Item 1. Business
General
In 1951, Delta established its first retail gas distribution system, which provided service to approximately 300 customers in Owingsville and Frenchburg, Kentucky. As a result of acquisitions and expansions of its customer base within its existing service areas, Delta currently provides retail gas distribution service for approximately 34,000 customers in central and southeastern Kentucky and, additionally, provides transportation service to industrial customers and interconnected pipelines located in the area.
Recently, Delta acquired leases for the storage of natural gas under approximately 8,000 acres in Bell County, Kentucky and is currently developing the property as an underground natural gas storage facility. This storage field should permit Delta to purchase and store gas when prices are less expensive and withdraw and sell the gas during the peak usage winter months.
The Company purchases and produces gas for distribution to its retail customers and also provides transportation service to industrial customers and inter-connected pipelines with its facilities that are located in 17 predominantly rural counties in central and southeastern Kentucky. The economy of Delta's service area is based principally on coal mining, farming and light industry. The communities in Delta's service area typically contains populations of less than 20,000. The four largest service areas are Corbin, Nicholasville, Middlesboro and Berea, where Delta serves approximately 6,100, 6,000, 3,700 and 3,800 customers, respectively.
Several communities served by Delta continue to expand, resulting in growth opportunities for the Company. Industrial parks have been developed in certain areas and have resulted in new industrial customers, some of whom are on-system transportation customers. As a result of this growth, Delta's total customer count increased by 2.9% in 1996.
Currently, over 99% of Delta's customers are residential and commercial. Delta's remaining, light industrial customers purchased approximately 6% of the total volume of gas sold by Delta at retail during 1996.
The Company's revenues are affected by various factors, including rates billed to customers, the cost of natural gas, economic conditions in the areas that the Company serves, weather conditions and competition. Delta competes for customers and sales with alternative sources of energy, including electricity, coal, oil, propane and wood. The Company's marketing subsidiaries, which purchase gas and resell it to various industrial customers and others, also compete for their customers with producers and marketers of natural gas. Gas costs, which the Company is generally able to pass through to customers, may cause customers to conserve, or, in the case of industrial customers, to use alternative energy sources. Also, the potential bypass of Delta's system by industrial customers and others is a competitive concern that Delta has addressed and will continue to address as the need arises.
Delta's retail sales are seasonal and temperature-sensitive, as the majority of the gas sold by Delta is used for heating. This seasonality impacts Delta's liquidity position and its management of its working capital requirements during each twelve month period, and changes in the average temperature during the winter months impacts its revenues year-to-year (see Management's Discussion and Analysis of Financial Condition and Results of Operations).
Retail gas sales for 1996 were approximately 4,705,000 thousand cubic feet ("Mcf"), generating approximately $27,810,000 in revenues, as compared to approximately 3,724,000 Mcf and approximately $24,690,003 in revenues for 1995. Heating degree days billed during 1996 were approximately 112% of the thirty year average as compared with approximately 90% in 1995. Principally as a result of this colder weather, sales volumes increased by 980,000 Mcf, or 26.3%, in 1996 as compared to 1995.
Delta's transportation of natural gas in 1996 generated revenues of approximately $3,331,000 as compared with approximately $3,049,000 during 1995. Of the total from transportation in 1996, approximately $2,913,000 (2,570,000 Mcf) and $418,000 (1,134,000 Mcf) were earned for transportation for on-system and off-system customers, respectively. Of the total from transportation for 1995, approximately $2,588,000 (2,390,000 Mcf) and $461,000 (1,452,000 Mcf) were earned from transportation for on-system and off-system customers, respectively.
As an active participant in many areas of the natural gas industry, Delta plans to continue its efforts to expand its gas distribution system. Delta continues to consider acquisitions of other gas systems, some of which are contiguous to its existing service areas, as well as expansion within its existing service areas. The Company also anticipates continuing activity in gas production and transportation and plans to pursue and increase these activities wherever practicable. The Company will continue to consider the construction or acquisition of additional transmission, storage and gathering facilities to provide for increased transportation, enhanced supply and system flexibility.
Gas Operations and Supply
Delta receives its gas supply from a combination of interstate and Kentucky sources. The Company intends to maintain an adequate gas supply to provide service to existing and future customers.
Delta's interstate gas supply is transported and stored by Tennessee Gas Pipeline Company ("Tennessee"), Columbia Gas Transmission Corporation ("Columbia") and Columbia Gulf Transmission Company ("Columbia Gulf"). Delta acquires its interstate gas supply from gas marketers. Delta also acquires gas supply from Kentucky producers and suppliers.
During the past few years, the Federal Energy Regulatory Commission ("FERC") restructured interstate natural gas pipeline operations, services and rates. As a result, Delta contracted for transportation and storage services with Tennessee, Columbia and Columbia Gulf and Delta now purchases gas supplies from others. This nation-wide change has resulted in a competitive national market for natural gas supplies as supply and demand determine the availability and prices of natural gas.
Delta's transportation and storage contracts with Tennessee extend until 2000 and thereafter continue on a year-to-year basis until terminated by either party. Tennessee is obligated under the contracts to transport up to approximately 17,600 Mcf per day for Delta. Delta acquires its gas for transportation by Tennessee under a contract with a gas marketer, which contract extends through April, 1997. During 1996, Delta purchased approximately 1,694,000 Mcf from the gas marketer, which natural gas was transported by Tennessee.
Delta's transportation and storage contracts with Columbia and Columbia Gulf extend until 2008 and thereafter continue on a year-to-year basis until terminated by one of the parties to the particular contract. Columbia and Columbia Gulf are obligated under the contracts to transport up to approximately 12,000 Mcf per day and approximately 4,000 Mcf per day, respectively, for Delta. Delta acquires its gas for transportation by Columbia and Columbia Gulf under contracts with a gas marketer, which contracts extend through April, 1997. During 1996, Delta purchased a total of approximately 1,065,000 Mcf from the gas marketer, which natural gas was transported by Columbia and Columbia Gulf.
Delta has a contract with The Wiser Oil Company ("Wiser") to purchase natural gas from Wiser through 1999. Delta and Wiser annually determine the daily deliverability from Wiser, and Wiser is committed to deliver that volume. Wiser currently is obligated to deliver 11,000 Mcf per day to Delta. Delta purchased approximately 1,585,000 Mcf from Wiser during 1996.
