants significant dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted may assume additional mortgage indebtedness excess 2000000 without effectively securing debentures equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default line credit debentures default line credit debenture agreements period presented 9 fair values financial instruments fair value debentures estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value debentures june 30 2005 2004 estimated 60750000 55758000 respectively carrying amounts accompanying consolidated financial statements june 30 2005 2004 54357000 54699000 respectively carrying amount financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 10 operating leases operating leases relate primarily well compressor station site leases rental expense longterm operating leases 88000 87000 90000 three years ending june 30 2005 2004 2003 respectively 11 commitments contingencies entered individual employment agreements five officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 32 million would paid addition continuation specified benefits five years lawsuit filed january 24 2005 us former employee alleging pay appropriate compensation employees work us period january 1982 december 2002 although believe complaint merit intend vigorously defend cannot predict outcome action liquidity financial condition results operations 12 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission regulation business includes setting rates permitted charge retail customers transportation customers monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases able adjust sales prices retail gas sell transport customers april 5 2004 filed request increased base rates kentucky public service commission general rate case 200400067 requested annual increase revenues 4277000 increase 741 test year case twelve months ended december 31 2003 public service commission approved new base rates effective october 7 2004 approved rates based upon return equity 105 provide additional annual revenues approximately 2756000 kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather november march billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities communities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid local franchise hold franchises four cities seven communities serve cities communities serve either franchises expired communities governmental organizations authorized grant franchises local governments required want offer franchise attempt acquire reacquire franchises whenever feasible without franchise local government could require us cease occupation streets public grounds prohibit us extending facilities new area city community date absence franchise caused adverse effect operations 13 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies single customer citizens gas utility district provided 10620000 nonregulated revenues 2005 segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses sale purchase gas well intercompany gas transportation services intersegment transportation revenue expense recorded tariff rates operating expenses taxes interest allocated nonregulated segment information shown periods 14 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods exhibit 3ii amended restated bylaws delta natural gas company inc article offices registered agent 11 principal office principal office corporation shall located 3617 lexington road winchester kentucky 40391 corporation may offices either within without commonwealth kentucky business corporation may require time 12 registered office registered office corporation shall 3617 lexington road winchester kentucky 40391 address registered office may changed time board directors 13 registered agent registered agent corporation shall secretary corporation article ii shareholders 21 annual meetings annual meeting shareholders shall held principal office corporation third thursday november year time president may designate board directors corporation resolution may year change place date time annual meeting established first sentence section 21 article ii purpose annual meetings shall election directors business may properly come election directors shall held day designated annual meeting adjournment thereof board directors shall cause election held special meeting shareholders soon thereafter may practicable 22 special meetings special meetings shareholders may called president majority members board directors holders least thirtythree onethird percent 33 13 votes entitled cast issue proposed considered proposed special meeting provided however call holders shall subject requirements kentucky law 23 place special meetings president board directors may designate place within without commonwealth kentucky place special meeting designation properly made special meeting otherwise called place meeting shall registered office corporation commonwealth kentucky 24 notice annual special meeting written printed notice stating place day hour annual special meeting case special meeting purpose purposes meeting called shall delivered less ten 10 days sixty 60 days date meeting either personally mail direction president secretary officer persons calling meeting shareholder record entitled vote meeting mailed notice shall deemed delivered deposited united states mail sealed envelope addressed shareholder address appears stock transfer books corporation postage thereon prepaid 25 fixing record date board directors may fix record date order determine shareholders entitled receive dividends distributions notice shareholders meeting demand special meeting vote take action receive allotment rights record date fixed board directors shall seventy 70 days meeting action requiring determination shareholders event record date fixed board directors record date shall determined pursuant kentucky law 26 quorum voting requirements unless corporations articles incorporation kentucky law requires otherwise majority votes entitled cast matter voting group shall constitute quorum action matter quorum exists action matter election directors voting group shall approved votes cast within voting group favoring action exceed votes cast opposing action unless corporations articles incorporation kentucky law requires greater number affirmative votes 27 proxies shareholder may vote shares person proxy b shareholder may appoint proxy vote otherwise act signing appointment form either personally attorney fact telegram cablegram appearing transmitted proper person photographic photostatic equivalent reproduction writing appointing proxy shall deemed sufficient signed appointment form c appointment proxy shall effective appointment form received secretary officer agent authorized tabulate votes appointment shall valid eleven 11 months unless longer period expressly provided appointment form appointment proxy shall revocable shareholder unless appointment form conspicuously stated irrevocable appointment coupled interest 28 voting shares subject provisions section 29 hereof outstanding share common stock authorized corporations articles incorporation voting power shall entitled one vote upon matter submitted vote meeting shareholders voting rights classes shares voting common stock shall set forth corporations articles incorporation appropriate legal action board directors 29 informal action shareholders action required taken may taken meeting shareholders may taken without meeting consent writing setting forth action taken shall signed shareholders entitled vote respect subject matter thereof article iii directors 31 general powers corporate powers shall exercised authority business affairs corporation managed direction board directors 32 number tenure qualifications number directors corporation shall ten 10 board directors shall divided three 3 classes class nearly equal possible director shall hold office term elected successor elected qualified whichever period longer 33 removal resignations meeting shareholders called expressly purpose director may removed cause vote holders majority shares entitled vote election directors removal without cause may occur set forth articles incorporation notwithstanding provisions section director may removed without cause number votes sufficient elect cumulative voting voted removal member board directors may resign board directors time giving written notice president secretary corporation person entity specified kentucky law unless otherwise specified notice resignation shall effective upon delivery notice shall require acceptance make effective 34 regular meetings regular annual meeting board directors shall held immediately place annual meeting shareholders board directors may provide resolution time place either within without commonwealth kentucky holding 12 additional regular meetings following twelve 12 month period without notice resolution 35 special meetings special meetings board directors may called request president two directors special meetings board directors shall held principal office corporation place may specified notice meeting 36 notice special meeting shall given least twelve 12 hours prior thereto written notice delivered personally mailed director business address telephone director personally mailed notice shall deemed delivered deposited united states mail sealed envelope addressed postage prepaid director may waive writing notice meeting attendance director meeting shall constitute waiver notice meeting unless director beginning meeting promptly upon arrival objects holding meeting transacting business meeting thereafter vote assent action taken meeting neither business transacted purpose regular special meeting board directors need specified notice waiver notice meeting 37 quorum majority number directors fixed determined accordance section 32 hereof shall constitute quorum transaction business meeting board directors 38 manner acting act majority directors present meeting quorum present shall act board directors unless otherwise required articles incorporation 39 vacancies vacancy occurring board directors may filled affirmative vote majority remaining directors though less quorum board directors director elected fill vacancy shall elected unexpired term predecessor office directorship filled reason increase number directors may filled board directors term office continuing next election directors shareholders 310 compensation director shall compensated accordance compensation guidelines established board directors payment shall preclude director serving corporation capacity receiving compensation 311 action written consent action required permitted taken board directors meeting may taken without meeting consent writing setting forth action taken shall signed directors 312 chairman vicechairman board directors may appoint one members chairman board directors board directors may also appoint one members vicechairman board directors individual shall serve absence chairman perform additional duties may assigned board directors article iv officers 41 classes officers corporation shall president one vicepresidents secretary treasurer shall elected board directors officers assistant officers may deemed necessary may elected appointed board directors 42 election term office officers corporation shall elected board directors regular annual meeting board directors election officers shall held meeting election shall held soon thereafter convenient vacancies may filled new offices created filled meeting board directors officer shall hold office successor shall duly elected shall qualified death shall resign shall removed manner hereinafter provided 43 removal resignations officer agent elected appointed board directors may removed board directors without cause whenever judgment best interests corporation would served thereby removal shall without prejudice contract rights person removed election appointment officer agent shall create contract rights officer corporation may resign time delivering notice president secretary corporation unless otherwise specified therein acceptance resignation shall necessary make effective officers resignation shall affect corporations contract rights officer 44 vacancies vacancy office death resignation removal disqualification otherwise may filled board directors unexpired portion term 45 president shall chief executive officer corporation chairman vicechairman appointed absence shall preside meetings shareholders board directors may sign certificates shares corporation deeds mortgages bonds contracts instruments board directors authorized executed except cases signing execution thereof shall expressly delegated board directors bylaws officer agent corporation shall required law otherwise signed executed president general shall perform duties incident office president chief executive officer duties may prescribed board directors time unless otherwise ordered board directors president shall full power authority behalf corporation attend act vote meetings shareholders corporation may hold stock meeting shall hold may exercise rights incident ownership stock corporation owner might exercised present board directors may confer like powers person persons 46 vicepresident absence president event inability refusal act vice presidents order designated time election otherwise board directors shall perform duties president acting shall powers subject restrictions upon president vicepresident may sign secretary assistant secretary certificates shares corporation shall perform duties time may assigned president board directors 47 treasurer shall chief financial officer corporation shall charge custody responsible funds securities corporation receive give receipts monies due payable corporation source whatsoever deposit monies name corporation banks trust companies depositories shall selected accordance provisions article v bylaws general perform duties incident office treasurer duties time may assigned president board directors required board directors treasurer shall give bond faithful discharge duties sum surety sureties board directors shall determine 48 secretary shall prepare keep minutes shareholders meetings board directors meetings one books provided purpose b see notices duly given accordance provisions bylaws required law c custodian corporate records seal corporation keep register post office address shareholder e sign president vicepresident certificates shares stock corporation f general charge stock transfer books corporation g responsibility authenticating records corporation h general perform duties incident office secretary duties time may assigned president board directors 49 compensation officers corporation shall fixed time board directors officer shall prevented receiving compensation reason fact also director corporation article v contracts loans checks deposits 51 contracts board directors may authorize officer officers agent agents enter contract execute deliver instruments name behalf corporation authority may general confined specific instances 52 loans shall contracted evidence indebtedness issued behalf corporation unless authorized president resolution board directors authority may general confined specific instances 53 deposits checks drafts etc funds corporation otherwise employed shall deposited time credit corporation banks trust companies depositories selected board directors two president vice president treasurer checks drafts electronic fund transfers wire transfers orders payment money notes evidences indebtedness issued name corporation shall signed otherwise authorized officer officers employee employees agent agents corporation manner shall time determined resolution board directors two president vice president treasurer article vi certificates shares transfer 61 certificates shares certificates representing shares corporation shall form may determined board directors laws commonwealth kentucky certificates shall signed president vicepresident secretary assistant secretary may sealed seal corporation facsimile thereof signature officers upon certificates may facsimiles certificate manually signed behalf transfer agent registrar corporation certificates shares shall consecutively numbered name person owning shares represented thereby number shares date issue shall entered books corporation certificates surrendered corporation transfer shall cancelled new certificates shall issued former certificates like number shares shall surrendered cancelled except case lost destroyed mutilated certificate new one may issued therefor upon terms indemnity corporation secretary may prescribe 62 transfer shares transfer shares corporation shall made books corporation registered holder thereof legal representative shall furnish proper evidence authority transfer attorney thereunto authorized power attorney duly executed filed secretary corporation surrender cancellation certificate shares person whose name shares stand books corporation shall deemed owner thereof purposes regards corporation 63 shares without certificates addition representing shares certificates provided corporation authorized issue shares classes series without certificates article vii indemnification 71 definitions used article vii proceeding means threatened pending completed action suit proceeding whether civil criminal administrative investigative whether formal informal b party includes person threatened made named defendant respondent proceeding c expenses include attorneys fees officer means person serving chairman board directors president vicepresident treasurer secretary assistant secretary corporation e director means individual director corporation individual director corporation serving request corporation director officer partner trustee employee agent another foreign domestic corporation partnership joint venture trust employee benefit plan enterprise director shall considered serving employee benefit plan request corporation duties corporation also impose duties otherwise involve services plan participants beneficiaries plan director includes unless context requires otherwise estate personal representative director 72 indemnification corporation shall indemnify officer director made party proceeding reason fact person officer director 1 officer director conducted good faith 2 officer director reasonably believed case conduct official capacity corporation conduct best interest corporation ii cases conduct least opposed best interest corporation 3 case criminal proceeding reasonable cause believe conduct unlawful b directors conduct respect employee benefit plan purpose reasonably believes interest participants beneficiaries plan shall conduct satisfies requirement section 72 a2ii bylaws c indemnification shall made judgments penalties fines settlements reasonable expenses including legal expenses actually incurred officer director connection proceeding except proceeding right corporation indemnification shall made reasonable expenses shall made respect proceeding officer director shall adjudged liable corporation termination proceeding judgment order settlement conviction upon plea nolo contendere equivalent shall determinative officer director meet requisite standard conduct set forth section 72 1 reasonable expenses incurred officer director party proceeding respect indemnity provided section 72 shall paid reimbursed corporation advance final disposition proceeding provided corporation receives written affirmation officer director good faith belief met requisite standard conduct set forth section 72 ii corporation receives written undertaking behalf officer director repay amount shall ultimately determined met standard conduct ii corporations board directors appropriate decisionmaker corporation determines facts known board directors decisionmaker would preclude indemnification kentucky law 2 undertaking required herein shall unlimited general obligation officer director shall require security shall accepted without reference financial ability officer director make repayment 3 determinations authorizations payments section 72d shall made manner specified section 72e bylaws e 1 corporation shall indemnify officer director section 72 unless authorized specific case determination made indemnification officer director permissible circumstances met standard conduct set forth section 72 2 determination shall made corporations board directors majority vote quorum consisting directors time parties proceeding ii quorum cannot obtained section 72e2i majority vote committee duly designated corporations board directors designation directors parties may participate consisting solely two 2 directors time parties proceeding iii special legal counsel selected corporations board directors committee manner prescribed sections 72e2i ii quorum board directors cannot obtained section 72e2i committee cannot designated section 72e2ii selected majority vote full board directors selection directors parties may participate 3 authorization indemnification evaluation reasonableness expenses shall made manner determination indemnification permissible except determination made special legal counsel authorization indemnification evaluation reasonableness expenses shall made entitled section 72e2iii select counsel 73 indemnification notwithstanding limitation imposed section 72 elsewhere addition indemnification set forth section 72 corporation full extent permitted law may agree contract otherwise indemnify officer director hold harmless judgments penalties fines settlements reasonable expenses actually incurred reasonably anticipated connection proceeding officer director party provided officer director made party proceeding reason fact officer director corporation reason inaction nondisclosure action statement made taken omitted behalf officer director respect corporation behalf officer director capacity officer director 74 insurance corporation may discretion board directors purchase maintain cause purchased maintained insurance behalf officers directors liability asserted incurred capacity arising status officer director extent insurance reasonably available insurance shall provide coverage officers directors board directors may deem appropriate article viii miscellaneous 81 amendments board directors shall power authority alter amend repeal bylaws corporation subject always power shareholders kentucky law change repeal bylaws 82 fiscal year board directors shall power fix time change fiscal year corporation fiscal year corporation shall begin first day july end thirtieth day june year 83 dividends board directors may time make distributions shareholders manner upon terms conditions provided kentucky law articles incorporation 84 seal board directors may adopt corporate seal 85 waiver notice whenever notice required given delivered provisions bylaws provisions corporations articles incorporation provisions corporation laws commonwealth kentucky waiver thereof writing signed person persons entitled notice whether time state therein shall equivalent delivery giving notice 86 construction unless context specifically requires otherwise reference bylaws gender shall include genders reference singular shall include plural reference plural shall include singular bylaws duly adopted board directors delta natural gas company inc effective may 2 2003 john f hall secretary choice law state texas special provisions general terms conditions attached hereto incorporated base contract made part hereof purposes reference base contract shall include general terms conditions seller buyer atmos energy marketing llc delta natural gas company inc rob ellis sgeorge billings name rob ellis name george billings title sr vice president title mgr gas supply general terms conditions attached made part base contract 1 purpose procedures base contract intended facilitate transactions purchase sale gas firm interruptible basis firm shall mean either party may interrupt performance without liability extent performance prevented reasons force majeure interruptible shall mean seller may interrupt performance time reason whether caused event force majeure liability transaction confirmation shall mean document similar form exhibit setting forth terms transaction formed pursuant paragraph 1 particular delivery period parties use following transaction confirmation procedure gas purchase sale transaction may effectuated telephone conversation either party may record telephone conversation parties purpose documenting oral agreements purchase sale gas agreement purchase sale gas hat reached telephone conversation legally binding recorded least one party recording evidences parties agreed upon delivery period delivery points performance obligation contract price contract quantity event contract quantity stated monthly basis purposes sections 2 3 references made amount gas delivered certain day monthly contract quantity amount shall divided number days month determine daily contract quantity recording signed writing satisfies applicable statute frauds patties seller shall buyer may send transaction confirmation confirm agreement purchase sale gas reached telephone conversation regardless whether recorded party may send transaction confirmation telephonic facsimile transmission mutually agreeable electronic means transaction confirmation must sent party close business day immediately following date agreement reached business day shall mean day except saturday sunday federal reserve bank holidays seller adopts confirming letterhead like signature transaction confirmation identification authentication seller transaction confirmation party receives legally binding patty satisfies applicable statute frauds part unless receiving party notifies sending party confirm deadline misstatement transaction confirmation terms transaction confirm deadline shall mean 500 pm central prevailing time second business day following day transaction confirmation received transaction confirmation time stamped 500 pm central prevailing time shall deemed received opening next business day material differences timely sent transaction confirmations governing transaction party sends timely notice disputing transaction confirmation governing transaction none transaction confirmations legally binding satisfies statute frauds either party notwithstanding anything contrary however fact binding transaction confirmation shall prevent enforcement agreement purchase sale gas recording entire agreement parties contract consists provisions contained listed order priority recording ii binding transaction confirmation iii base contract conflict among items ii iii immediately preceding sentence delivery period delivery points performance obligation contract price contract quantity said items shall govern priority listed immediately preceding sentence parties agree party may electronically record telephone conversations respect contract respective employees without special notice patty party shall obtain necessary consent agents employees recording parties agree contest validity enforceability telephonic recordings entered accordance requirements base contract transaction confirmation contains provisions relating commercial terms transaction ie price quantity performance obligation delivery point period delivery andor transportation conditions modify supplement base contract eg arbitration additional representations warranties provisions shall deemed accepted pursuant paragraph must expressly agreed parties writing provided foregoing shall invalidate transaction agreed parties 2 performance obligation seller agrees sell deliver buyer agrees receive purchase contract quantity particular transaction accordance terms contract sales purchases firm interruptible basis agreed parties transaction sole exclusive remedy buyer event breach seller days firm obligation deliver gas shall recovery following payment seller buyer amount equal positive difference purchase price paid buyer using commercially reasonable efforts obtain gas alternate fuel elected buyer replacement gas available price reasonable delivery area consistent amount notice provided seller immediacy buyers gas consumption needs quantities involved anticipated length failure seller contract price adjusted commercially reasonable differences transportation costs delivery points multiplied difference contract quantity actually delivered seller days ii event buyer used commercially reasonable efforts replace gas replacement available sole exclusive remedy buyer shall unfavorable difference contract price henry hub midpoint price listed gas daily multiplied difference contract quantity actually delivered seller days sole exclusive remedy seller event breach buyer firm obligation receive gas days shall limited payment buyer seller amount equal difference contract quantity actual quantity delivered seller received buyer days multiplied positive difference obtained subtracting henry hub midpoint price listed gas daily contract price 3 transportation nominations imbalances seller shall sole responsibility transporting gas delivery point buyer shall sole responsibility transporting gas delivery point parties shall coordinate nomination activities giving sufficient notice meet deadlines affected transporters shall mean gas gathering pipeline companies utilities local distribution companies acting capacity transporter transporting gas seller buyer upstream downstream respectively delivery point pursuant base contract gas delivered purchased day either party become aware actual deliveries delivery point greater less quantity gas confirmed transporters movement transportation management scheduled gas party shall promptly notify party parties shall use commercially reasonable efforts avoid imposition fees penalties cashouts costs including limited costs purchased borrowed gas charges cash kind assessed transporters failure comply satisfy nomination usage requirements ii daily andor monthly imbalance iii directive transporters revise nominations scheduling imbalance charges buyer shall promptly communicate seller notification directive transporters potential effective imbalance charges imbalance charges resulting failure timely communicate andor comply notification directive shall responsibility party whose failure caused imbalance charges incurred result buyers receipt quantities gas greater less scheduled gas buyer shall pay imbalance charges reimburse seller imbalance charges paid seller imbalance charges incurred result sellers delivery quantities gas greater less scheduled gas seller shall pay imbalance charges reimburse buyer imbalance charges paid buyer without limiting generality foregoing provisions paragraph 3 avoidance doubt parties acknowledge sharp changes available pipeline capacity may occur little notice one transporters move transport manage gas purchased sold hereunder resulting pipeline capacity allocations operational flow orders ofo pipeline interconnect problems unscheduled maintenance similar causes event parties shall use reasonable efforts avoid imposition imbalance charges however buyer shall reimburse seller imbalance charges incurred imposed upon seller notwithstanding sellers exercise reasonable efforts avoid charges revising nominations otherwise rescheduling quantities delivered account buyer hereunder seller shall leave ability utilize alternate transportation however seller shall pass resulting incremental transportation charges avoided transportation charges buyer 4 quality measurement gas delivered seller shall meet pressure quality heat content requirements receiving transporter unit quantity measurement purposes contract shall one mmbtu dry measurement gas quantities shall accordance established procedures receiving transporter 5 taxes seller shall pay cause paid taxes fees levies penalties licenses charges imposed government authority taxes respect gas prior delivery points buyer shall pay cause paid taxes respect gas delivery points taxes delivery points notwithstanding foregoing buyer agrees reimburse seller additional increase sales use utility receipts gross receipts similar tax imposed future taxing governmental authority respect sale use transportation gas sold pursuant agreement party required remit pay taxes partys responsibility hereunder party responsible taxes shall promptly reimburse party taxes party entitled exemption taxes charges shall furnish party necessary documentation thereof 6 billings payments seller shall invoice buyer mail electronically via fax email fifteenth 15th day month actual quantities delivered seller received buyer prior month actual quantities cannot determined billing date seller shall invoice buyer shall pay based quantity scheduled gas buyer pay sellers invoice whether based actual deliveries scheduled gas wire transfer within ten 10 days receipt sellers invoice twentyfifth 25th day month immediately following month delivery whichever later seller shall notify buyer necessary adjustments volumes next succeeding invoice payment date falls day business day payment made next business day buyer fails pay amounts due seller due interest shall accrue lesser prime rate interest published time chase manhattan bank new york plus two percent 2 date payment due paid ii maximum applicable lawful interest rate buyer agrees pay collection costs including reasonable attorneys fees court costs incurred seller collecting past due amounts seller addition remedies available may suspend performance past due amounts late payment charges collection costs paid buyer seller agree net undisputed amounts due owing andor past due arising contract party owing greater amount shall make single payment net amount accordance section payments required made pursuant terms adequate assurance credit support obligations shall subject netting contract 7 title warranty indemnity unless otherwise specifically agreed title gas shall pass seller buyer delivery points seller shall responsibility assume liability respect gas prior delivery buyer delivery points buyer shall responsibility liability respect said gas delivery buyer delivery points seller warrants right convey transfer good merchantable title gas sold hereunder delivered buyer free clear liens encumbrances claims except provided section warranties express implied including warranty merchantability fitness particular purpose disclaimed seller agrees indemnify buyer save harmless losses liabilities claims including reasonable attorneys fees costs court claims persons arising claims title personal injury property damage said gas charges thereon attach title passes buyer except extent injuries damage caused negligence buyer agrees indemnify seller save harmless claims persons arising claims regarding payment personal injury property damage said gas charges thereon attach title passes buyer except extent injuries damage caused negligence seller 8 financial responsibility seller reasonable grounds insecurity regarding performance obligation contract whether due buyer including without limitation occurrence material change creditworthiness buyer seller may demand adequate assurance performance adequate assurance performance shall mean sufficient security form amount term reasonably acceptable seller including limited standby irrevocable letter credit prepayment security interest asset performance bond guaranty including issuer security 9 default buyer guarantor shall make assignment general arrangement benefit creditors ii file petition otherwise commence authorize acquiesce commencement proceeding case bankruptcy similar law protection creditors petition filed proceeding commenced iii otherwise become bankrupt insolvent however evidenced iv unable pay debts fall due v receiver provisional liquidator conservator custodian trustee similar official appointed respect substantially assets vi fail give adequate assurances performance required herein within 2 business days written request seller vii paid amount due hereunder second business day following written notice payment due seller shall right sole election immediately withhold andor suspend deliveries payments upon notice andor terminate contract manner provided section 10 addition remedies available hereunder without limiting applicability provision us bankruptcy code amended bankruptcy code including without limitation sections 362 546 556 560 thereof applicable definitions section 101 thereof parties acknowledge agree transaction confirmations recordings entered hereunder constitute forward contracts swap agreements defined section 101 bankruptcy code rights parties section 9 agreement constitute contractual rights liquidate transactions margin collateral provided margin collateral security similar agreement related hereto constitute margin payment defined section 101 bankruptcy code parties entitled rights protections afforded sections 362 546 556 560 bankruptcy code 10 early termination damages contract terminated either party seller shall determine good faith commercially reasonable manner amount owed seller whether due payment yet made ii market value defined transactions contract seller shall liquidate accelerate contract terminated transaction market value amount equal difference market value contract value defined shall due seller contract value means amount gas remaining delivered purchased contract transactions multiplied contract price market value means amount gas remaining delivered purchased contract transactions multiplied market price similar transaction delivery point determined seller commercially reasonable manner ascertain market value seller may consider among valuations settlement prices nymex gas futures contracts quotations leading dealers energy swap contracts physical gas trading markets similar sales purchases bona fide thirdparty offers adjusted length term differences transportation costs seller shall required enter replacement agreement transactions order determine market value extensions term transaction parties bound termination date including limited evergreen provisions shall considered determining contract values market values avoidance doubt option pursuant one party right extend term transaction shall considered determining contract values market values