UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007 or
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ________
Commission File No. 0-8788
DELTA NATURAL GAS COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
Kentucky |
61-0458329 |
(Incorporated in the State of) |
(I.R.S. Employer Identification No.) |
3617 Lexington Road, Winchester, Kentucky |
40391 |
(Address of Principal Executive Offices) |
(Zip Code) |
859-744-6171
(Registrants Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the Issuers classes of common stock, as of the latest practicable date.
3,281,814 Shares of Common Stock, Par Value $1.00 Per Share, Outstanding as of September 30, 2007.
DELTA NATURAL GAS COMPANY, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION |
|
3 |
|
|
|
ITEM 1. Financial Statements |
|
3 |
|
|
|
Consolidated Statements of Income (Loss) (Unaudited) for the three and twelve month periods ended September 30, 2007 and 2006 |
|
3 |
|
|
|
Consolidated Balance Sheets (Unaudited) as of September 30, 2007, June 30, 2007 and September 30, 2006 |
|
4 |
|
|
|
Consolidated Statements of Changes in Shareholders Equity (Unaudited) for the three and twelve month periods ended September 30, 2007 and 2006 |
|
6 |
|
|
|
Consolidated Statements of Cash Flows (Unaudited) for the three and twelve month periods ended September 30, 2007 and 2006 |
|
7 |
|
|
|
Notes to Consolidated Financial Statements (Unaudited) |
|
8 |
|
|
|
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
11 |
|
|
|
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
|
16 |
|
|
|
ITEM 4. Controls and Procedures |
|
17 |
|
|
|
PART II. OTHER INFORMATION |
|
17 |
|
|
|
ITEM 1. Legal Proceedings |
|
17 |
|
|
|
ITEM 1A. Risk Factors |
|
17 |
|
|
|
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds |
|
17 |
|
|
|
ITEM 3. Defaults Upon Senior Securities |
|
17 |
|
|
|
ITEM 4. Submission of Matters to a Vote of Security Holders |
|
17 |
|
|
|
ITEM 5. Other Information |
|
17 |
|
|
|
ITEM 6. Exhibits |
|
18 |
|
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|
Signatures |
|
19 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
|
|
Three Months Ended |
|
Twelve Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
OPERATING REVENUES |
|
$ |
12,404,170 |
|
$ |
13,113,351 |
|
$ |
97,459,212 |
|
$ |
116,136,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased gas |
|
$ |
7,909,201 |
|
$ |
8,562,863 |
|
$ |
65,406,707 |
|
$ |
84,948,283 |
|
Operation and maintenance |
|
|
2,896,147 |
|
|
2,688,370 |
|
|
12,792,384 |
|
|
12,228,652 |
|
Depreciation and amortization |
|
|
1,259,028 |
|
|
1,135,235 |
|
|
4,821,432 |
|
|
4,310,164 |
|
Taxes other than income taxes |
|
|
442,713 |
|
|
452,666 |
|
|
1,847,781 |
|
|
1,789,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
12,507,089 |
|
$ |
12,839,134 |
|
$ |
84,868,304 |
|
$ |
103,276,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
$ |
(102,919 |
) |
$ |
274,217 |
|
$ |
12,590,908 |
|
$ |
12,859,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND DEDUCTIONS, NET |
|
|
14,202 |
|
|
21,947 |
|
|
126,520 |
|
|
228,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST CHARGES |
|
|
1,209,062 |
|
|
1,174,459 |
|
|
4,681,865 |
|
|
5,027,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME TAXES |
|
$ |
(1,297,779 |
) |
$ |
(878,295 |
) |
$ |
8,035,563 |
|
$ |
8,060,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT) |
|
|
(486,834 |
) |
|
(341,550 |
) |
|
3,011,416 |
|
|
2,998,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(810,945 |
) |
$ |
(536,745 |
) |
$ |
5,024,147 |
|
$ |
5,062,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE |
|
$ |
(.25 |
) |
$ |
(.16 |
) |
$ |
1.54 |
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC AND DILUTED) |
|
|
3,278,556 |
|
|
3,257,537 |
|
|
3,271,031 |
|
|
3,248,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
.31 |
|
$ |
.305 |
|
$ |
1.225 |
|
$ |
1.205 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September 30, |
|
June 30, |
|
September 30, |
|
|||
|
|
2007 |
|
2007 |
|
2006 |
|
|||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
283,736 |
|
$ |
187,820 |
|
$ |
193,249 |
|
Accounts receivable, less accumulated provisions for doubtful accounts of $180,000, $300,000 and $295,000, respectively |
|
|
8,701,983 |
|
|
7,389,993 |
|
|
7,314,764 |
|
Gas in storage, at average cost |
|
|
18,185,078 |
|
|
11,841,791 |
|
|
17,363,913 |
|
Deferred gas costs |
|
|
3,352,647 |
|
|
2,941,826 |
|
|
2,319,006 |
|
Materials and supplies, at average cost |
|
|
565,704 |
|
|
559,087 |
|
|
428,218 |
|
Prepayments |
|
|
3,575,199 |
|
|
2,629,682 |
|
|
1,395,552 |
|
Total current assets |
|
$ |
34,664,347 |
|
$ |
25,550,199 |
|
$ |
29,014,702 |
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
$ |
188,349,368 |
|
$ |
187,148,032 |
|
$ |
182,829,629 |
|
Less-Accumulated provision for depreciation |
|
|
(65,854,219 |
) |
|
(64,879,205 |
) |
|
(62,041,852 |
) |
Net property, plant and equipment |
|
$ |
122,495,149 |
|
$ |
122,268,827 |
|
$ |
120,787,777 |
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
|
|
Cash surrender value of officers life insurance |
|
$ |
425,609 |
|
$ |
425,609 |
|
$ |
401,032 |
|
Note receivable from officer |
|
|
|
|
|
|
|
|
56,000 |
|
Prepaid pension cost |
|
|
1,110,665 |
|
|
951,571 |
|
|
3,812,316 |
|
Regulatory assets |
|
|
8,240,642 |
|
|
8,220,590 |
|
|
4,126,634 |
|
Unamortized debt expense and other |
|
|
2,937,041 |
|
|
2,984,154 |
|
|
3,051,185 |
|
Total other assets |
|
$ |
12,713,957 |
|
$ |
12,581,924 |
|
$ |
11,447,167 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
169,873,453 |
|
$ |
160,400,950 |
|
$ |
161,249,646 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (continued)
(UNAUDITED)
|
|
|
September 30, |
|
|
June 30, |
|
|
September 30, |
|
|
||||
|
|
|
2007 |
|
|
2007 |
|
|
2006 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
||||
Accounts payable |
|
$ |
7,271,806 |
|
$ |
10,299,066 |
|
$ |
5,986,093 |
|
|
||||
Notes payable |