Delta has contracts with Enpro to purchase all the natural gas produced from Enpro's wells on certain leases in Bell, Knox and Whitley Counties, Kentucky. These agreements remain in force so long as gas is produced in commercial quantities from the wells on the leases. Remaining proved, developed natural gas reserves are estimated at approximately 4,400,000 Mcf. Delta purchased a total of approximately 205,000 Mcf from those properties during 1996. Enpro also produces oil from certain of these leases, but oil production has not been significant.
Delta receives gas under agreements with various other marketers, brokers and Kentucky producers, most of which are priced as short-term, or spot-market, purchases. The combined volumes of gas purchased from these sources during 1996 were approximately 319,000 Mcf.
Resources and Delgasco purchase gas from various marketers and Kentucky producers, most of which is priced as short-term, or spot-market, purchases. The gas is resold to industrial customers on Delta's system, to Delta for system supply and to others. The combined volumes of gas purchased by Resources and Delgasco from these sources during 1996 were approximately 2,132,000 Mcf.
Delta is presently developing an underground natural gas storage field with an estimated eventual working capacity of 4,000,000 Mcf. It is anticipated that this storage capability will permit Delta to purchase and store gas during the non-heating season, and then withdraw and sell the gas during the peak usage winter months. Storage project capital expenditures are estimated at approximately $6 million during fiscal 1997. Delta is currently recovering a return on storage field investments through rates.
Delta continues to seek additional new gas supplies from all available sources, including those in the proximity of its facilities in southeastern Kentucky. Also, Resources and Delgasco continue to pursue acquisitions of new gas supplies from Kentucky producers and others.
Some producers in Delta's service area can access certain pipeline delivery systems other than Delta, which provides competition from others for transportation of such gas. Delta will continue its efforts to purchase or transport any natural gas available that is produced in reasonable proximity to its facilities. Delta will continue to maintain an active gas supply management program that emphasizes long-term reliability and the pursuit of cost effective sources of gas for its customers.
Regulatory Matters
Delta is subject to the regulatory authority of the Public Service Commission of Kentucky ("PSC") with respect to various aspects of Delta's business, including rates and service to retail and transportation customers. The Company monitors the need to file a general rate case as a way to adjust its sales prices. Delta currently has no general rate cases filed with the PSC.
Delta's rates include a Gas Cost Recovery ("GCR") clause, which permits changes in Delta's gas costs to be reflected in the rates charged to customers. The GCR requires Delta to make quarterly filings with the PSC, but such procedure does not require a general rate case. The PSC allows Delta to recover storage costs in rates through the GCR mechanism or general rate cases.
In addition to PSC regulation, Delta may obtain non-exclusive franchises from the cities and communities in which it operates authorizing it to place its facilities in the streets and public grounds. However, no utility may obtain a franchise until it has obtained from the PSC a Certificate of Convenience and Necessity authorizing it to bid on the franchise. Delta holds franchises in four of the ten cities in which it maintains branch offices and in six other communities it serves. In the other cities or communities, either Delta's franchises have expired, the communities do not have governmental organizations authorized to grant franchises, or the local governments have not required, or do not want to offer, a franchise. Delta attempts to acquire or reacquire franchises whenever feasible.
Without a franchise, a local government could require Delta to cease its occupation of the streets and public grounds or prohibit Delta from extending its facilities into any new area of that city or community. To date, the absence of a franchise has had no adverse effect on Delta's operations.
Capital Expenditures
Capital expenditures during 1996 were approximately $13.4 million and for 1997 are estimated to be approximately $16.4 million. These include planned expenditures for development of underground natural gas storage, system extensions, computer system upgrades and the replacement and improvement of existing transmission, distribution, gathering and general facilities.
Employees
Delta employed a total of 171 full-time employees on June 30, 1996. Delta considers its relationship with its employees to be satisfactory. Delta's employees are not represented by unions or subject to any collective bargaining agreements.
Consolidated Statistics
For the Years Ended June 30, 1996 1995 1994 1993 1992
Retail Customers Served, End of Period Residential .............. 29,840 29,029 27,939 27,293 26,488 Commercial ............... 4,453 4,287 4,242 4,093 4,035 Industrial ............... 75 72 76 75 66
Total ................. 34,368 33,388 32,257 31,461 30,589
Operating Revenues ($000) Residential sales ........ 16,540 14,772 16,597 14,578 13,945 Commercial sales ......... 9,788 8,673 9,663 8,269 7,651 Industrial sales ......... 1,483 1,248 1,671 1,383 1,188 On-system transportation . 2,913 2,588 2,310 2,451 2,348 Off-system transportation. 418 461 623 836 1,342 Subsidiary sales ......... 5,297 3,959 3,755 3,532 2,580 Other .................... 137 143 228 172 147
Total ................. 36,576 31,844 34,847 31,221 29,201
System Throughput (Million Cu. Ft.) Residential sales ........ 2,741 2,173 2,511 2,341 2,202 Commercial sales ......... 1,673 1,328 1,506 1,368 1,235 Industrial sales ......... 291 223 316 281 229
Total retail sales .... 4,705 3,724 4,333 3,990 3,666
For the Years Ended June 30, 1996 1995 1994 1993 1992
On-system transportation.. 2,570 2,390 2,186 2,248 2,061
Off-system transportation. 1,134 1,452 1,997 2,668 4,580
Total ................. 8,409 7,566 8,516 8,906 10,307
Average Annual Consumption Per End of Period Residential Customer (Thousand Cu.Ft.). 92 75 90 86 83 Lexington, Kentucky Degree Days Actual..................... 5,268 4,217 4,999 4,676 4,370 Percent of 30 year average (4,712) ................. 111.8 89.5 106.1 99.2 92.7
Average Revenue Per Mcf Sold at Retail ($) ............. 5.91 6.63 6.44 6.07 6.21
Average Gas Cost Per Mcf Sold at Retail ($) ............. 2.81 3.37 3.34 2.90 3.01
Item 2.

Item 2. Properties
Delta owns its corporate headquarters in Winchester. In addition, Delta owns buildings used for branch operations in nine of the cities it serves and rents an office in one city. Also, Delta owns a building in Laurel County used for training as well as equipment and materials storage.
The Company owns approximately 1,900 miles of natural gas gathering, transmission, distribution and service lines. These lines range in size up to eight inches in diameter. There are no significant encumbrances on these assets.
Delta holds leases for the storage of natural gas under approximately 8,000 acres located in Bell County, Kentucky. This property is being developed for the underground storage of natural gas and when complete is estimated to have a working capacity of approximately 4,000,000 Mcf of gas.