rate interest used calculating net present value shall determined seller commercially reasonable manner seller shall give buyer written notice amount including reasonable detail calculations buyer shall pay amount within 20 twenty days receipt notice 11 force majeure except regard partys obligation make payments imbalance charges due hereunder neither party shall liable failure perform firm obligation extent failure caused force majeure term force majeure employed herein means cause reasonably within control party claiming suspension including physical events acts god landslides lightning earthquakes fires storms storm warnings hurricanes result evacuation affected area floods washouts explosions breakage accident necessity repairs machinery equipment lines pipe ii weather related events affecting entire geographic region low temperatures cause freezing failure wells lines pipe iii interruption andor curtailment firm transportation including inpath outofpath transportation andor storage transporters iv acts others strikes lockouts industrial disturbances riots sabotage insurrections wars v governmental actions necessity compliance court order law statute ordinance regulation policy effect law promulgated governmental authority jurisdiction seller buyer shall make reasonable efforts avoid adverse impacts force majeure resolve event occurrence occurred order resume performance neither party shall entitled benefit provisions force majeure party claiming excuse failed remedy condition resume performance covenants obligations reasonable dispatch party whose performance prevented force majeure must provide notice patty initial notice may given orally however written notice reasonably full particulars event occurrence required soon reasonably possible upon providing written notice force majeure party affected party relieved obligation onset force majeure event make accept delivery gas applicable extent duration force majeure neither party shall deemed failed obligations occurrence event 12 term contract may terminated 60 sixty days written notice shall remain effect expiration latest delivery period transactions notwithstanding foregoing rights either party make adjustments pursuant sections 6 16 hereof obligation either party indemnify netting rights parties obligation make payments hereunder shall survive termination contract transaction 13 limitations breach provision express remedy measure damages provided express remedy measure damages shall sole exclusive remedy partys liability hereunder shall limited set forth provision remedies damages law equity waived remedy measure damages expressly provided herein transaction partys liability shall limited direct actual damages direct actual damages shall sole exclusive remedy remedies damages law equity waived unless expressly herein provided neither party shall liable consequential incidental punitive exemplary indirect damages lost profits business interruption damages statute tort contract indemnity provision otherwise intent parties limitations herein imposed remedies measure damages without regard cause causes related thereto including negligence party whether negligence sole joint concurrent active passive extent damages required paid hereunder liquidated parties acknowledge damages difficult impossible determine otherwise obtaining adequate remedy inconvenient damages calculated hereunder constitute reasonable approximation harm loss 14 applicable law regulations tariffs contract subject existing future legislation governmental laws orders directives rules regulations tariffs including without limitation applying maximum price may charged sale gas issued regulatory body transporters jurisdiction hereunder event regulatory body directly indirectly asserts jurisdiction sale purchase transportation gas hereunder either party shall right contest validity law order rule regulation neither acquiescence therein compliance therewith period time provision contained herein shall construed waiver right buyer agrees reimburse seller increase tariffs imposed future regulatory authority transporters respect sale use transportation natural gas sold pursuant agreement 15 assignment contract right obligation hereunder shall made without written consent party consent shall unreasonably withheld delayed change control ownership merger recapitalization either party shall considered assignment 16 adjustment right either party shall right reasonable times examine records extent necessary verify accuracy statement charge computation made pursuant provision contract parties agree cooperate negotiate dispute transporters errors measurement reporting either party may request receive payment verifiable statement adjustment within two 2 years statement 17 notices transaction confirmations invoices payments notices force majeure communications notices shall made addresses specified writing respective parties time notices required hereunder may sent facsimile mutually acceptable electronic means nationally recognized overnight courier service first class mail hand delivered notice shall given received business day addressee absence proof actual receipt date following presumptions apply notices sent facsimile shall deemed received upon sending partys receipt facsimile machines confirmation successful transmission day facsimile received business day five pm business day facsimile shall deemed received next following business day notice overnight mail courier shall deemed received next business day sent earlier time confirmed receiving patty notice via first class mail shall considered delivered five 5 business days mailing 18 pricing buyer option lockin price specified quantities exceed contract quantity mutually agreeable price 19 miscellaneous provision contract determined invalid void unenforceable court jurisdiction determination shall invalidate void make unenforceable provision agreement covenant contract sets forth understandings parties respecting transaction subject hereto prior contracts understandings representations whether oral written relating transactions merged superseded contract effective transactions contract may amended writing executed parties party acknowledges agrees purposes agreement party utility term used section 366 bankruptcy code party agrees waive assert applicability provisions section 366 bankruptcy proceeding wherein party debtor proceeding party agrees waive right assert party provider last resort 20 enforceability party represents warrants full complete authority enter perform obligations agreement constitutes legal valid binding obligation party enforceable accordance terms except enforceability may affected bankruptcy law application principles equity person executes agreement behalf either party represents warrants full complete authority party bound thereby page 4 special conditions 1 expiration delivery period transaction confirmation shall automatically extend twelve 12 successive months unless terminated sixty 60 days written notice transaction confirmation constitutes confirms agreement parties sell purchase gas accordance terms described herein x subject base contract seller buyer dated subject terms naesb standard 631 april 19 2002 revision base contract general terms conditions default elections applying texas choice law naesb provided however upon execution contract sale purchase natural gas parties transaction shall merged governed executed contract please confirm foregoing correctly sets forth terms agreement respect transaction signing space provided returning copy executed confirmation us failure execute return confirmation advise us errors time specified base contract naesb specified gas begins flow shall constitute acceptance terms page l 2 srob ellis agreed accepted seller atmos energy marketing llc agreed accepted buyer delta natural gas company inc sgeorge billings printed name george billings printed name rob ellis title sr vicepresident title mgr gas supply symbols unless expressly provided otherwise prices per mmbtu gas gd means gas daily r midpoint index applicable delivery day specified location means inside fercs gas market report index first publication month delivery month specified location ngw means natural gas week r ngi means natural gas intelligence nymex means new york mercantile exchange kcbot means kansas city board trade exhibit 10d gas sales agreement delta natural gas company inc buyer woodward marketing llc seller gas sales agreement gas sales agreement made entered effective 1st day may 2003 delta natural gas company inc kentucky corporation hereinafter referred buyer woodward marketing llc delaware corporation hereinafter referred seller witnesseth whereas buyer seller entered gas sales agreement effective may 1 2003 providing purchase buyer sale seller firm basis 100 natural gas requirements buyers residential small commercial customers specified service areas providing certain services seller buyer whereas buyer party fts1 service agreements columbia gulf transmission company columbia gulf party gts service agreements columbia gas transmission corporation columbia buyer holds firm pipeline transportation andor storage capacity two interstate pipelines whereas term agreement buyer desires assign seller pipeline storage capacities columbia gulf columbia service agreements whereas purpose setting forth terms said agreements buyer seller parties entered agreement therefore consideration covenants agreements set forth herein parties agree follows article definitions unless expressly stated otherwise following terms used agreement shall mean 11 term btu shall mean british thermal unit shall mean amount heat energy required raise temperature one avoirdupois pound water fiftynine degrees fahrenheit 59 f sixtydegrees fahrenheit 60 f standard atmospheric pressure determined dry basis prices charges paid hereunder shall computed dry btu basis 12 term day shall mean period time beginning 900 central time zone calendar day ending 900 central time zone following calendar day definition day may change time set forth columbias tariff file federal energy regulatory commission successor agency 13 term delivery points defined article iv 14 term gas shall include casinghead gas natural gas wells residue gas resulting processing casinghead gas well gas 15 term liquefiable hydrocarbons means hydrocarbons except hydrocarbons separated gas stream conventional singlestage mechanical field separation methods mixture thereof may extracted gas sold hereunder methane except nominal quantities lost processing operations including limited natural gasolines butanes propane ethane 16 term liquid hydrocarbons means hydrocarbons natural state liquids shall include liquefiable hydrocarbons condense gas stream production transportation 17 term mcf shall mean one thousand 1000 cubic feet pressure fourteen seventythreehundredths 1473 pounds per square inch absolute temperature sixty degrees 60 f fahrenheit correction boyles law 18 term mmbtu shall mean one million 1000000 btus 19 term month shall mean period time beginning first calendar day calendar month ending first day following calendar month 110 term year shall mean period twelve 12 consecutive months commencing first day month following effective date defined article vi subsequent twelve 12 month period provided first year include period effective date first day following month effective date first day month article ii quantity nominations 21 purchase quantity subject terms conditions agreement buyer shall purchase receive seller shall sell deliver firm basis quantity gas equal 100 buyers columbiasupplied residential small commercial supply requirements deltastanton deltawinchester service areas 100000 dth annually deltacumberland service areas subject section22 seder expressly acknowledges large percentage industriallarge commercial end users buyers systems purchase gas buyer arrange gas supplies volumes flowing delivery points end users shall first gas columbias meters buyers acceptance volumes behalf end users shall constitute violation sellers exclusive supplier provisions agreement 22 maximum quantity notwithstanding anything contrary herein maximum quantity gas seller obligated sell deliver delivery points agreement herein referred mdq shall equal lesser gts daily limitations set forth columbias ferc tariff indicated exhibit b maximum amount gas transported columbia redelivered delivery points firm transportation contracts columbia gulf transmission company columbia gulf released assigned seller accordance article v 3 herein referred firm transportation contracts upon mutual agreement parties seller may sell buyer may purchase quantities excess mdq price terms excess sales mutually agreed upon parties prior delivery excess gas 23 remedies failure deliver receive 231 sellers failure deliver seller fails deliver buyer natural gas requirements mdq day reasons imbalances variations transportation agreements operational balancing agreements governed article v ii event force majeure event described section 55 seller shall reimburse credit buyer following 1 seller reimburse buyer sum difference positive price buyer pays substitute supply gas alternative fuel propane ii prices set forth section 311 agreement calculated based upon buyers actual load factor agreement multiplied quantity seller failed deliver accordance subsection b reasonable incremental costs expenses incurred transporting substitute supplies c reasonable incidental expenses incurred purchasing substitute supplies buyer agrees act good faith purchasing substitute supplies minimize sellers obligations buyer hereunder 2 buyer reasonable efforts unable obtain substitute supplies seller shall provide buyer difference highest commodity price paid buyer purchase gas alternative fuel propane last two years exceed 10 per mmbtu prices set forth section 311 agreement calculated based upon buyers actual load factor agreement multiplied quantity gas seller failed deliver accordance 232 curtailment addition remedies set forth section 231 reason including event force majeure seller unable meet firm sales obligations sellers available supplies columbia seller curtail deliveries sales customers prorata basis based upon actual nominations sellers firm sales customers made period curtailment actual nomination buyer exceed mdq extent curtailment sellers customers would useful maintaining deliveries buyer upon buyers request seller provide buyer information verify deliveries buyer curtailed accordance subsection 233 failure take buyer fails receive purchase full requirements accordance section 21 buyer pay seller 0035 per mmbtu times difference full requirements b quantities actually taken buyer applicable seasonal period 234 exclusive remedy parties agree actual losses incurred buyer result sellers failure deliver quantities incurred seller result 4 buyers failure take quantities would uncertain impossible determine precision result payments seller buyer accordance subsections 231 233 respectively deliveries seller accordance subsection 232 shall sole exclusive remedy sellers failure deliver buyers failure take quantities set forth article payments seller buyer pursuant section 23 reasonable compensation failures 24 uniform takes unless permitted otherwise columbia buyer receive gas delivery points defined section 41 rates compliance terms firm transportation contract columbia released assigned seller accordance article v 25 alternate rate schedule prior seller submitting monthly nominations columbia hereunder buyer may direct seller cause gas sold hereunder delivered columbia gas rate schedule notwithstanding foregoing seller shall authority determine whether sufficient capacity exists permit delivery daily nominated quantities event seller reasonably determines sufficient capacity available permit delivery nominated quantities seller authorized cause buyers gas delivered columbia gas rate schedule gts volumes delivered buyer columbia gas alternate rate schedule shall assessed transportation charge buyer 025 mmbtu plus applicable fuel surcharges article iii price 31 commodity price quantities within mdq 311 citygate service price mmbtu gas sold delivered hereunder delivery points mdq shall priced columbia gulf mainline monthly index published inside fercs gas market report minus 007mmbtu plus applicable its2 transportation fuel charges pricing contract shall redetermined event buyers storage rights columbia contracts altered 312 fixed price alternative substitution commodity price parties may mutually agree utilization nymex natural gas futures otherwise lock fixed price part mdq one months parties agree fixed price buyer required purchase designated monthly quantities parties agreed fixed price notwithstanding provision contrary agreement 32 commodity price excess gas price mmbtu gas sold delivered hereunder excess mdq shall determined accordance section 22 agreement 33 transportation storage costs buyer shall responsible paying columbia gulf columbia transportation services rendered firm transportation agreements seller shall responsible charges incurred connection utilization capacity buyers firm transportation contracts purposes providing gas 5 supply buyer seller shall credit buyer 90 revenue derived thirdparty release buyers firm capacity posted transporters electronic bulletin board article iv delivery points 41 delivery points delivery points gas sold delivered hereunder shall points specified exhibit hereto 42 adjustments delivery points recognized parties sellers ability deliver gas delivery points set forth section 41 dependent upon sellers ability utilize firm transportation contracts released buyer seller accordance article v provisions based columbias tariff provisions effect date execution agreement sellers ability utilize released assigned delegated contracts deliver gas sold hereunder delivery points set forth section 41 terms section shall revised reflect substantial change columbias tariff regard utilization contracts delivery point flexibility place parties relative position agreement substantially different position parties prior change tariffs article v transportation storage arrangements 51 transportation storage arrangements 511 transfer arrangements buyer firm transportation rights columbia gulf firm transportation storage rights columbia specified exhibit hereto recognized parties buyer holds firm transportation capacity columbia gulf transmission companys pipeline fts1 service agreements firm transportationstorage capacity columbia gts service agreements order provide delivered storage service buyer delivery points effective date agreement buyer execute blanket authorization agreement seller columbia seller shall full complete control utilization contracts including without limitation manner timing transportation injections withdrawals gas contracts provided seller may without buyers prior written consent amend primary delivery points firm transportation contracts change rate schedule level maximum entitlements services offered seller agrees amend modify buyers agreements transporting pipelines listed blanket authorization agreement manner diminishes buyers rights andor level service therein without buyers prior written consent buyer also appoint seller agent purposes administering firm transportation contracts transportation storage substitute gas supplies buyer purchases accordance section 231 b extent release assignments provided permitted pipelines tariffs releaseassignment agency arrangements shall accordance pipelines tariffs shall terminate upon expiration agreement prior release delegation rights elections receipt points delivery points supply leg capacity monthly maximum daily quantity elections similar elections must given columbia 6 buyer cooperate seller make necessary elections designated seller similarly buyer cooperate seller make amendments contracts requested seller become effective date agreement extent said amendments adversely affect buyers sole opinion buyers costs buyers level quality service event supplementation contradiction blanket authorization agreement terms agreement shall control govern rights obligations liabilities seller buyer 52 responsibility firm transportation storage contracts 521 responsibility administration subject buyers obligation pay seller accordance section 33 upon transfer firm transportation contracts seller shall assume obligations rights contracts including without limitation obligation submit nominations columbia pay applicable scheduling imbalance charges provide fuel loss quantities 522 operational balancing agreements seller responsible correcting imbalances variations firm transportation understood seller shall correct imbalances variations pursuant rate schedule gts automatic storage injections withdrawals addition buyer agrees appoint seller agent enter maintain operational balancing agreement oba columbia accordance columbias tariff seller unable correct imbalances variations automatic injections withdrawals set forth due inventory levels storage buyers account otherwise variance actual deliveries confirmed nominations delivery points allocated oba seller shall responsible correcting variation imbalance oba resulting monthend cashout 523 penalty responsibility buyer required reimburse seller 1 unauthorized overrun penalties associated takes excess maximum daily quantities firm transportation storage contracts 2 penalties charges imposed transporters due buyers failure comply directive pipeline limiting quantities less buyers contracted maximum daily quantities 3 daily variance charges penalties imposed transporters pipeline imbalances related charges andor penalties resulting failure take dispatch agreed upon volumes shall responsibility party whose failure caused imbalance penalty 53 telemetry buyer shall authorize seller access columbia telemetry readings buyers behalf long buyer required give current access columbias telemetry readings 531 projected requirements buyer shall provide seller monthly projected requirements 23 preceding month buyer cooperate seller ensure nominations including necessary adjustments thereto made timely columbia nominations reflect actual expected deliveries receipts storage withdrawal season year cumulative variances buyers projected monthly requirements actual monthly takes exceed cumulative maximum storage quantities set forth heading capacity exhibit hereto excess quantities shall priced applicable gas daily midpoint price buyer cooperate seller make necessary elections designated seller similarly buyer cooperate seller make amendments contracts requested seller become effective date agreement extent said amendments adversely affect buyers sole opinion buyers costs buyers level quality service event supplementation contradiction blanket authorization agreement terms agreement shall control govern rights obligations liabilities seller buyer 52 responsibility firm transportation storage contracts 521 responsibility administration subject buyers obligation pay seller accordance section 33 upon transfer firm transportation contracts seller shall assume obligations rights contracts including without limitation obligation submit nominations columbia pay applicable scheduling imbalance charges provide fuel loss quantities 522 operational balancing agreements seller responsible correcting imbalances variations firm transportation understood seller shall correct imbalances variations pursuant rate schedule gts automatic storage injections withdrawals addition buyer agrees appoint seller agent enter maintain operational balancing agreement oba columbia accordance columbias tariff seller unable correct imbalances variations automatic injections withdrawals set forth due inventory levels storage buyers account otherwise variance actual deliveries confirmed nominations delivery points allocated oba seller shall responsible correcting variation imbalance oba resulting monthend cashout 523 penalty responsibility buyer required reimburse seller 1 unauthorized overrun penalties associated takes excess maximum daily quantities firm transportation storage contracts 2 penalties charges imposed transporters due buyers failure comply directive pipeline limiting quantities less buyers contracted maximum daily quantities 3 daily variance charges penalties imposed transporters pipeline imbalances related charges andor penalties resulting failure take dispatch agreed upon volumes shall responsibility party whose failure caused imbalance penalty 53 telemetry buyer shall authorize seller access columbia telemetry readings buyers behalf long buyer required give current access columbias telemetry readings 531 projected requirements buyer shall provide seller monthly projected requirements 23 preceding month buyer cooperate seller ensure nominations including necessary adjustments thereto made timely columbia nominations reflect actual expected deliveries receipts storage withdrawal season year cumulative variances buyers projected monthly requirements actual monthly takes exceed cumulative maximum storage quantities set forth heading capacity exhibit hereto excess quantities shall priced applicable gas daily midpoint price 532 forecasts nominations based buyers projections set forth section 531 historical data weather forecasting seller forecast buyers daily natural gas requirements based forecast seller submit necessary nominations columbia accordance section 521 54 adjustments imbalance provisions purpose sections 51 53 establish parties responsibilities administering firm contracts oba releasedassigned delegated correcting imbalances receipts deliveries variations confirmed nominations actual deliveries delivery points provisions based tariff provisions approved columbias ferc tariff date agreement executed including right balance variation projected actual daily loads injections withdrawals storage firm storage contracts b existing load profile buyer terms section shall revised reflect substantial change either columbias tariff regard correction imbalances variations associated penalties b buyers load profile place parties relative position agreement substantially different position parties prior change columbias tariff buyers load profile parties unable agree appropriate revisions matter shall submitted arbitration accordance article xiv decision effective first day month following issuance arbitrators decision 55 transportation limitation either columbia gulf interrupts curtails otherwise fails receive transport deliver gas sold andor delivered hereunder interruption curtailment due sellers failure pay transporters unless extent sellers failure pay result buyers failure reimburse seller accordance section 33 sellers obligation deliver gas agreement shall suspended portion quantities interrupted curtailed transporters long interruption curtailment deliveries continues article 55 shall apply seller transporting gas columbia buyers gts contracts 56 displacement transportation seller acknowledges separate agreements buyer transports gas columbia behalf third parties address differences scheduled deliveries actual deliveries buyer columbia agreed underdeliveries third party transportation gas scheduled delivered buyer columbia made buyer gts storage withdrawals overdeliveries buyer third party transportation agreements result injections excess volumes deltacumberland gts storage account close month withdrawals injections due daily transportation underdeliveries overdeliveries balanced result net withdrawal buyer purchase volume gas seller addition purchases points delivery result net injection buyer credit volume volumes purchased seller month article vi term agreement 61 primary term agreement shall become effective may 1 2003 herein referred effective date shall continue full force effect primary term three years april 30 2006 expiration primary term agreement extended additional oneyear periods unless 60 days prior expiration 8 primary term either party gives written notice party desire extend primary term 62 transfer gas storage gas remaining storage termination agreement injected march 31 year agreement terminates shall transferred sold seller buyer arithmetic average commodity prices applicable months november december january february march immediately preceded termination date agreement gas remaining storage termination agreement injected march 31 year agreement terminates shall transferred sold seller buyer price mutually agreed parties provided seller inject gas storage buyers account march 31 year unless buyer consents injections purposes determining quantities injected march 31 termination agreement quantities injected storage march 31 shall deemed withdrawn first prior quantities injected march 31 year article vii title taxes 71 transfer title possession control title gas sold hereunder shall pass seller buyer upon delivery said gas buyer applicable delivery points parties hereto seller shall deemed control possession gas delivered hereunder shall indemnify hold buyer harmless damage injury losses occur prior delivery buyer delivery points otherwise buyer shall deemed exclusive control possession thereof shall indemnify hold seller harmless injury damage losses 72 warranty title except set forth seller warrants title gas delivered hereunder seller right sell gas free liens adverse claims every kind seller indemnify save buyer harmless loss damage expense every character account adverse claims applicable gas title gas passes buyer indemnify save seller harmless loss damage expense every character account adverse claims applicable gas title passes buyer 73 taxes buyer shall reimburse seller taxes fees charges income taxes levied governmental regulatory body gas sold agreement gas held buyers storage accounts article viii quality pressure 81 quality pressure requirements seller deliver gas sold agreement receipt points firm transportation contracts columbia conditions meet quality pressure specifications set forth columbias tariff neither seller buyer shall obligated install operate compression facilities 82 remedy noncompliance gas sold agreement fails meet standards concerning quality pressure set forth section 81 b columbia fails receive transport gas c columbia deliver requirements buyer seller shall deemed failed deliver quantities nominated buyer shall subject remedies set forth section 23 article ix measurement tests 91 measurement point natural gas sold hereunder shall measured near delivery points columbias system pressures existence time shall corrected unit measurement shall one mmbtu 92 standards measurement tests unless specified herein contrary standards measurement tests shall governed standards set forth columbias tariff 93 operation measurement seller replacement shipper firm transportation contracts shall cause columbia operate measurement facilities involved metering receiving gas delivery points operation shall include changing charts calculation volumes calibration maintenance adjustments repair meter facilities accordance columbias tariff extent either party access rights delivery points including measurement facilities party provide similar access party extent permitted fulfill rights obligations agreement article x processing seller may process gas remove liquid hydrocarbons liquefiable hydrocarbons prior delivery gas buyer delivery points event seller elects process gas hydrocarbons removed shall sellers sole responsibility costs including associated transportation costs shall paid seller shall indemnify defend hold buyer harmless therefrom article xi billing payment 111 billing payment seller shall render buyer address indicated section 155 hereof fifteenth 15th day calendar month certified registered overnight mail invoice gas purchased preceding month according measurements computations prices provided herein buyer agrees make payment hereunder seller account available funds wire transfer mail location seller may time designate writing payment shall made buyer within later twentyfifth 25th month b ten 10 days date receipt sellers invoice provided columbias billing schedule changes either tariffs buyer pay seller earlier date coincide earlier payments due columbia firm transportation contracts invoiced amount paid 10 due interest unpaid amount shall accrue current prime rate interest published money rates wall street journal exceed applicable maximum lawful rate together court costs attorneys fees costs collection seller may incur enforcing terms agreement default continues thirty 30 days written notice seller buyer seller may suspend gas deliveries hereunder without liability without prejudice remedies notwithstanding good faith dispute arises parties amounts due invoice matters buyer pay portion statement dispute due date parties continue perform obligations agreement dispute provided buyer required provide within 30 days written request seller good sufficient surety bond guaranteeing payment seller amount ultimately found due 112 credit standards sales hereunder term agreement shall subject appropriate review approval sellers credit department buyer agrees provide information reasonably required sellers credit department effect proper evaluation without limiting seller may suspend deliveries agreement buyer admits unable pay debts become due b applies agrees appointment receiver trustee liquidation properties c makes general assignment benefit creditors files voluntary petition bankruptcy petition seeking reorganization arrangement creditors bankruptcy law e party petition bankruptcy law filed party admits material allegations petition filed f adjudicated bankrupt bankruptcy law g fails meet credit standards set forth columbias tariff 113 adjustments payments overcharge undercharge form whatsoever shall time found bill therefor paid seller shall refund amount overcharge received seller buyer shall pay amount undercharge within thirty 30 days final determination thereof provided shall retroactive adjustment overcharge undercharge matter brought attention party writing within lesser twelve 12 months following date deliveries agreement made b period statements payments columbia become final 114 review books records buyer seller shall right inspect examine reasonable hours books records charts pertaining sale gas hereunder charge fee arising hereunder confidentiality agree maintain extent necessary verify accuracy invoice charge computation made pursuant agreement article xii regulatory bodies 121 laws regulations agreement shall subject valid applicable governmental laws orders regulatory authorizations directives rules regulations governmental body official jurisdiction parties facilities gas agreement provision thereof nothing contained herein shall construed waiver right question contest law order rule regulation forum jurisdiction 122 reliance law parties entitled act accordance law amended reversed otherwise disposed final nonappealable order 123 cooperation parties shall cooperate ensure compliance governmental regulation including obtaining maintaining necessary regulatory authorizations reasonable exchange provision information needed filing reporting requirements 124 changes law regulation federal state statute regulation order court law regulatory authority directly indirectly prohibits performance agreement b makes performance illegal impossible c effects change substantive provision agreement significant material adverse impact upon ability either party perform obligations agreement parties use reasonable efforts revise agreement performance agreement longer prohibited illegal impossible longer impacted material adverse fashion b agreement revised manner preserves maximum extent possible respective positions parties party provide reasonable prompt notice party proposed law regulations regulatory proceedings actions could affect rights obligations parties unable revise agreement accordance party whose performance rendered prohibited illegal impossible impacted material adverse manner shall right sole discretion suspend terminate agreement upon written notice party article xiii force majeure 131 force majeure buyer seller rendered unable wholly part force majeure perform obligations agreement obligation make payments due agreement agreed performance respective obligations seller buyer deliver purchase receive gas far affected force majeure shall excused suspended inception inability corrected longer period buyer seller whichever claiming inability shall give notice thereof soon practicableafter occurrence force majeure notice may given orally writing given orally shall promptly confirmed writing giving reasonably full particulars inability shall promptly corrected extent may corrected exercise reasonable diligence party claiming inability reason force majeure 132 liability force majeure neither buyer seller shall liable losses damages regardless nature thereof however occurring whether losses damages direct indirect immediate remote reason caused arising way attributable suspension performance obligation either party extent suspension occurs party rendered unable wholly part force majeure perform obligations unless force majeure event caused negligence willful misconduct party claiming force majeure 133 definition force majeure term force majeure used herein shall mean event restricts prevents performance agreement b reasonably within control party claiming suspension c exercise due diligence party unable prevent overcome remedy events may give rise claim force majeure include acts god epidemics landslides hurricanes floods washouts lightning earthquakes storm warnings perils sea acts court governmental regulatory authorities acts civil disorder acts industrial disorder accidents sellers buyers transporters facilities storage pipeline system freezing sellers suppliers wells lines pipe storage facilities equipment necessities making repairs alterations machinery wells platforms lines pipe storage facilities pumps compressors valves gauges similar equipment cratering blowout failure well wells produce similar event cause provided however settlement labor dispute prevent end act industrial disorder shall within sole discretion party agreement involved labor dispute requirement inability shall