|
|
18,589,434 |
|
|
4,189,918 |
|
|
14,572,267 |
|
|
||||
Current portion of long-term debt |
|
|
1,200,000 |
|
|
1,200,000 |
|
|
1,200,000 |
|
|
||||
Accrued taxes |
|
|
1,251,885 |
|
|
973,651 |
|
|
1,219,556 |
|
|
||||
Customers deposits |
|
|
479,465 |
|
|
482,446 |
|
|
460,979 |
|
|
||||
Accrued interest on debt |
|
|
866,822 |
|
|
865,871 |
|
|
865,368 |
|
|
||||
Accrued vacation |
|
|
708,277 |
|
|
702,521 |
|
|
694,848 |
|
|
||||
Deferred income taxes |
|
|
956,140 |
|
|
1,273,000 |
|
|
701,000 |
|
|
||||
Other liabilities |
|
|
454,446 |
|
|
459,651 |
|
|
335,464 |
|
|
||||
Total current liabilities |
|
$ |
31,778,275 |
|
$ |
20,446,124 |
|
$ |
26,035,575 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
LONG-TERM DEBT |
|
$ |
58,507,000 |
|
$ |
58,625,000 |
|
$ |
58,790,000 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
DEFERRED CREDITS AND OTHER |
|
|
|
|
|
|
|
|
|
|
|||||
Deferred income taxes |
|
$ |
22,301,883 |
|
$ |
22,467,900 |
|
$ |
20,679,500 |
|
|||||
Investment tax credits |
|
|
204,650 |
|
|
213,600 |
|
|
241,350 |
|
|||||
Regulatory liabilities |
|
|
2,394,220 |
|
|
2,503,256 |
|
|
2,511,060 |
|
|||||
Asset retirement obligations and other |
|
|
2,038,603 |
|
|
1,716,599 |
|
|
1,786,788 |
|
|||||
Total deferred credits and other |
|
$ |
26,939,356 |
|
$ |
26,901,355 |
|
$ |
25,218,698 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
COMMITMENTS AND CONTINGENCIES (NOTES 8 & 9) |
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities |
|
$ |
117,224,631 |
|
$ |
105,972,479 |
|
$ |
110,044,273 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
COMMON SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|||||
Common shares ($1.00 par value) |
|
$ |
3,281,814 |
|
$ |
3,277,106 |
|
$ |
3,261,034 |
|
|||||
Premium on common shares |
|
|
43,620,293 |
|
|
43,508,979 |
|
|
43,146,455 |
|
|||||
Retained earnings |
|
|
5,746,715 |
|
|
7,642,386 |
|
|
4,797,884 |
|
|||||
Total common shareholders equity |
|
$ |
52,648,822 |
|
$ |
54,428,471 |
|
$ |
51,205,373 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities and common shareholders equity |
|
$ |
169,873,453 |
|
$ |
160,400,950 |
|
$ |
161,249,646 |
|
|||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) |
Delta Natural Gas Company, Inc. (Delta or the Company) sells and distributes or transports natural gas to approximately 39,000 customers. Our distribution system is located in central and southeastern Kentucky. We transport natural gas to our industrial customers who purchase their gas in the open market. We also transport natural gas on behalf of local producers and customers not on our distribution system and we own and operate an underground storage field. We have three wholly-owned subsidiaries. Delta Resources, Inc. buys gas and resells it to industrial or other large use customers on Deltas system. Delgasco, Inc. buys gas and resells it to Delta Resources and to customers not on Deltas system. Enpro, Inc. owns and operates production properties and undeveloped acreage. All subsidiaries of Delta are included in the consolidated financial statements. Intercompany balances and transactions have been eliminated. |
(2) |
In our opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the three and twelve months ended September 30, 2007 and 2006 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the periods ended September 30, 2007 are not necessarily indicative of the results of operations to be expected for the full fiscal year. Because of the seasonal nature of our sales, we generate the smallest proportion of cash from operations during the warmer months, when sales volumes decrease considerably. Most construction activity and gas storage injections take place during these warmer months. Twelve month ended financial information is provided for additional information only. The accompanying financial statements are unaudited and should be read in conjunction with the financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended June 30, 2007. |
(3) |
In July 2006, the FASB issued Interpretation No. 48, entitled Accounting for Uncertainty in Income Taxes, to clarify the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Financial Accounting Standards Board Statement No. 109. Interpretation No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Interpretation No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. |
We adopted the provisions of Interpretation No. 48 on July 1, 2007. The adoption of Interpretation No. 48 resulted in an adjustment to beginning Retained Earnings of $68,000. At adoption, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $668,000, of which $97,000 related to interest. The liability for unrecognized tax benefits expected to be recognized within the next twelve months has been presented as a reduction to prepaid taxes which is included in Prepayments on the September 30, 2007 Consolidated Balance Sheet. The liability for unrecognized tax benefits not expected to be recognized within the next twelve months has been presented in Asset retirement obligations and other on the September 30, 2007 Consolidated Balance Sheet. Interest and penalties on tax uncertainties are classified in Income Taxes on the Consolidated Statements of Income. For the quarter ended September 30, 2007, an additional $13,000 of interest was accrued which increased the liability for unrecognized tax benefits. The amount of unrecognized tax benefits, net of tax, which, if recognized, would impact the effective tax rate was $98,000. It is reasonably possible that the amount of unrecognized tax benefits will change in the next 12 months. However, it is not expected that such change will have a significant impact on our results of operations or financial position. We file income tax returns in the Federal and Kentucky jurisdictions. Tax years previous to June 30, 2004 and June 30, 2003 are no longer subject to examination for Federal and Kentucky income taxes, respectively.