Delta owns the rights to any oil and gas underlying approximately 3,500 acres in Bell County. Portions of these properties are used by Delta for the storage of natural gas. The maximum capacity of the storage facilities is approximately 550,000 Mcf. These properties otherwise are currently non- producing, and Delta has not had reserve studies performed on the properties.
Enpro owns interests in certain oil and gas leases relating to approximately 11,000 acres located in Bell, Knox and Whitley Counties. There presently are 56 gas wells and 7 oil wells producing from these properties. Enpro's remaining proved, developed natural gas reserves are estimated at approximately 4,400,000 Mcf. Oil production from the property has not been significant. Also, Enpro owns the oil and gas underlying approximately 11,500 additional acres in Bell, Clay and Knox Counties. These properties are currently non-producing, and Enpro has not had reserve studies performed on the properties.
During 1994, Enpro entered an agreement with a producer relating to approximately 14,000 acres of Enpro's undeveloped holdings. Under the terms of the agreement, the producer is conducting exploration activities on the acreage. Enpro reserved the option to participate in wells drilled. Enpro also retained certain working and royalty interests in any production from future wells.
There are no significant encumbrances on the Company's assets.
Item 3.

Item 3. Legal Proceedings
Delta and its subsidiaries are not parties to any legal proceedings which are expected to have a materially adverse impact on the financial condition or results of operations of the Company.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1996.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Delta has paid cash dividends on its common stock each year since 1964. While it is the intention of the Board of Directors to continue to declare dividends on a quarterly basis, the frequency and amount of future dividends will depend upon the Company's earnings, financial requirements and other relevant factors, including limitations imposed by the indenture for the Debentures.
Delta's common stock is traded in the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol DGAS. The accompanying table reflects the high and low sales prices during each quarter as reported by NASDAQ and the quarterly dividends declared per share.
Range of Stock Prices($) Dividends Quarter High Low Per Share($)
Fiscal 1996
First 17 1/4 15 3/4 .28 Second 18 1/4 15 1/2 .28 Third 18 16 .28 Fourth 16 3/4 15 1/2 .28
Fiscal 1995
First 20 17 1/2 .28 Second 18 15 3/4 .28 Third 18 3/4 16 .28 Fourth 18 1/2 16 3/4 .28
There were 2,382 record holders of Delta's common stock as of August 1, 1996.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Company's utility operations are subject to regulation by the PSC, which approves rates that are intended to permit a specified rate of return on investment. The Company's rate tariffs allow the cost of gas to be passed through to customers.
Delta's business is temperature-sensitive. Accordingly, the Company's operating results in any given period reflect, in addition to other factors, the impact of weather, with colder temperatures resulting in increased sales. The Company anticipates that this sensitivity to seasonal and weather conditions will continue to be so reflected in the Company's operating results in future periods.
Capital expenditures for Delta for fiscal 1997 are expected to be approximately $16,400,000. Delta generates internally only a portion of the cash necessary for its capital expenditure requirements and finances the balance of its capital expenditures on an interim basis through the use of its borrowing capability under its short-term line of credit. The current available line of credit is $20,000,000, of which approximately $18,075,000 was borrowed at June 30, 1996. The line of credit, which is with Bank One, Kentucky, NA, expires during November, 1996. These short-term borrowings are periodically repaid with the net proceeds from the sale of long-term debt and equity securities, as was done in July, 1996 when the net proceeds of approximately $20,400,000 from the sale of $15,000,000 of debentures and 400,000 shares of common stock was used to repay short-term debt and for working capital.
Because of the seasonal nature of Delta's sales, the smallest proportion of cash generated from operations is received during the warmer months when sales volumes decrease considerably. Additionally, most construction activity takes place during the non-heating season because of more favorable weather conditions. Therefore, during the warmer, non- heating months, cash needs for operations and construction are partially met through short-term borrowings.
The primary cash flows during the last three years are summarized below:
1996 1995 1994 Provided by operating activities $ 3,094,809 $ 6,943,183 $ 6,172,019 Used in investing activities (13,373,416) (8,122,838) (7,374,747) Provided by financing 10,294,461 1,158,887 1,144,396 activities
Net increase (decrease in cash and cash equivalents $ 15,854 $ (20,768) $ (58,332)
Results of Operations
Operating Revenues
The increase in operating revenues for 1996 of approximately $4,732,000 was due primarily to an increase in retail sales volumes of approximately 980,000 Mcf as a result of the colder winter weather in 1996. Billed degree days were approximately 112% of the thirty-year average ("normal") degree days for 1996 as compared with approximately 90% for 1995. In addition, on- system transportation volumes for 1996 increased approximately 180,000 Mcf, or 8%. These increases were partially offset by decreases in the cost of gas purchased that were reflected in rates billed to customers through Delta's gas cost recovery clause and by a decrease in off-system transportation volumes of approximately 318,000 Mcf, or 22%, due primarily to reduced deliveries from local producers.
The decrease in operating revenues for 1995 of approximately $3,003,000 was due primarily to a decrease in retail sales volumes of approximately 609,000 Mcf as a result of the warmer winter weather in 1995 (approximately 90% of normal weather compared to approximately 106% for 1994) and an approximate $162,000 (545,000 Mcf) decrease in off-system transportation due to reduced deliveries from some local production. The decrease was partially offset by an increase in on-system transportation of approximately $278,000 due to a 204,000 Mcf increase in volumes transported and by an increase in customers served of approximately 1,100, or 3.5%.
Operating Expenses
The increase in purchased gas expense for 1996 of approximately $1,893,000 was due primarily to the increased gas purchases for retail sales resulting from the colder winter weather during 1996. The increase was partially offset by decreases in the cost of gas purchased for retail sales.
The decrease in purchased gas expense for 1996 of approximately $1,753,000 was due primarily to the decreased retail sales volumes resulting from the warmer winter weather during 1995.
The increase in operation and maintenance expenses during 1996 of approximately $640,000 was due primarily to increases in payroll and related benefit costs.
The decrease in operation and maintenance expenses during 1995 of approximately $380,000 was due primarily to decreases in payroll and related benefit costs.
The increases in depreciation expense during 1996 and 1995 of approximately $327,000 and $206,000, respectively, were due primarily to additional depreciable plant.