corrected reasonable diligence shall apply labor disputes notwithstanding expressly agreed failure inability make delivery single source supply shall constitute event force majeure beyond greater period necessary seller locate another supply gas exceed one day b period necessary adjust nominations applicable pipelines transport gas another supply gas 134 termination force majeure event continues period thirty 30 days party claim force majeure may time thereafter terminate agreement upon ten 10 days prior written notice extent force majeure event corrected prior expiration notice period article xiv arbitration 141 submission dispute arbitration controversy pertaining matters expressly made subject arbitration agreement shall determined board arbitration consisting three members upon notice submission given either party notice shall also name one 1 arbitrator party receiving notice shall notice party within ten 10 days thereafter name second arbitrator failing party giving notice submission shall name second arbitrator two 2 arbitrators appointed shall name third arbitrator failing within ten 10 days third arbitrator shall appointed person senior terms service activelysitting judge united states district court district buyers principal place business located 142 qualification arbitrators shall qualified education experience training natural gas industry decide upon particular question dispute 143 arbitration proceedings arbitrators appointed giving parties due notice date hearing reasonable opportunity heard shall promptly hear controversy location buyers principal place business located shall thereafter render decision determining said controversy later ninety 90 days board appointed decision requires support majority arbitrators board arbitration unable reach decision new arbitrators named shall act hereunder request either party like manner none previously named presentation evidence concluded party shall submit arbitrators final offer proposed resolution dispute arbitrators shall approve final offer one party without modification reject considering evidence deciding final offer approve arbitrators shall guided criteria described applicable section agreement 144 arbitrators decision arbitrators shall rendered writing supported written reasons decision arbitrators shall final binding upon parties decision arbitrators shall kept confidential accordance section 151 agreement party shall bear expenses chosen arbitrator expenses third arbitrator shall borne equally parties party shall bear compensation expenses legal counsel witnesses employees article xv miscellaneous 151 confidentiality except necessary obtain transportation gas agreement otherwise provided herein seller buyer agree maintain confidentiality agreement terms conditions hereof seller buyer agree divulge third party except extent required law court order regulation administrative agency jurisdiction buyer seller subject matter agreement required disclosed party subject disclosure requirement shall notify party immediately b cooperate fullest extent seeking whatever confidential status may available protect material disclosed 152 incidental consequential punitive damages except expressly provided agreement parties hereto waive rights claims causes action arising agreement incidental consequential punitive damages resulting breach agreement either party shall limited actual damages incurred party claiming damages 153 third party beneficiaries neither buyer seller intend provisions agreement benefit third party third party shall right enforce terms agreement buyer seller 154 waiver default waiver buyer seller default agreement shall operate waiver future default whether like different character 155 notices except otherwise expressly provided agreement every notice request statement invoice provided agreement shall writing directed party given made delivered partys address follows buyer delta natural gas company inc 3617 lexington road winchester ky 40391 attention mr brian ramsey phone 8597446171 ext158 fax 8597443623 email bramseydeltagas com seller nominations woodward marketing llc woodward marketing llc 377 riverside drive suite 109 11251 northwest freeway suite 400 franklin tn 37064 houston tx 77092 attention mr rob ellis attention mr rick sullivan phone 6155952878 phone 7136887771 fax 6157940947 fax 7136885124 either buyer seller may choose one addresses receiving invoices statements notices payments notifying manner provided written notices requests statements invoices shall considered transmitted time delivery hand delivered mail next working day mailing transmitted telephone oral means telecopy form electronic telegraphic communication notices shall considered transmitted time oral communication time telecopy form electronic telegraphic communication sent 156 choice law parties agree laws commonwealth kentucky shall control construction interpretation validity andor enforcement agreement 157 assignment provisions agreement shall extend binding successors assigns parties hereto insofar applicable rights obligations succeeded assigned succession assignment shall relieve assigning succeeded party obligations without written consent party consent shall unreasonably withheld provided either party may assign agreement affiliate without prior written consent party nothing section prevents either party pledging mortgaging part partys property security buyer shall require purchaser lessee buyers distribution system assume obligations agreement extent elected seller 158 interpretation construction agreement presumption shall made party grounds party drafted agreement provision thereof 159 headings article section subsection agreement purposes convenience shall interpreted meaning effect 1510 entire agreement terms conditions contained herein constitute full complete agreement parties change made must submitted writing agreed parties 1511 severability except otherwise stated herein article section declared rendered unlawful court law regulatory authority jurisdiction parties deemed unlawful statutory change otherwise affect lawful obligations arise agreement 1512 enforceability party represents necessary power authority enter perform obligations agreement constitutes legal valid binding obligation party enforceable accordance terms except enforceability may affected bankruptcy law application principles equity witness whereof agreement executed multiple counterparts original july 15 2003 delta natural gas company inc woodward marketing llc rob ellis george billings name george billings name rob ellis title mgr gas supply title sr vp page 2 exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent registered public accounting firm consent incorporation reference registration statement 33104301 1 report dated august 31 2005 relating financial statements financial statement schedule delta natural gas company inc subsidiaries report expresses unqualified opinion companys consolidated financial statements financial statement schedule includes explanatory paragraph referring companys change effective july 1 2002 method accounting asset retirement obligations 2 report dated august 31 2005 relating managements report effectiveness internal control financial reporting appearing annual report form 10k delta natural gas company inc year ended june 30 2005 cincinnati ohio august 31 2005 exhibit 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 2 2005 sglenn r jennings glenn r jennings president chief executive officer exhibit 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 john f hall certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date september 2 2005 sjohn f hall john f hall vice president finance secretary treasurer exhibit 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2005 filed securities exchange commission date hereof report glenn r jennings president chief executive officer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sglenn r jennings glenn r jennings president chief executive officer september 2 2005 exhibit 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2005 filed securities exchange commission date hereof report john f hall vice president finance secretary treasurer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition result operations delta natural gas company inc sjohn f hall john f hall vice president finance secretary treasurer september 2 2005 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrant’s amended restated articles incorporation dated november 16 2006 incorporated herein reference exhibit 3i registrant’s form 10k file 00008788 period ended june 30 2007 3ii registrant’s amended restated bylaws dated november 16 2006 incorporated herein reference exhibit 3ii registrant’s form 10k file 00008788 period ended june 30 2007 4a indenture dated march 1 2006 respect 575 insured quarterly notes due april 1 2021 incorporated herein reference exhibit 4d delta’s form s3 reg 333132322 dated march 31 2006 4b indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d delta’s form s2 reg 333100852 dated october 30 2002 10a employment agreements registrant four officers john b brown johnny l caudill alan l heath glenn r jennings incorporated herein reference exhibit 10k registrant’s form 10q file 00008788 period ended march 31 2000 10b supplemental retirement benefit agreement trust agreement registrant glenn r jennings incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated february 25 2005 10c gas sales agreement dated may 1 2005 registrant atmos energy marketing llc filed herewith 10d gas sales agreement dated may 1 2003 registrant atmos energy marketing llc filed herewith 10e gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrant’s form s2 reg 333100852 dated february 7 2003 10f gts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrant’s form s2 reg 333100852 dated february 7 2003 10g fts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrant’s form s2 reg 333100852 dated february 7 2003 10h loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrant’s form s2 reg 333100852 dated february 7 2003 10i promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2002 10j gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrant’s form s2 reg 333104301 dated april 4 2003 10k gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrant’s form s2 reg 333104301 dated april 4 2003 10l deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrant’s form s2 reg 333104301 dated april 4 2003 10m underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrant’s form s2 reg 333104301 dated april 4 2003 10n base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrant’s form s2 reg 333104301 dated april 4 2003 10o oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrant’s form s2 reg 333104301 dated april 4 2003 10p agreement transport natural gas registrant nami resources company llc incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated march 23 2005 10q modification agreement extending october 31 2009 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2007 computation consolidated ratio earnings fixed charges subsidiaries registrant consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day august 2008 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board president august 29 2008 glenn r jennings chief executive officer ii principal financial officer principal accounting officer sjohn b brown chief financial officer august 29 2008 john b brown treasurer secretary iii majority board directors slinda k breathitt director august 29 2008 linda k breathitt slanny greer director august 29 2008 lanny greer sbilly joe hall director august 29 2008 billy joe hall smichael j kistner director august 29 2008 michael j kistner slewis n melton director august 29 2008 lewis n melton sarthur e walker jr director august 29 2008 arthur e walker jr smichael r whitley director august 29 2008 michael r whitley report independent registered public accounting firm board directors stockholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2008 2007 related consolidated statements income stockholders equity cash flows three years period ended june 30 2008 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2008 2007 results operations cash flows three years period ended june 30 2008 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements july 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 discussed note 2 consolidated financial statements june 30 2007 company adopted statement financial accounting standards 158 employers accounting defined benefit pension postretirement plans also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 28 2008 expressed unqualified opinion companys internal control financial reporting deloitte touche llp cincinnati ohio august 28 2008 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 38000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system three whollyowned subsidiaries delta resources inc buys gas resells industrial large use customers delta’s system delgasco inc buys gas resells delta resources inc customers delta’s system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost plus removal expense less salvage value charged accumulated provision depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 23 27 25 average depreciable plant 2008 2007 2006 respectively e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired f gas cost recovery gas cost recovery “gcr” clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism g revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customer’s meter last read monthend unbilled revenues gas costs include following 000 unbilled revenues 1579 1058 unbilled gas costs unbilled volumes mcf unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 38000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting regulated operations follow accounting reporting requirements financial accounting standards board statement 71 entitled accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows 000 regulatory assets current assets deferred gas costs 4613 2942 assets loss extinguishment debt 2539 2729 asset retirement obligations 1352 1249 accrued pension 3538 3935 regulatory case expenses total assets 7714 8220 total regulatory assets 12327 11162 regulatory liabilities accrued cost removal longlived assets regulatory liability deferred income taxes 1530 1718 total regulatory liabilities 2145 2503 deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism currently earning return loss extinguishment debt asset retirement costs recovered customer rates included depreciation rates pension expenses rate case expenses recovered customer rates allowed operating expenses l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change opinion management longlived assets appropriately valued accompanying consolidated financial statements derivatives purchase sell natural gas certain gas purchase sale contracts qualify derivative financial accounting standards board statement 133 entitled accounting derivative instruments hedging activities contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements 2 new accounting pronouncements recently adopted pronouncements july 2006 fasb issued interpretation 48 entitled accounting uncertainty income taxes clarify accounting uncertainty income taxes recognized enterprise’s financial statements accordance financial accounting standards board statement 109 entitled accounting income taxes interpretation 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements interpretation 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement adopted provisions interpretation 48 july 1 2007 adoption interpretation 48 resulted adjustment beginning retained earnings 68000 adoption total amount gross unrecognized tax benefits uncertain tax positions including positions impacting timing tax benefits 668000 97000 related interest note 4 notes consolidated financial statements discusses income taxes entered sharebased payment transactions therefore adoption statement financial accounting standards 123r entitled sharebased payment securities exchange commission staff accounting bulletin 107 entitled sharebased payment impact us september 2006 financial accounting standards board issued statement 158 entitled employers’ accounting defined benefit pension postretirement plans statement 158 requires employers sponsor defined benefit plans recognize funded status plan gains losses previously recognized net periodic benefit cost sponsor’s financial statements fiscal years ending december 15 2006 additionally statement 158 requires employers sponsor defined benefit plans measure assets benefit obligations end employer’s fiscal year fiscal years beginning december 15 2007 statement 71 provides guidance regulated utilities deferring costs would otherwise charged expense equity nonregulated enterprises adopted disclosure recognition provisions statement 158 effective june 30 2007 applying provisions statement recorded regulatory asset representing adjustment pension asset recognizing funded status plan adjustment would represented accumulated comprehensive income without application statement 71 adoption statement 158 recognition disclosure provisions resulted increase regulatory assets 3935000 offset decrease prepaid pension cost 3935000 adoption statement 158 discussed note 5 notes consolidated financial statements impact consolidated results operations cash flows effective july 1 2008 adopt measurement date provision statement 158 require us change measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 expected 760000 amount 152000 attributable change measurement dates charged directly retained earnings july 1 2008 fiscal 2009 pension costs amount 608000 expected recognized consolidated statement income recently issued pronouncements september 2006 financial accounting standards board issued statement 157 entitled fair value measures february 2007 issued statement 159 entitled fair value option financial assets financial liabilities statements effective fiscal years beginning november 15 2007 statements define fair value establish framework measuring fair value generally accepted accounting principles expand disclosures fair value measurements expect statements shall effective 2009 fiscal year material impact results operations financial position february 2008 financial accounting standards board issued financial accounting standards board staff position 1572 entitled effective date fasb statement 157 delays effective date statement 157 one year nonfinancial assets liabilities except items recognized disclosed fair value financial statements recurring basis march 2008 financial accounting standards board issued statement 161 entitled disclosures derivative instruments hedging activities statement 161 enhances disclosures required statement 133 entities required provide enhanced disclosures entity uses derivative instruments ii derivative instruments related hedged items accounted statement 133 related interpretations iii derivative instruments related hedged items affect entity’s financial position financial performance cash flows expect statement shall effective 2010 fiscal year impact results operations financial position 3 asset retirement obligations legal obligations required financial accounting standards board statement 143 entitled accounting asset retirement obligations financial accounting standards interpretation 47 entitled accounting conditional asset retirement obligations june 30 2008 2007 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant statement 71 recover cost removing regulated assets depreciation rates following summary asset retirement obligations related assets net accumulated depreciation reflected accompanying consolidated balance sheets captions asset retirement obligations property plant equipment respectively asset retirement net 000 obligations assets june 30 2006 1578 accretion depreciation 10 change obligations 232 june 30 2007 1466 accretion depreciation 2 change obligations june 30 2008 1600 additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire asset pursuant interpretation 47 nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement 71 recorded approximately 615000 785000 accrued cost removal regulatory liabilities accompanying consolidated balance sheets june 30 2008 2007 respectively provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 000 deferred tax liabilities accelerated depreciation 23251 21036 deferred gas costs 1751 1116 pension regulatory assets loss extinguishment debt 1036 regulatory assets asset retirement obligations regulatory assets unrecognized accrued pension 1343 1494 total 28782 26525 deferred tax assets alternative minimum tax credits regulatory liabilities investment tax credits reserve bad debt asset retirement obligations accrued personal leave section 263a capitalized costs total 2722 2784 net accumulated deferred income tax liability 26060 23741 components income tax provision comprised following years ended june 30 000 components income tax expense current federal 1158 state total 1553 1069 deferred 2594 2450 1914 income tax expense 4147 3157 2983 reconciliation statutory federal income tax rate effective income tax rate shown table statutory federal income tax rate 340 state income taxes net federal benefit 40 46 amortization investment tax credits 03 05 differences net 08 effective income tax rate 377 373 july 2006 financial accounting standards board issued interpretation 48 clarify accounting uncertainty income taxes recognized enterprise’s financial statements accordance statement 109 interpretation 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements interpretation 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months presented accrued taxes june 30 2008 consolidated balance sheet liability unrecognized tax benefits expected recognized within next twelve months presented asset retirement obligations june 30 2008 consolidated balance sheet interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 156000 accrued interest 116000 unrecognized tax positions 18000 recognized 2008 consolidated statement income expect unrecognized tax benefits decrease approximately 204000 within next twelve months primarily due filing method change internal revenue service decrease related timing differences expected material impact financial position results operations effective tax rate reasonably possible additional changes unrecognized tax benefits however expected change significant impact results operations financial position following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2005 june 30 2004 longer subject examination federal kentucky income taxes respectively 5 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately adopted disclosure recognition provisions statement 158 effective june 30 2007 following table describes total incremental effect adoption statement 158 individual line items june 30 2007 consolidated balance sheet statement requires employers sponsor defined benefit plans recognize funded status defined benefit pension plan statement financial position recognize comprehensive income changes funded status year changes occur statement 71 provides regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current rate recovery kentucky based financial accounting standards board statement 87 entitled employers’ accounting pensions amended statement 158 regulators clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recovered future rates regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost 000 application statement 158 adjustments application statement 158 prepaid pension cost 4887 3935 regulatory assets accrued pension 3935 obligations funded status plan measured march 31 follows 000 change benefit obligation benefit obligation beginning year 13277 12696 service cost interest cost actuarial gain loss 894 amendment 3 benefits paid 1102 1036 benefit obligation end year 12773 13277 change plan assets fair value plan assets beginning year 14229 13067 actual return plan assets employer contributions 1500 benefits paid 1102 1036 fair value plan assets end year 14197 14229 recognized amounts projected benefit obligation 12773 13277 plan assets fair value 14197 14229 funded status 1424 net amount recognized prepaid benefit costs consolidated balance sheets 1424 items yet recognized component net periodic benefit costs prior service cost 857 940 net loss 4395 4875 amounts recognized regulatory assets 3538 3935 accumulated benefit obligation 11679000 12191000 2008 2007 respectively 000 components net periodic benefit cost service cost interest cost expected return plan assets 988 995 931 amortization unrecognized net loss amortization prior service cost 86 net periodic benefit cost weightedaverage assumptions used determine benefit obligations discount rate 65 58 rate compensation increase 40 weightedaverage assumptions used determine net periodic benefit cost discount rate 58 expected longterm return plan assets 70 80 rate compensation increase 40 expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments marketrelated value plan assets marketrelated value plan assets based upon fair value plan assets pension plan weightedaverage asset allocations plan’s measurement date march 31 asset category follows equity securities fixed income securities equity investment target approximately 65 includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 677000 pension plan 2009 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit pension plan employees hired may 9 2008 receive 4 contribution employee savings plan account contribution discretionary subject change approval board directors freezing defined benefit plan new entrants impact level benefits existing participants statement financial accounting standards 106 entitled employers’ accounting postretirement benefits statement financial accounting standards 112 entitled employers’ accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employee’s contribution maximum company contribution 35 employee’s annual compensation employees hired may 9 2008 annually receive 4 nonelective contribution savings plan account beginning july 1 2008 contribution discretionary subject change approval board directors 2008 2007 2006 delta’s savings plan expense 281000 256000 240000 respectively effective july 1 2008 company match 100 employee’s elective contribution maximum matching contribution 40 c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings delta’s chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings’ retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2008 2007 irrevocable trust assets 250000 203000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 6 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 18653 21063 26055 shares 2008 2007 2006 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2008 156098 shares available issuance 7 note receivable officer related party transaction reflected 2007 2006 consolidated statements income 62000 24000 respectively compensation related forgiveness principal 160000 loan made glenn r jennings chairman board president chief executive officer forgave 2000 principal amount month service mr jennings completed june 30 2007 mr jennings made monthly interest payments note based annual interest rate 6 forgave remaining balance note effective june 30 2007 8 notes payable current available bank line credit branch banking trust company 40000000 6829000 4190000 borrowed weighted average interest rate 321 632 june 30 2008 2007 respectively maximum amount borrowed 2008 2007 26858000 18975000 respectively interest line determined monthly london interbank offered rate plus 75 used bank line credit annual cost unused bank line credit 125 bank line credit extends october 31 2009 9 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 redemption 25000 annually made behalf deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us beginning april 2009 premium february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us february 2009 1 premium subsequent february 2009 premium redeem debentures amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2008 2007 unamortized balance 5123000 5511000 respectively loss extinguishment debt 2539000 2729000 included deferred amortized term related debt consistent regulatory treatment current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined “events default” among things make obligations immediately due payable consider following covenants restrictive • dividend payments cannot made unless consolidated shareholders’ equity company exceeds 25800000 thus retained earnings restricted • may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented 10 fair values financial instruments fair value longterm debt estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value longterm debt june 30 2008 2007 estimated 55164000 57457000 respectively carrying amounts accompanying consolidated balance sheets june 30 2008 2007 59518000 59825000 respectively carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 11 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 78000 88000 three years ending june 30 2008 2007 2006 respectively 12 commitments contingencies entered individual employment agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 3 million would paid addition continuation specified benefits five years 13 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission’s regulation business includes setting rates permitted charge regulated customers monitor need file requests kentucky public service commission general rate increase natural gas transportation services april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 rate case requested return common equity 121 test year rate case twelve months ended december 31 2006 increased rates requested become effective may 20 2007 implementation proposed rates suspended october 20 2007 october 2007 negotiated settlement kentucky attorney general regarding rate case settlement agreement provided 3920000 additional annual revenues stipulated settlement purposes 105 return common shareholders’ equity increase rates allocated primarily monthly customer charge partially decouple revenues volumes gas sold order kentucky public service commission received october 19 2007 approving terms settlement rates effective october 20 2007 kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small non residential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve either franchises expired areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 14 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies single customer citizens gas utility district provided 17087000 9843000 15422000 nonregulated revenues 2008 2007 2006 respectively although assurance revenues continue levels 2008 2007 2006 purchased approximately 99 natural gas interstate sources utilize atmos energy marketing b gas services fulfill interstate purchase requirements segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation gas storage services intersegment transportation revenues expenses recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown following table 000 operating revenues regulated external customers 58219 53499 65343 intersegment 4019 3643 3498 total regulated 62238 57142 68841 nonregulated external customers 54438 44669 51904 eliminations intersegment 4019 3643 3498 total operating revenues 112657 98168 117247 operating expenses regulated purchased gas 33493 30887 43233 depreciation 4053 4579 4084 14840 13538 13292 total regulated 52386 49004 60609 nonregulated purchased gas 43389 35173 43039 depreciation 5119 4547 4219 total nonregulated 48626 39839 47378 eliminations intersegment 4019 3643 3498 total operating expenses 96993 85200 104489 income deductions net regulated nonregulated total income deductions interest charges regulated 4556 4501 4991 nonregulated 13 total interest charges 4770 4647 4978 income tax expense regulated 2022 1349 1235 nonregulated 2125 1808 1748 total income tax expense 4147 3157 2983 net income regulated 3356 2422 2234 nonregulated 3474 2876 2791 total net income 6830 5298 5025 assets regulated 163952 154029 150541 nonregulated 6863 6372 5013 total assets 170815 160401 155554 capital expenditures regulated 5564 8083 7781 nonregulated total capital expenditures 5564 8083 7781 15 subsequent events july 2008 kentucky public service commission approved case 200800062 request implement conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness also provides rebates purchase certain highefficiency appliances program helps align interests residential customers reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs including reimbursement margins lost sales incentives provided us 16 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 2008 2007 2006 column b column c column e additions deductions exhibit 12 delta natural gas company inc subsidiary companies computation consolidated ratio earnings fixed charges interest accrued uncertain tax positions accordance financial accounting standards board interpretation 48 presented income taxes 2008 consolidated statement income interest excluded determination fixed charges exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent registered public accounting firm consent incorporation reference registration statement 33104301 1 report dated august 28 2008 relating consolidated financial statements financial statement schedule delta natural gas company inc subsidiaries company report expressed unqualified opinion company’s consolidated financial statements financial statement schedule included explanatory paragraphs regarding company’s adoption new accounting standards 2008 2007 2 report dated august 28 2008 relating effectiveness company’s internal control financial reporting appearing annual report form 10k delta natural gas company inc year ended june 30 2008 deloitte touche llp cincinnati ohio august 28 2008 exhibit 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrant’s disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrant’s internal control financial reporting occurred registrant’s recent fiscal quarter registrant’s fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrant’s internal control financial reporting 5 registrant’s certifying officer disclosed based recent evaluation internal control financial reporting registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrant’s ability record process summarize report financial information b fraud whether material involves management employees significant role registrant’s internal control financial reporting date august 29 2008 sglenn r jennings glenn r jennings chairman board president chief executive officer exhibit 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 john b brown certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrant’s disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrant’s internal control financial reporting occurred registrant’s recent fiscal quarter registrant’s fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrant’s internal control financial reporting 5 registrant’s certifying officer disclosed based recent evaluation internal control financial reporting registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrant’s ability record process summarize report financial information b fraud whether material involves management employees significant role registrant’s internal control financial reporting date august 29 2008 sjohn b brown john b brown chief financial officer treasurer secretary exhibit 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2008 filed securities exchange commission date hereof “report” glenn r jennings chairman board president chief executive officer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition results operations delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer august 29 2008 exhibit 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2008 filed securities exchange commission date hereof “report” john b brown chief financial officer treasurer secretary company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition results operations delta natural gas company inc sjohn b brown john b brown chief financial officer treasurer secretary august 29 2008 item 15 exhibits financial statement schedules 3i registrant’s amended restated articles incorporation dated november 16 2006 incorporated herein reference exhibit 3i registrant’s form 10ka file 00008788 period ended june 30 2007 3ii registrant’s amended restated bylaws dated september 24 2010 incorporated herein reference exhibit 31 registrants form 8k file 0008788 dated september 27 2010 4a indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d registrant’s form s2 reg 333100852 dated october 30 2002 4b indenture dated march 1 2006 respect 575 insured quarterly notes due april 1 2021 incorporated herein reference exhibit 4d registrant’s form s3 reg 333132322 dated march 10 2006 1001 gas sales agreement dated may 1 2000 atmos energy marketing llc registrant incorporated herein reference exhibit 10c registrant’s form s2a reg 333100852 dated december 13 2002 1002 base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrant’s form s2 reg 333104301 dated april 4 2003 1003 gas sales agreement dated may 1 2003 atmos energy marketing llc registrant incorporated herein reference exhibit 10d registrants form 10k file 00008788 period ended june 30 2003 1004 gas sales agreement dated may 1 2005 atmos energy marketing llc registrant incorporated herein reference exhibit 10c registrants form 10k file 00008788 period ended june 30 2005 1005 gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrant’s form s2a reg 333100852 dated december 13 2002 1006 agreement transport natural gas nami resources company llc registrant dated march 10 2005 incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated march 23 2005 1007 amendment dated july 22 2010 agreement transport natural gas nami resources company llc registrant filed herewith 1008 gts service agreements dated november 1 1993 service agreement nos 37813 37814 37815 appendix respective service agreements effective november 1 2010 