(4) |
We bill our customers on a monthly meter reading cycle. At the end of each month, gas service which has been rendered from the latest date of each meter reading cycle to the month-end is unbilled. |
Unbilled revenues and gas costs include the following:
8
|
|
September 30 |
|
June 30 |
|
September 30 |
|
(000) |
|
2007 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Unbilled revenues ($) |
|
1,237 |
|
1,058 |
|
1,418 |
|
Unbilled gas costs ($) |
|
618 |
|
497 |
|
729 |
|
Unbilled volumes (Mcf) |
|
51 |
|
48 |
|
66 |
|
Unbilled revenues are included in Accounts receivable and unbilled gas costs are included in Deferred gas costs on the accompanying Consolidated Balance Sheets.
(5) |
Net pension costs for our trusteed, noncontributory defined benefit pension plan for the periods ended September 30 include the following: |
|
|
Three Months Ended |
|
Twelve Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||||
($000) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
187 |
|
179 |
|
724 |
|
764 |
|
Interest cost |
|
187 |
|
175 |
|
712 |
|
698 |
|
Expected return on plan assets |
|
(247 |
) |
(249 |
) |
(994 |
) |
(947 |
) |
Amortization of unrecognized net loss |
|
62 |
|
58 |
|
236 |
|
251 |
|
Amortization of prior service cost |
|
(21 |
) |
(21 |
) |
(84 |
) |
(86 |
) |
Net periodic benefit cost |
|
168 |
|
142 |
|
594 |
|
680 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
Our note receivable from an officer on the accompanying September 30, 2006 Consolidated Balance Sheet relates to a $160,000 loan to Glenn R. Jennings, our Chairman of the Board, President and Chief Executive Officer. |
(7) |
The current available bank line of credit with Branch Banking and Trust Company is $40,000,000, of which $18,589,000, $4,190,000 and $14,572,000 were borrowed having a weighted average interest rate of 6.72%, 6.32% and 6.33%, as of September 30, 2007, June 30, 2007 and September 30, 2006, respectively. The interest on this line is determined monthly at the London Interbank Offered Rate plus 1% on the used bank line of credit. The bank line of credit has been extended through October 31, 2009, and this extension reduced the interest rate on October 31, 2007 to the London Interbank Offered Rate plus .75%. |
Our bank line of credit agreement and the Indentures relating to all of our publicly held Debentures and Insured Quarterly Notes contain defined events of default which, among other things, can make the obligations immediately due and payable. Of these, we consider the following covenants to be most restrictive:
|
|
Dividend payments cannot be made unless consolidated shareholders equity of the Company exceeds $25,800,000 (thus no retained earnings were restricted); and |
|
|
We may not assume any additional mortgage indebtedness in excess of $5,000,000 without effectively securing all Debentures and Insured Quarterly Notes equally to such additional indebtedness. |
Furthermore, a default on the performance on any single obligation incurred in connection with our borrowings simultaneously creates an event of default with the bank line of credit and all of the Debentures and Insured Quarterly Notes. We were not in default on any of our bank line of credit, Debentures or Insured Quarterly Notes during any period presented.
(8) |
We have entered into individual employment agreements with our four officers. The agreements expire or may be terminated at various times. The agreements provide for continuing monthly payments or lump sum payments and the continuation of specified benefits over varying periods in certain cases following defined changes in ownership of the Company. If the change in ownership occurred on September 30, 2007 and |
9
lump sum payments were made to all four officers in accordance with the agreements, approximately $2.8 million would be paid in addition to the continuation of specified benefits for up to five years.
(9) |
We are not a party to any legal proceedings that are expected to have a materially adverse impact on our liquidity, financial condition or results of operations. |
(10) |
The Kentucky Public Service Commission exercises regulatory authority over our natural gas distribution and transportation services. The Kentucky Public Service Commissions regulation of our business includes setting the rates we are permitted to charge for these services. We monitor our need to file requests with the Kentucky Public Service Commission for a general rate increase for our natural gas distribution and transportation services. |
On April 20, 2007, we filed a request for increased rates with the Kentucky Public Service Commission. This general rate case, Case No. 2007-00089, requested an annual revenue increase of approximately $5,642,000, an increase of 9.3%. The rate case requested a return on common equity of 12.1%. The test year for the case was the twelve months ended December 31, 2006. The increased rates were requested to become effective May 20, 2007, but the implementation of the proposed rates was suspended until October 20, 2007.
On October 3, 2007 we announced we had reached a settlement agreement with the Attorney General regarding this rate case. The settlement agreement provided for $3,920,000 of additional annual revenues, and stipulated for settlement purposes a 10.5% return on common shareholders equity. The increase in rates was allocated primarily to the monthly customer charge to partially decouple revenue from volumes of gas sold. An order from the Kentucky Public Service Commission was received on October 19, 2007 approving the terms of the settlement with rates effective on or after October 20, 2007.