The increases in taxes other than income taxes during 1996 and 1995 of approximately $173,000 and $78,000, respectively, were primarily due to increased property taxes which resulted from increased plant and property valuations, and to increased payroll taxes, which resulted from increased wages.
Changes in income taxes during 1996 and 1995 of approximately $517,000 and $467,000, respectively, were primarily due to changes in net income.
Interest Charges
The increases in other interest charges during 1996 and 1995 of approximately $448,000 and $176,000, respectively, were due primarily to increased average short-term borrowings and increased average interest rates.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE PAGE
Management's Statement of Responsibility for Financial Reporting and Accounting 21
Report of Independent Public Accountants 22
Consolidated Statements of Income for the years ended June 30, 1996 1995 and 1994 23
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 24
Consolidated Balance Sheets as of June 30, 1996 and 1995 26
Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994 28
Consolidated Statements of Capitalization as of June 30, 1996 and 1995 29
Notes to Consolidated Financial Statements 30
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1996, 1995 and 1994 38
Schedules other than those listed above are omitted because they are not required, not applicable or the required information is shown in the financial statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Registrant intends to file a definitive proxy statement with the Commission pursuant to Regulation 14A (17 CFR 240.14a) not later than 120 days after the close of the fiscal year. In accordance with General Instruction G(3) to Form 10-K, the information called for by Items 10, 11, 12 and 13 is incorporated herein by reference to the definitive proxy statement. Neither the report on Executive Compensation nor the performance graph included in the Company's definitive proxy statement shall be deemed incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) - Financial Statements, Schedules and Exhibits
(1) - Financial Statements See Index at Item 8
(2) - Financial Statement Schedules See Index at Item 8
(3) - Exhibits
Exhibit No.
3(a) - Delta's Amended and Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3(a) to Delta's Form 10-Q for the period ended March 31, 1990.
3(b) - Delta's By-Laws as amended August 21, 1996.
4(a) - The Indenture dated April 1, 1991 in respect of 9% Debentures due April 30, 2011, is incorporated herein by reference to Exhibit 4(e) to Delta's Form S-2 dated April 23, 1991.
4(b) - The Indenture dated September 1, 1993 in respect of 6 5/8% Debentures due October 1, 2023, is incorporated herein by reference to Exhibit 4(e) to Delta's Form S-2 dated September 2, 1993.
4(c) - The Indenture dated July 1, 1996 in respect of 8.3% Debentures due August 1, 2026, is incorporated herein by reference to Exhibit 4(c) to Delta's Form S-2 dated June 21, 1996.
10(a) - Certain of Delta's material natural gas supply contracts are incorporated herein by reference to Exhibit 10 to Delta's Form 10 for the year ended June 30, 1978 and by reference to Exhibits C and D to Delta's Form 10-K for the year ended June 30, 1980.
10(b) - Gas Purchase Contract between Delta and Wiser is incorporated herein by reference to Exhibit 2(C) to Delta's Form 8-K dated February 9, 1981.
10(c) - Assignment to Delta by Wiser of its Columbia Service Agreement, including a copy of said Service Agreement, is incorporated herein by reference to Exhibit 2(D) to Delta's Form 8-K dated February 9, 1981.
10(d) - Contract between Tennessee and Delta for the sale of gas by Tennessee to Delta (amends earlier contract for Nicholasville and Wilmore Service Areas) is incorporated herein by reference to Exhibit 10(d) to Delta's Form 10-Q for the period ended September 30, 1990.
10(e) - Contract between Tennessee and Delta for the sale of gas by Tennessee to Delta (amends earlier contract for Jeffersonville Service Area) is incorporated herein by reference to Exhibit 10(e) to Delta's Form 10-Q for the period ended September 30, 1990.
10(f) - Contract between Tennessee and Delta for the sale of gas by Tennessee to Delta (amends earlier contract for Salt Lick Service Area) is incorporated herein by reference to Exhibit 10(f) to Delta's Form 10-Q for the period ended September 30, 1990.
10(g) - Contract between Tennessee and Delta for the sale of gas by Tennessee to Delta (amends earlier contract for Berea Service Area) is incorporated herein by reference to Exhibit 10(g) to Delta's Form 10-Q for the period ended September 30, 1990.
10(h) - Service Agreements between Columbia and Delta for the sale of gas by Columbia to Delta (amends earlier service agreements for Cumberland, Stanton and Owingsville service areas) are incorporated herein by reference to Exhibit 10(h) to Delta's Form 10-Q for the period ended September 30, 1990.
10(i) - Amendment to Gas Purchase Contract between Delta and Wiser is incorporated herein by reference to Exhibit 10(c) to Delta's Form 10-Q for the period ended December 31, 1988.
10(j) - Second amendment to Gas Purchase Contract between Delta and Wiser is incorporated herein by reference to Exhibit 10(j) to Delta's Form 10-K for the period ended June 30, 1994.
10(k) - Employment agreement between Delta and Alan L. Heath, an officer, is incorporated herein by reference to Exhibit 10(k) to Delta's Form 10-Q for the period ended December 31, 1985.
10(l) - Employment agreements between Delta and two officers, those being John F. Hall and Robert C. Hazelrigg, are incorporated herein by reference to Exhibit 10(m) to Delta's Form 10-Q for the period ended December 31, 1988.
10(m) - Employment agreement dated May 31, 1995 between Delta and Glenn R. Jennings, an officer, is incorporated herein by reference to Exhibit 10(m) to Delta's Form 10-K for the period ended June 30, 1995.
10(n) - Employment agreement dated June 19, 1995 between Delta and Johnny L. Caudill, an officer, is incorporated herein by reference to Exhibit 10(n) to Delta's Form 10K for the period ended June 30, 1995.
12 - Computation of the Consolidated Ratio of Earnings to Fixed Charges.
21 - Subsidiaries of the Registrant are incorporated herein by reference to Exhibit 22 to Delta's Form 10-K for the period ended June 30, 1986.
23 - Consent of Independent Public Accountants.
(b) Reports on 8-K.
No reports on Form 8-K were filed during the three months ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of September, 1996.
DELTA NATURAL GAS COMPANY, INC.