columbia gas transmission corporation registrant filed herewith 1009 fts1 service agreements dated october 4 1994 service agreement nos 43827 43828 43829 appendix respective service agreements effective november 1 2010 columbia gulf transmission corporation registrant filed herewith 1010 underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrant’s form s2 reg 333104301 dated april 4 2003 1011 oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrant’s form s2 reg 333104301 dated april 4 2003 1012 gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrant’s form s2 reg 333104301 dated april 4 2003 1013 gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrant’s form s2 reg 333104301 dated april 4 2003 1014 deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrant’s form s2 reg 333104301 dated april 4 2003 1015 loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrant’s form s2a reg 333100852 dated december 13 2002 1016 promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2002 1017 modification agreement extending october 31 2004 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2003 1018 modification agreement extending october 31 2005 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2004 1019 modification agreement extending october 31 2007 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated august 19 2005 1020 modification agreement extending october 31 2009 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2007 1021 modification agreement extending june 30 2011 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated june 30 2009 1022 modification agreement extending june 30 2013 promissory note loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated june 30 2011 1023 employment agreement dated march 1 2000 glenn r jennings registrant’s chairman board president chief executive officer registrant incorporated herein reference exhibit k registrant’s form 10q file 00008788 dated march 31 2000 1024 officer agreements dated march 1 2000 two officers john b brown johnny l caudill registrant incorporated herein reference exhibit 10k registrant’s form 10q file 00008788 period ended march 31 2000 1025 officer agreement dated november 20 2008 brian ramsey registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated november 21 2008 1026 officer agreement dated november 19 2010 matthew wesolosky registrant incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated november 24 2010 1027 supplemental retirement benefit agreement trust agreement glenn r jennings registrant incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated february 25 2005 1028 registrants amended restated dividend reinvestment stock purchase plan dated november 17 2005 incorporated herein reference exhibit 99b registrant’s s3d reg 333130301 dated december 14 2005 1029 registrants incentive compensation plan dated january 1 2008 incorporated herein reference exhibit 41 registrant’s s8 reg 333165210 dated march 4 2010 1030 notices performance shares award four officers john b brown johnny l caudill glenn r jennings brian ramsey registrant incorporated herein reference exhibits 103 104 105 106 registrant’s form 8k file 0008788 dated august 20 2010 1031 notices performance shares award five officers john b brown johnny l caudill glenn r jennings brian ramsey matthew wesolosky registrant incorporated herein reference exhibits 101 102 103 104 105 registrant’s form 8k file 0008788 dated august 16 2011 computation consolidated ratio earnings fixed charges subsidiaries registrant consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day august 2011 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board president august 26 2011 glenn r jennings chief executive officer iiprincipal financial officer sjohn b brown chief financial officer august 26 2011 john b brown treasurer secretary iii principal accounting officer matthew wesolosky vice president controller august 26 2011 matthew wesolosky iv majority board directors sglenn r jennings chairman board president august 26 2011 glenn r jennings chief executive officer slinda k breathitt director august 26 2011 linda k breathitt slanny greer director august 26 2011 lanny greer smichael j kistner director august 26 2011 michael j kistner slewis n melton director august 26 2011 lewis n melton sarthur e walker jr director august 26 2011 arthur e walker jr smichael r whitley director august 26 2011 michael r whitley report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries “company” june 30 2011 2010 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2011 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2011 2010 results operations cash flows three years period ended june 30 2011 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 26 2011 expressed unqualified opinion companys internal control financial reporting deloitte touche llp indianapolis indiana august 26 2011 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 37000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers delta’s system delgasco inc buys gas resells delta resources inc customers delta’s system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets 000 regulated segment distribution transmission storage 182041 179366 general miscellaneous intangibles 21847 21040 construction work progress 5142 1602 total regulated segment 209030 202008 nonregulated segment 2379 2241 total property plant equipment 211409 204249 pipe replacement program approved kentucky public service commission allows us adjust rates annually earn return capital expenditures replacement pipe related facilities incurred subsequent test year recent rate case pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 26 21 average depreciable plant 2011 2010 2009 respectively effective october 2010 implemented new depreciation rates approved kentucky public service commission 2010 rate case decreased remaining depreciable lives depreciable assets approved kentucky public service commission accrue asset removal costs certain type property depreciation expense corresponding credit regulatory liabilities consolidated balance sheet depreciable utility plant equipment retired related removal costs incurred charged regulatory liability e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred f gas cost recovery gas cost recovery “gcr” component regulated gas rates provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism general rate case kentucky public service commission approved change gas cost recovery clause effective january 2011 allowing us recover uncollectible gas cost portion bad debt expense component gcr adjustment g revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customer’s meter last read monthend unbilled revenues gas costs include following 000 unbilled revenues 1437 1120 unbilled gas costs unbilled volumes mcf unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 37000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows 000 regulatory assets current assets deferred gas costs 3379 3297 assets conservationefficiency program expenses loss extinguishment debt 1967 2157 asset retirement obligations 2391 2000 accrued pension 4069 7557 regulatory case expenses total assets 8823 12115 total regulatory assets 12202 15412 regulatory liabilities accrued cost removal longlived assets regulatory liability deferred income taxes 1162 1283 total regulatory liabilities 1508 1664 regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 20 years l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value considered exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards p gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers’ needs potential exists differences actual volumes stored versus perpetual records primarily due inaccuracies measurement injections withdrawals risks gas escaping facility periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments made perpetual inventory records discussed note 16 notes consolidated financial statements gas storage inventory recorded average cost 2 new accounting pronouncements recently issued pronouncements fair value measurement disclosure may 2011 financial accounting standards board issued guidance fair value measurement disclosure guidance issued part joint effort financial accounting standards board international accounting standards board converge two set standards single conceptual framework would change fair value measurement guidance applied future periods guidance effective quarter ending march 31 2012 expected material impact results operations financial position 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included unamortized debt expense consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded mutual funds mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fair value trust assets follows 000 trust assets carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value debentures insured quarterly notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate insured quarterly notes contain insurance provides continuing payment principal interest holders event default insured quarterly notes upon default insurer would pay interest principal holders maturity insured quarterly notes obligation would transfer insurer therefore insurance considered determination fair value insured quarterly notes 4 asset retirement obligations legal obligations june 30 2011 2010 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services fiscal year ended 2011 recognized asset retirement obligations mains services placed service amount 1000 2011 asset retirement obligations increased reflect revisions estimated cost retire certain mains wells 2010 asset retirement obligations increased reflect revisions estimated cost retire certain services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations related assets net accumulated depreciation reflected accompanying consolidated balance sheets captions asset retirement obligations property plant equipment respectively 000 asset retirement obligations beginning year 2201 1670 liabilities incurred liabilities settled 434 371 accretion revisions estimated cash flows end year 2561 2201 additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted regulator even though costs represent legal obligations accordance regulatory accounting standards 346000 382000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2011 2010 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets delta’s state net operating loss carry forward expires 2029 temporary differences gave rise net accumulated deferred income tax liability periods follows 000 deferred tax liabilities accelerated depreciation 32827 31002 deferred gas costs 1283 1252 regulatory assets loss extinguishment debt regulatory assets asset retirement obligations regulatory assets unrecognized accrued pension 1545 2869 pension 1035 prepaid expenses total 38878 37014 deferred tax assets alternative minimum tax credits regulatory liabilities investment tax credits reserve bad debt asset retirement obligations accrued employee benefits section 263a capitalized costs pension state net operating loss carryforward total 2672 3492 net accumulated deferred income tax liability 36206 33522 components income tax provision comprised following years ended june 30 000 components income tax expense current federal 1709 state 115 total 1232 1824 deferred 2528 5016 2193 income tax expense 3760 3192 3008 reconciliation statutory federal income tax rate effective income tax rate shown table statutory federal income tax rate 340 state income taxes net federal benefit 40 amortization investment tax credits 03 04 differences net 06 16 10 effective income tax rate 371 361 366 recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented asset retirement obligations consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 80000 66000 june 30 2011 2010 respectively june 30 2011 accrued interest 56000 unrecognized tax positions 26000 9000 recognized 2011 2010 consolidated statements income respectively following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2008 june 30 2007 longer subject examination federal kentucky income taxes respectively federal 2008 2009 tax returns currently examination 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions equal amounts necessary fund plan adequately contributed 2000000 plan fiscal 2011 generally accepted accounting principles “gaap” require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2011 june 30 2010 respectively follows 000 change benefit obligation benefit obligation beginning year 16506 14058 service cost interest cost actuarial loss 2044 benefits paid 448 1179 benefit obligation end year 17915 16506 change plan assets fair value plan assets beginning year 15288 13629 actual return plan assets 4216 2338 employer contributions 2000 benefits paid 448 1179 fair value plan assets end year 21056 15288 items yet recognized component net periodic benefit costs prior service cost 576 662 net loss 4645 8219 amounts recognized regulatory assets 4069 7557 accumulated benefit obligation 15721000 14426000 2011 2010 respectively 000 components net periodic benefit cost service cost interest cost expected return plan assets 1079 953 1010 amortization unrecognized net loss amortization prior service cost 86 net periodic benefit cost 1129 1040 weightedaverage assumptions used determine benefit obligations discount rate 525 625 rate compensation increase 40 weightedaverage assumptions used determine net periodic benefit cost discount rate 525 625 650 expected longterm return plan assets 70 rate compensation increase 40 plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 65 equity investments 35 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations real estate equity securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities regularly review asset allocation periodically rebalance investments targeted allocation appropriate assets plan comprised investments mutual funds common collective trusts individual mutual fund common collective trust selected based investment strategy mirrors specific asset class within target allocation mutual fund common collective trust categorized based primary investment strategy mutual funds categorized level 1 fair value hierarchy fair value mutual funds determined based quoted market price fund commoncollective trusts categorized level 2 fair value hierarchy fair value commoncollective trusts determined based net asset value published respective fund manager multiplied number units held trust investments commoncollective trusts restrictions ability sell investments respective level within fair value hierarchy determined described note 1 notes consolidated financial statements following represents fair value plan assets 000 level 1 level 2 level 3 asset class cash exchange traded mutual funds us equity securities fixed income securities 1098 foreign equity securities 1263 domestic real estate securities 2442 5520 common collective trusts shortterm income fund us fixed income fund 2179 global equity growth fund 2559 global equity value fund 1150 us equity index fund 2000 foreign equity index fund 2039 blended fund b 5520 15515 total 21056 5541 15515 000 level 1 level 2 level 3 asset class cash exchange traded mutual funds us equity securities foreign equity securities 1161 domestic real estate securities 1916 3579 common collective trusts shortterm income fund us fixed income fund 2210 global equity growth fund 1659 global equity value fund us equity index fund 1394 foreign equity index fund 1418 blended fund b 3997 11700 total 15288 3588 11700 mutual fund common collective trust categorized based primary investment strategy b blended fund combination us equity securities 65 us fixed income securities 35 determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations made 2000000 discretionary contributions defined benefit plan 2011 expect contribute 500000 defined benefit plan 2012 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit retirement plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employee’s contribution maximum company contribution 4 employee’s annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2011 2010 2009 delta’s savings plan expense 301000 293000 308000 respectively c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings delta’s chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings’ retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2011 2010 irrevocable trust assets 511000 373000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 22316 16810 22287 shares 2011 2010 2009 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2011 94685 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase gas supply combination spot market gas purchases forward gas purchases mitigate price risk efforts balance supply demand none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable based average borrowings bank line credit 2011 1 one hundred basis points increase average interest rate would result 35000 decrease annual pretax net income current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2011 june 30 2010 maximum amount borrowed 2011 2010 7709000 13429000 respectively effective june 30 2011 bank line credit extended june 30 2013 extension decreased interest rate used line credit london interbank offered rate plus 15 london interbank offered rate plus 115 annual cost unused bank line credit 125 10 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 38541000 38852000 outstanding june 30 2011 2010 respectively redemption 25000 annually made behalf individual deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us premium event default insured quarterly notes holders insured principal interest payments insurer would continue pay interest principal maturity insured quarterly notes february 2003 issued 20000000 700 debentures mature february 2023 19410000 19460000 outstanding june 30 2011 2010 respectively redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us premium amortize debt issuance expenses life related debt straightline basis approximates effective interest method june 30 2011 2010 unamortized balance 3961000 4349000 respectively loss extinguishment debt 1967000 2157000 included deferred regulatory asset amortized term related debt consistent regulatory accounting discussed note 1 notes consolidated financial statements current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined “events default” among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made capital stock repurchased unless giving effect dividend payments repurchases consolidated shareholders’ equity minus value company’s intangible assets exceeds 25800000 thus retained earnings restricted · may assume secured indebtedness excess 5000000 unless secure 700 debentures 575 insured quarterly notes equally additional secured indebtedness · without consent bank extended us bank line credit paying terminating bank line credit may · merge another entity · sell material portion assets ordinary course business · issue stock aggregate exceeds thirtyfive percent 35 outstanding shares common stock · permit person group related persons hold twenty percent 20 company’s outstanding shares common stock furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented 11 earnings per share following table sets forth computation basic diluted earnings per share certain awards shareholder approved incentive compensation plan provide recipient award rights shareholder delta natural gas company inc including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method 16000 participating unvested shares outstanding june 30 2011 june 30 2011 nonparticipating unvested performance shares outstanding nonparticipating unvested performance shares would included diluted earnings per share calculation using treasury stock method unless effect including shares antidilutive shares 2011 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 72000 74000 78000 years ended june 30 2011 2010 2009 respectively 13 commitments contingencies entered forward purchase agreements beginning july 2010 expiring various dates december 2011 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate gas supply meet customers’ gas requirements agreements aggregate minimum purchase obligations 218000 fiscal year ended june 30 2012 entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 35 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 18 note 20 notes consolidated financial statements would immediately vest kentucky department revenue assessed delta resources 5565000 includes 3013000 taxes 1963000 penalties 589000 interest failure collect remit 3 utility gross receipts license tax period july 2005 june 2011 tax 3 license tax levied gross billing utility passed customers delta resources natural gas marketer utility regulated kentucky public service commission since case law state kentucky opinions issued state attorney general support utility gross receipts license tax applicable regulated utilities believe delta resources exempt tax protested assessment cannot currently predict outcome protest june 30 2011 accrued amounts related assessment although kentucky department revenue asserted claim interest accrued subsequent date assessments calculated unasserted liabilities interest approximate 132000 event unsuccessful defending position delta resources would right seek reimbursement customers amounts paid department revenue relating assessment leaving delta resources potentially liable interest component assessment uncollectible amounts however would liable penalties kentucky law provides waiver penalties done tax position taken done good faith upon analysis recommendation legal counsel january 2011 filed lawsuit chartis insurance seeking recovery insurance claim filed us chartis insurance march 2009 claim sought reimbursement 1350000 related gas escaped underground storage field 2007 discussed note 16 notes consolidated financial statements time policy chartis insurance insure natural gas stored underground storage field believed policy designed cover loss chartis insurance reimbursed us loss external consultant engaged chartis insurance challenged right recover policy delta chartis filed motions issue party burden proof respect cause gas loss may 2011 court ruled motion citing delta burden proof demonstrate loss caused external factor although matter currently litigation also engaged settlement discussions chartis unable predict outcome legal proceeding settlement discussions party material pending legal proceedings 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission’s regulation business includes setting rates permitted charge regulated customers monitor need file requests kentucky public service commission general rate increase natural gas transportation services kentucky public service commission historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive gas costs reasonable rate return april 2010 filed request increased rates kentucky public service commission general rate case 201000116 requested annual revenue increase approximately 5315000 rate case utilized test year twelve months ended december 31 2009 requested return common equity 120 kentucky public service commission approved increased base rates general rate case provide additional 3513000 annual revenues based upon 104 allowed return common equity 1770000 increase annual depreciation expense majority increase allocated fixed monthly customer charge opposed volumetric rate therefore increase revenues less dependent customer usage occurs evenly throughout year increased base rates effective service rendered october 22 2010 addition increased rates pipe replacement program approved 2010 rate case pipe replacement program allows us adjust rates annually earn return capital expenditures incurred subsequent test year associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities february 2011 kentucky public service commission approved initial pipe replacement filing effective may 2011 provide us 139000 additional annual revenues kentucky public service commission allows us conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs including reimbursement margins lost sales incentives provided us kentucky public service commission allows us gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred general rate case kentucky public service commission approved change gas cost recovery clause effective january 2011 allowing us recover uncollectible gas cost portion bad debt expense component gas cost recovery adjustment additionally weather normalization provision tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 15 operating segments company two segments regulated natural gas distribution transmission segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenues recorded segments come sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed changes market price gas uncommitted gas volumes nonregulated companies nonregulated segment two customers provided 5 operating revenues largest customer provided 11461000 6722000 4285000 nonregulated revenues 2011 2010 2009 respectively second largest customer provided 8067000 5097000 nonregulated revenues 2011 2010 respectively assurance revenues customers continue levels 2011 2010 2009 purchased approximately 99 natural gas atmos energy marketing b gas services segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation gas storage services intersegment transportation revenues expenses recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown following table 000 operating revenues regulated external customers 48697 45676 64479 intersegment 3777 3441 3427 total regulated 52474 49117 67906 nonregulated external customers 34343 30746 41158 eliminations intersegment 3777 3441 3427 total operating revenues 83040 76422 105637 operating expenses regulated purchased gas 21078 20518 39138 depreciation 5037 3823 3737 14318 15105 15246 total regulated 40433 39446 58121 nonregulated purchased gas 26762 23582 32940 depreciation 5440 3813 5092 total nonregulated 32322 27513 38150 eliminations intersegment 3777 3441 3427 total operating expenses 68978 63518 92844 000 income deductions net regulated 50 nonregulated 1 total income deductions 46 interest charges regulated 4029 4055 4305 nonregulated total interest charges 4089 4169 4528 income tax expense regulated 3012 2008 1949 nonregulated 1184 1059 total income tax expense 3760 3192 3008 net income regulated 5153 3717 3479 nonregulated 1212 1935 1732 total net income 6365 5652 5211 assets regulated 168997 164871 154297 nonregulated 5899 3761 8208 total assets 174896 168632 162505 capital expenditures regulated 8120 5275 8422 nonregulated total capital expenditures 8123 5275 8422 16 gas storage inventory adjustment operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers’ needs periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records fiscal 2009 storage field data suggested inventory adjustment required related storage well allowed natural gas escape analyzing data recorded adjustment 1350000 adjustment included operation maintenance expense 2009 consolidated statement income march 2009 filed insurance claim 1350000 relating escaped gas june 30 2011 received insurance proceeds currently litigation insurance carrier discussed note 13 notes consolidated financial statements 17 sale property plant equipment 2009 sold two surplus office buildings 335000 resulted us recording 156000 gains sales gains included operation maintenance expense 2009 consolidated statement income 18 sharebased compensation november 2009 shareholders adopted approved delta natural gas company inc incentive compensation plan “plan” previously approved board directors august 2009 plan provides incentive compensation payable shares common stock plan became effective january 1 2010 administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 500000 shares june 30 2011 475000 shares common stock available issuance plan shares common stock may available authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded operation maintenance expense consolidated statement income based fair value awards grant date amortized requisite service period fair value closing price shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met cumulative compensation expense recognized sharebased compensation exceeds tax deductions allowed income tax returns immaterial tax deficiency recognized income tax expense 2011 increased taxes payable august 2010 shares common stock awarded virtually delta’s employees directors accordance plan 9000 shares awarded grant date fair value 264000 2933 per share recipients vested awards shortly awards granted time vesting date grant date shares awarded transferable holders shares vested shares immediately transferable august 2010 performance shares awarded companys executive officers maximum could issued performance awards 16000 shares grant date fair value 469000 2933 per share performance share awards vest performance objective awards met based companys fiscal 2011 earnings per common share cash bonuses stock awards june 30 2011 performance objective satisfied subject limitations described incentive compensation plan notice performance shares awards 16000 shares paid form unvested shares contain service condition whereby recipient award shall vest onethird increments year beginning august 31 2011 annually august 31 thereafter fully vested long recipient employee throughout service period compensation expense 263000 recognized 2011 related awards remaining 206000 compensation expense expected recognized 2012 2014 performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objective since performance condition satisfied holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2011 22 years holders performance shares may sell transfer pledge shares vest following summarizes activity performance shares 1 represents maximum number shares could issued based achieving performance criteria 19 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 20 subsequent events august 2011 11000 shares awarded stock bonus employees officers equity compensation members board directors grant date fair value 337000 additionally august 2011 performance shares awarded company’s executive officers performance share awards vest performance objective awards met based company’s fiscal 2012 audited earnings per share cash bonuses stock awards subject limitations described incentive compensation plan notice performance share awards performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2012 annually august 31 thereafter fully vested long recipient employee throughout service period maximum number shares could issued performance awards 18000 grant date fair value 552000 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2011 2010 2009 item 15 exhibits financial statement schedules 3i registrant’s amended restated articles incorporation dated november 16 2006 incorporated herein reference exhibit 3i registrant’s form 10ka file 00008788 period ended june 30 2007 3ii registrant’s amended restated bylaws dated may 10 2010 incorporated herein reference exhibit 31 registrants form 8k file 0008788 dated may 13 2010 4a indenture dated march 1 2006 respect 575 insured quarterly notes due april 1 2021 incorporated herein reference exhibit 4d delta’s form s3 reg 333132322 dated march 10 2006 4b indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d delta’s form s2 reg 333100852 dated october 30 2002 10a gas sales agreement dated may 1 2005 registrant atmos energy marketing llc incorporated herein reference exhibit 10c registrants form 10k file 00008788 period ended june 30 2005 10b gas sales agreement dated may 1 2003 registrant atmos energy marketing llc incorporated herein reference exhibit 10d registrants form 10k file 00008788 period ended june 30 2003 10c base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrant’s form s2 reg 333104301 dated april 4 2003 10d gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrant’s form s2a reg 333100852 dated december 13 2002 10e agreement transport natural gas registrant nami resources company llc incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated march 23 2005 10f amendment dated july 22 2010 agreement transport natural gas registrant nami resources company llc filed herewith 10g gts service agreements dated november 1 1993 service agreement nos 37813 37814 37815 appendix respective service agreements effective november 1 2010 columbia gas transmission corporation registrant filed herewith 10h fts1 service agreements dated october 4 1994 service agreement nos 43827 43828 43829 appendix respective service agreements effective november 1 2010 columbia gulf transmission corporation registrant filed herewith 10i gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrant’s form s2 reg 333104301 dated april 4 2003 10j gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrant’s form s2 reg 333104301 dated april 4 2003 10k deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrant’s form s2 reg 333104301 dated april 4 2003 10l underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrant’s form s2 reg 333104301 dated april 4 2003 10m oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrant’s form s2 reg 333104301 dated april 4 2003 10n loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrant’s form s2a reg 333100852 dated december 13 2002 10o promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2002 10p modification agreement extending october 31 2004 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2003 10q modification agreement extending october 31 2005 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2004 10r modification agreement extending october 31 2007 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated august 19 2005 10s modification agreement extending october 31 2009 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrant’s form 10q file 00008788 period ended september 30 2007 10t modification agreement extending june 30 2011 promissory note loan agreement dated october 31 2002 registrant branch banking trust company incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated june 30 2009 10u employment agreements registrant three officers john b brown johnny l caudill glenn r jennings incorporated herein reference exhibit 10k registrant’s form 10q file 00008788 period ended march 31 2000 10v employment agreement registrant brian ramsey incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated november 21 2008 10w supplemental retirement benefit agreement trust agreement registrant glenn r jennings incorporated herein reference exhibit 10a registrant’s form 8k file 00008788 dated february 25 2005 10x registrants amended restated dividend reinvestment stock purchase plan dated november 17 2005 incorporated herein reference exhibit 99b registrant’s s3d reg 333130301 dated december 14 2005 10y registrants incentive compensation plan dated january 1 2008 incorporated herein reference exhibit 41 registrant’s s8 reg 333165210 dated march 4 2010 10z notices performance shares award registrant four officers john b brown johnny l caudill glenn r jennings brian ramsey incorporated herein reference exhibits 103 104 105 106 registrant’s form 8k file 0008788 dated august 20 2010 computation consolidated ratio earnings fixed charges subsidiaries registrant consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 3133 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 3rd day september 2010 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board president september 3 2010 glenn r jennings chief executive officer iiprincipal financial officer principal accounting officer sjohn b brown chief financial officer september 3 2010 john b brown treasurer secretary iii majority board directors slinda k breathitt director september 3 2010 linda k breathitt slanny greer director september 3 2010 lanny greer smichael j kistner director september 3 2010 michael j kistner slewis n melton director september 3 2010 lewis n melton sarthur e walker jr director september 3 2010 arthur e walker jr smichael r whitley director september 3 2010 michael r whitley report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries “company” june 30 2010 2009 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2010 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2010 2009 results operations cash flows three years period ended june 30 2010 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated september 3 2010 expressed unqualified opinion companys internal control financial reporting deloitte touche llp cincinnati ohio september 3 2010 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 37000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers delta’s system delgasco inc buys gas resells delta resources inc customers delta’s system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 21 23 average depreciable plant 2010 2009 2008 respectively effective october 20 2007 implemented new depreciation rates allowed kentucky public service commission 2007 rate case increased remaining depreciable lives depreciable assets e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired f gas cost recovery gas cost recovery “gcr” component regulated gas rates provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism g revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customer’s meter last read monthend unbilled revenues gas costs include following 000 unbilled revenues 1120 1386 unbilled gas costs unbilled volumes mcf unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 37000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting account regulated operations accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows 000 regulatory assets current assets deferred gas costs 3297 2357 assets conservationefficiency program expenses loss extinguishment debt 2157 2348 asset retirement obligations 2000 1464 accrued pension 7557 7309 regulatory case expenses total assets 12115 11395 total regulatory assets 15412 13752 regulatory liabilities accrued cost removal longlived assets regulatory liability deferred income taxes 1283 