(11) |
Our Company has two segments: (i) a regulated natural gas distribution, transmission and storage segment and (ii) a non-regulated segment which participates in related ventures, consisting of natural gas marketing and production. The regulated segment serves residential, commercial and industrial customers in the single geographic area of central and southeastern Kentucky. Virtually all of the revenue recorded under both segments comes from the sale or transportation of natural gas. Price risk for the regulated business is mitigated through our Gas Cost Recovery Clause, approved quarterly by the Kentucky Public Service Commission. Price risk for the non-regulated business is mitigated by efforts to balance supply and demand. However, there are greater risks in the non-regulated segment because of the practical limitations on the ability to perfectly predict our demand. In addition, we are exposed to price risk resulting from changes in the market price of gas and uncommitted gas volumes of our non-regulated companies. A single customer, Citizens Gas Utility District, provided $2,161,000 and $9,870,000 of non-regulated revenues for the three and twelve months ended September 30, 2007, respectively. Citizens Gas Utility District provided $2,134,000 and $14,409,000 of non-regulated revenues for the three and twelve months ended September 30, 2006, respectively. |
The segments follow the same accounting policies as described in the Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements which are included in our Annual Report on Form 10-K for the year ended June 30, 2007. Intersegment revenues and expenses consist of intercompany revenues and expenses from intercompany gas transportation and gas storage services. Intersegment transportation revenue and expense are recorded at our tariff rates. Revenues and expenses for the storage of natural gas is recorded based on quantities stored. Operating expenses, taxes and interest are allocated to the non-regulated segment.
10
Segment information is shown below for the periods:
|
|
Three Months Ended |
|
Twelve Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||||
($000) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
Regulated |
|
|
|
|
|
|
|
|
|
External customers |
|
5,268 |
|
5,151 |
|
53,615 |
|
65,162 |
|
Intersegment |
|
696 |
|
757 |
|
3,582 |
|
3,523 |
|
Total regulated |
|
5,964 |
|
5,908 |
|
57,197 |
|
68,685 |
|
|
|
|
|
|
|
|
|
|
|
Non-regulated |
|
|
|
|
|
|
|
|
|
External customers |
|
7,136 |
|
7,962 |
|
43,844 |
|
50,974 |
|
|
|
|
|
|
|
|
|
|
|
Eliminations for intersegment |
|
(696 |
) |
(757 |
) |
(3,582 |
) |
(3,523 |
) |
Total operating revenues |
|
12,404 |
|
13,113 |
|
97,459 |
|
116,136 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
|
|
|
|
|
|
|
Regulated |
|
(1,200 |
) |
(1,011 |
) |
2,233 |
|
2,135 |
|
Non-regulated |
|
389 |
|
474 |
|
2,791 |
|
2,927 |
|
Total net income (loss) |
|
(811 |
) |
(537 |
) |
5,024 |
|
5,062 |
|
(12) |
In September, 2006, the Financial Accounting Standards Board issued Statement No. 158, entitled Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. Statement No. 158 requires employers who sponsor defined benefit plans to recognize the funded status of the plan and gains and losses not previously recognized in net periodic benefit cost in the sponsors financial statements in fiscal years ending after December 15, 2006. Additionally, Statement No. 158 requires employers who sponsor defined benefit plans to measure assets and benefit obligations as of the end of the employers fiscal year in fiscal years ending after December 15, 2008. |
On June 30, 2007 we adopted the requirement to recognize the funded status of our defined benefit plan on our Consolidated Balance Sheet. The requirement to measure plan assets and benefit obligations as of our fiscal year end shall be effective for our fiscal 2009 year-end. We do not expect this requirement to have a material impact on our results of operations or financial position.
(13) |
In September 2006, the Financial Accounting Standards Board issued Statement No. 157, entitled Fair Value Measures and in February 2007, issued Statement No. 159, entitled The Fair Value Option for Financial Asset and Financial Liabilities. Both statements are effective for fiscal years beginning after November 15, 2007. The statements define fair value, establish a framework for measuring fair value in generally accepted accounting principles and expand disclosures about fair value measurements. We do not expect these statements, which shall be effective for our 2009 fiscal year, to have a material impact on our results of operations or financial position. |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR TO DATE SEPTEMBER 30, 2007 OVERVIEW AND FUTURE OUTLOOK
Due to the seasonality of our regulated business, we traditionally incur a consolidated net loss in the first quarter of our fiscal year. The regulated segment historically sells only 6% of its annual volumes during the quarter, while 25% of the annual fixed costs are incurred.
11
Consolidated net loss per share for the three months ended September 30, 2007 ($0.25) increased $0.09 per share from the net loss per share for the three months ended September 30, 2006 ($0.16). The increase is primarily due to an $189,000 increase in the net loss for our regulated segment. The increase in regulated net loss was attributable to increased depreciation expense as a result of capital expenditures for depreciable property as well as increased operation and maintenance expense. These increases were partially offset by increased gross margins from our regulated segment due to a 31% increase in volumes transported to off-system customers. Our non-regulated net income for the three months ended September 30, 2007 decreased from the same period in the prior year due to a decrease in gross margins as a result of lower prices.
The results for the year ended June 30, 2008 in our regulated segment should be significantly impacted by implementing new base rates effective on or after October 20, 2007. The new rates, as approved by the Kentucky Public Service Commission, are designed to generate an additional $3,920,000, of revenue. Our 2008 results will also be dependent on the winter weather and the extent to which our customers choose to conserve their natural gas usage or discontinue their natural gas service in reaction to higher gas prices, a trend we have experienced for the last several fiscal years.
We expect our non-regulated segment to continue to contribute to our consolidated net income in fiscal 2008, as in recent years, based on contracts currently in place. Future profitability of the non-regulated segment, though, is dependent on the business plans of a few large customers and the market prices of natural gas, which are both out of our control. If natural gas prices decrease considerably, we expect to experience a corresponding decrease in our non-regulated segment margins.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provide our primary source of cash. Cash provided by operating activities consists of net income (loss) adjusted for non-cash items, including depreciation, amortization, deferred income taxes and changes in working capital.
Our ability to maintain liquidity depends on our bank line of credit, shown as notes payable on the accompanying Consolidated Balance Sheets. Notes payable increased to $18,589,000 at September 30, 2007, compared with $4,190,000 at June 30, 2007. This increase reflects the seasonal nature of our sales and cash needs. Our cash requirements during the quarters ended September 30, 2007 and 2006 exceeded cash provided by operations, primarily due to the purchase of natural gas which is injected into storage for use during the heating months. Additionally, our liquidity is impacted by the fact that we sometimes generate internally only a portion of the cash necessary for our capital expenditure requirements. We made capital expenditures of $2,137,000 during the three months ended September 30, 2007. We finance the balance of our capital expenditures on an interim basis through this bank line of credit. We periodically repay our short-term borrowings under our bank line of credit by using the net proceeds from the sale of long-term debt and equity securities, as was done in 2006 by a $3,830,000 repayment in connection with the issuance of the 5.75% Insured Quarterly Notes.