By /s/Glenn R. Jennings Glenn R. Jennings, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
(i) Principal Executive Officer:
/s/ Glenn R. Jennings President, Chief September 11, 1996 (Glenn R. Jennings) Executive Officer and Director
(ii) Principal Financial Officer and Principal Accounting Officer:
/s/ John F. Hall Vice President - Finance, September 11, 1996 (John F. Hall) Secretary and Treasurer
(iii) A Majority of the Board of Directors:
/s/ H. D. Peet Chairman of the Board September 11, 1996 (H. D. Peet)
/s/ Donald R. Crowe Director September 11, 1996 (Donald R. Crowe)
/s/ Jane Hylton Green Director September 11, 1996 (Jane Hylton Green)
/s/ Billy Joe Hall Director September 11, 1996 (Billy Joe Hall)
/s/ Virgil E. Scott Director September 11, 1996 (Virgil E. Scott)
/s/ Henry C. Thompson Director September 11, 1996 (Henry C. Thompson)
/s/ Arthur E. Walker, Jr. Director September 11, 1996 (Arthur E. Walker, Jr.)
Management's Statement of Responsibility for Financial Reporting and Accounting
Management is responsible for the preparation, presentation and
integrity of the financial statements and other financial information in this
report. In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from these estimates.
The Company maintains a system of accounting and internal controls which
management believes provides reasonable assurance that the accounting records
are reliable for purposes of preparing financial statements and that the
assets are properly accounted for and protected.
The Board of Directors pursues its oversight role for these financial
statements through its Audit Committee which consists of three outside
directors. The Audit Committee meets periodically with management to review
the work and monitor the discharge of their responsibilities. The Audit
Committee also meets periodically with the Company's internal auditor as well
as Arthur Andersen LLP, the independent auditors, who have full and free
access to the Audit Committee, with or without management present, to discuss
internal accounting control, auditing and financial reporting matters.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Delta Natural Gas Company, Inc.:
We have audited the accompanying consolidated balance sheets and statements of capitalization of DELTA NATURAL GAS COMPANY, INC. (a Kentucky corporation) and subsidiary companies as of June 30, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended June 30, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delta Natural Gas Company, Inc. and subsidiary companies as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index to Consolidated Financial Statements and Schedule is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Louisville, Kentucky
August 16, 1996
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Income
For the Years Ended June 30, 1996 1995 1994
Operating Revenues ............ $36,576,055 $31,844,339 $34,846,941
Operating Expenses Purchased gas .............. $17,389,755 $15,497,156 $17,250,556 Operation and maintenance (Note 1) ................. 8,642,511 8,002,797 8,382,767
Depreciation and depletion (Note 1) ................. 2,510,952 2,183,558 1,977,868
Taxes other than income taxes .................... 1,036,282 863,340 875,477
Income taxes (Note 1) ...... 1,559,500 1,042,400 1,509,600
Total operating expenses. $31,139,000 $27,589,251 $29,996,268
Operating Income .............. $ 5,437,055 $ 4,255,088 $ 4,850,673
Other Income and Deductions, Net 32,503 50,582 34,987
Income Before Interest Charges. $ 5,469,558 $ 4,305,670 $ 4,885,660
Interest Charges Interest on long-term debt.. $ 1,851,768 $ 1,879,442 $ 1,879,526
Other interest ............. 867,641 419,693 243,729
Amortization of debt expense 88,800 88,800 91,404
Total interest charges .. $ 2,808,209 $ 2,387,935 $ 2,214,659
Net Income $ 2,661,349 $ 1,917,735 $ 2,671,001
Weighted Average Number of Common Shares Outstanding ... 1,886,629 1,850,986 1,775,068
Earnings Per Common Share ..... $ 1.41 $ 1.04 $ 1.50
Dividends Declared Per Common Share ....................... $ 1.12 $ 1.12 $ 1.11
The accompanying notes to consolidated financial statements are an integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1996 1995 1994
Cash Flows From Operating Activities: Net income ...................... $ 2,661,349 $ 1,917,735 $ 2,671,001
Adjustments to reconcile net income to net cash from operating activities: Depreciation, depletion and amortization ............... 2,663,475 2,272,358 2,069,013 Deferred income taxes and investment tax credits ..... 1,762,500 (77,000) 874,800 Other - net .................. 484,474 602,180 446,969 (Increase) decrease in assets: Accounts receivable .......... (860,255) (118,237) 802,197 Materials and supplies ....... (124,697) 173,319 (229,275) Prepayments .................. 53,702 (105,903) 25,701 Other assets ................. 31,823 (209,225) (780)
Increase (decrease) in liabilities: Accounts payable ............. 871,207 178,609) 513,265 Refunds due customers ........ (456,283) 83,572 358,270 Accrued taxes ................ (270,394) 72,210) (34,543) Other current liabilities .... 56,951 69,742 38,675 (Deferred) advance recovery of gas cost ................ (3,788,143) 2,583,128 (1,372,030) Advances for construction and other ...................... 9,100 2,333 8,756
Net cash provided by operating activities .... $ 3,094,809 $ 6,943,183 $ 6,172,019
Cash Flows From Investing Activities: Capital expenditures ............ $(13,373,416) $(8,122,838) $(7,374,747)
Net cash used in investing activities .............. $(13,373,416) $(8,122,838) $(7,374,747)
The accompanying notes to consolidated financial statements are an integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1996 1995 1994
Cash Flows From Financing Activities: (Note 5) Dividends on common stock .......$ (2,113,414) $(2,073,374) $(1,972,368) Issuance of common stock, net.... 568,875 502,361 3,965,113 Issuance of debentures, net...... - - 14,246,937 Repayment of long-term debt ..... (561,000) (240,100) (11,330,286) Issuance of notes payable........ 25,955,000 19,495,000 20,180,000 Repayment of notes payable....... (13,555,000) (16,525,000) (23,945,000)
Net cash provided by financing activities $ 10,294,461 $ 1,158,887 $ 1,144,396
Net Increase (Decrease) in Cash and Cash Equivalents ...................$ 15,854 $ (20,768) $ (58,332)
Cash and Cash Equivalents, Beginning of Year .................. 135,779 156,547 214,879
Cash and Cash Equivalents, End of Year ........................$ 151,633 $ 135,779 $ 156,547
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for: Interest $ 2,491,091 $ 2,253,472 $ 2,141,705 Income taxes $ 193,560 $ 1,264,942 $ 715,000
The accompanying notes to consolidated financial statements are an integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
As of June 30, 1996 1995
Assets Gas Utility Plant, at cost .............. $98,795,623 $84,944,969 Less - Accumulated provision for depreciation......................... (26,749,774) 24,588,203)