1406 total regulatory liabilities 1664 1710 regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value considered exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards p gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers’ needs potential exists differences actual volumes stored versus perpetual records primarily due inaccuracies measurement injections withdrawals risks gas escaping facility periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments made perpetual inventory records discussed note 15 notes consolidated financial statements gas storage inventory recorded average cost 2 new accounting pronouncements recently adopted pronouncements income taxes july 2006 financial accounting standards board issued guidance clarify accounting uncertainty income taxes recognized enterprise’s financial statements addressed determination whether tax benefits claimed expected claimed tax return recorded financial statements may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement adopted new guidance july 1 2007 resulted adjustment beginning retained earnings 69000 note 5 notes consolidated financial statements discusses income taxes b postretirement benefits september 2006 financial accounting standards board issued new guidance require employers sponsor defined benefit plans measure assets benefit obligations end employer’s fiscal year fiscal years beginning december 15 2007 effective july 1 2008 adopted guidance changed measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 760000 amount 152000 attributable change measurement dates accordingly recognized 119000 decrease prepaid pension expense 33000 decrease unrecovered pension expense regulatory asset decreases accounted reduction beginning retained earnings july 1 2008 net 58000 tax december 2008 financial accounting standards board issued guidance increase transparency surrounding types assets risks associated defined benefit pension postretirement plan guidance requires employers provide additional disclosure surrounding investment strategies major categories plan assets valuation techniques used measure fair value plan assets guidance adopted prospectively june 30 2010 impact results operations financial position disclosures required guidance included note 6 notes consolidated financial statements c fair value measurement disclosure september 2006 financial accounting standards board issued guidance establish framework measuring fair value expand disclosure requirements fair value measurements although guidance require additional fair value measurements applies accounting standards require permit fair value measurements effective july 1 2008 adopted guidance financial instruments cumulative effect adjustment retained earnings result adopting guidance april 2009 financial accounting standards board issued guidance determine fair value volume level activity asset liability significantly decreased identifying transactions orderly guidance effective fiscal year ended june 30 2009 impact results operations financial position april 2009 financial accounting standards board issued guidance related recognition presentation otherthantemporary impairments debt equity securities guidance effective fiscal year ended june 30 2009 impact results operations financial position january 2010 financial accounting standards board issued guidance requiring entities fair value measurements disaggregate major categories assets liabilities within disclosures disclose transfers levels within fair value hierarchy disclose inputs valuation techniques level 2 level 3 fair value measurements guidance effective quarter ended march 31 2010 impact results operations financial position note 3 notes consolidated financial statements discusses fair value measurements derivatives hedging march 2008 financial accounting standards board issued guidance enhance disclosures derivative instruments hedging activities entities required provide enhanced disclosures entity uses derivative instruments ii derivative instruments related hedged instruments accounted iii derivative instruments related hedged items affect entity’s financial position financial performance cash flows guidance effective quarter ended march 31 2009 impact results operations financial position note 8 notes consolidated financial statements discusses derivative instruments hedging activities 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included unamortized debt expense consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded mutual funds mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fair value trust assets follows june 30 june 30 000 trust assets carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value debentures insured quarterly notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate insured quarterly notes contain insurance provides continuing payment principal interest holders event default insured quarterly notes upon default insurer would pay interest principal holders maturity insured quarterly notes obligation transfers insurer therefore insurance considered determination fair value insured quarterly notes nonfinancial assets nonfinancial liabilities measured fair value nonrecurring basis consist asset retirement obligations asset retirement obligations measured fair value upon initial recognition based expected future cash flows obligation considered level 3 fair value measurements fiscal year ended june 30 2010 recognized asset retirement obligations natural gas liquids storage tanks mains services placed service amount 4000 expected future cash flows obligations based cost estimates third party retire underlying asset discounted using credit adjusted riskfree rate credit adjusted riskfree rate determined based daily treasury yield curve adjusted credit risk based recent trades debentures additionally certain future events may require us evaluate longlived assets impairment determine carrying value exceeds fair value 4 asset retirement obligations legal obligations june 30 2010 2009 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services 2010 additional asset retirement obligations recognized reflect revisions estimated cost retire certain services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations related assets net accumulated depreciation reflected accompanying consolidated balance sheets captions asset retirement obligations property plant equipment respectively 000 asset retirement obligations beginning year 1670 1600 liabilities incurred liabilities settled 371 70 accretion revisions estimated cash flows end year 2201 1670 additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire asset nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted regulator even though costs represent legal obligations accordance regulatory accounting standards 382000 304000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2010 2009 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 000 deferred tax liabilities accelerated depreciation 31002 25650 deferred gas costs 1252 regulatory assets loss extinguishment debt regulatory assets asset retirement obligations regulatory assets unrecognized accrued pension 2869 2775 total 37014 31191 deferred tax assets alternative minimum tax credits regulatory liabilities investment tax credits reserve bad debt asset retirement obligations accrued personal leave section 263a capitalized costs pension state net operating loss carry forward total 3492 2839 net accumulated deferred income tax liability 33522 28352 components income tax provision comprised following years ended june 30 000 components income tax expense current federal 1709 1158 state 115 total 1824 1553 deferred 5016 2193 2594 income tax expense 3192 3008 4147 reconciliation statutory federal income tax rate effective income tax rate shown table statutory federal income tax rate 340 state income taxes net federal benefit 40 amortization investment tax credits 03 04 03 differences net 16 10 effective income tax rate 361 366 377 recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented asset retirement obligations consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 66000 149000 june 30 2010 2009 respectively june 30 2009 accrued interest 30000 unrecognized tax positions 9000 14000 recognized 2010 2009 consolidated statements income respectively following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2007 june 30 2006 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically makes annual contributions equal amounts necessary fund plan adequately contributed 500000 plan fiscal 2010 generally accepted accounting principles require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2010 june 30 2009 respectively follows items yet recognized component net periodic benefit costs prior service cost 662 749 net loss 8219 8058 amounts recognized regulatory assets 7557 7309 accumulated benefit obligation 14426000 12682000 2010 2009 respectively 000 components net periodic benefit cost service cost interest cost expected return plan assets 953 1010 988 amortization unrecognized net loss amortization prior service cost 86 net periodic benefit cost 1040 weightedaverage assumptions used determine benefit obligations discount rate 525 625 650 rate compensation increase 40 weightedaverage assumptions used determine net periodic benefit cost discount rate 625 650 580 expected longterm return plan assets 70 rate compensation increase 40 plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 65 equity investments 35 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations real estate equity securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities regularly review asset allocation periodically rebalance investments targeted allocation appropriate assets plan comprised investments mutual funds common collective trusts individual mutual fund common collective trust selected based investment strategy mirrors specific asset class within target allocation mutual fund common collective trust categorized based primary investment strategy mutual funds categorized level 1 fair value hierarchy fair value mutual funds determined based quoted market price fund commoncollective trusts categorized level 2 fair value hierarchy fair value commoncollective trusts determined based net asset value published respective fund manager multiplied number units held trust respective level within fair value hierarchy determined described note 1 notes consolidated financial statements following represents fair value plan assets june 30 000 level 1 level 2 level 3 asset class cash exchange traded mutual funds us equity securities foreign equity securities 1161 domestic real estate 1916 3579 common collective trusts shortterm income fund us fixed income fund 2210 global equity growth fund 1659 global equity value fund us equity index fund 1394 foreign equity index fund 1418 blended fund b 3997 11700 total 15288 3588 11700 mutual fund common collective trust categorized based primary investment strategy b blended fund combination us equity securities 65 us fixed income securities35 determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations contributed total 1000000 defined benefit retirement plan august 2010 additional contributions expected fiscal 2011 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit retirement plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employee’s contribution maximum company contribution 4 employee’s annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2010 2009 2008 delta’s savings plan expense 293000 308000 281000 respectively c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings delta’s chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings’ retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2010 2009 irrevocable trust assets 373000 281000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 16810 22287 18653 shares 2010 2009 2008 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2010 117001 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase gas supply combination spot market gas purchases forward gas purchases mitigate price risk efforts balance supply demand none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company shown notes payable accompanying consolidated balance sheets permits borrowings 40000000 available june 30 2010 june 30 2009 3653000 borrowed weighted average interest rate 18 maximum amount borrowed 2010 2009 13429000 31325000 respectively bank line credit extends june 30 2011 interest rate used line credit london interbank offered rate plus 15 annual cost unused bank line credit 125 10 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 38852000 39140000 outstanding june 30 2010 2009 respectively redemption 25000 annually made behalf deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us premium event default insured quarterly notes holders insured principal interest payments insurer would continue pay interest principal maturity insured quarterly notes february 2003 issued 20000000 700 debentures mature february 2023 19460000 19659000 outstanding june 30 2010 2009 respectively redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us premium amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2010 2009 unamortized balance 4349000 4736000 respectively loss extinguishment debt 2157000 2348000 included deferred amortized term related debt consistent regulatory treatment current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined “events default” among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made unless consolidated shareholders’ equity company exceeds 25800000 thus retained earnings restricted · may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented 11 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 74000 year ended june 30 2010 78000 years ended june 30 2009 2008 12 commitments contingencies entered forward purchase agreements beginning july 2009 expiring various dates november 2010 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate gas supply meet customers gas requirements agreements aggregate minimum purchase obligations 474000 fiscal year ended june 30 2011 entered individual employment agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 31 million would paid addition continuation specified benefits five years kentucky department revenue assessed delta resources 824000 includes 406000 taxes 285000 penalties 133000 interest failure collect remit 3 utility gross receipts license tax period july december 2005 tax 3 license tax levied gross billing utility passed customers case law state kentucky opinions issued state attorney general support utility gross receipts license tax applicable regulated utilities since delta resources natural gas marketer utility regulated kentucky public service commission believe delta resources exempt tax protested assessment cannot currently predict outcome protest june 30 2010 accrued amounts related contingency event unsuccessful defending position delta resources would right seek reimbursement customers amounts paid department revenue relating assessment leaving delta resources potentially liable interest component assessment uncollectible amounts however would liable penalties kentucky law provides waiver penalties done tax position taken done good faith upon analysis recommendation legal counsel although kentucky department revenue asserted claim tax periods december 2005 calculated potential future unasserted liabilities could approximate 52 million includes estimated taxes penalties interest party material pending legal proceedings 13 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission’s regulation business includes setting rates permitted charge regulated customers monitor need file requests kentucky public service commission general rate increase natural gas transportation services kentucky public service commission historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive gas costs reasonable rate return rates currently charge regulated customers implemented october 2007 april 23 2010 filed request increased rates kentucky public service commission general rate case 201000116 requests annual revenue increase approximately 5315000 increase 115 rate case utilizes test year twelve months ended december 31 2009 requests return common equity 120 request allocates majority requested increase fixed monthly customer charge opposed volumetric rate therefore increase revenue would less dependent customer usage occur evenly throughout year addition request increased rates proposed pipe replacement program would allow us adjust rates annually earn return capital expenditures incurred subsequent test year associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory relocation facilities also proposed change gas cost recovery clause include uncollectible gas cost portion bad debt expense component gas cost recovery rate filing requested increased rates effective may 23 2010 however matter general practice kentucky public service commission suspended implementation proposed rates period five months effective date time filing reviewed public hearing began august 31 2010 although management opinion request reasonable unable predict outcome proceeding kentucky public service commission approved conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs including reimbursement margins lost sales incentives provided us kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred quarter ended june 30 2010 filed quarterly application change gas cost recovery rates charge distribution customers proposed rates effective april 26 2010 however kentucky public service commission suspended proposed gas cost recovery rates considered reasonableness rates result suspension gas cost recovery rates approved january 2010 remained effect kentucky public service commission approved filing june 24 2010 additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 14 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenues recorded segments come sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies 2010 2009 2008 purchased approximately 99 natural gas atmos energy marketing b gas services segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation gas storage services intersegment transportation revenues expenses recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown following table 000 operating revenues regulated external customers 45676 64479 58219 intersegment 3441 3427 4019 total regulated 49117 67906 62238 nonregulated external customers 30746 41158 54438 eliminations intersegment 3441 3427 4019 total operating revenues 76422 105637 112657 operating expenses regulated purchased gas 20518 39138 33493 depreciation 3823 3737 4053 15105 15246 14840 total regulated 39446 58121 52386 nonregulated purchased gas 23582 32940 43389 depreciation 3813 5092 5119 total nonregulated 27513 38150 48626 eliminations intersegment 3441 3427 4019 total operating expenses 63518 92844 96993 income deductions net regulated 50 nonregulated total income deductions 46 interest charges regulated 4055 4305 4556 nonregulated total interest charges 4169 4528 4770 000 income tax expense regulated 2008 1949 2022 nonregulated 1184 1059 2125 total income tax expense 3192 3008 4147 net income regulated 3717 3479 3356 nonregulated 1935 1732 3474 total net income 5652 5211 6830 assets regulated 164871 154297 163952 nonregulated 3761 8208 6863 total assets 168632 162505 170815 capital expenditures regulated 5275 8422 5564 nonregulated total capital expenditures 5275 8422 5564 15 gas storage inventory adjustment operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers’ needs periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records fiscal 2009 storage field data suggested inventory adjustment required related storage well allowed natural gas escape analyzing data recorded adjustment 1350000 adjustment included operation maintenance expense 2009 consolidated statement income march 23 2009 filed insurance claim 1350000 relating escaped gas october 22 2009 received preliminary findings external consultant engaged insurance company review claim preliminary findings challenge right recover full amount claim disagree consultant’s preliminary findings filed rebuttal insurance company cannot predict amount insurance proceeds current rate case includes regulatory expense unreimbursed gas losses related adjustment 868000 recorded insurance recovery asset regulatory asset accompanying consolidated financial statements however extent recovery becomes probable evaluate recognition appropriate asset time 16 sale property plant equipment 2009 sold two surplus office buildings 335000 resulted us recording 156000 gains sales gains included operation maintenance expense 2009 consolidated statement income 17 sharebased compensation november 2009 annual meeting shareholders delta natural gas company inc shareholders adopted approved delta natural gas company inc incentive compensation plan “plan” previously approved board directors august 2009 subject shareholder approval plan provides incentive compensation payable stock restricted stock bonus awards plan became effective january 1 2010 administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 500000 shares common stock may available authorized unissued shares reacquired us shares purchase open market february 2010 received authorization kentucky public service commission issue shares pursuant plan march 2010 registered shares securities exchange commission june 30 2010 awards granted shares issued plan august 2010 board directors delta natural gas company inc ratified approved recommendation deltas corporate governance compensation committee grant stock bonus awards deltas employees directors performance share awards companys executive officers accordance deltas incentive compensation plan august 2010 9000 shares awarded stock bonus grant date fair value 264000 performance share awards vest performance objective awards met based companys fiscal 2011 audited earnings per share cash bonuses stock awards subject limitations described incentive compensation plan notice performance shares award performance shares paid shall form restricted stock shall vest 13 increments year beginning august 31 2011 annually august 31 thereafter fully vested long recipient employee throughout restriction period maximum number shares would issued performance award 16000 grant date fair value 469000 18 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods recorded 1350000 nonrecurring inventory adjustment december 31 2008 gas storage discussed note 15 notes consolidated financial statements schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 2010 2009 2008 item 15 exhibits financial statement schedule financial statements schedule exhibits 1 financial statements see index item 8 2 financial statement schedule see index item 8 3 exhibits exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day august 2015 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc winchester kentucky audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2015 2014 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2015 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2015 2014 results operations cash flows three years period ended june 30 2015 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2015 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission report dated august 25 2015 expressed unqualified opinion companys internal control financial reporting deloitte touche llp indianapolis indiana august 25 2015 delta natural gas company inc consolidated statements income accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system extract liquids natural gas storage field pipeline systems sold market prices three whollyowned subsidiaries delta resources inc buys natural gas resells industrial large use customers deltas system delgasco inc buys natural gas resells delta resources inc customers deltas system enpro inc owns operates natural gas production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment depreciation property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 29 average depreciable plant 2015 2014 2013 respectively approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheet depreciable utility plant equipment retired related removal costs incurred charged regulatory liability pipe replacement program tariff allows us adjust regulated rates annually earn return capital incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2015 2014 2013 natural gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks gas escaping field periodically analyze volumes pressure data relating storage field order substantiate natural gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records natural gas storage inventory recorded average cost regulated revenues bill regulated sales natural gas tariff rates approved kentucky public service commission customers billed monthly basis however billing cycle certain classes customers necessarily coincide calendar monthend customers apply unbilled method accounting estimate accrue revenues applicable customers yet billed related natural gas costs charged expense end month natural gas service rendered date customers meter last read monthend unbilled revenues included accounts receivable unbilled natural gas costs included deferred natural gas costs accompanying consolidated balance sheets include following record onsystem transportation services period transport natural gas enduse customer within system onsystem transportation customers receive natural gas supply third partyshippers delivering natural gas delta’s system bill onsystem transportation services transportation rates approved kentucky public service commission include fixed monthly charges volumetric rates delta resources utilizes delta’s onsystem transportation service revenue delta resources tariff rates eliminated upon consolidation record offsystem transportation services period transport natural gas interstate pipeline behalf thirdparty shippers delivering natural gas delta’s system bill offsystem transportation services tariff rates approved kentucky public service commission volumetric rates delgasco utilizes delta‘s offsystem transportation service revenue delgasco tariff rates eliminated upon consolidation daily volumes natural gas delivered thirdparty shippers supplying transportation customers rarely equal daily volumes billed customers resulting periodic transportation imbalances shortterm duration delta monitors activity regularly notifies shippers imbalance transportation imbalances turn create imbalances natural gas supply delta’s system thus requiring delta purchase either less volumes natural gas meet customers’ natural gas requirements included consolidated balance sheets either accounts payable prepayments respectively consistent regulatory treatment natural gas cost recovery tariff discussed note 14 notes consolidated financial statements imbalances impact results operations net impact imbalances offset regulatory assetliability related natural gas cost recovery tariff nonregulated revenues delta resources enters contracts whereby obligated supply onehundred percent customers’ natural gas requirements either fixed indexbased rates delta resources recognizes revenue period actual metered volumes delivered customer delta resources utilizes delta’s onsystem transportation service transportation expenses paid delta resources delta tariff rates eliminated upon consolidation delgasco enters contracts deliver fixed quantities natural gas customers either fixed indexbased rates delgasco recognizes revenue based upon period customer takes possession natural gas delgasco utilizes delta’s offsystem transportation service transportation expenses paid delgasco delta tariff rates eliminated upon consolidation enpro produces natural gas supplies portion delgasco’s natural gas requirements recognizes sale natural gas period delgasco takes possession natural gas revenues related natural gas costs enpro delgasco within nonregulated segment eliminated upon consolidation recognize revenue natural gas liquids period customer takes possession natural gas liquids factors affect revenue sale natural gas liquids include hydrocarbon content liquids market price natural gas liquids regulated purchased natural gas expense regulated natural gas rates include natural gas cost recovery tariff approved kentucky public service commission provides dollartracker matches revenues natural gas costs provides eventual dollarfordollar recovery natural gas costs incurred regulated segment recovery uncollectible natural gas cost portion bad debt expense natural gas costs based amount natural gas costs recovered revenue differences actual natural gas costs natural gas costs billed deferred reflected computation future billings customers using natural gas cost recovery mechanism excise taxes delta collects certain excise taxes levied state local governments customers taxes accounted net basis therefore included revenues accompanying consolidated statements income accounts receivable allowance doubtful accounts record allowance doubtful accounts reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated natural gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 32 years derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded securities exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards 2 new accounting pronouncements september 2013 internal revenue service irs issued final regulations regarding tax treatment amounts paid acquire produce improve tangible property update temporary regulations issued irs december 2011 2014 irs stated intent issue guidance specific industry sectors including natural gas final regulations effective tax year beginning july 1 2014 however expect compliance final regulations industry specific guidance material impact results operations financial position cash flows may 2014 financial accounting standards board issued guidance revising principles standards revenue recognition guidance creates framework recognizing revenue improve comparability revenue recognition practices across entities industries guidance effective quarterly report ending september 30 2018 evaluating methods adoption allowed new standard effect standard expected results operations financial position cash flows june 2014 financial accounting standards board issued guidance sharebased payments performance targets achieved subsequent requisite service period guidance effective quarter ending september 30 2016 expected material impact results operations financial position cash flows april 2015 financial accounting standards board issued guidance presentation debt issuance costs requires debt issuance cost recognized direct deduction carrying amount debt liability guidance effective quarter ending september 2016 expected material impact results operations financial position cash flows may 2015 financial accounting standards board issued guidance simplifying disclosure certain investments measured using net asset value per share investment guidance longer requires investments categorized within fair value hierarchy guidance effective quarter ending september 2016 expected material impact results operations financial position cash flows july 2015 financial accounting standards board issued guidance simplifying measurement inventory guidance requires inventory measured lower cost net realizable value guideline effective quarter ending september 2017 expected material impact results operations financial position cash flows 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust recorded fair value consist exchange traded securities exchange traded mutual funds securities mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy fair value trust assets follows carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes presented current portion longterm debt well current portion longterm debt consolidated balance sheets stated historical cost fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date fair value longterm debt categorized level 3 fair value hierarchy 4 asset retirement obligations legal obligations june 30 2015 2014 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain natural gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown asset retirement obligations accompanying consolidated balance sheets additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted kentucky public service commission even though costs represent legal obligations accordance regulatory accounting standards 417000 355000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2015 2014 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences capitalization thresholds tax reporting purposes versus financial reporting purposes differences recognition purchased natural gas costs certain accruals currently deductible income tax purposes utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included longterm liabilities accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented longterm liabilities consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income june 30 2015 2014 unrecognized tax positions recognized would impact effective tax rate june 30 2015 2014 5000 interest accrued unrecognized tax positions 2014 recognized interest income 4000 unrecognized tax positions consolidated statements income following reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2013 june 30 2012 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions fund plan adequately generally accepted accounting principles “gaap” require employers sponsor defined benefit plans recognize funded status defined benefit pension plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2015 june 30 2014 respectively follows accumulated benefit obligation 25012000 22810000 2015 2014 respectively plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 70 equity investments 30 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations domestic real estate securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities additional diversification invest absolute return strategy mutual funds include equity fixed income securities objective providing return greater inflation regularly review asset allocation periodically rebalance investments targeted allocations appropriate assets plan comprised investments individual securities mutual funds individual exchange traded equity securities exchange traded mutual funds treasury securities categorized level 1 fair value hierarchy fair value investments determined based quoted market price investment mutual funds categorized based primary investment strategy respective level within fair value hierarchy determined described note 1 notes consolidated financial statements corporate bonds municipal bonds us agency securities valued based calculation using interest rate curves credit spreads applied terms debt maturity coupon rate supported observable transactions categorized level 2 fair value hierarchy following represents fair value plan assets determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review high quality corporate bond yields maturities approximating remaining life projected benefit obligations made 1000000 discretionary contribution defined benefit plan fiscal 2015 expect contribute 500000 defined benefit plan fiscal 2016 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit plan freezing defined benefit plan new entrants impact level benefits existing participants provide postretirement postemployment benefits defined benefit retirement plan retired employees supplemental retirement plan described employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution savings plan account company contributions discretionary subject change approval board directors 2015 2014 2013 savings plan expense 359000 350000 313000 respectively supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta makes discretionary contributions irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted 2015 2014 2013 delta contributed 60000 year trust june 30 2015 2014 irrevocable trust assets 977000 907000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 26412 28809 28436 shares 2015 2014 2013 respectively registered 400000 shares issuance reinvestment plan 2006 june 30 2015 approximately 67000 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase natural gas supply combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts mitigate price risk related sale natural gas efforts balance supply demand regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2015 june 30 2014 maximum amount borrowed 2015 2014 126000 691000 respectively bank line credit extends june 30 2017 interest rate used line credit london interbank offered rate plus 115 effective july 1 2015 london interbank offered rate plus 1075 annual cost unused bank line credit 0125 restrictive covenants discussed note 10 notes consolidated financial statements 10 longterm debt series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december following table summarizes contractual maturities series notes fiscal year additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes amortize debt issuance expenses life related debt using effective interest method june 30 2015 2014 unamortized balance 3000000 3240000 respectively june 30 2015 2014 unamortized balance included loss extinguishment debt 2916000 3149000 respectively deferred regulatory asset amortized term debt discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable financial covenants include covenants related tangible net worth total debt capitalization ratio fixed charge ratio additionally company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items believe compliance financial covenants bank line credit 426 series notes periods presented consolidated financial statements furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank 11 earnings per share following table sets forth computation basic diluted earnings per common share percentage allocated weighted average common shares outstanding b incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 16 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed note c weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive unvested nonparticipating shares outstanding june 30 2015 2014 2013 c certain awards shareholder approved incentive compensation plan discussed note 16 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive shares 2015 2014 2013 65000 74000 68000 unvested participating shares outstanding june 30 2015 2014 2013 respectively 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 69000 68000 71000 years ended june 30 2015 2014 2013 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 43 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 16 notes consolidated financial statements would immediately vest party material pending legal proceedings entered forward purchase agreements portion nonregulated segments natural gas purchases beginning july 2015 expiring december 2016 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate natural gas supply meet customers natural gas requirements agreements aggregate minimum purchase obligations 440000 150000 fiscal years ending june 30 2016 june 30 2017 respectively 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services includes approval rates tariffs regulation business includes setting rates permitted charge regulated customers monitor need file requests general rate increase natural gas distribution transportation services historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive natural gas costs reasonable rate return regulated rates recently adjusted 2010 rate case became effective october 2010 matters kentucky public service commission would material impact results operations financial position cash flows pipe replacement program tariff allows us adjust rates annually earn return capital expenditures incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities natural gas cost recovery tariff permits us adjust rates charged customers reflect changes natural gas supply costs bad debt expense related natural gas cost although required file general rate case adjust rates pursuant natural gas cost recovery tariff required make quarterly filings kentucky public service commission overrecovered natural gas costs collected refunded adjustments customer bills beginning three months end quarter actual natural gas costs incurred weather normalization tariff provides adjustment rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts additionally conservation efficiency program tariff residential customers allows us adjust rates activities performed program perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises five cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise adversely affected operations 15 segment information company two reportable segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marking activities sales natural gas liquids nonregulated segment produces portion natural gas markets customers division segments separate revenue generating components based upon regulation products services segments operate single geographic area central southeastern kentucky chief operating decision maker chief executive officer evaluate performance based net income respective segment nonregulated segment two customers provided 5 operating revenues 2015 largest customer provided approximately 17852000 12569000 nonregulated revenues 2015 2014 respectively second largest customer provided approximately 7127000 9494000 17866000 nonregulated revenues 2015 2014 2013 respectively assurance revenues customers continue levels regulated segment purchased approximately 99 98 natural gas atmos energy marketing midwest energy services 2015 2014 respectively 2013 purchased approximately 98 natural gas atmos energy marketing b gas services midwest energy services nonregulated segment purchased approximately 99 natural gas atmos energy marketing midwest energy services 2015 2014 purchased approximately 96 natural gas atmos energy marketing b gas services midwest energy services 2013 purchased approximately 92 natural gas atmos energy marketing mb services reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 16 sharebased compensation shareholder approved incentive compensation plan “plan” provides compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2015 approximately 745000 shares common stock available issuance plan subject limitations imposed corporate governance guidelines shares common stock may available authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded nonregulated segment included operation maintenance expense consolidated statements income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met sharebased compensation expense 1095000 1112000 922000 2015 2014 2013 respectively excess tax benefits 9000 31000 recognized increase premium common shares 2015 2014 consolidated balance sheets respectively decreased taxes payable deduction income tax purposes exceeds compensation expense recognized financial reporting purposes excess tax benefits utilized offset tax deficiencies related sharebased compensation subsequent periods stock awards 2015 2014 2013 common stock awarded virtually delta employees directors grant date fair values 443000 22000 shares 350000 17000 shares 264000 12000 shares respectively recipients vested awards shortly awards granted time grant dates vesting dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares 2015 2014 2013 performance shares awarded companys executive officers grant date fair values 773000 39000 shares 801000 39000 shares 844000 39000 shares respectively performance share awards vest performance objectives awards met based companys earnings per common share fiscal year performance shares awarded cash bonuses sharebased compensation upon satisfaction performance objectives unvested shares issued recipients vest onethird increments august 31 subsequent achieving performance objectives long recipients employees throughout service period recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest june 30 2015 performance objectives performance shares awarded 2015 satisfied subject limitations plan 26000 unvested shares issued recipients subject service condition whereby award shall vest onethird increments year beginning august 31 2015 annually august 31 thereafter fully vested long recipient employee throughout service period unvested shares executive officers retire met normal retirement age defined benefit retirement plan sponsored company attained age sixtyseven time termination employment fully vest upon retirement date performance objectives performance shares awarded 2014 met 39000 unvested shares issued august 31 2014 26000 shares remain unvested june 30 2015 2014 2013 compensation expense related performance shares 652000 762000 658000 respectively compensation expense 332000 expected recognized 2016 2018 unvested shares performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2015 14 years following summarizes activity performance shares represents maximum number shares could issued based achieving performance criteria 17 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 18 subsequent events august 2015 8400 shares common stock awarded directors grant date fair value 169000 august 2015 performance shares awarded companys executive officers performance share awards vest performance objective awards met based companys fiscal 2016 audited earnings per share cash bonuses sharebased compensation subject limitations described plan performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2016 annually august 31 thereafter fully vested long recipient employee throughout service period unvested shares executive officers retire met normal retirement age defined benefit retirement plan sponsored company attained age sixtyseven time termination employment fully vest upon retirement date maximum number shares could issued performance awards 39000 grant date fair value 787000 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2015 2014 2013 item 15 exhibits financial statement schedules financial statements schedules exhibits 1 financial statements see index item 8 2 financial statement schedules see index item 8 3 exhibits exhibit 3i registrants amended restated articles incorporation 3ii registrants amended restated bylaws 4a indenture dated march 1 2006 respect 575 insured quarterly notes due april 1 2021 incorporated herein reference exhibit 4d deltas form s3 reg 333132322 dated march 31 2006 4b indenture dated january 1 2003 respect 7 debentures due february 1 2023 incorporated herein reference exhibit 4d deltas form s2 reg 333100852 dated october 30 2002 10a employment agreements registrant four officers john b brown johnny l caudill alan l heath glenn r jennings incorporated herein reference exhibit 10k registrants form 10q file 00008788 period ended march 31 2000 10b supplemental retirement benefit agreement trust agreement registrant glenn r jennings incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated february 25 2005 10c gas sales agreement dated may 1 2005 registrant atmos energy marketing llc filed herewith 10d gas sales agreement dated may 1 2003 registrant atmos energy marketing llc filed herewith 10e gas transportation agreement service package 9069 dated december 19 1994 tennessee gas pipeline company registrant incorporated herein reference exhibit 10e registrants form s2 reg 333100852 dated february 7 2003 10f gts service agreement service agreement 37815 dated november 1 1993 columbia gas transmission corporation registrant incorporated herein reference exhibit 10f registrants form s2 reg 333100852 dated february 7 2003 10g fts1 service agreement service agreement 4328 dated october 4 1994 columbia gulf transmission company registrant incorporated herein reference exhibit 10g registrants form s2 reg 333100852 dated february 7 2003 10h loan agreement dated october 31 2002 branch banking trust company registrant incorporated herein reference exhibit 10i registrants form s2 reg 333100852 dated february 7 2003 10i promissory note original principal amount 40000000 made registrant order branch banking trust company incorporated herein reference exhibit 10a registrants form 10q file 00008788 period ended september 30 2002 10j gas storage lease dated october 4 1995 judy l fuson guardian jamie nicole fuson minor lonnie ferrin assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10j registrants form s2 reg 333104301 dated april 4 2003 10k gas storage lease dated november 6 1995 thomas j carnes individually attorneyinfact trustee individuals named therein registrant incorporated herein reference exhibit 10k registrants form s2 reg 333104301 dated april 4 2003 10l deed perpetual gas storage easement dated december 21 1995 katherine cornelius william cornelius frances carolyn fitzpatrick isabelle fitzpatrick smith kenneth w smith registrant incorporated herein reference exhibit 10l registrants form s2 reg 333104301 dated april 4 2003 10m underground gas storage lease agreement dated march 9 1994 equitable resources exploration division equitable resources energy company lonnie ferrin amendment 1 novation underground gas storage lease agreement dated march 22 1995 equitable resources exploration lonnie ferrin registrant incorporated herein reference exhibit 10m registrants form s2 reg 333104301 dated april 4 2003 10n base contract shortterm sale purchase natural gas dated january 1 2002 b gas services inc registrant incorporated herein reference exhibit 10n registrants form s2 reg 333104301 dated april 4 2003 10o oil gas lease dated july 19 1995 meredith j evans helen evans paddock oil gas inc assignment dated june 15 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment dated august 31 1995 paddock oil gas inc assignor lonnie ferrin assignee assignment assumption agreement dated november 10 1995 lonnie ferrin registrant incorporated herein reference exhibit 10o registrants form s2 reg 333104301 dated april 4 2003 10p agreement transport natural gas registrant nami resources company llc incorporated herein reference exhibit 10a registrants form 8k file 00008788 dated march 23 2005 12 computation consolidated ratio earnings fixed charges 21 subsidiaries registrant 23 consent independent registered public accounting firm 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day august 2007 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated principal executive officer sglenn r jennings chairman board president august 29 2007 glenn r jennings chief executive officer ii principal financial officer principal accounting officer sjohn b brown chief financial officer august 29 2007 john b brown treasurer secretary iii majority board directors sdonald r crowe director august 29 2007 donald r crowe slanny greer director august 29 2007 lanny greer sbilly joe hall director august 29 2007 billy joe hall smichael j kistner director august 29 2007 michael j kistner slewis n melton director august 29 2007 lewis n melton sarthur e walker jr director august 29 2007 arthur e walker jr smichael r whitley director august 29 2007 michael r whitley report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets statements capitalization delta natural gas company inc subsidiaries june 30 2007 2006 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2007 audits also included consolidated financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2007 2006 results operations cash flows three years period ended june 30 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements effective june 30 2006 company adopted financial accounting standards board interpretation 47 accounting conditional asset retirement obligations discussed note 5 consolidated financial statements 2007 company changed method accounting defined benefit pension plan result adopting statement financial standards 158 employers accounting defined benefit pension postretirement plans also audited accordance standards public company accounting oversight board united states effectiveness companys internal control financial reporting june 30 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated august 28 2007 expressed unqualified opinion companys internal control financial reporting deloitte touche llp cincinnati ohio august 28 2007 delta natural gas company inc subsidiary companies consolidated statements capitalization june 30 2007 2006 common shareholders equity common shares par value 100 per share notes 5 6 authorized 20000000 shares issued outstanding 3277106 3256043 shares 2007 2006 respectively 3277106 3256043 premium common shares 43508979 43025733 retained earnings note 9 7642386 6327948 total common shareholders equity 54428471 52609724 longterm debt notes 9 10 insured quarterly notes 575 due 2021 39845000 40000000 debentures 70 due 2023 19980000 19990000 total debt 59825000 59990000 less amounts due within one year included current liabilities 1200000 total longterm debt 58625000 58790000 total capitalization 113053471 111399724 accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc delta company sells distributes transports natural gas approximately 39000 customers distribution system located central southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system operate underground storage field three whollyowned subsidiaries delta resources inc delta resources buys gas resells industrial large use customers deltas system delgasco inc buys gas resells delta resources customers deltas system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost plus removal expense less salvage value charged accumulated provision depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 27 25 26 average depreciable plant 2007 2006 2005 respectively e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired f gas cost recovery gas cost recovery gcr clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism g revenue recognition bill customers monthly meter reading cycle end month gas service rendered latest date cycle meter reading monthend unbilled prior november 2004 accordance ratemaking treatment followed kentucky public service commission recorded regulated revenues gas costs billed basis financial reporting regulatory purposes connection receiving rate order october 2004 began estimating regulated unbilled revenues gas costs end month reflecting amounts financial statements unbilled revenues gas costs include following 000 2007 2006 unbilled revenues 1058 1188 unbilled gas costs 497 594 unbilled volumes mcf 48 50 unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets reflecting sales unbilled volumes accompanying consolidated financial statements beginning november 2004 resulted nonrecurring increase operating income 617000 net income 379000 year ended june 30 2005 h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 39000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting regulated operations follow accounting reporting requirements statement financial accounting standards 71 entitled accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows 000 regulatory assets 2007 2006 current assets deferred gas costs 2942 1827 assets loss extinguishment debt 2729 2920 asset retirement costs 1249 1126 accrued pension 3935 rate case expenses 307 145 total assets 8220 4191 total regulatory assets 11162 6018 regulatory liabilities accrued cost removal longlived assets 785 880 regulatory liability deferred income taxes 1718 1696 total regulatory liabilities 2503 2576 deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism currently earning return loss extinguishment debt asset retirement costs recovered customer rates included depreciation rates pension expenses rate case expenses recovered customer rates allowed operating expenses l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value assets disposed estimated fair value reevaluated circumstances events change opinion management longlived assets appropriately valued accompanying consolidated financial statements derivatives purchase sell natural gas certain gas purchase sale contracts qualify derivative statement financial accounting standards 133 entitled accounting derivative instruments hedging activities contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n reclassifications certain amounts prior years reclassified conform current year presentation first quarter fiscal 2007 changed presentation consolidated statements income consolidated balance sheets method prescribed ferc uniform system accounts comparable publicly traded utilities reclassification resulted moving income taxes operating expenses income deductions net aggregating single amount represents income taxes additionally consolidated balance sheets organized present items order liquidity changes impact previously reported revenue net income earnings per share considered immaterial overall presentation consolidated financial statements 2 new accounting pronouncements march 2005 financial accounting standards board issued interpretation 47 entitled accounting conditional asset retirement obligations clarify scope timing liability recognition fasb statement 143 entitled accounting asset retirement obligations interpretation 47 requires liability recognized asset retirement obligation conditional based occurrence future event even timing method settlement uncertain adopted interpretation 47 june 30 2006 recorded asset retirement obligations required pursuant federal regulations related retirement service lines mains although timing retirements uncertain upon adoption interpretation recorded asset retirement obligations amount 1349000 amount 350000 recorded incremental cost underlying property plant equipment less 127000 accumulated depreciation cumulative effect related accretion liability depreciation asset 1126000 recorded regulatory asset pursuant financial accounting standards 71 entitled accounting effects certain types regulation recover cost removing regulated assets depreciation rates additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire asset pursuant interpretation 47 entered sharebased payment transactions therefore adoption statement financial accounting standards 123r entitled sharebased payment securities exchange commission staff accounting bulletin 107 entitled sharebased payment impact us june 2006 financial accounting standards board issued interpretation 48 accounting uncertainty income taxes clarify accounting uncertainty income taxes recognized enterprises financial statements accordance financial accounting standards board statement 109 accounting income taxes expect interpretation 48 shall effective 2008 fiscal year material impact results operations statement position september 2006 financial accounting standards board issued statement 158 entitled employers accounting defined benefit pension postretirement plans statement 158 requires employers sponsor defined benefit plans recognize funded status plan gains losses previously recognized net periodic benefit cost sponsors financial statements fiscal years ending december 15 2006 additionally statement 158 requires employers sponsor defined benefit plans measure assets benefit obligations end employers fiscal year fiscal years beginning december 15 2007 statement 71 provides guidance regulated utilities deferring costs would otherwise charged expense equity nonregulated enterprises applying provisions statement requirements statement 158 recorded regulatory asset representing adjustment pension asset recognizing funded status plan adjustment would represented accumulated comprehensive income without application statement 71 adoption statement 158 recognition disclosure provisions resulted increase regulatory assets 3935000 offset decrease prepaid pension cost 3935000 adoption statement 158 impact consolidated results operations cash flows see note 5 september 2006 financial accounting standards board issued statement 157 entitled fair value measures february 2007 issued statement 159 entitled fair value option financial assets financial liabilities statements effective fiscal years beginning november 15 2007 statements define fair value establish framework measuring fair value generally accepted accounting principles expand disclosures fair value measurements expect statements shall effective 2009 fiscal year material impact results operations statement position 3 asset retirement obligations legal obligations required financial accounting standards statement 143 entitled accounting asset retirement obligations june 30 2007 2006 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services june 30 2006 adopted financial accounting standards board interpretation 47 entitled accounting conditional asset retirement obligations upon adoption interpretation recorded asset retirement obligations amount 1349000 discussed note 2 notes consolidated financial statements following summary asset retirement obligations related assets net accumulated depreciation reflected accompanying consolidated balance sheets captions asset retirement obligations property plant equipment respectively asset retirement net 000 obligations assets june 30 2005 214 52 fin 47 adoption 1349 223 accretion 14 depreciation 2 additional obligations 1 june 30 2006 1578 274 accretion 120 depreciation 10 change obligations 232 june 30 2007 1466 32 nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement financial accounting standards 71 entitled accounting effects certain types regulation recorded approximately 785000 880000 accrued cost removal regulatory liabilities accompanying consolidated balance sheets june 30 2007 2006 respectively 4 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse deferred income tax balances june 30 2007 reflect 1 decrease state kentucky corporate income tax rate changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows 2007 2006 000 deferred tax liabilities accelerated depreciation 21036 19913 deferred gas costs 1116 705 pension 921 2064 debt issuance expense 1036 1110 regulatory assets asset retirement obligations 474 428 regulatory assets unrecognized pension costs 1494 448 344 total 26525 24564 deferred tax assets alternative minimum tax credits 753 1004 regulatory liabilities 950 979 investment tax credits 81 95 asset retirement obligations 494 536 506 570 total 2784 3184 net accumulated deferred income tax liability 23741 21380 components income tax provision comprised following years ended june 30 000 2007 2006 2005 components income tax expense current federal 494 813 341 state 213 256 164 total 707 1069 505 deferred 2450 1914 2634 income tax expense 3157 2983 3139 reconciliation statutory federal income tax rate effective income tax rate shown table 2007 2006 2005 statutory federal income tax rate 340 state income taxes net federal benefit 46 53 amortization investment tax credits 05 differences net 08 03 effective income tax rate 373 385 5 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees retirement income based number years service annual rates compensation company makes annual contributions equal amounts necessary fund plan adequately adopted disclosure recognition provisions statement 158 effective june 30 2007 following table describes total incremental effect adoption statement 158 individual line items june 30 2007 consolidated balance sheet statement requires employers sponsor defined benefit plans recognize funded status defined benefit pension plan statement financial position recognize comprehensive income changes funded status year changes occur statement 71 provides regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current rate recovery kentucky based statement 87 amended statement 158 regulators clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recovered future rates regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost application statement 000 adjustments 158 prepaid pension cost 4887 3935 952 regulatory assets accrued pension 3935 obligations funded status plan measured march 31 follows 000 2007 2006 change benefit obligation benefit obligation beginning year 12696 12087 service cost 715 780 interest cost 700 697 actuarial gain loss 202 295 benefits paid 1036 573 benefit obligation end year 13277 12696 change plan assets fair value plan assets beginning year 13067 11301 actual return plan assets 698 839 employer contributions 1500 benefits paid 1036 573 fair value plan assets end year 14229 13067 recognized amounts projected benefit obligation 13277 12696 plan assets fair value 14229 13067 funded status 952 371 unrecognized net actuarial loss 4609 unrecognized prior service cost 1026 net amount recognized prepaid benefit costs statement financial position 952 3954 upon adoption statement 158 unrecognized amounts recognized regulatory asset funded status plan equal amount recognized prepaid pension costs 2007 consolidated balance sheet items yet recognized component net periodic benefit costs prior service cost 940 1026 net loss 4875 4609 total 3935 3583 amounts recognized regulatory asset 3935 accumulated benefit obligation 12191 11848 000 2007 2006 2005 components net periodic benefit cost service cost 715 780 715 interest cost 700 697 612 expected return plan assets 995 931 863 amortization unrecognized net loss 233 257 178 amortization prior service cost 86 net periodic benefit cost 567 717 556 weightedaverage assumptions used determine benefit obligations discount rate 580 rate compensation increase 400 weightedaverage assumptions used determine net periodic benefit cost discount rate 580 600 expected longterm return plan assets 800 rate compensation increase 400 expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 60 percent equity investments approximately 40 percent fixed income investments plan assets pension plan weightedaverage asset allocations plans measurement date march 31 asset category follows 2007 2006 equity securities 59 54 debt securities 37 34 4 12 100 equity investment target approximately 65 percent includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 1500000 pension plan 2008 following benefit payments reflect expected future service appropriate expected paid 000 2008 855 2009 927 2010 520 2011 920 2012 603 2013 2017 8645 statement financial accounting standards 106 entitled employers accounting postretirement benefits statement financial accounting standards 112 entitled employers accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 35 employees annual compensation 2007 2006 2005 deltas savings plan expense 256000 240000 234000 respectively c employee stock purchase plan employee stock purchase plan stock plan qualified permanent employees eligible participate terms stock plan employees could contribute monthly basis 1 annual salary level july 1 year used purchase deltas common stock issued delta common stock based upon fiscal year contributions using average high low sale prices deltas stock quoted nasdaqs global market last business day june matched shares purchased stock equivalent market value 118000 issued july 2004 board discontinued stock plan july 1 2004 supplemental retirement agreement february 24 2005 deltas board directors adopted nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta contribute 60000 annually irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2007 2006 irrevocable trust assets 203000 124000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 6 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan reinvestment plan provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 21063 26055 24447 shares 2007 2006 2005 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2007 174751 shares available issuance 7 note receivable officer note receivable officer accompanying 2006 consolidated balance sheet relates 160000 loan made glenn r jennings chairman board president chief executive officer outstanding balance loan 62000 june 30 2006 forgave 2000 principal amount month service mr jennings completed june 30 2007 mr jennings made monthly interest payments note based annual interest rate 6 forgave remaining balance note effective june 30 2007 8 notes payable current available bank line credit branch banking trust company 40000000 4190000 7046000 borrowed weighted average interest rate 632 613 june 30 2007 2006 respectively maximum amount borrowed 2007 2006 18975000 33833000 respectively interest line determined monthly london interbank offered rate plus 1 used bank line credit effective august 12 2005 annual cost unused bank line credit changed 30 125 bank line credit extended october 31 2007 process extending bank line credit october 31 2009 extension reduce interest rate october 31 2007 london interbank offered rate plus 75 9 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 redemption 25000 annually made behalf deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us beginning april 2009 premium february 2003 issued 20000000 700 debentures mature february 2023 redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners 700 debentures redeemed us 2 premium declining ratably ceases february 2009 may 2006 redeemed 23672000 aggregate principal amount 715 debentures due 2018 may 2006 redeemed 10169000 aggregate principal amount 6 58 debentures due 2023 amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2007 2006 unamortized balance 5511000 5887000 respectively loss extinguishment debt 2730000 2920000 included deferred amortized term related debt consistent regulatory treatment current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined events default among things make obligations immediately due payable consider following covenants restrictive dividend payments cannot made unless consolidated shareholders equity company exceeds 25800000 thus retained earnings restricted may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented 10 fair values financial instruments fair value longterm debt estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value longterm debt june 30 2007 2006 estimated 57457000 56389000 respectively carrying amounts accompanying consolidated financial statements june 30 2007 2006 59825000 59990000 respectively carrying amount financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 11 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 78000 88000 three years ending june 30 2007 2006 2005 respectively 12 commitments contingencies entered individual employment agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 29 million would paid addition continuation specified benefits five years 13 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commissions regulation business includes setting rates permitted charge retail customers transportation customers monitor need file requests kentucky public service commission general rate increase retail gas transportation services general rate cases able adjust sales prices retail gas sell transport customers april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 test year case twelve months ended december 31 2006 increased rates requested become effective may 20 2007 rate case requests return common equity 121 request allocates component requested increase monthly customer charge thus helping decouple revenues volumes gas sold also seeks new conservationefficiency program cost recovery tariff help promote conservation efficient use natural gas residential customers additionally proposed experimental customer rate stabilization mechanism help provide future stable equitable rates customers adjusting rates annually without customers pay frequent costly rate cases kentucky public service commission suspended implementation proposed new rates october 20 2007 time filing reviewed reasonableness proposed rates considered public hearing set october 3 2007 purpose crossexamination witnesses although management opinion request reasonable unable predict outcome proceeding kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve either franchises expired areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 14 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenue recorded segments comes sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated business mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies single customer citizens gas utility district provided 9843000 15422000 10620000 nonregulated revenues 2007 2006 2005 respectively segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation gas storage services intersegment transportation revenues expenses recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown periods 000 2007 2006 2005 operating revenues regulated external customers 53499 65343 52210 intersegment 3643 3498 3357 total regulated 57142 68841 55567 nonregulated external customers 44669 51904 31971 eliminations intersegment 3643 3498 3357 total operating revenues 98168 117247 84181 operating expenses regulated purchased gas 30887 43233 28945 depreciation 4579 4084 4125 13538 13292 13557 total regulated 49004 60609 46627 nonregulated purchased gas 35173 43039 24502 depreciation 119 120 125 4547 4219 3794 total nonregulated 39839 47378 28421 eliminations intersegment 3643 3498 3357 total operating expenses 85200 104489 71691 income deductions net regulated 134 228 90 nonregulated 22 total income deductions 134 228 112 interest charges regulated 4501 4991 4493 nonregulated 146 13 28 total interest charges 4647 4978 4465 income tax expense regulated 1349 1235 1737 nonregulated 1808 1748 1402 total income tax expense 3157 2983 3139 net income regulated 2422 2234 2800 nonregulated 2876 2791 2199 total net income 5298 5025 4999 assets regulated 154029 150541 141841 nonregulated 6372 5013 2921 total assets 160401 155554 144762 capital expenditures regulated 8083 7781 5337 nonregulated 1 total capital expenditures 8083 7781 5338 15 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods basic diluted earnings loss operating net income per common quarter ended revenues income loss share fiscal 2007 september 30 13113351 274217 536745 16 december 31 28434215 5135224 2380821 73 march 31 41022436 7140820 3665329 112 june 30 15598389 417782 211058 07 fiscal 2006 september 30 14224340 172497 574469 18 december 31 42060769 5950539 2893164 89 march 31 46535375 6676509 3339992 103 june 30 14426660 42038 634052 19 exhibit 21 subsidiaries registrant delgasco inc enpro inc delta resources inc whollyowned subsidiaries registrant incorporated state kentucky business corporate names exhibit 23 consent independent registered public accounting firm consent incorporation reference registration statement 33104301 1 report dated august 28 2007 relating financial statements financial statement schedule delta natural gas company inc subsidiaries report expressed unqualified opinion companys consolidated financial statements financial statement schedule included explanatory paragraphs regarding companys adoption new accounting standards 2006 2007 2 report dated august 28 2007 relating effectiveness internal control financial reporting appearing annual report form 10k delta natural gas company inc year ended june 30 2007 deloitte touche llp cincinnati ohio august 28 2007 exhibit 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 glenn r jennings certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date august 29 2007 sglenn r jennings glenn r jennings chairman board president chief executive officer exhibit 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 john b brown certify 1 reviewed annual report form 10k delta natural gas company inc 2 based knowledge report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered report 3 based knowledge financial statements financial information included report fairly present material respects financial condition results operations cash flows registrant periods presented report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a15e 15d15e internal control financial reporting defined exchange act rules 13a15f 15d15f registrant designed disclosure controls procedures caused disclosure controls procedures designed supervision ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period report prepared b designed internal control financial reporting caused internal control financial reporting designed supervision provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles c evaluated effectiveness registrants disclosure controls procedures presented report conclusions effectiveness disclosure controls procedures end period covered report based evaluation disclosed report change registrants internal control financial reporting occurred registrants recent fiscal quarter registrants fourth fiscal quarter case annual report materially affected reasonably likely materially affect registrants internal control financial reporting 5 registrants certifying officers disclosed based recent evaluation internal control financial reporting registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies material weaknesses design operation internal control financial reporting reasonably likely adversely affect registrants ability record process summarize report financial information b fraud whether material involves management employees significant role registrants internal control financial reporting date august 29 2007 sjohn b brown john b brown chief financial officer treasurer secretary exhibit 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2007 filed securities exchange commission date hereof report glenn r jennings chairman board president chief executive officer company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition results operations delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer august 29 2007 exhibit 322 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 connection annual report delta natural gas company inc form 10k period ending june 30 2007 filed securities exchange commission date hereof report john b brown chief financial officer treasurer secretary company certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 best knowledge belief 1 report fully complies requirements section 13a 15d securities exchange act 1934 2 information contained report fairly presents material respects financial condition results operations delta natural gas company inc sjohn b brown john b brown chief financial officer treasurer secretary august 29 2007 item 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 31st day august 2009 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc audited accompanying consolidated balance sheets delta natural gas company inc company june 30 2009 2008 related consolidated statements income shareholders equity cash flows three years period ended june 30 2009 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company june 30 2009 2008 results operations cash flows three years period ended june 30 2009 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements july 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 discussed note 2 consolidated financial statements july 1 2008 company adopted measurement date provision statement financial accounting standards 158 employers accounting defined benefit pension postretirement plans also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated august 31 2009 expressed unqualified opinion companys internal control financial reporting deloitte touche llp cincinnati ohio august 31 2009 accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements delta natural gas company inc subsidiary companies notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 37000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase gas open market also transport natural gas behalf local producers customers distribution system three whollyowned subsidiaries delta resources inc buys gas resells industrial large use customers delta’s system delgasco inc buys gas resells delta resources inc customers delta’s system enpro inc owns operates production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated preparation consolidated financial statements evaluated subsequent events balance sheet date june 30 2009 august 31 2009 filing date form 10k b cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents c property plant equipment property plant equipment stated original cost includes materials labor related costs allocation general administrative costs construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost plus removal expense less salvage value charged accumulated provision depreciation determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 21 23 27 average depreciable plant 2009 2008 2007 respectively effective october 20 2007 implemented new depreciation rates allowed kentucky public service commission 2007 rate case increased remaining depreciable lives depreciable assets e maintenance expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred betterment replacement unit property accounted addition retirement utility plant time retirement accumulated provision depreciation charged original cost property retired f gas cost recovery gas cost recovery “gcr” clause provides dollartracker matches revenues gas costs provides eventual dollarfordollar recovery gas costs incurred regulated segment approved kentucky public service commission expense gas costs based amount gas costs recovered revenue differences actual gas costs estimated costs billed deferred reflected computation future billings customers using gcr mechanism g revenue recognition bill customers monthly meter reading cycle end month gas service rendered date customer’s meter last read monthend unbilled revenues gas costs include following unbilled revenues included accounts receivable unbilled gas costs included deferred gas costs accompanying consolidated balance sheets h excise taxes certain excise taxes levied state local governments collected delta customers taxes accounted net basis therefore included revenues accompanying consolidated statements income revenues customer receivables serve 37000 customers central southeastern kentucky revenues customer receivables arise primarily sales natural gas customers transportation services others provisions doubtful accounts recorded reflect expected net realizable value accounts receivable customer accounts charged deemed uncollectible turned collection agency pursue j use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates k rate regulated basis accounting regulated operations follow accounting reporting requirements financial accounting standards board statement 71 entitled accounting effects certain types regulation economic effects regulation result regulated company recovering costs customers period different period costs would charged expense unregulated enterprise results costs deferred assets consolidated balance sheets regulatory assets recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future regulatory liabilities amounts recorded regulatory assets regulatory liabilities follows deferred gas costs presented every three months kentucky public service commission recovery accordance gas cost recovery rate mechanism amounts recoverable conservation efficiency program presented annually kentucky public service commission recovery accordance conservationefficiency program cost recovery rate mechanism currently earning return loss extinguishment debt asset retirement costs recovered customer rates included depreciation rates pension expenses regulatory case expenses recovered customer rates allowed operating expenses l impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements derivatives purchase sell natural gas certain gas purchase sale contracts qualify derivative financial accounting standards board statement 133 entitled accounting derivative instruments hedging activities contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements n marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust increases trust assets deferred compensation liability assets trust consist exchange traded mutual funds classified trading securities financial accounting standards board statement 115 entitled accounting certain investments debt equity securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate 2 new accounting pronouncements recently adopted pronouncements july 2006 fasb issued interpretation 48 entitled accounting uncertainty income taxes clarify accounting uncertainty income taxes recognized enterprise’s financial statements accordance financial accounting standards board statement 109 entitled accounting income taxes interpretation 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements interpretation 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement adopted provisions interpretation 48 july 1 2007 adoption interpretation 48 resulted adjustment beginning retained earnings 69000 adoption total amount gross unrecognized tax benefits uncertain tax positions including positions impacting timing tax benefits 668000 97000 related interest note 4 notes consolidated financial statements discusses income taxes september 2006 financial accounting standards board issued statement 158 entitled employers’ accounting defined benefit pension postretirement plans statement 158 contains provisions relating disclosure recognition adopted effective june 30 2007 additionally statement 158 requires employers sponsor defined benefit plans measure assets benefit obligations end employer’s fiscal year fiscal years beginning december 15 2007 effective july 1 2008 adopted measurement date provision statement 158 required us change measurement date defined benefit plan march 31 june 30 pension costs april 1 2008 june 30 2009 760000 amount 152000 attributable change measurement dates accordingly recognized 119000 decrease prepaid pension expense 33000 decrease unrecovered pension expense regulatory asset decreases accounted reduction beginning retained earnings july 1 2008 net 58000 tax september 2006 financial accounting standards board issued statement 157 entitled fair value measures february 2007 issued statement 159 entitled fair value option financial assets financial liabilities statements define fair value establish framework measuring fair value accordance accounting principles generally accepted united states america expand disclosure requirements fair value measurements statement 157 fair value considered exchange price orderly transaction market participants sell asset transfer liability measurement date fair value definition statement 157 focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability although statement 157 require additional fair value measurements applies accounting pronouncements require permit fair value measurements determine fair value financial assets liabilities based following fair value hierarchy prescribed statement 157 prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions effective july 1 2008 adopted statement 157 financial instruments cumulative effect adjustment retained earnings result adopting statement 157 statement 159 permits entities elect measure many financial instruments certain items fair value although statement 159 effective fiscal year beginning july 1 2008 currently financial assets financial liabilities provisions statement 159 elected however future may elect measure certain financial instruments fair value accordance standard june 30 2009 financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust june 30 2009 assets trust 281000 included unamortized debt expense consolidated balance sheets offsetting liability included asset retirement obligations consolidated balance sheets contributions trust presented investing activities 2009 consolidated statement cash flows liability considered financial liability within scope statement 157 assets trust recorded fair value consist exchange traded mutual funds mutual funds recorded fair value using observable market prices active markets categorized level 1 statement 157 hierarchy march 2008 financial accounting standards board issued statement 161 entitled disclosures derivative instruments hedging activities statement 161 enhances disclosures required statement 133 entitled accounting derivative instruments hedging activities entities required provide enhanced disclosures entity uses derivative instruments ii derivative instruments related hedged instruments accounted statement 133 related interpretations iii derivative instruments related hedged items affect entity’s financial position financial performance cash flows effective march 31 2009 adopted provisions statement 161 varying degrees regulated nonregulated segments exposed commodity price risk purchase gas supply combination spot market gas purchases forward gas purchases mitigate price risk efforts balance supply demand none gas contracts accounted using fair value method accounting gas purchase contracts gas sales contracts meet definition derivative designated contracts “normal purchases” “normal sales” statement 133 april 2009 financial accounting standards board issued financial accounting standards board staff position fas 1574 entitled determining fair value volume level activity asset liability significantly decreased identifying transactions orderly staff position provides additional guidance estimating fair value accordance statement 157 volume level activity asset liability significantly decreased staff position effective fiscal year ending june 30 2009 impact results operations financial position april 2009 financial accounting standards board issued financial accounting standards board staff position fas 1152 fas 1242 entitled recognition presentation otherthantemporary impairments staff position provides additional guidance presentation disclosure otherthantemporary impairments debt equity securities staff position effective fiscal year ending june 30 2009 impact results operations financial position may 2009 financial accounting standards board issued statement 165 entitled subsequent events statement 165 establishes general standards accounting disclosure events occur balance sheet date financial statements issued available issued statement 165 requires disclosure date entity evaluated subsequent events basis date adopted statement 165 june 30 2009 result adoption impact results operations financial position recently issued pronouncements february 2008 financial accounting standards board issued financial accounting standards board staff position 1572 entitled effective date financial accounting standards board statement 157 delays effective date statement 157 one year nonfinancial assets liabilities except items recognized disclosed fair value financial statements recurring basis staff position shall effective quarter ending september 30 2009 material impact results operations financial position december 2008 financial accounting standards board issued financial accounting standards board staff position fas 132r1 entitled employer’s disclosures postretirement benefit plan assets amends financial accounting standards board statement 132r entitled employers’ disclosures pensions postretirement benefits increase transparency surrounding types assets risks associated defined benefit pension postretirement plan statement 132r amended require employers provide additional disclosure surrounding investment strategies major categories plan assets valuation techniques used measure fair value plan assets staff position shall effective fiscal year ending june 30 2010 impact results operations financial position april 2009 financial accounting standards board issued financial accounting standards board staff position fas 1071 apb 281 entitled interim disclosures fair value financial instruments staff position amends financial accounting standards board statement 107 disclosures fair value financial instruments accounting principles board opinion 28 entitled interim financial reporting require disclosure fair value financial instruments interim reporting periods staff position shall effective quarter ending september 30 2009 impact results operations financial position 3 asset retirement obligations legal obligations required financial accounting standards board statement 143 entitled accounting asset retirement obligations financial accounting standards interpretation 47 entitled accounting conditional asset retirement obligations june 30 2009 2008 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant statement 71 recover cost removing regulated assets depreciation rates following summary asset retirement obligations related assets net accumulated depreciation reflected accompanying consolidated balance sheets captions asset retirement obligations property plant equipment respectively additional asset retirement obligation relative retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire asset pursuant interpretation 47 nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense believe removal assets end useful life likely even though costs represent legal obligations statement 143 accordance provisions statement 71 recorded approximately 304000 615000 accrued cost removal regulatory liabilities accompanying consolidated balance sheets june 30 2009 2008 respectively 4 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences recognition purchased gas costs certain accruals currently deductible income tax purposes investment tax credits deferred certain periods prior fiscal 1987 amortized income estimated useful lives applicable properties utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates current portion net accumulated deferred income tax liability shown current liabilities longterm portion included deferred credits accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table july 2006 financial accounting standards board issued interpretation 48 clarify accounting uncertainty income taxes recognized enterprise’s financial statements accordance statement 109 interpretation 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements interpretation 48 may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented asset retirement obligations consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income amount unrecognized tax benefits net tax recognized would impact effective tax rate 149000 accrued interest 60000 unrecognized tax positions 14000 18000 recognized 2009 2008 consolidated statements income respectively fiscal 2008 filed method change internal revenue service related timing deducting certain expenses fiscal 2009 received approval method change result method change liability unrecognized tax positions decreased 265000 45000 represented interest previously accrued unrecognized tax position 220000 represented deferred taxes unrecognized tax position reasonably possible additional changes unrecognized tax benefits within next twelve months however expected change significant impact results operations financial position following tabular reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2006 june 30 2005 longer subject examination federal kentucky income taxes respectively 5 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit pension plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically makes annual contributions equal amounts necessary fund plan adequately due conditions debt equity markets experienced decline value assets held defined benefit pension plan thus contributed 2677000 plan fiscal 2009 statement 158 requires employers sponsor defined benefit plans recognize funded status defined benefit pension plan statement financial position recognize comprehensive income changes funded status year changes occur statement 71 provides regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current rate recovery kentucky based financial accounting standards board statement 87 entitled employers’ accounting pensions amended statement 158 kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit plan expected recovered future rates regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2009 march 31 2008 respectively follows accumulated benefit obligation 12682000 11679000 2009 2008 respectively expected longterm rate return pension plan assets based targeted asset allocation assumption approximately 65 equity investments approximately 35 fixed income investments marketrelated value plan assets marketrelated value plan assets based upon fair value plan assets plan assets pension plan weightedaverage asset allocations june 30 2009 march 31 2008 plan’s measurement date asset category follows equity investment target approximately 65 includes allocations domestic international emerging markets asset allocation designed achieve moderate level overall portfolio risk keeping desired risk objective regularly review asset allocation periodically rebalance investments targeted allocation appropriate expect contribute 500000 pension plan 2010 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit pension plan freezing defined benefit plan new entrants impact level benefits existing participants statement financial accounting standards 106 entitled employers’ accounting postretirement benefits statement financial accounting standards 112 entitled employers’ accounting postemployment benefits affect us provide postretirement postemployment benefits pension plan retired employees b employee savings plan employee savings plan “savings plan” eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employee’s contribution maximum company contribution 4 employee’s annual compensation maximum matching contribution 35 prior july 1 2008 employees hired may 9 2008 eligible participate defined benefit pension plan annually receive 4 nonelective contribution savings plan account beginning july 1 2008 contribution discretionary subject change approval board directors 2009 2008 2007 delta’s savings plan expense 308000 281000 256000 respectively c supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings delta’s chairman board president chief executive officer delta contributes 60000 annually irrevocable trust mr jennings’ retirement trustee make annual payments 100000 mr jennings trust depleted june 30 2009 2008 irrevocable trust assets 281000 250000 respectively amounts included unamortized debt expense accompanying consolidated balance sheets liabilities corresponding amounts included asset retirement obligations accompanying consolidated balance sheets 6 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 22287 18653 21063 shares 2009 2008 2007 respectively registered 200000 shares issuance reinvestment plan 2006 june 30 2009 133811 shares available issuance 7 note receivable officer related party transaction reflected 2007 consolidated statements income 62000 compensation related forgiveness principal 160000 loan made glenn r jennings chairman board president chief executive officer forgave 2000 principal amount month service mr jennings completed june 30 2007 mr jennings made monthly interest payments note based annual interest rate 6 forgave remaining balance note effective june 30 2007 8 notes payable current available bank line credit branch banking trust company shown notes payable accompanying consolidated balance sheets 40000000 3653000 6829000 borrowed weighted average interest rate 18 321 june 30 2009 2008 respectively maximum amount borrowed 2009 2008 31325000 26858000 respectively effective june 30 2009 bank line credit extended june 30 2011 extension increased interest rate used line credit london interbank offered rate plus 75 london interbank offered rate plus 15 annual cost unused bank line credit 125 9 longterm debt april 2006 issued 40000000 575 insured quarterly notes mature april 2021 39140000 39642000 outstanding june 30 2009 2008 respectively redemption 25000 annually made behalf deceased holders aggregate 800000 annually deceased beneficial owners 575 insured quarterly notes redeemed us premium event default insured quarterly notes holders insured principal interest payments insurer would continue pay interest principal maturity insured quarterly notes february 2003 issued 20000000 700 debentures mature february 2023 19659000 19876000 outstanding june 30 2009 2008 respectively redemption 25000 annually made behalf individual deceased holders aggregate 400000 annually deceased beneficial owners premium redeem debentures amortize debt issuance expenses life related debt straightline basis approximates effective yield method june 30 2009 2008 unamortized balance 4736000 5123000 respectively loss extinguishment debt 2348000 2539000 included deferred amortized term related debt consistent regulatory treatment current portion longterm debt 1200000 represents maximum aggregate principal amounts paid deceased beneficial owners therefore maximum maturities next five years 1200000 year insured quarterly notes debentures sinking fund requirements bank line credit agreement indentures relating publicly held debentures insured quarterly notes contain defined “events default” among things make obligations immediately due payable consider following covenants restrictive · dividend payments cannot made unless consolidated shareholders’ equity company exceeds 25800000 thus retained earnings restricted · may assume additional mortgage indebtedness excess 5000000 without effectively securing debentures insured quarterly notes equally additional indebtedness furthermore default performance single obligation incurred connection borrowings simultaneously creates event default bank line credit debentures insured quarterly notes default bank line credit debentures insured quarterly notes period presented 10 fair values financial instruments fair value longterm debt estimated using discounted cash flow analysis based current incremental borrowing rates similar types borrowing arrangements fair value longterm debt june 30 2009 2008 estimated 52633000 55164000 respectively carrying amounts accompanying consolidated balance sheets june 30 2009 2008 58799000 59518000 respectively carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value 11 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 78000 three years ending june 30 2009 2008 2007 12 commitments contingencies entered forward purchase agreements beginning july 2009 expiring various dates october 2011 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate gas supply meet customers gas requirements agreements aggregate minimum purchase obligations 3765000 143000 fiscal years ended june 30 2010 2011 respectively entered individual employment agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 29 million would paid addition continuation specified benefits five years party material pending legal proceedings 13 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services kentucky public service commission’s regulation business includes setting rates permitted charge regulated customers monitor need file requests kentucky public service commission general rate increase natural gas transportation services april 20 2007 filed request increased rates kentucky public service commission general rate case 200700089 requested annual revenue increase approximately 5642000 increase 93 rate case requested return common equity 121 october 2007 negotiated settlement kentucky attorney general regarding rate case settlement agreement provided 3920000 additional annual revenues stipulated settlement purposes 105 return shareholders’ equity increase rates allocated primarily monthly customer charge therefore increase revenue occurred evenly throughout year dependent customer usage order kentucky public service commission received october 19 2007 approving terms settlement rates effective october 20 2007 july 2008 kentucky public service commission approved case 200800062 request implement conservation efficiency program residential customers program provides us perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us margins lost sales due program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs including reimbursement margins lost sales incentives provided us kentucky public service commission also approved gas cost recovery clause permits us adjust rates charged customers reflect changes natural gas supply costs although required file general rate case adjust rates pursuant gas cost recovery clause required make quarterly filings kentucky public service commission overrecovered gas costs collected refunded adjustments customer bills beginning three months end quarter actual gas costs incurred additionally weather normalization clause rate tariffs approved kentucky public service commission allows us adjust rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises five cities serve continue operate conditions expired franchises four cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise caused adverse effect operations 14 operating segments company two segments regulated natural gas distribution transmission storage segment ii nonregulated segment participates related ventures consisting natural gas marketing production regulated segment serves residential commercial industrial customers single geographic area central southeastern kentucky virtually revenues recorded segments come sale transportation natural gas price risk regulated business mitigated gas cost recovery clause approved quarterly kentucky public service commission price risk nonregulated segment mitigated efforts balance supply demand however greater risks nonregulated segment practical limitations ability perfectly predict demand addition exposed price risk resulting changes market price gas uncommitted gas volumes nonregulated companies single customer citizens gas utility district provided 10248000 17087000 9843000 nonregulated revenues 2009 2008 2007 respectively citizens decreased purchases us thus revenues expected continue historical levels 2009 2008 2007 purchased approximately 99 natural gas atmos energy marketing b gas services segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses consist intercompany revenues expenses intercompany gas transportation gas storage services intersegment transportation revenues expenses recorded tariff rates revenues expenses storage natural gas recorded based quantities stored operating expenses taxes interest allocated nonregulated segment information shown following table 15 gas storage inventory adjustment operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers’ needs periodically analyze volumes pressure data relating storage field order substantiate gas inventory carried perpetual inventory records 2009 analyzing storage field data end injection cycle determined inventory adjustment required estimated adjustment amount would range 1350000 1750000 based storage field data currently available cannot determine amount within range likely 2009 storage field data suggested inventory adjustment related storage well identified 2007 allowing natural gas escape storage well remediated fiscal 2008 prior 2009 sufficient data available determine amount lost gas inventory resulting compromised storage well prior 2009 reason believe represented material financial risk company analysis 2009 indicated material shortfall storage gas volumes comparison perpetual inventory records 2009 analysis also provided us enough information estimate range adjusting inventory 2009 recorded gas storage inventory adjustment amount 1350000 adjustment included operation maintenance expense consolidated statements income year ended june 30 2009 future adjustment inventory determined additional storage field data collected evaluated future storage injection withdrawal cycles underground storage facility insured certain risks although sought appropriate reimbursement insurer cannot predict amount insurance proceeds depending outcome pursuit insurance recovery also evaluate whether unreimbursed gas losses eligible regulatory recovery gas cost recovery rate mechanism recovery methods recorded insurance recovery asset regulatory asset accompanying financial statements however extent recovery becomes probable evaluate recognition asset time 16 sale property plant equipment 2009 sold two surplus office buildings 335000 resulted us recording 156000 gains sales gains included operation maintenance expense 2009 consolidated statements income 17 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods recorded 1350000 nonrecurring inventory adjustment december 31 2008 gas storage discussed note 15 notes consolidated financial statements schedule ii delta natural gas company inc subsidiary companies valuation qualifying accounts years ended june 30 2009 2008 2007 item 15 exhibits financial statement schedule financial statements schedule exhibits 1 financial statements see index item 8 2 financial statement schedule see index item 8 3 exhibits exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day august 2016 delta natural gas company inc sglenn r jennings glenn r jennings chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders delta natural gas company inc winchester kentucky audited accompanying consolidated balance sheets delta natural gas company inc subsidiaries company june 30 2016 2015 related consolidated statements income changes shareholders equity cash flows three years period ended june 30 2016 audits also included financial statement schedule listed index item 8 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position delta natural gas company inc subsidiaries june 30 2016 2015 results operations cash flows three years period ended june 30 2016 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states companys internal control financial reporting june 30 2016 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission report dated august 26 2016 expressed unqualified opinion companys internal control financial reporting deloitte touche llp atlanta georgia august 26 2016 delta natural gas company inc consolidated statements income accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements cash flows continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements delta natural gas company inc consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements delta natural gas company inc notes consolidated financial statements 1 summary significant accounting policies principles consolidation delta natural gas company inc “delta” “the company” distributes transports natural gas approximately 36000 customers distribution transportation systems located central southeastern kentucky operate underground storage field southeastern kentucky transport natural gas industrial customers purchase natural gas open market also transport natural gas behalf local producers customers distribution system extract liquids natural gas storage field pipeline systems sold market prices three whollyowned subsidiaries delta resources inc buys natural gas resells industrial large use customers deltas system delgasco inc buys natural gas resells delta resources inc customers deltas system enpro inc owns operates natural gas production properties undeveloped acreage subsidiaries delta included consolidated financial statements intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes consolidated statements cash flows temporary cash investments maturity three months less date purchase considered cash equivalents property plant equipment depreciation property plant equipment stated original cost includes materials labor related costs allocation general administrative costs betterment replacement unit property accounted addition utility plant construction work progress included rate base determining customer rates therefore allowance funds used construction recorded cost regulated plant retired disposed normal course business deducted plant accounts cost less salvage value charged accumulated provision depreciation property plant equipment comprised following major classes assets expenditures maintenance repairs units property charged appropriate maintenance expense accounts month incurred determine provision depreciation using straightline method application rates various classes utility plant rates based upon estimated service lives properties equivalent composite rates 28 average depreciable plant 2016 2015 2014 approved kentucky public service commission accrue asset removal costs certain types property depreciation expense corresponding increase regulatory liabilities consolidated balance sheets depreciable utility plant equipment retired related removal costs incurred charged regulatory liability pipe replacement program tariff allows us adjust regulated rates annually earn return capital incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities impairment longlived assets evaluate longlived assets impairment events changes circumstances indicate carrying value assets may recoverable determination whether impairment occurred based estimate undiscounted future cash flows attributable assets compared carrying value assets impairment occurred amount impairment recognized determined estimating fair value assets recording provision impairment loss carrying value greater fair value opinion management longlived assets appropriately valued accompanying consolidated financial statements impairments longlived assets 2016 2015 2014 natural gas storage operate natural gas underground storage field utilize inject store natural gas nonheating season withdraw natural gas heating season meet customers needs potential exists differences actual volumes stored versus perpetual records primarily due differences measurement injections withdrawals risks natural gas escaping field periodically analyze volumes pressure data relating storage field order substantiate natural gas inventory carried perpetual inventory records periodic analysis storage field data utilizes trends underlying data require multiple periods observation determine differences exist analysis result adjustments perpetual inventory records natural gas storage inventory recorded average cost regulated revenues bill regulated sales natural gas tariff rates approved kentucky public service commission customers billed monthly basis however billing cycle certain classes customers necessarily coincide calendar monthend customers apply unbilled method accounting estimate accrue revenues applicable customers yet billed related natural gas costs charged expense end month natural gas service rendered date customers meter last read monthend unbilled revenues included accounts receivable consolidated balance sheets june 30 2016 unbilled natural gas costs included deferred natural gas costs june 30 