The $4,017,000 increase in notes payable at September 30, 2007, compared to the previous year, was primarily due to increased borrowings over the prior year. During the twelve months ended September 30, 2006 $3,830,000 of excess proceeds from the issuance of the 5.75% Insured Quarterly Notes was used to repay a portion of the notes payable.
Long-term debt decreased to $58,507,000 at September 30, 2007, compared with $58,625,000 at June 30, 2007 and $58,790,000 at September 30, 2006. These decreases resulted from the redemption of the Debentures and Insured Quarterly Notes, which allow for limited redemptions to be made to certain holders or their beneficiaries.
Cash and cash equivalents increased to $284,000 at September 30, 2007, compared with $188,000 at June 30, 2007 and $193,000 at September 30, 2006. These increases in cash and cash equivalents for the three and twelve months ended September 30, 2007 are summarized in the following table:
12
|
|
Three Months Ended |
|
Twelve Months Ended |
|
||||
|
|
September 30, |
|
September 30 |
|
||||
($000) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Provided by (used in) operating activities |
|
(11,163 |
) |
(4,989 |
) |
8,072 |
|
8,174 |
|
Used in investing activities |
|
(2,122 |
) |
(1,620 |
) |
(8,199 |
) |
(7,269 |
) |
Provided by (used in) financing activities |
|
13,381 |
|
6,652 |
|
217 |
|
(884 |
) |
Increase in cash and cash equivalents |
|
96 |
|
43 |
|
90 |
|
21 |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007, cash used in operating activities increased $6,174,000 (124%) as compared to 2006. The increase is attributable to a $3,988,000 increase in cash paid for gas due to the timing of payments for our gas payables. An additional $1,837,000 of the increase is attributable to decreased cash received from customers based on the timing of collections of our customer accounts receivable.
For the twelve months ended September 30, 2007, cash provided by operations decreased $102,000 (1%) as compared to 2006. The decrease is attributable to a $19,315,000 decrease in cash paid for gas, which was partially offset by a decrease in cash received from customers of $18,499,000. The decreases are a result of decreased gas prices over the same time period (see related discussion in Results of Operations). Additionally, cash paid for income taxes increased $642,000 due to increased estimated payments made for the 2007 fiscal year.
Changes in cash used in investing activities result primarily from changes in the level of capital expenditures between years.
For the three months ended September 30, 2007, cash provided by financing activities increased $6,729,000 (101%) as compared to 2006, due to increased borrowings on our bank line of credit to meet our operating cash needs.
For the twelve months ended September 30, 2007, cash provided by financing activities increased $1,101,000 (125%). The increase is attributable to $4,954,000 of increased borrowings on our bank line of credit. The increase is partially offset by an additional $3,480,000 provided by financing activities in 2006 from the refinancing of the 7.15% and 6 5/8% Debentures.
Cash Requirements
Our capital expenditures result in a continued need for capital. These capital expenditures are being made for system extensions and for the replacement and improvement of existing transmission, distribution, gathering, storage and general facilities. We expect our capital expenditures for fiscal 2008 to be $5.7 million.
Sufficiency of Future Cash Flows
To the extent that internally generated cash is not sufficient to satisfy operating and capital expenditure requirements and to pay dividends, we will rely on our bank line of credit. Our current available line of credit is $40,000,000, of which $18,589,000 was borrowed at September 30, 2007, and was classified as notes payable in the accompanying Consolidated Balance Sheets. The current bank line of credit is with Branch Banking and Trust Company and has been extended through October 31, 2009.
We expect that internally generated cash, coupled with short-and long-term borrowings, will be sufficient to satisfy our operating and normal capital expenditure requirements and to pay dividends for the next twelve months and the foreseeable future.
Our ability to sustain acceptable earnings levels, finance capital expenditures and pay dividends is contingent on the adequate and timely adjustment of the regulated sales and transportation prices we charge our customers. The Kentucky Public Service Commission sets these prices and we continuously monitor our need to file rate requests with the Kentucky Public Service Commission for general rate increases for our regulated services.
On April 20, 2007, we filed a request for increased rates with the Kentucky Public Service commission. This general rate case, Case No. 2007-00089, requested an annual revenue increase of approximately $5,642,000, an
13
increase of 9.3%. This rate case requested a return on common equity of 12.1%. The test year for the case was the twelve months ended December 31, 2006. The increased rates were requested to become effective May 20, 2007. The Kentucky Public Service Commission suspended the implementation of the proposed rates until October 20, 2007.
On October 3, 2007 we announced we had reached a settlement agreement with the Attorney General regarding this rate case. The settlement agreement provided for $3,920,000 of additional annual revenues, and stipulated for settlement purposes a 10.5% return on common shareholders equity. The increase in rates was allocated primarily to the monthly customer charge to partially decouple revenue from volumes of gas sold. An order from the Kentucky Public Service Commission was received on October 19, 2007 approving the terms of the settlement with rates effective on or after October 20, 2007.
RESULTS OF OPERATIONS
Gross Margins
Our regulated and non-regulated revenues, other than transportation, have offsetting gas expenses. Therefore, throughout the following, we refer to gross margin. With respect to our regulated and non-regulated segments, gross margin refers to operating revenues less purchased gas, which can be derived directly from our Consolidated Statements of Income. Operating Income as presented on the Consolidated Statements of Income is the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (GAAP). Gross margin is a non-GAAP financial measure, as defined in accordance with SEC rules. We view gross margin as an important performance measure of the core profitability of our operations. The measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses.
Natural gas prices are determined by an unregulated national market. Therefore, the price that we pay for natural gas fluctuates with national supply and demand. See Item 3 for the impact of forward contracts.