Net gas plant $72,045,849 $60,356,766
Current Assets Cash and cash equivalents ............ $ 151,633 $ 135,779 Accounts receivable, less accumulated provisions for doubtful accounts of $105,756 and $ 81,608 in 1996 and 1995, respectively ................. 2,096,454 1,236,199 Gas in storage, at average cost ...... 427,164 490,710 Deferred gas costs (Note 1) .......... 2,676,357 - Materials and supplies, at first-in, first-out cost ..................... 652,139 527,442 Prepayments .......................... 369,544 423,246
Total current assets $ 6,373,291 $ 2,813,376
Other Assets Cash surrender value of officers' life insurance (face amount of $1,036,009 and $1,044,355 in 1996 and 1995, respectively) ...................... $ 304,339 $ 293,116 Note receivable from officer ......... 126,000 130,000 Unamortized debt expense and other (Note 5) ........................... 2,291,158 2,355,458
Total other assets $ 2,721,497 $ 2,778,574
Total assets $81,140,637 $65,948,716
The accompanying notes to consolidated financial statements are an integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (continued)
As of June 30, 1996 1995
Liabilities and Shareholders' Equity
Capitalization (See Consolidated Statements of Capitalization) Common shareholders' equity .......... $23,628,323 $22,511,513 Long-term debt (Notes 5 and 6)........ 24,488,916 23,702,200 Notes payable refinanced subsequent to yearend (Note 4).................... 18,075,000 - Total capitalization .............. $66,192,239 $46,213,713
Current Liabilities Notes payable (Note 4) ............... $ - $ 5,675,000 Current portion of long-term debt (Notes 5 and 6)................ 1,084,800 1,057,700 Accounts payable ..................... 2,826,438 1,955,231 Accrued taxes ........................ 93,554 363,948 Refunds due customers ................ 23,354 479,637 Advance recovery of gas cost.......... - 1,111,786 Customers' deposits .................. 304,246 331,708 Accrued interest on debt ............. 637,596 473,001 Accrued vacation ..................... 485,847 454,728 Other accrued liabilities ............ 238,571 349,872
Total current liabilities $ 5,694,406 $12,252,611
Deferred Credits and Other Deferred income taxes ................ $ 7,318,500 $ 5,510,400 Investment tax credits ............... 779,400 850,400 Regulatory liability (Note 1) ........ 938,300 912,900 Advances for construction and other .. 217,792 208,692
Total deferred credits and other $ 9,253,992 $ 7,482,392
Commitments and Contingencies (Note 7) ..
Total liabilities and shareholders' equity ............ $81,140,637 $65,948,716
The accompanying notes to consolidated financial statements are an integral part of these statements.
Delta Natural Gas Company, Inc. and Subsidiary Companies
Consolidated Statements of Capitalization
As of June 30, 1996 1995
Common Shareholders' Equity Common shares, par value $1.00 per share (Notes 2 and 3) Authorized - 6,000,000 shares Issued and outstanding - 1,903,580 and 1,868,734 shares in 1996 and 1995, respectively ........... $ 1,903,580 $ 1,868,734 Premium on common shares .................. 20,572,132 20,022,643 Capital stock expense ..................... (1,620,252) (1,604,792) Retained earnings (Note 5) ................ 2,772,863 2,224,928
Total common shareholders' equity ...... $23,628,323 $22,511,513
Long-Term Debt (Notes 5 and 6) Debentures, 6 5/8%, due 2023 .............. $14,000,000 $14,561,000 Debentures, 9%, due 2011................... 10,000,000 10,000,000 Promissory note from acquisition of under- ground storage, non-interest bearing, due through 2001 (less $398,419 unamor- tized discount) 1,401,581 - Other 172,135 198,900
Total long-term debt ................. $25,573,716 $24,759,900
Less - Amounts due within one year, included in current liabilities ....... (1,084,800) (1,057,700)
Net long-term debt ................... $24,488,916 $23,702,200
Notes payable refinanced subsequent to yearend (Note 4) $18,075,000 $ -
Total capitalization .............. $66,192,239 $46,213,713
The accompanying notes to consolidated financial statements are an integral part of these statements.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
(a) Principles of Consolidation -- Delta Natural Gas Company, Inc. ("Delta" or "the Company") has four wholly-owned subsidiaries. Delta Resources, Inc. ("Resources") buys gas and resells it to industrial customers on Delta's system and to Delta for system supply. Delgasco, Inc. buys gas and resells it to Resources and to customers not on Delta's system. Deltran, Inc. operates underground natural gas storage facilities that it leases from Delta. Enpro, Inc. owns and operates production properties. All subsidiaries of Delta are included in the consolidated financial statements. Intercompany balances and transactions have been eliminated.
(b) Cash Equivalents -- For the purposes of the Consolidated Statements of Cash Flows, all temporary cash investments with a maturity of three months or less at the date of purchase are considered cash equivalents.
(c) Depreciation -- The Company determines its provision for depreciation using the straight-line method and by the application of rates to various classes of utility plant. The rates are based upon the estimated service lives of the properties and were equivalent to composite rates of 2.9%, 2.8%, and 2.7% of average depreciable plant for 1996, 1995 and 1994, respectively.
(d) Maintenance -- All expenditures for maintenance and repairs of units of property are charged to the appropriate maintenance expense accounts. A betterment or replacement of a unit of property is accounted for as an addition and retirement of utility plant. At the time of such a retirement, the accumulated provision for depreciation is charged with the original cost of the property retired and also for the net cost of removal.
(e) Gas Cost Recovery -- Delta has a Gas Cost Recovery ("GCR") clause which provides for a dollar-tracker that matches revenues and gas costs and provides eventual dollar-for-dollar recovery of all gas costs incurred. The Company expenses gas costs based on the amount of gas costs recovered through revenue. Any differences between actual gas costs and those estimated costs billed are deferred and reflected in the computation of future billings to customers using the GCR mechanism.
(f) Revenue Recognition -- The Company records revenues as billed to its customers on a monthly meter reading cycle. At the end of each month, gas service which has been rendered from the latest date of each cycle meter reading to the month-end is unbilled.
(g) Revenues and Customer Receivables -- The Company supplies natural gas to approximately 34,000 customers in central and southeastern Kentucky. Revenues and customer receivables arise primarily from sales of natural gas to customers and from transportation services for others. Provisions for doubtful accounts are recorded to reflect the expected net realizable value of accounts receivable.