2015 unbilled natural gas costs included regulatory liability refundable natural gas costs accompanying consolidated balance sheets unbilled amounts include following record onsystem transportation services period transport natural gas enduse customer within system onsystem transportation customers receive natural gas supply third partyshippers delivering natural gas delta’s system bill onsystem transportation services tariff rates approved kentucky public service commission include fixed monthly charges volumetric rates delta resources utilizes delta’s onsystem transportation service delta recognizes revenue delta resources tariff rates eliminates upon consolidation record offsystem transportation services period transport natural gas interstate pipeline behalf thirdparty shippers delivering natural gas delta’s system bill offsystem transportation services tariff rates approved kentucky public service commission volumetric rates delgasco utilizes delta‘s offsystem transportation service delta recognizes revenue delgasco tariff rates eliminates upon consolidation daily volumes natural gas delivered thirdparty shippers supplying transportation customers rarely equal daily volumes billed customers resulting periodic transportation imbalances shortterm duration delta monitors activity regularly notifies shippers imbalance transportation imbalances turn create imbalances natural gas supply delta’s system thus requiring delta purchase either less volumes natural gas meet customers’ natural gas requirements included consolidated balance sheets either accounts payable prepayments respectively consistent regulatory treatment natural gas cost recovery tariff discussed note 14 notes consolidated financial statements imbalances impact results operations net impact imbalances offset regulatory assetliability related natural gas cost recovery tariff nonregulated revenues delta resources enters contracts whereby obligated supply onehundred percent customers’ natural gas requirements either fixed indexbased rates delta resources recognizes revenue period actual metered volumes delivered customer delta resources utilizes delta’s onsystem transportation service records transportation expenses tariff rates eliminate upon consolidation delgasco enters contracts deliver fixed quantities natural gas customers either fixed indexbased rates delgasco recognizes revenue based upon period customer takes possession natural gas delgasco utilizes delta’s offsystem transportation service records transportation expenses tariff rates eliminate upon consolidation enpro produces natural gas supplies portion delgasco’s natural gas requirements recognizes sale natural gas period delgasco takes possession natural gas revenues related natural gas costs enpro delgasco within nonregulated segment eliminate upon consolidation recognize revenue natural gas liquids period customer takes possession natural gas liquids factors affect revenue sale natural gas liquids include hydrocarbon content liquids market price natural gas liquids volumes natural gas liquids sold regulated purchased natural gas expense regulated natural gas rates include natural gas cost recovery tariff approved kentucky public service commission provides dollartracker matches revenues natural gas costs provides eventual dollarfordollar recovery natural gas costs incurred regulated segment recovery uncollectible natural gas cost portion bad debt expense natural gas costs based amount natural gas costs recovered revenue differences actual natural gas costs natural gas costs billed deferred reflected computation future billings customers using natural gas cost recovery mechanism excise taxes delta collects certain excise taxes levied state local governments customers taxes accounted net basis therefore included revenues accompanying consolidated statements income accounts receivable allowance doubtful accounts record allowance doubtful accounts reflect expected net realizable value accounts receivable accounts receivable charged deemed uncollectible turned collection agency pursue rate regulated basis accounting account regulated segment accordance applicable regulatory guidance economic effects regulation result regulated company recovering costs customers period different period costs would charged expense nonregulated enterprise results costs deferred assets consolidated balance sheets “regulatory assets” recorded expenses amounts reflected rates additionally regulators impose liabilities upon regulated company amounts previously collected customers current collection rates costs expected incurred future “regulatory liabilities” amounts recorded regulatory assets regulatory liabilities follows regulatory assets liabilities approved recovery kentucky public service commission currently recovered refunded regulated natural gas rates addition unrecovered balance loss extinguishment debt included rate base therefore earns return weighted average recovery period regulatory assets earning return 26 years derivatives certain natural gas purchase sale contracts qualify derivatives contracts designated normal purchases sales accounted accrual basis recorded fair value accompanying consolidated financial statements marketable securities supplemental retirement benefit agreement glenn r jennings chairman board president chief executive officer nonqualified deferred compensation plan agreement establishes irrevocable rabbi trust assets trust earmarked pay benefits agreement recognized liability related obligation pay benefits mr jennings make discretionary contributions trust order fully fund related deferred compensation liability assets trust consist exchange traded securities exchange traded mutual funds classified trading securities assets recorded fair value consolidated balance sheets based observable market prices active markets net realized unrealized gains losses included earnings period effectively offset corresponding earnings impact associated change fair value deferred compensation liability assets relate fair value fair value defined exchange price orderly transaction market participants sell asset transfer liability measurement date fair value focuses exit price would received us sell asset paid transfer liability versus entry price would price paid acquire asset received assume liability determine fair value based following fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels • level 1 observable inputs consisting quoted prices active markets identical assets liabilities • level 2 inputs quoted prices active markets observable either directly indirectly • level 3 unobservable inputs require reporting entity develop assumptions although accounting standards permit entities elect measure many financial instruments certain items fair value currently financial assets financial liabilities provision elected however future may elect measure certain financial instruments fair value accordance standards 2 accounting pronouncements recently issued pronouncements may 2014 financial accounting standards board issued guidance revising principles standards revenue recognition guidance creates framework recognizing revenue improve comparability revenue recognition practices across entities industries focusing customer obtains control goods services rather current risks rewards model recognition core principle new standard entity recognizes revenue transfers goods services customers amount reflects consideration entity expects entitled goods services new disclosure requirements include information intended communicate nature amount timing uncertainty revenue cash flows applicable contracts including significant judgments entities generally required make estimates use judgment new standard guidance effective quarterly report ending september 30 2018 evaluating methods adoption allowed new standard effect standard expected results operations financial position cash flows july 2015 financial accounting standards board issued guidance simplifying measurement inventory guidance requires inventory measured lower cost net realizable value guideline effective quarter ending september 30 2017 expected material impact results operations financial position cash flows january 2016 financial accounting standards board issued guidance improve recognition measurement presentation disclosure financial instruments improvements include guidance estimating fair value financial instruments measured amortized cost balance sheet classification financial assets liabilities balance sheet reduced disclosure fair value financial instruments recognized balance sheet amortized cost guidance effective quarter ending september 30 2018 expected material impact results operations financial position cash flows disclosures february 2016 financial accounting standards board issued guidance revising principles standards recognizing leases guidance requires lessees recognize statement financial position liability lease payments rightofuse asset representing right use underlying asset lease term recognition measurement lease expenses significantly changed previous guidance effective quarter ending september 30 2018 evaluating impact guidance expected results operations financial position cash flows march 2016 financial accounting standards board issued guidance simplifying accounting disclosure requirements sharebased compensation including income tax consequences classification awards equity liability classification statement cash flows guidance effective quarter ending september 30 2017 expected material impact results operations financial position cash flows recently adopted pronouncements june 2014 financial accounting standards board issued guidance sharebased payments performance targets achieved subsequent requisite service period instances guidance requires performance target excluded determination grant date fair value probable performance target met recognition compensation cost attributable periods requisite service already rendered guidance impact sharebased payment awards outstanding thus guidance adopted prospectively sharebased payment awards granted june 30 2016 impact results operations financial position cash flows april 2015 financial accounting standards board issued guidance presentation debt issuance costs requires debt issuance costs recognized direct deduction carrying amount debt liability debt issuance costs represent assets rather adjustments carrying cost debt adopted guidance retrospectively june 30 2015 implementation guidance resulted 77000 84000 reduction longterm debt accompanying consolidated balance sheets june 30 2016 2015 respectively representing amounts previously reported unamortized debt expense adoption guidance material effect results operations financial position cash flows may 2015 financial accounting standards board issued guidance simplifying disclosure certain investments measured using net asset value per share investment guidance provides practical expedient investments measured net asset value per share categorized within fair value hierarchy ie level 1 2 3 adoption guidance impact results operations financial position cash flows november 2015 financial accounting standards board issued guidance simplify presentation deferred income taxes balance sheet classifying deferred tax assets liabilities noncurrent result standard presented deferred tax liabilities assets net noncurrent deferred income taxes accompanying consolidated balance sheets retrospectively periods presented adoption standard resulted 442000 141000 reclassification current deferred income tax liability longterm deferred income tax liability 2016 2015 respectively note 5 notes consolidated financial statements discusses income taxes 3 fair value measurements financial assets liabilities measured fair value recurring basis consist assets supplemental retirement benefit trust included noncurrent assets consolidated balance sheets contributions trust presented investing activities consolidated statements cash flows assets trust consist exchange traded securities exchange traded mutual funds securities mutual funds recorded fair value using observable market prices active markets categorized level 1 fair value hierarchy trust assets follows carrying amounts financial instruments including cash equivalents accounts receivable notes receivable accounts payable approximate fair value fair value assets defined benefit retirement plan disclosed note 6 notes consolidated financial statements series notes presented current portion longterm debt longterm debt consolidated balance sheets stated historical cost net unamortized debt issuance costs fair value longterm debt based expected future cash flows debt discounted using credit adjusted riskfree rate credit adjusted riskfree rate 426 series notes estimated cost borrow debt instrument terms private lender measurement date fair value longterm debt categorized level 3 fair value hierarchy 4 asset retirement obligations legal obligations june 30 2016 2015 accrued liabilities related assets net accumulated depreciation relative legal obligation retire certain natural gas wells storage tanks mains services asset retirement obligations related regulated assets accretion liability depreciation asset retirement costs recorded regulatory assets pursuant regulatory accounting standards recover cost removing regulated assets depreciation rates following summary asset retirement obligations shown accompanying consolidated balance sheets additional asset retirement obligation related retirement wells located underground natural gas storage facility since expect utilize storage facility long provide natural gas customers determined underlying asset indeterminate life therefore recorded liability associated cost retire wells nonlegal obligations accordance established regulatory practices accrue costs removal longlived assets depreciation expense extent recovery costs granted kentucky public service commission even though costs represent legal obligations accordance regulatory accounting standards 487000 417000 accrued cost removal recorded regulatory liability accompanying consolidated balance sheets june 30 2016 2015 respectively 5 income taxes provide income taxes temporary differences resulting use alternative methods income expense recognition financial tax reporting purposes differences result primarily use accelerated tax depreciation methods certain properties versus straightline depreciation method financial reporting purposes differences capitalization thresholds tax reporting purposes versus financial reporting purposes differences recognition purchased natural gas costs certain accruals currently deductible income tax purposes utilize asset liability method accounting income taxes requires deferred income tax assets liabilities computed using tax rates effect book tax temporary differences reverse changes tax rates applied accumulated deferred income taxes immediately recognized operating results ratemaking treatment regulatory liability established recognize regulatory obligation refund excess deferred taxes customer rates net deferred income tax liability presented noncurrent deferred income taxes accompanying consolidated balance sheets temporary differences gave rise net accumulated deferred income tax liability periods follows components income tax provision comprised following years ended june 30 reconciliation statutory federal income tax rate effective income tax rate shown table recognize income tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate settlement liability unrecognized tax benefits expected recognized within next twelve months partially offset prepaid income taxes presented prepayments consolidated balance sheets liability unrecognized tax benefits expected recognized within next twelve months presented longterm liabilities consolidated balance sheets interest penalties tax uncertainties classified income tax expense consolidated statements income june 30 2016 2015 unrecognized tax positions recognized would impact effective tax rate following reconciliation unrecognized tax benefits file income tax returns federal kentucky jurisdictions tax years previous june 30 2013 june 30 2012 longer subject examination federal kentucky income taxes respectively 6 employee benefit plans defined benefit retirement plan trusteed noncontributory defined benefit retirement plan covering eligible employees hired prior may 9 2008 retirement income based number years service annual rates compensation company historically made annual contributions fund plan adequately generally accepted accounting principles “gaap” require employers sponsor defined benefit retirement plans recognize funded status defined benefit retirement plan balance sheet recognize comprehensive income changes funded status year changes occur however regulatory accounting standards provide regulated entities defer recoverable costs would otherwise charged expense equity nonregulated entities current costofservice ratemaking kentucky allows recovery net periodic benefit cost determined gaap kentucky public service commission clear consistent historical treatment rate recovery therefore recorded regulatory asset representing probable recovery portion change funded status defined benefit retirement plan expected recognized future net periodic benefit cost regulatory asset adjusted annually prior service cost actuarial losses recognized net periodic benefit cost obligations funded status plan measured june 30 2016 june 30 2015 respectively follows accumulated benefit obligation 28124000 25012000 2016 2015 respectively plan assets target investment allocations developed using asset allocation model weighs risk versus return various investment indices create target asset allocation maximize return subject moderate amount portfolio risk tolerance established careful consideration plan liabilities plan funded status corporate financial condition investment portfolios contain diversified blend equity fixed income investments target investment allocations approximately 70 equity investments 30 fixed income investments equity investment target allocations heavily weighted toward domestic equity securities allocations domestic real estate securities foreign equity securities purposes diversification fixed income securities primarily include us government obligations corporate debt securities additional diversification invest absolute return strategy mutual funds include equity fixed income securities objective providing return greater inflation plan amended investment policy allow liability driven investments time match portion plans liability underlying assets regularly review asset allocation periodically rebalance investments targeted allocations appropriate assets plan comprised investments individual securities mutual funds individual exchange traded equity securities exchange traded mutual funds treasury securities categorized level 1 fair value hierarchy fair value investments determined based quoted market price investment mutual funds categorized based primary investment strategy respective level within fair value hierarchy determined described note 1 notes consolidated financial statements corporate bonds municipal bonds us agency securities valued based calculation using interest rate curves credit spreads applied terms debt maturity coupon rate supported observable transactions categorized level 2 fair value hierarchy following represents fair value plan assets determined expected longterm rate return plan assets input plan actuaries investment consultants based upon many factors including asset allocations historical asset returns expected future market conditions discount rates used company valuing pension liabilities based review highquality corporate bond yields maturities approximating remaining life projected benefit obligations made 500000 discretionary contribution defined benefit retirement plan fiscal 2016 august 2016 made 1000000 discretionary contribution defined benefit retirement plan expect make additional 500000 discretionary contribution defined benefit retirement plan fiscal 2017 following benefit payments reflect expected future service appropriate expected paid effective may 9 2008 employees hired date eligible participate defined benefit retirement plan freezing defined benefit retirement plan new entrants impact level benefits existing participants provide postretirement postemployment benefits defined benefit retirement plan retired employees supplemental retirement agreement described employee savings plan employee savings plan eligible employees may elect contribute portion annual compensation maximum amount permitted law company matches 100 employees contribution maximum company contribution 4 employees annual compensation employees hired may 9 2008 eligible participate defined benefit retirement plan annually receive additional 4 nonelective contribution employee savings plan account company contributions discretionary subject change approval board directors 2016 2015 2014 employee savings plan expense 379000 359000 350000 respectively supplemental retirement agreement sponsor nonqualified defined contribution supplemental retirement agreement glenn r jennings deltas chairman board president chief executive officer delta makes discretionary contributions irrevocable trust mr jennings retirement trustee make annual payments 100000 mr jennings trust depleted 2016 2015 2014 delta contributed 60000 year trust june 30 2016 2015 irrevocable trust assets 1034000 977000 respectively amounts included noncurrent assets accompanying consolidated balance sheets liabilities corresponding amounts included longterm liabilities accompanying consolidated balance sheets 7 dividend reinvestment stock purchase plan dividend reinvestment stock purchase plan “reinvestment plan” provides shareholders record reinvest dividends also make limited additional investments 50000 per year shares common stock company reinvestment plan issued 28437 26412 28809 shares 2016 2015 2014 respectively registered 400000 shares issuance reinvestment plan 2006 june 30 2016 approximately 38000 shares available issuance 8 risk management derivative instruments varying degrees regulated nonregulated segments exposed commodity price risk purchase natural gas supply combination requirements contracts minimum purchase obligations monthly spot purchase contracts forward purchase contracts mitigate price risk related sale natural gas efforts balance supply demand regulated segment utilize requirements contracts spot purchase contracts underground storage meet regulated customers natural gas requirements minimal price risk permitted pass natural gas costs regulated customers natural gas cost recovery tariff none natural gas contracts accounted using fair value method accounting natural gas purchase contracts natural gas sales contracts meet definition derivative designated contracts normal purchases normal sales 9 notes payable current bank line credit branch banking trust company permits borrowings 40000000 available june 30 2016 june 30 2015 2016 borrowing bank line credit maximum amount borrowed 2015 126000 bank line credit extends june 30 2017 interest rate used line credit london interbank offered rate plus 1075 annual cost unused bank line credit 0125 restrictive covenants discussed note 10 notes consolidated financial statements 10 longterm debt series notes unsecured bear interest rate 426 per annum payable quarterly mature december 20 2031 required make annual 1500000 principal payment series notes december following table summarizes contractual maturities series notes fiscal year additional prepayment principal company may subject prepayment premium varies depending yields united states treasury securities maturity equal remaining average life series notes amortize debt issuance expenses life related debt using effective interest method june 30 2016 2015 77000 84000 debt issuance costs respectively reflected adjustment carrying amount longterm debt accompanying consolidated balance sheets june 30 2016 2015 loss extinguishment debt 2689000 2916000 respectively deferred regulatory asset amortized term debt discussed note 1 notes consolidated financial statements bank line credit series notes agreed certain financial covenants noncompliance covenants make obligations immediately due payable financial covenants include covenants related tangible net worth total debt capitalization ratio fixed charge ratio additionally company may pay aggregate dividends capital stock plus amounts paid redemption capital stock excess sum 15000000 plus companys cumulative earnings september 30 2011 adjusted certain unusual nonrecurring items believe compliance financial covenants bank line credit 426 series notes periods presented consolidated financial statements furthermore agreement governing 426 series notes contains crossdefault provision provides default 426 series notes default outstanding indebtedness exceeds 2500000 similarly loan agreement governing bank line credit contains crossdefault provision provides default bank line credit default 426 series notes fail cure default within ten days notice bank 11 earnings per share following table sets forth computation basic diluted earnings per common share percentage allocated common shares b represents dividends paid common shares exclusive unvested participating shares c incentive compensation plan recipients performance share awards receive unvested nonparticipating shares discussed note 16 notes consolidated financial statements unvested nonparticipating shares become dilutive interim quarterend performance objective met performance objective continues met end performance period shares become unvested participating shares fiscal yearend discussed note c weighted average number unvested nonparticipating shares outstanding period included diluted earnings per common share calculation using treasury stock method unless effect including shares would antidilutive unvested nonparticipating shares outstanding june 30 2016 2015 2014 certain awards shareholder approved incentive compensation plan discussed note 16 notes consolidated financial statements provide recipients awards rights shareholder delta including right dividends declared common shares unvested shares participating dividends considered participating securities included computation basic diluted earnings per share using twoclass method unless effect including shares would antidilutive june 30 2016 28000 participating shares outstanding excluded computation earnings allocated common shares 2016 holders unvested participating shares contractual obligation share losses antidilutive shares 2015 2014 28000 65000 74000 unvested participating shares outstanding june 30 2016 2015 2014 respectively 12 operating leases noncancellable operating leases operating leases relate primarily well compressor station site leases cancellable option rental expense operating leases 78000 69000 68000 years ended june 30 2016 2015 2014 respectively 13 commitments contingencies entered employment agreement chairman board president chief executive officer change control agreements four officers agreements expire may terminated various times agreements provide continuing monthly payments lump sum payments continuation specified benefits varying periods certain cases following defined changes ownership company event agreements exercised form lump sum payments approximately 44 million would paid addition continuation specified benefits five years additionally upon change control unvested shares awarded incentive compensation plan discussed note 16 notes consolidated financial statements would immediately vest party material pending legal proceedings entered forward purchase agreements portion nonregulated segments natural gas purchases may 2017 agreements require us purchase minimum amounts natural gas throughout term agreements established normal course business ensure adequate natural gas supply meet nonregulatled customers natural gas requirements agreements aggregate minimum purchase obligations 612000 fiscal year ending june 30 2017 14 regulatory matters kentucky public service commission exercises regulatory authority retail natural gas distribution transportation services includes approval rates tariffs monitor need file requests general rate increase natural gas distribution transportation services kentucky public service commission historically utilized costofservice ratemaking base rates established recover normal operating expenses exclusive natural gas costs reasonable rate return rate base rate base consists primarily regulated segments property plant equipment natural gas storage unamortized debt expense offset accumulated depreciation certain deferred income taxes regulated rates recently adjusted 2010 rate case became effective october 2010 matters kentucky public service commission would material impact results operations financial position cash flows pipe replacement program tariff allows us adjust rates annually earn return capital expenditures incurred subsequent last rate case associated replacement pipe related facilities pipe replacement program designed additionally recover costs associated mandatory retirement relocation facilities natural gas cost recovery tariff permits us adjust rates charged customers reflect changes natural gas supply costs bad debt expense related natural gas cost although required file general rate case adjust rates pursuant natural gas cost recovery tariff required make quarterly filings kentucky public service commission overrecovered natural gas costs collected refunded adjustments customer bills beginning three months end quarter actual natural gas costs incurred weather normalization tariff provides adjustment rates residential small nonresidential customers reflect variations thirty year average weather december april billing cycles adjustments customer bills made real time basis lag collecting refunding customers related dollar amounts additionally conservation efficiency program tariff residential customers allows us adjust rates activities performed program perform energy audits promote conservation awareness provide rebates purchase certain highefficiency appliances program helps align interests residential customers interests reimbursing us gross margins lost sales due operating program providing incentives us promote customer conservation rates adjusted annually recover costs incurred programs reimbursement margins lost sales incentives provided us addition regulation kentucky public service commission may obtain nonexclusive franchises cities operate authorizing us place facilities streets public grounds utility may obtain franchise obtained approval kentucky public service commission bid franchise hold franchises seven cities serve continue operate conditions expired franchises fifteen cities serve cities areas serve areas served governmental organizations authorized grant franchises city governments require franchise attempt acquire reacquire franchises whenever feasible without franchise city could require us cease occupation streets public grounds prohibit us extending facilities new area city date absence franchise adversely affected operations 15 segment information company two reportable segments regulated segment nonregulated segment regulated segment includes natural gas distribution transportation services regulated kentucky public service commission nonregulated segment includes natural gas marking activities sales natural gas liquids nonregulated segment produces portion natural gas markets customers division segments separate revenue generating components based upon regulation products services segments operate single geographic area central southeastern kentucky chief operating decision maker chief executive officer evaluate performance based net income respective segment nonregulated segment two customers provided 5 operating revenues 2016 largest customer provided approximately 11555000 17852000 12569000 nonregulated revenues 2016 2015 2014 respectively second largest customer provided approximately 5656000 7127000 9494000 nonregulated revenues 2016 2015 2014 respectively assurance revenues customers continue levels regulated segment purchased approximately 99 natural gas atmos energy marketing midwest energy services 2016 2015 2014 purchased approximately 98 natural gas atmos energy marketing b gas services midwest energy services nonregulated segment purchased approximately 99 natural gas atmos energy marketing midwest energy services 2016 2015 purchased approximately 99 natural gas atmos energy marketing b gas services midwest energy services 2014 purchased approximately 96 natural gas atmos energy marketing mb services reportable segments follow accounting policies described summary significant accounting policies note 1 notes consolidated financial statements intersegment revenues expenses represent natural gas transportation costs regulated segment nonregulated segment tariff rates operating expenses taxes interest allocated nonregulated segment information shown following table 16 sharebased compensation shareholder approved incentive compensation plan “plan” provides compensation payable shares common stock plan administered corporate governance compensation committee board directors complete discretion determining employees officers outside directors shall eligible participate plan well type amount terms conditions award subject limitations plan number shares common stock may issued pursuant plan may exceed aggregate 1000000 shares june 30 2016 approximately 747000 shares common stock available issuance plan subject limitations imposed corporate governance guidelines shares common stock may available authorized unissued shares reacquired us shares purchase open market compensation expense sharebased compensation recorded nonregulated segment operation maintenance expense consolidated statements income based fair value awards grant date amortized requisite service period fair value closing price common shares grant date grant date commitment issue sharebased awards arises generally award approved terms awards communicated employee director initially recognize expense performance shares probable stipulated performance criteria met sharebased compensation expense 452000 1095000 1112000 2016 2015 2014 respectively extent cumulative deduction income tax purposes exceeds cumulative compensation expense recognized financial reporting purposes excess tax benefits utilized offset tax deficiencies related sharebased compensation subsequent periods 2016 2015 immaterial differences compensation expense financial reporting purposes income tax purposes recognized stock awards 2016 common stock awarded deltas directors grant date fair value 169000 8400 shares 2015 2014 common stock awarded virtually delta employees directors grant date fair values 443000 22000 shares 350000 17000 shares respectively recipients vested awards shortly awards granted time grant dates vesting dates shares awarded transferable holders shares vested shares received stock awards immediately transferable performance shares 2016 2015 2014 performance shares awarded companys executive officers grant date fair values 787000 39000 shares 773000 39000 shares 801000 39000 shares respectively performance shares vest performance objectives awards met based companys earnings per common share fiscal year performance shares awarded cash bonuses sharebased compensation upon satisfaction performance objectives unvested shares issued recipients vest onethird increments august 31 subsequent achieving performance objectives long recipients employees throughout service period unvested shares executive officers still employed company fully vest upon attaining age sixtyseven recipients awards also become vested result certain events death disability holders unvested shares dividend participation rights voting rights remaining terms awards holders performance shares may sell transfer pledge shares vest 2016 2015 2014 compensation expense related performance shares 283000 652000 762000 respectively performance objectives performance shares awarded 2016 satisfied awards forfeited performance objectives performance shares awarded 2014 2015 met 28000 shares remain unvested june 30 2016 company recognize remaining 49000 expense associated shares 2017 2019 performance shares graded vesting schedules separate annual vesting tranche treated separate award expense recognition compensation expense amortized vesting period individual awards based probable outcome meeting performance objectives since performance condition satisfied shares granted 2014 2015 holder performance shares dividend participation rights voting rights remaining term awards holder becomes vested result certain events death disability holder subject satisfaction performance condition weighted average expected remaining vesting period june 30 2016 07 years following summarizes activity performance shares represents maximum number shares could issued based achieving performance criteria 17 quarterly financial data unaudited quarterly data reflects opinion management normal recurring adjustments necessary present fairly results interim periods 18 subsequent events august 2016 9600 shares common stock awarded outside directors grant date fair value 247000 august 2016 performance shares awarded companys executive officers performance share awards vest performance objective awards met based companys fiscal 2017 audited earnings per share cash bonuses sharebased compensation subject limitations described plan performance shares paid shall form unvested shares contain service condition whereby recipients awards shall vest onethird increments year beginning august 31 2017 annually august 31 thereafter fully vested long recipient employee throughout service period unvested shares executive officers still employed company fully vest upon attaining age sixtyseven maximum number shares could issued performance awards 41000 grant date fair value 1056000 schedule ii delta natural gas company inc valuation qualifying accounts years ended june 30 2016 2015 2014