In the following table we set forth variations in our gross margins for the three and twelve months ended September 30, 2007 compared with the same periods in the preceding year. The variation amounts and percentages presented in the following tables for regulated and non-regulated gross margins include intersegment transactions. These intersegment revenues and expenses are eliminated in the Consolidated Statements of Income.
14
|
|
2007 compared to 2006 |
|
||
|
|
Three Months |
|
Twelve Months |
|
|
|
Ended |
|
Ended |
|
($000) |
|
September 30, |
|
September 30, |
|
|
|
|
|
|
|
Increase (decrease) in regulated Gross margins |
|
(61 |
) |
270 |
|
On-system transportation |
|
(77 |
) |
(196 |
) |
Off-system transportation |
|
196 |
|
597 |
|
Other |
|
54 |
|
(78 |
) |
Total |
|
112 |
|
593 |
|
|
|
|
|
|
|
Increase (decrease) in non-regulated
|
|
(198 |
) |
225 |
|
Other |
|
31 |
|
46 |
|
Total |
|
(167 |
) |
271 |
|
|
|
|
|
|
|
Increase (decrease) in consolidated gross margins |
|
(55 |
) |
864 |
|
|
|
|
|
|
|
Gas sales |
|
(8.1 |
) |
1.3 |
|
On-system transportation |
|
(9.2 |
) |
(6.1 |
) |
Off-system transportation |
|
30.7 |
|
17.6 |
|
|
|
|
|
|
|
Percentage increase (decrease) in non-regulated gas sales volumes |
|
(3.7 |
) |
9.9 |
|
|
|
|
|
|
|
Heating degree days were 93% of normal thirty year average temperatures for the twelve months ended September 30, 2007 as compared with 94% of normal temperatures in 2006. A heating degree day results from a day during which the average of the high and low temperature is at least one degree less than 65 degrees Fahrenheit.
For the three months ended September 30, 2007, gross margins decreased $55,000 (1%). The decrease is attributable to a $167,000 (11%) decrease in our non-regulated gross margin, which was partially offset by an $112,000 (4%) increase in our regulated gross margins. The non-regulated gross margins decreased $114,000 due to decreased gas prices and $53,000 due to decreased volumes transported. The regulated gross margins increased as a result of a 31% increase in volumes transported for our off-system transportation customers.
For the twelve months ended September 30, 2007, gross margins increased $864,000 (3%). The increase is attributable to a $593,000 (3%) increase in our regulated gross margins and a $271,000 (3%) increase in our non-regulated gross margins. The regulated gross margins increased as a result of a 1% increase in volumes sold to our distribution customers and an 18% increase in the volumes transported for our off-system transportation customers, partially offset by a 6% decrease in the volumes transported for our on-system transportation customers. The non-regulated gross margins increased $842,000 due to increased volumes transported, partially offset by a $571,000 decrease due to lower gas prices.
Operation and Maintenance
For the three months ended September 30, 2007, operations and maintenance expense increased $208,000 (8%). The increase was primarily attributable to increased employee benefit costs of $129,000, primarily due to increased medical costs. Additionally, outside professional services increased by $59,000.
15
Depreciation and amortization
Depreciation and amortization increased $124,000 (11%) and $511,000 (12%) for the three and twelve months ended September 30, 2007, respectively. The increases are attributable to increases in depreciable plant resulting from capital expenditures of $2,137,000 and $8,329,000 for the three and twelve months ended September 30, 2007, respectively. These capital expenditures relate to the replacement and improvement of our transmission, distribution, gathering, storage and general facilities.
Other Income and Deductions, Net
The decrease in other income and deductions, net for the twelve months ended September 30, 2007 of $102,000 (45%) was due to investment income received during the twelve months ended September 30, 2006 on cash invested when we refinanced a portion of our long-term debt.
Income Taxes
For the three months ended September 30, 2007, income tax benefit increased $145,000 (43%) as a result of the $419,000 (48%) increased net loss before income taxes for the same time period.
Basic and Diluted Earnings Per Common Share
For the three and twelve months ended September 30, 2007 and 2006, our basic earnings (loss) per common share changed as a result of changes in net income (loss) and an increase in the number of our common shares outstanding. We increased our number of common shares outstanding as a result of shares issued through our Dividend Reinvestment and Stock Purchase Plan.
We have no potentially dilutive securities. As a result, our basic earnings (loss) per common share and our diluted earnings (loss) per common share are the same.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We purchase our gas supply through a combination of spot market gas purchases and forward gas purchases. The price of spot market gas is based on the market price at the time of delivery. The price we pay for our natural gas supply acquired under our forward gas purchase contracts, however, is fixed prior to the delivery of the gas. Additionally, we inject some of our gas purchases into gas storage facilities in the non-heating months and withdraw this gas from storage for delivery to customers during the heating season. For our regulated business, we have minimal price risk resulting from these forward gas purchase and storage arrangements because we are permitted to pass these gas costs on to our regulated customers through the gas cost recovery rate mechanism.
Price risk for the non-regulated business is mitigated by efforts to balance supply and demand. However, there are greater risks in the non-regulated segment because of the practical limitations on the ability to perfectly predict demand. In addition, we are exposed to price risk resulting from changes in the market price of gas on uncommitted gas volumes of our non-regulated companies.
None of our gas contracts are accounted for using the fair value method of accounting. While some of our gas purchase contracts meet the definition of a derivative, we have designated these contracts as normal purchases and normal sales under Statement of Financial Accounting Standards No. 133, entitled Accounting for Derivatives Instruments and Hedging Activities.
We are exposed to risk resulting from changes in interest rates on our variable rate bank line of credit. The interest rate on our bank line of credit with Branch Banking and Trust Company is benchmarked to the monthly London Interbank Offered Rate. The balances on our bank line of credit were $18,589,000, $4,190,000 and $14,572,000 on September 30, 2007, June 30, 2007 and September 30, 2006, respectively. The weighted average interest rates on our bank line of credit were 6.72%, 6.32%, and 6.33% on September 30, 2007, June 30, 2007 and September 30, 2006, respectively. Based on the amounts of our outstanding bank line of credit on September 30, 2007, June 30, 2007 and September 30, 2006, a one percent (one hundred basis point) increase in our average interest rates would result in decreases in our annual pre-tax net income of $186,000, $42,000 and $146,000, respectively.