(h) Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(i) Long-Lived Assets -- In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " ("SFAS No. 121"), effective for fiscal years beginning after December 15, 1995. The Company plans to adopt the provisions of SFAS No. 121 in the first quarter of 1997. The new standard requires that long-lived assets and certain identified intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing such impairment reviews, companies will be required to estimate the sum of future cash flows from an asset and compare such amount to the asset's carrying amount. Any excess of carrying amount over expected cash flows will result in a possible write-down of an asset to its fair value. Based on current operating conditions, legal requirements and regulatory environment, the Company does not expect adoption of SFAS No. 121 to have a material adverse impact on its financial position or results of operations.
(j) Income Taxes -- The Company provides for income taxes on temporary differences resulting from the use of alternative methods of income and expense recognition for financial and tax reporting purposes. The differences result primarily from the use of accelerated tax depreciation methods for certain properties versus the straight-line depreciation method for financial purposes, differences in recognition of purchased gas cost recoveries and certain other accruals which are not currently deductible for income tax purposes. Investment tax credits were deferred for certain periods prior to fiscal 1987 and are being amortized to income over the estimated useful lives of the applicable properties. The Company utilizes the liability method for accounting for income taxes, which requires that deferred income tax assets and liabilities are computed using tax rates that will be in effect when the book and tax temporary differences reverse. The change in tax rates applied to accumulated deferred income taxes may not be immediately recognized in operating results because of ratemaking treatment. A regulatory liability has been established to recognize the future revenue requirement impact from these deferred taxes. The temporary differences which gave rise to the net accumulated deferred income tax liability for the periods are as follows:
1996 1995
Deferred Tax Liabilities Accelerated depreciation $8,091,500 $7,186,700 Deferred gas cost 1,055,700 - Debt expense 399,200 413,500 Other 252,900 178,900
Total $9,799,300 $7,779,100
1996 1995
Deferred Tax Assets Unamortized investment tax $ 307,400 $ 335,400 credit Regulatory liabilities 370,000 360,100 Alternative minimum tax credits 1,305,600 724,300 Deferred gas cost - 438,500 Other 497,800 410,400
Total $2,480,800 $2,268,700
Net accumulated deferred income tax liability $7,318,500 $5,510,400
The components of the income tax provision are comprised of the following for the years ended June 30:
1996 1995 1994
Components of income tax expense: Payable currently: Federal $ 52,100 $ 453,900 $ 306,300 State (255,100) 194,500 100,800 Total $ (203,000) $ 648,400 $ 407,100
Deferred 1,762,500 394,000 1,102,500
Income tax expense $ 1,559,500 $ 1,042,400 $ 1,509,600
Reconciliation of the statutory federal income tax rate to the effective income tax rate is shown in the table below:
1996 1995 1994
Statutory federal income tax rate 34.0% 34.0% 34.0% State income taxes net of federal benefit 5.2 5.2 5.2 Amortization of investment tax credit (1.7) (2.4) (1.8) Other differences - net - (.9) (.9)
Effective income tax rate 37.5% 35.9% 36.5%
(2) Employee Benefit Plans:
(a) Defined Benefit Retirement Plan - Delta has a trusteed, noncontributory, defined benefit pension plan covering all eligible employees. Retirement income is based on the number of years of service and annual rates of compensation. The Company makes annual contributions equal to the amounts necessary to fund the plan adequately. The funded status of the pension plan at March 31, the plan year end, and the amounts recognized in the Company's consolidated balance sheets at June 30 were as follows:
1996 1995 1994
Plan assets at fair value $6,058,458 $5,358,108 $5,251,296 Actuarial present value of benefit obligation: Vested benefits $2,789,736 $3,605,363 $4,114,517 Non-vested benefits 9,346 21,742 30,562 Accumulated benefit obligation $2,799,082 $3,627,105 $4,145,079 Additional amounts related to projected salary increases 2,811,907 1,638,014 1,734,413 Total projected benefit obligation $5,610,989 $5,265,119 $5,879,492 Plan assets in excess of (less than) projected benefit obligation $ 447,469 $ 92,989 $ (628,196) Unrecognized net assets at date of initial application being amortized over 15 years (254,365) (296,759) (339,153) Unrecognized net (gain) loss (13,481) 286,557 950,735 Accrued pension asset (liability) $ 179,623 $ 82,787 $ (16,614)
The assets of the plan consist primarily of common stocks, bonds and certificates of deposit. Net pension costs for the years ended June 30 include the following:
1996 1995 1994 Service cost for benefits earned $ 382,751 $ 432,546 $ 455,097 during the year Interest cost on projected benefit 356,897 382,167 357,372 obligation Actual return on plan assets (886,211) (623,972) (45,100) Net amortization and deferral 444,044 185,660 (353,530) Net periodic pension cost $ 297,481 $ 376,401 $ 413,839
The weighted average discount rates and the assumed rates of increase in future compensation levels used in determining the actuarial present values of the projected benefit obligation at June 30, 1996, 1995 and 1994 were 7.0%, 7.0%, and 6.5%, respectively (discount rates), and 4% (rates of increase). The expected long-term rates of return on plan assets were 8%.
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits", and SFAS No. 112, "Employers' Accounting for Post-Employment Benefits", do not affect the Company, as Delta does not provide benefits for post-retirement or post-employment other than the pension plan for retired employees.
(b) Employee Savings Plan - The Company has an Employee Savings Plan ("Savings Plan") under which eligible employees may elect to contribute any whole percentage between 2% and 15% of their annual compensation. The Company will match 50% of the employee's contribution up to a maximum Company contribution of 2% of the employee's annual compensation through June 30, 1996. The maximum Company contribution was increased to 2.5% effective July 1, 1996. For 1996, 1995 and 1994, Delta's Savings Plan expense was approximately $111,000, $112,000 and $107,000, respectively.
(c) Employee Stock Purchase Plan - The Company has an Employee Stock Purchase Plan ("Stock Plan") under which qualified permanent employees are eligible to participate. Under the terms of the Stock Plan, such employees can contribute on a monthly basis 1% of their annual salary level (as of July 1 of each year) to be used to purchase Delta's common stock. The Company issues Delta common stock, based upon the fiscal year contributions, using an average of the last sale price of Delta's stock as quoted in NASDAQ's National Market System at the close of business for the last five business days in June and matches those shares so purchased. Therefore, stock equivalent to approximately $100,900 was issued in July, 1996. The continuation and terms of the Stock Plan are subject to approval by Delta's Board of Directors on an annual basis. Delta's Board has continued the Stock Plan through June 30, 1997.