16
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commissions (SECs) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2007, and, based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance that information requiring disclosure is recorded, processed, summarized, and reported within the timeframe specified by the SECs rules and forms.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2007 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any legal proceedings that are expected to have a materially adverse impact on our liquidity, financial condition or results of operations.
ITEM 1A. RISK FACTORS
No material changes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
17
ITEM 6. EXHIBITS
|
10(a) |
Modification Agreement extending to October 31, 2009 the Promissory Note and Loan Agreement dated October 31, 2002 between the Registrant and Branch Banking and Trust Company. |
|
31.1 |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: November 6, 2007 |
|
/s/Glenn R. Jennings |
|
|
Glenn R. Jennings Chairman of the Board, President and Chief Executive Officer (Duly Authorized Officer) |
|
|
|
|
|
|
|
|
/ s/John B. Brown |
|
|
John B. Brown Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) |
19
|
|
Exhibit 10(a) |
Maker DELTA NATURAL GAS COMPANY, INC. |
|
9580219605 |
|
|
Customer Number |
Address 3617 LEXINGTON ROAD |
BB&T |
|
WINCHESTER, KY 40391-0000 |
|
00003 |
|
MODIFICATION AGREEMENT |
Note Number |
$ 40,000,000.00 |
10/31/2002 |
$ 40,000,000.00 |
10/31/2007 |
Original Amount of Note |
Original Date |
Modification Amount |
Modification Date |
This Modification Agreement (hereinafter Agreement) is made and entered into this 31 st day of October, 2007 , by and between DELTA NATURAL GAS COMPANY, INC. , maker(s), co-maker(s), endorser(s), or other obligor(s) on the Promissory Note (as defined below), hereinafter also referred to as Borrower and Branch Banking and Trust Company, a North Carolina banking corporation, hereinafter referred to as Bank.
Witnesseth : Whereas, Borrower has executed and delivered to Bank the following documents (collectively, the Loan Documents):
(a) a Promissory Note payable to Bank, which Promissory Note includes the original Promissory Note and Addendum dated as of October 31, 2002, in the face principal amount of $40,000,000.00 and all renewals, extensions substitutions and modifications thereof, including without limitation the Modification Agreement dated October 31, 2003, the Modification Agreement dated October 31, 2004, and the Modification Agreement dated August 12, 2005, collectively Promissory Note, said Promissory Note being more particularly identified by description of the original note above;
(b) a Loan Agreement dated October 31, 2002 (hereinafter Loan Agreement); and
Borrower and Bank agree that said Loan Documents be modified only to the limited extent as is hereinafter set forth; that all other terms, conditions, and covenants of the Loan Documents remain in full force and effect, and that all other obligations and covenants of Borrower, except as herein modified, shall remain in full force and effect, and binding between Borrower and Bank;
NOW THEREFORE, in mutual consideration of the premises, the sum of Ten Dollars ($10) and other good and valuable consideration, each to the other parties paid, the parties hereto agree that
1. |
The Promissory Note is amended as hereinafter described: |
INTEREST RATE, PRINCIPAL AND INTEREST PAYMENT TERM MODIFICATIONS (To the extent no change is made, existing terms continue. Sections not completed are deleted)
a. |
Principal and interest are payable as follows: |
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[ X ] |
Principal (plus any accrued interest not otherwise scheduled herein) is due in full at maturity on 10/31/2009 . |
[ X ] |
Accrued interest is payable Monthly continuing on November 30, 2007 and on the same day of each calendar period thereafter, with one final payment of all remaining interest due on October 31, 2009 . |
b. |
The eighth grammatical paragraph on page 1 of the Promissory Note is hereby amended and restated so as to read in its entirety as follows: This note (Note) is given by the Borrower in connection with a Loan Agreement between the Borrower and the Bank dated October 31, 2002 (as amended by that certain Modification Agreement between the Bank and the Borrower dated October 31, 2003, that certain Modification Agreement between the Bank and the Borrower dated October 31, 2004, and that certain Modification Agreement between the Bank and the Borrower dated August 12, 2005) all as executed by the Borrower. |
2. |
The Addendum to Promissory Note is amended as hereinafter described: |
The definition of Adjusted LIBOR Rate is hereby amended and restated so as to read in its entirety as follows: Adjusted LIBOR Rate means a rate of interest per annum equal to the sum obtained (rounded upwards, if necessary, to the next higher 1/100th of 1.0%) by adding (i) 30-day LIBOR plus (ii) .75 percent (0.75%) per annum, which shall be adjusted
1373KY (0304)
monthly on the first day of each month for each LIBOR Interest Period. If the first day of any month falls on date when the Bank is closed, the Adjusted LIBOR Rate shall be determined as of the last preceding business day. The Adjusted LIBOR Rate shall be adjusted for any change in the LIBOR Reserve Percentage so that Bank shall receive the same yield.
3. |
The Loan Agreement is amended as hereinafter described: |
In the paragraph on page 1 of the Loan Agreement, titled Line of Credit, the date October 31, 2003 is hereby deleted and the date October 31, 2009 is inserted in lieu thereof.
If the Promissory Note and Loan Agreement being modified by this Agreement is signed by more than one person or entity, the modified Promissory Note shall be the joint and several obligation of all signers and the property and liability of each and all of them. It is expressly understood and agreed that this Agreement is a modification only and not a novation. The original obligation of the Borrower as evidenced by the Promissory Note above described is not extinguished hereby. It is also understood and agreed that except for the modification(s) contained herein said Promissory Note, and any other Loan Documents or Agreements evidencing, securing or relating to the Promissory Note and all singular terms and conditions thereof, shall be and remain in full force and effect. This Agreement shall not release or affect the liability of any co-makers, obligors, endorsers or guarantors of said Promissory Note. Borrower and Debtor(s)/Grantor(s), if any, jointly and severally consent to the terms of this Agreement, waive any objection thereto, affirm any and all obligations to Bank and certify that there are no defenses or offsets against said obligations or the Bank, including without limitation the Promissory Note. Bank expressly reserves all rights as to any party with right of recourse on the aforesaid Promissory Note.