(3) Dividend Reinvestment and Stock Purchase Plan:
The Company's Dividend Reinvestment and Stock Purchase Plan (Reinvestment Plan) provides that shareholders of record can reinvest dividends and also make limited additional investments of up to $50,000 per year in shares of common stock of the Company. Shares purchased under the Reinvestment Plan are authorized but unissued shares of common stock of the Company, and 28,024 shares were issued in 1996. Delta reserved 200,000 shares under the Reinvestment Plan in December, 1994, and, as of June 30, 1996 there were 154,791 shares still available for issuance.
(4) Notes Payable and Line of Credit:
Substantially all of the cash balances of Delta are maintained to compensate the respective banks for banking services and to obtain lines of credit; however, no specific amounts have been designated as compensating balances, and Delta has the right of withdrawal of such funds. At June 30, 1996, the available line of credit was $20,000,000, ($15,000,000 at June 30, 1995) of which $18,075,000 and $5,675,000 had been borrowed at an interest rate of 6.285%, and 6.935% for 1996 and 1995, respectively. The maximum amount borrowed during 1996 and 1995 was $18,075,000 and $8,430,000, respectively. The interest on this line is, at the option of Delta, either at the daily prime rate or is based upon certificate of deposit rates. The current line of credit expires on November 15, 1996.
These short-term borrowings were repaid in July, 1996, with the net proceeds of approximately $20,400,000 from the sale of $15,000,000 of debentures and 400,000 shares of common stock.
(5) Long-Term Debt:
On July 19, 1996, Delta issued $15,000,000 of 8.3% Debentures that mature in July, 2026. Redemption on behalf of deceased holders within 60 days of notice of up to $25,000 per holder will be made annually, subject to an annual aggregate limitation of $500,000. The 8.3% Debentures can be redeemed by the Company beginning in August, 2001 at a 5% premium, such premium declining ratably until it ceases in August, 2006. Restrictions under the indenture agreement covering the 8.3% Debentures include, among other things, a restriction whereby dividend payments cannot be made unless consolidated shareholders' equity of the company exceeds $18,000,000. No retained earnings are restricted under the provisions of the indenture.
On October 18, 1993, Delta issued $15,000,000 of 6 5/8% Debentures that mature in October, 2023. Each holder may require redemption of up to $25,000 annually, subject to an annual aggregate limitation of $500,000. Such redemption will also be made on behalf of deceased holders within 60 days of notice, subject to the annual aggregate $500,000 limitation. The 6 5/8% Debentures can be redeemed by the Company beginning in October, 1998 at a 5% premium, such premium declining ratably until it ceases in October, 2003.
On May 1, 1991, Delta issued $10,000,000 of 9% Debentures that mature in April, 2011. Each holder may require redemption of up to $25,000 of the 9.5% debentures annually, subject to an annual aggregate limitation of $500,000. Such redemption will also be made on behalf of deceased holders within 60 days of notice, subject to the annual aggregate $500,000 limitation. The 9% Debentures can be redeemed by the Company beginning in April, 1996 at a 5% premium, such premium declining ratably until it ceases in April, 2001. The Company may not assume any additional mortgage indebtedness in excess of $1 million without effectively securing the 9% Debentures equally to such additional indebtedness.
Debt issuance expenses are deferred and amortized over the terms of the related debt. Call premium in 1994 of approximately $475,000 was deferred and is being amortized over the term of the related debt consistent with regulatory treatment.
A non-interest bearing promissory note was issued by Delta on November 10, 1995 in the amount of $1,800,000, payable in installments of $400,000 in 1998, $700,000 in 2000 and $700,000 in 2002. The note was issued when Delta purchased leases and depleted gas wells to develop them for the underground storage of natural gas. Delta secured the promissory note by escrow of 102,858 shares of Delta's common stock. These shares will be issued to the holder of the promissory note only in the event of default in payment by Delta.
This underground natural gas storage field located on Canada Mountain in Bell County, Kentucky will have an estimated working capacity of 4,000,000 Mcf. It is anticipated that this storage capability will permit Delta to purchase and store gas during the non-heating season, and then withdraw and sell the gas during the peak usage winter months. Storage project capital expenditures are estimated at approximately $6,000,000 during fiscal 1997. Delta is currently recovering a return on storage field investments through rates.
Other long-term debt requires principal payments of approximately $85,000 in 1997 and $67,000 in 1998.
(6) Fair Values of Financial Instruments
The fair value of the Company's debentures is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's debentures at June 30, 1996 is estimated to be $22,073,000. The carrying amount in the accompanying consolidated financial statements is $24,000,000.
The carrying amount of the Company's other financial instruments including cash equivalents, accounts receivable, notes receivable, accounts payable and the non-interest bearing promissory note approximate their fair value.
(7) Commitments and Contingencies:
The Company has entered into individual employment agreements with its five officers. The agreements expire or may be terminated at various times. The agreements provide for continuing monthly payments or lump sum payments and continuation of certain benefits over varying periods in the event employment is altered or terminated following certain changes in ownership of the Company.
(8) Rates:
Reference is made to "Regulatory Matters" herein with respect to rate matters.
(9) Quarterly Financial Data (Unaudited):
The quarterly data reflects, in the opinion of management, all normal recurring adjustments necessary to present fairly the results for the interim periods.
Earnings Operating Net (Loss) per Operating Income Income Common Quarter Ended Revenues (Loss) (Loss) Share(a)
Fiscal 1996
September 30 $ 3,774,849 $ (147,522) $ (760,662) $(.41) December 31 8,406,787 1,331,803 649,089 .34 March 31 16,023,581 3,421,608 2,725,444 1.44 June 30 8,370,838 831,166 47,478 .03
Fiscal 1995
September 30 $ 3,634,262 $ (45,141) $ (633,058) $(.34) December 31 7,131,698 822,241 228,119 .12 March 31 14,903,281 2,842,418 2,255,994 1.22 June 30 6,175,098 635,570 66,680 .04
______________________________________________________________
(a) Quarterly earnings per share may not equal annual earnings per share due to changes in shares outstanding.
EXHIBIT INDEX
Exhibit 3(b) Amended and Restated By-Laws
Exhibit 12 Computation of the Consolidated Ratio of Earnings to Fixed Charges
Exhibit 23 Consent of Independent Certified Public Accountants
Exhibit 27 Financial Data Schedule