Borrower agrees that the only interest charge is the interest actually stated in the Promissory Note, and that any loan or origination fee shall be deemed charges rather than interest, which charges are fully earned and non-refundable. It is further agreed that any late charges are not a charge for the use of money but are imposed to compensate Bank for some of the administrative services, costs and losses associated with any delinquency or default under the Promissory Note, and said charges shall be fully earned and non-refundable when accrued. All other charges imposed by Bank upon Borrower in connection with the Promissory Note and the loan including, without limitation, any commitment fees, loan fees, facility fees, origination fees, discount points, default and late charges, prepayment fees, statutory attorneys fees and reimbursements for costs and expenses paid by Bank to third parties or for damages incurred by Bank are and shall be deemed to be charges made to compensate Bank for underwriting and administrative services and costs, other services, and costs or losses incurred and to be incurred by Bank in connection with the Promissory Note and the loan and shall under no circumstances be deemed to be charges for the use of money. All such charges shall be fully earned and non-refundable when due.
The Bank may, at its option, charge any fees for the modification, renewal, extension, or amendment of any of the terms of the Promissory Note(s) as permitted by applicable law.
In the words Prime Rate, Bank Prime Rate, BB&T Prime Rate, Banks Prime Rate or BB&Ts Prime Rate are used in this Agreement, they shall refer to the rate announced by the Bank from time to time as its Prime Rate. The Bank makes loans both above and below the Prime Rate and uses indexes other than the Prime Rate. Prime Rate is the name given a rate index used by the Bank and does not in itself constitute a representation of any preferred rate or treatment.
Unless otherwise provided herein, it is expressly understood and agreed by and between Borrower. Debtor(s)/Grantor(s) and Bank that any and all collateral (including but not limited to real property, personal property, fixtures, inventory, accounts, instruments, general intangibles, documents, chattel paper, and equipment) given as security to insure faithful performance by Borrower and any other third party of any and all obligations to Bank, however created, whether now existing or hereafter arising, shall remain as security for the Promissory Note as modified hereby.
It is understood and agreed that if Bank has released collateral herein, it shall not be required or obligated to take any further steps to release said collateral from any lien or security interest unless Bank determines, in its sole discretion, that it may do so without consequence to its secured position and relative priority in other collateral; and unless Borrower bears the reasonable cost of such action. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same, or of any other right on any further occasion. Each of the parties signing this Agreement regardless of the time, order or place of signing waives presentment, demand, protest, and notices of every kind, and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral if at any time there is available to the Bank collateral for the Promissory Note, as amended, and to the additions or releases of any other parties or persons primarily or secondarily liable. Whenever
1373KY (0304)
possible the provisions of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is prohibited by or invalid under such law, such provisions shall be ineffective to the extent of any such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All rights and obligations arising hereunder shall be governed by and construed in accordance with the laws of the same state which governs the interpretation and enforcement of the Promissory Note.
From and after any event of default under this Agreement, the Promissory Note, or any related deed of trust, security agreement or loan agreement, interest shall accrue on the sum of the principal balance and accrued interest then outstanding at the variable rate equal to the Banks Prime Rate plus 5% per annum (Default Rate), provided that such rate shall not exceed at any time the highest rate of interest permitted by the laws of the Commonwealth of Kentucky; and further that such rate shall apply after judgement. In the event of any default, the then remaining unpaid principal amount and accrued but unpaid interest then outstanding shall bear interest at the Default Rate until such principal and interest have been paid in full. Bank shall not be obligated to accept any check, money order, or other payment instrument marked payment in full on any disputed amount due hereunder, and Bank expressly reserves the right to reject all such payment instruments. Borrower agrees that tender of its check or other payment instrument so marked will not satisfy or discharge its obligation under this Note, disputed or otherwise, even if such check or payment instrument is inadvertently processed by Bank unless in fact such payment is in fact sufficient to pay the amount due hereunder.
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DELTA NATURAL GAS COMPANY, INC |
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By |
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Glenn R. Jennings, President |
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BRANCH BANKING AND TRUST COMPANY |
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By |
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W. Harvey Coggin, Senior Vice President |
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ACCOUNT # l NOTE #
9580210605 |
00003 |
G:\BB&T Legal\Commercial Loan Documents\Delta Natural Gas Note Modification for 10312007
1373KY (0304)
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Exhibit 31.1 |
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER |
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PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |
I, Glenn R. Jennings, certify that:
I have reviewed this quarterly report on Form 10-Q of Delta Natural Gas Company, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 6, 2007
By: |
/ s/Glenn R. Jennings |
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Glenn R. Jennings |
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Chairman of the Board, President and Chief Executive Officer |
Exhibit 31.2 |
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER |
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |
I, John B. Brown, certify that:
I have reviewed this quarterly report on Form 10-Q of Delta Natural Gas Company, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 6, 2007
By: |
/s/John B. Brown |
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John B. Brown |
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Chief Financial Officer, Treasurer and Secretary |
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Exhibit 32.1 |
CERTIFICATION OF THE
CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Delta Natural Gas Company, Inc. on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Glenn R. Jennings, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Delta Natural Gas Company, Inc. |
November 6, 2007
By: |
/ s/Glenn R. Jennings |
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Glenn R. Jennings |
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Chairman of the Board, President and Chief Executive Officer |
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Exhibit 32.2 |
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CERTIFICATION OF THE |
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CHIEF FINANCIAL OFFICER PURSUANT TO |
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18 U.S.C. SECTION 1350, |
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AS ADOPTED PURSUANT TO |
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SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
In connection with the Quarterly Report of Delta Natural Gas Company, Inc. on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John B. Brown, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Delta Natural Gas Company, Inc. |
November 6, 2007
By: |
/s/John B. Brown |
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John B. Brown |
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Chief Financial Officer, Treasurer and Secretary |